UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission File Number: 0-21487
CARVER BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3904174
(State or Other Jurisdiction (I.R.S. Employer
of 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) 230-2900
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE AMERICAN STOCK EXCHANGE
(Title of Class) (Name of each Exchange on
which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. |_| Yes |X| No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. |_|Yes |X| No
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer
|_| Large Accelerated |_| Accelerated |X| non-accelerated
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No
As of June 15, 2006, there were 2,502,247 shares of common stock of the
registrant outstanding. The aggregate market value of the Registrant's common
stock held by non-affiliates (based on the closing sales price of $17.39 per
share of the registrant's common stock on June 15, 2006) was approximately $43.5
million.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of registrant's proxy statement for the Annual Meeting of stockholders
for the fiscal year ended March 31, 2006 are incorporated by reference into Part
III of this Form 10-K.
CARVER BANCORP, INC.
2006 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
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Item 1. Business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
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Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
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Item 10. Directors and Executive Officers of Carver Bancorp, Inc
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accounting Fees and Services
PART IV
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Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
EXHIBIT INDEX
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 which
may be identified by the use of such words as "may," "believe," "expect,"
"anticipate," "should," "plan," "estimate," "predict," "continue," and
"potential" or the negative of these terms or other comparable terminology.
Examples of forward-looking statements include, but are not limited to,
estimates with respect to our financial condition, results of operations and
business that are subject to various factors which could cause actual results to
differ materially from these estimates. These factors include, but are not
limited to:
o the Company's success in implementing its new business initiatives,
including expanding its product line, adding new branch offices and
ATM centers and successfully re-building its brand image;
o increases in competitive pressure among financial institutions or
non-financial institutions;
o legislative or regulatory changes which may adversely affect the
Company's business;
o technological changes which may be more difficult or expensive than we
anticipate;
o changes in interest rates which may reduce net interest margins and
net interest income;
o changes in deposit flows, loan demand or real estate values which may
adversely affect the Company's business;
o changes in accounting principles, policies or guidelines which may
cause the Company's condition to be perceived differently;
o litigation or other matters before regulatory agencies, whether
currently existing or commencing in the future, which may delay the
occurrence or non-occurrence of events longer than anticipated;
o the ability of the Company to originate and purchase loans with
attractive terms and acceptable credit quality;
o success in integrating Community Capital Bank into Carver operations;
o the ability of the Company to realize cost efficiencies; and
o general economic conditions, either nationally or locally in some or
all areas in which the Company does business, or conditions in the
securities markets or the banking industry which could affect
liquidity in the capital markets, the volume of loan origination,
deposit flows, real estate values, the levels of non-interest income
and the amount of loan losses.
Any or all of our forward-looking statements in this Annual Report and in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Consequently, no forward-looking statement can be guaranteed. We
do not intend to update any of the forward-looking statements after the date of
this prospectus or to conform these statements to actual events.
PART I
ITEM 1. BUSINESS
OVERVIEW
Carver Federal Savings Bank, a wholly owned subsidiary of Carver Bancorp,
Inc., is the largest African-American operated savings bank in the nation, with
$661 million in assets as of March 31, 2006. Headquartered in the heart of the
Harlem community of New York City, Carver Federal Savings Bank has eight branch
offices, five stand-alone 24/7 ATM centers, and over 120 employees. Carver
Federal Savings Bank's consumer and commercial offerings include an array of
deposit and real estate loan products that facilitate investing, savings and
borrowing by its customers. Carver Federal Savings Bank also offers wealth
management products through a third party provider.
GENERAL DESCRIPTION OF BUSINESS
Carver Bancorp, Inc.
Carver Bancorp, Inc., a Delaware corporation (on a stand-alone basis, the
"Holding Company" or "Registrant"), is the holding company for Carver Federal
Savings Bank, a federally chartered savings bank, and its subsidiaries
(collectively, the "Bank" or "Carver Federal"), Carver Statutory Trust I (the
"Trust") and Alhambra Holding Corporation, a Delaware corporation ("Alhambra").
The Trust, which was formed in September 2003, exists for the sole purpose of
issuing trust preferred debt securities and investing the proceeds in an
equivalent amount of subordinated debentures of the Holding Company. The Holding
Company formed Alhambra to hold the Holding Company's investment in a commercial
office building that was subsequently sold in March 2000. Alhambra is currently
inactive. Collectively, the Holding Company, the Bank and the Holding Company's
other direct and indirect subsidiaries are referred to herein as the "Company"
or "Carver."
On October 24, 1994, Carver Federal converted from mutual to stock form and
issued 2,314,275 shares of its common stock at a price of $10 per share. On
October 17, 1996, the Bank completed its reorganization into a holding company
structure (the "Reorganization") and became a wholly owned subsidiary of the
Holding Company. Pursuant to an Agreement and Plan of Reorganization, dated May
21, 1996, each share of the Bank's outstanding common stock was exchanged for
one share of common stock of the Holding Company. On January 11, 2000, the
Holding Company sold, pursuant to a Securities Purchase Agreement, dated January
11, 2000, in a private placement 40,000 shares of Series A Convertible Preferred
Stock (the "Series A Preferred Stock") to Morgan Stanley & Co. Incorporated
("MSDW") and 60,000 Shares of Series B Convertible Preferred Stock (the "Series
B Preferred Stock") to Provender Opportunities Fund L.P. ("Provender"). On June
1, 2004, Provender sold all 60,000 of its Series B Preferred Stock to Keefe
Bruyette & Woods, Inc ("KBW"). On October 15, 2004, both MSDW and KBW elected to
convert their Preferred Shares into shares of the Holding Company's common
stock, thus an additional 208,333 shares of common stock were issued to these
parties.
On April 6, 2006, the Company entered into a definitive merger agreement to
acquire Community Capital Bank (`CCB"), a Brooklyn-based community bank with
approximately $162 million in assets, in a cash transaction valued at $11.1
million, or $40.00 per Community Capital share. The agreement has been approved
by the Boards of Directors of both companies and, on June 28, 2006, was also
approved by the stockholders of Community Capital. The transaction is subject to
and is awaiting regulatory approval and is expected to close by September 30,
2006. The acquisition of CCB and its award-winning small business lending
platform will expand the Company's ability to capitalize on substantial growth,
especially in the small business market.
The Holding Company conducts business as a unitary savings and loan holding
company, and the principal business of the Holding Company consists of the
operation of its wholly owned subsidiary, the Bank. The Holding Company's
executive offices are located at the home office of the Bank at 75 West 125th
Street, New York, New York 10027. The Holding Company's telephone number is
(718) 230-2900.
Carver Federal Savings Bank
Carver Federal was chartered in 1948 and began operations in 1949 as Carver
Federal Savings and Loan Association, a federally chartered mutual savings and
loan association, at which time it obtained federal deposit insurance and became
a member of the Federal Home Loan Bank of New York (the "FHLB-NY"). Carver
Federal converted to a federal savings bank in 1986 and changed its name at that
time to Carver Federal Savings Bank.
Carver Federal was founded as an African-American operated institution to
provide residents of under-served communities with the ability to invest their
savings and obtain credit. Carver Federal's principal business consists of
attracting deposit accounts through its eight branch offices and investing those
funds in mortgage loans and other investments permitted to federal savings
banks. Based on its asset size as of March 31, 2006, Carver Federal is the
largest African-American operated financial institution in the United States.
On March 8, 1995, Carver Federal formed CFSB Realty Corp. as a wholly owned
subsidiary to hold real estate acquired through foreclosure pending eventual
disposition. At March 31, 2006, this subsidiary had $218,000 in total capital
and a minimal net operating loss. At March 31, 2006 no foreclosed real estate
was held by the Company, however as a result of a property tax redemption, the
Bank, through its subsidiary Carver Realty Corp., took fee ownership of a vacant
tract of land in Bayshore, NY. See Note 1 of Notes to Consolidated Financial
Statements. Carver Federal also owns CFSB Credit Corp., an inactive subsidiary
originally formed to undertake the Bank's credit card issuances. During the
fourth quarter of the fiscal year ended March 31, 2003 ("fiscal 2003"), Carver
Federal formed Carver Asset Corporation, a wholly owned subsidiary which
qualifies as a real estate investment trust ("REIT") pursuant to the Internal
Revenue Code of 1986, as amended. This subsidiary may, among other things, be
utilized by Carver Federal to raise capital in the future. As of March 31, 2006
Carver Asset Corporation owned mortgage loans valued at approximately $131
million. On August 18, 2005 Carver Federal formed Carver Community Development
Corp. ("CCDC"), a wholly owned community development entity whose purpose is to
make qualified business loans in low-income communities. As of March 31, 2006,
CCDC had no assets or results from operations.
Carver Federal's current operating strategy consists primarily of: (1) the
origination and purchase of one- to four-family residential, commercial,
construction and multifamily real estate loans in its primary market area; (2)
investing funds not utilized for loan originations or purchases in the purchase
of United States government agency securities and mortgage-backed securities;
(3) developing a commercial line of business through the pending acquisition of
CCB in the fiscal year ended March 31, 2007 ("fiscal 2007"); (4) generating fee
income by attracting and retaining core deposit accounts, and expanding its ATM
network and sale of wealth management products; and (5) continuing to monitor
and control its expenses by efficiently utilizing personnel, branch facilities
and alternative delivery channels (telephone banking, online banking, and ATMs)
to service its customers. The business is not operated in such a way that would
require segment reporting.
Carver Federal's primary market area for deposits consists of the areas
currently served by its eight branch offices with an anticipation of two
additional offices with the successful acquisition of CCB. Carver Federal
considers its primary lending market to include Bronx, Kings, New York and
Queens counties, together comprising New York City, and lower Westchester
County, New York. See "Item 2--Properties."
Although Carver Federal's branch offices are located in areas that were
historically underserved by other financial institutions, Carver Federal is
facing increasing competition for deposits and residential mortgage lending in
its immediate market areas. Management believes that this competition has become
more intense as a result of an increased examination emphasis by federal banking
regulators on financial institutions' fulfillment of their responsibilities
under the Community Reinvestment Act ("CRA") and the improving economic
conditions in its market area. The Bank's competition for loans comes
principally from mortgage banking companies, commercial banks, savings banks and
savings and loan associations. The Bank's most direct competition for deposits
comes from commercial banks, savings banks, savings and loan associations and
credit unions. Competition for deposits also comes from money market mutual
funds and other corporate and government securities funds as well as from other
financial intermediaries such as brokerage firms and insurance companies. Many
of Carver Federal's competitors have substantially greater resources than Carver
Federal and offer a wider array of financial services and products than Carver
Federal. At times, these larger financial institutions may offer below market
interest rates on mortgage loans and above market interest rates for deposits.
These pricing concessions combined with competitors' larger presence in the New
York market add to the challenges Carver Federal faces in expanding its current
market share and growing its near term profitability. The Bank believes that it
can compete with these institutions by offering a competitive range of products
and services through personalized service and community involvement and by
growing the customer base and product suite with the pending acquisition of CCB.
Carver continues to evaluate acquisition opportunities as part of its
strategic objective for long term growth and may acquire directly or indirectly
through Carver Federal.
As of June 15, 2006, Carver Federal had 126 full-time equivalent employees,
none of whom was represented by a collective bargaining agreement. The Bank
considers its employee relations to be satisfactory.
AVAILABLE INFORMATION
The Company makes available on or through its internet website,
http://www.carverbank.com, its Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Such
reports are free of charge and are available as soon as reasonably practicable
after the Company electronically files such material with, or furnishes it to,
the Securities and Exchange Commission ("SEC"). The public may read and copy any
materials the Company files with the SEC at the SEC's Public Reference Room at
450 Fifth Street, NW, Washington, DC, 20549. Information may be obtained on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC, including the Company, at http://www.sec.gov.
In addition, certain other basic corporate documents, including our
Corporate Governance Principles, Code of Ethics, Code of Ethics for Senior
Financial Officers and the charters of our Finance and Audit Committee,
Compensation Committee and Nominating/Corporate Governance Committee and the
date of our annual meeting are posted on our website. Printed copies of these
documents are also available free of charge to any stockholder who requests
them. Stockholders seeking additional information should contact the Corporate
Secretary's office by mail at 75 West 125th Street, New York, NY 10027 or by
e-mail at corporatesecretary@carverbank.com.
LENDING ACTIVITIES
GENERAL. Carver Federal's principal lending activity is the origination or
purchase of first mortgage loans for the purpose of purchasing or refinancing
one- to four-family residential, multifamily, and commercial properties. Carver
Federal also originates or participates in loans for the construction or
renovation of commercial properties and residential housing developments. In
addition, Carver Federal provides permanent and end loan financing upon
completion of construction and, to a lesser extent, originates secured consumer
and business loans. First mortgage loan purchases during the fiscal year ended
March 31, 2006 ("fiscal 2006"), accounted for 46.5% of loan additions. In order
to achieve the Bank's loan growth objectives, loan purchases are made to
supplement originations.
LOAN PORTFOLIO COMPOSITION. Gross loans receivable increased by $71.4
million, or 16.7%, to $496.2 million at March 31, 2006 compared to $424.7
million at March 31, 2005. Carver Federal's net loan portfolio as a percentage
of total assets increased to 74.7% at March 31, 2006 compared to 67.4% at March
31, 2005. One- to four-family mortgage loans totaled $143.4 million, or 28.9% of
Carver Federal's total gross loan portfolio, multifamily loans totaled $104.7
million, or 21.1% of total gross loans, non-residential real estate loans, which
includes commercial and church loans, totaled $154.0 million, or 31.1% of total
gross loans, and construction loans, net of loans in process, totaled $92.5
million, or 18.6% of total gross loans. Consumer (credit card loans, personal
loans, and home improvement loans) and business loans totaled $1.5 million, or
0.3% of total gross loans.
Carver Federal pays a premium when the effective yield on the loans being
purchased is greater than the current market rate for comparable loans. These
premiums are amortized as the loan is repaid. It is possible that, in a
declining interest rate environment, the rate or speed at which loans repay may
increase which may have the effect of accelerating the amortization of the
premium and therefore reducing the effective yield of the loan. Total premiums
Carver paid on purchased loans increased by $147,000 or 8.4%, to $1.9 million at
March 31, 2006 compared to $1.7 million at March 31, 2005. The increase was
attributable to additional premiums recorded on new loans purchased.
Allowance for loan losses was substantially unchanged at $4.0 million at
March 31, 2006 compared to $4.1 million at March 31, 2005. During fiscal 2006
$82,000 in net charge-offs were recorded and no additional provisions for loan
losses were established. See "--Asset Quality--Asset Classification and
Allowance for Losses."
The following table sets forth selected data relating to the composition of
Carver Federal's loan portfolio by type of loan at the dates indicated.
AT MARCH 31,
------------------------------------------------------------------------
2006 2005 2004
---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One- to four-family $ 143,433 28.91% $ 155,797 36.69% $ 98,645 27.80%
Multifamily 104,718 21.11% 101,899 23.99% 120,252 33.88%
Non-residential 154,044 31.05% 116,769 27.49% 102,641 28.92%
Construction 92,511 18.64% 48,579 11.43% 27,376 7.71%
Consumer and business (1) 1,453 0.29% 1,697 0.40% 6,010 1.69%
--------- --------- --------- --------- --------- ---------
Total gross loans 496,159 100.00% 424,741 100.00% 354,924 100.00%
========= ========= =========
ADD:
Premium on loans 1,890 1,743 1,264
LESS:
Deferred fees and loan discounts (602) (400) (163)
Allowance for loan Losses (4,015) (4,097) (4,125)
--------- --------- ---------
Net loan portfolio $ 493,432 $ 421,987 $ 351,900
========= ========= =========
AT MARCH 31,
-----------------------------------------------
2003 2002
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- ---------
REAL ESTATE LOANS:
One- to four-family $ 71,735 24.20% $ 122,814 41.84%
Multifamily 131,749 44.45% 118,589 40.39%
Non-residential 79,244 26.74% 40,101 13.66%
Construction 11,539 3.89% 9,742 3.32%
Consumer and business (1) 2,125 0.72% 2,328 0.79%
--------- --------- --------- ---------
Total gross loans 296,392 100.00% 293,574 100.00%
========= =========
ADD:
Premium on loans 867 906
LESS:
Deferred fees and loan discounts (363) (642)
Allowance for loan Losses (4,158) (4,128)
--------- ---------
Net loan portfolio $ 292,738 $ 289,710
========= =========
(1) Includes personal, credit card, home equity, home improvement and business
loans.
ONE- TO FOUR-FAMILY RESIDENTIAL LENDING. Traditionally, Carver Federal's
lending activity has been the origination and purchase of loans secured by first
mortgages on existing one- to four-family residences. Carver Federal originates
and purchases one- to four-family residential mortgage loans in amounts that
usually range between $35,000 and $750,000. Approximately 95% of Carver
Federal's one- to four-family residential mortgage loans at March 31, 2006 had
adjustable rates and approximately 5% had fixed rates. Over the last fiscal
year, Carver Federal has shifted its efforts from primarily originating and
purchasing one- to four-family residential loans to more profitable
non-residential and construction real estate loans. This has resulted in a $12.4
million reduction in one- to four-family residential real estate loans.
Carver Federal's one- to four-family residential mortgage loans are
generally for terms of 30 years, amortized on a monthly basis, with principal
and interest due each month. Residential mortgage loans often remain outstanding
for significantly shorter periods than their contractual terms. These loans
customarily contain "due-on-sale" clauses that permit the Bank to accelerate
repayment of a loan upon transfer of ownership of the mortgaged property. Also,
borrowers may refinance or prepay one- to four-family residential loans at their
option without penalty.
The Bank's lending policies generally limit the maximum loan-to-value
("LTV") ratio on one- to four-family residential mortgage loans secured by
owner-occupied properties to 95% of the lesser of the appraised value or
purchase price, with private mortgage insurance required on loans with LTV
ratios in excess of 80%. Under certain special loan programs, Carver Federal
originates and sells loans secured by single-family homes purchased by first
time home buyers where the LTV ratio may be up to 97%.
Carver Federal's fixed-rate, one- to four-family residential mortgage loans
are underwritten in accordance with applicable secondary market underwriting
guidelines and requirements for sale. From time to time the Bank has sold such
loans to Federal National Mortgage Association ("FNMA"), the State of New York
Mortgage Agency ("SONYMA") and other third parties. Loans are generally sold
with limited recourse on a servicing retained basis except to SONYMA where the
sale is made with servicing released. Carver Federal uses several servicing
firms to sub-service mortgage loans, whether held in portfolio or sold with the
servicing retained. At March 31, 2006, the Bank, through its sub-servicers,
serviced $22.8 million in loans for FNMA and $10.4 million for other third
parties.
Carver Federal offers one-year, three-year, five/one-year and
five/three-year adjustable-rate one- to four-family residential mortgage loans.
These loans are generally retained in Carver Federal's portfolio although they
may be sold on the secondary market. They are indexed to the weekly average rate
on one-year, three-year and five-year U.S. Treasury securities, respectively,
adjusted to a constant maturity (usually one year), plus a margin. The rates at
which interest accrues on these loans are adjustable every one, three or five
years, generally with limitations on adjustments of two percentage points per
adjustment period and six percentage points over the life of a one-year
adjustable-rate mortgage and four percentage points over the life of three-year
and five-year adjustable-rate mortgages.
The retention of adjustable-rate loans in Carver Federal's portfolio helps
reduce Carver Federal's exposure to increases in prevailing market interest
rates. However, there are unquantifiable credit risks resulting from potential
increases in costs to borrowers in the event of upward repricing of
adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers. Although adjustable-rate loans allow
the Bank to increase the sensitivity of its interest-earning assets to changes
in interest rates, the extent of this interest rate sensitivity is limited by
periodic and lifetime interest rate adjustment limitations. Accordingly, there
can be no assurance that yields on the Bank's adjustable-rate loans will fully
adjust to compensate for increases in the Bank's cost of funds. Adjustable-rate
loans increase the Bank's exposure to decreases in prevailing market interest
rates, although decreases in the Bank's cost of funds would tend to offset this
effect.
MULTIFAMILY REAL ESTATE LENDING. Carver Federal continued to originate and
purchase multifamily loans during fiscal 2006. Rates offered on this product are
considered to be competitive with flexible terms that make this product
attractive to borrowers. Multifamily property lending entails additional risks
compared to one- to four-family residential lending. For example, such loans are
dependent on the successful operation of such buildings and can be significantly
impacted by supply and demand conditions in the market for multifamily
residential units. Over the past several years, Carver Federal has expanded its
presence in the multifamily lending market in the New York City metropolitan
area. At March 31, 2006, multifamily loans totaled $104.7 million, or 21.1% of
Carver Federal's gross loan portfolio.
Carver Federal's multifamily product guidelines generally require that the
maximum LTV not exceed 80% based on the appraised value of the mortgaged
property. The Bank generally requires a debt service coverage ratio ("DSCR") of
at least 1.25 on multifamily loans, which requires the properties to generate
cash flow after expenses and allowances in excess of the principal and interest
payment. Carver Federal originates and purchases multifamily mortgage loans,
which are predominantly adjustable rate loans that generally amortize on the
basis of a 15-, 20-, 25- or 30-year period and require a balloon payment after
the first five years, or the borrower may have an option to extend the loan for
two additional five-year periods. The Bank, on a case-by-case basis, originates
ten-year fixed rate loans.
To help ensure continued collateral protection and asset quality for the
term of multifamily real estate loans, Carver Federal employs a loan risk-rating
system. Under the risk-rating system, all commercial real estate loans are
risk-rated internally at the time of origination and again annually to evaluate
any changes in the credit profile of the borrower and the underlying collateral.
Carver Federal's independent internal loan review personnel prepare written
summary reports of multifamily real estate loan relationships of $250,000 to
$2.0 million while an independent consulting firm prepares a written report for
relationships exceeding $2.0 million. Summary reports are then reviewed by the
Internal Asset Review Committee for changes in the credit profile of individual
borrowers and the portfolio as a whole.
NON-RESIDENTIAL REAL ESTATE LENDING. Carver Federal's non-residential real
estate lending activity consists predominantly of originating loans for the
purpose of purchasing or refinancing office, mixed-use (properties used for both
commercial and residential purposes but predominantly commercial), retail and
church buildings in its market area. Non-residential real estate lending entails
additional risks compared with one- to four-family residential and multifamily
lending. For example, such loans typically involve large loan balances to single
borrowers or groups of related borrowers, and the payment experience on such
loans typically is dependent on the successful operation of the commercial
property. Carver Federal's maximum LTV on non-residential real estate mortgage
loans is generally 75% based on the appraised value of the mortgaged property.
The Bank generally requires a DSCR of at least 1.30 on non-residential real
estate loans. The Bank requires the assignment of rents of all tenants' leases
in the mortgaged property, which serves as additional security for the mortgage
loan. At March 31, 2006, non-residential real estate mortgage loans totaled
$154.0 million, or 31.1% of the gross loan portfolio. This balance also reflects
a year over year increase of $37.3 million which is in line with the Bank's
objective of investing in higher yielding loans.
All non-residential real estate loans are risk rated internally. At least
annually, Carver Federal's loan review personnel prepare written summary reports
for relationships of $250,000 to $2.0 million. An independent third party also
risk-rates and produce written summary reports for non-residential loans over
$2.0 million.
Historically, Carver Federal has been a New York City metropolitan area
leader in the origination of loans to churches. At March 31, 2006, loans to
churches totaled $14.6 million, or 2.9% of the Bank's gross loan portfolio.
These loans generally have five-, seven- or ten-year terms with 15-, 20- or
25-year amortization periods and a balloon payment due at the end of the term
and generally have no greater than a 70% LTV ratio. The Bank provides
construction financing for churches and generally provides permanent financing
upon completion of construction. There are currently 25 church loans in the
Bank's loan portfolio.
Loans secured by real estate owned by faith-based organizations generally
are larger and involve greater risks than one- to four-family residential
mortgage loans. Because payments on loans secured by such properties are often
dependent on voluntary contributions by members of the church's congregation,
repayment of such loans may be subject to a greater extent to adverse conditions
in the economy. The Bank seeks to minimize these risks in a variety of ways,
including reviewing the organization's financial condition, limiting the size of
such loans and establishing the quality of the collateral securing such loans.
The Bank determines the appropriate amount and type of security for such loans
based in part upon the governance structure of the particular organization, the
length of time the church has been established in the community and a cash flow
analysis of the church to determine its ability to service the proposed loan.
Carver Federal will obtain a first mortgage on the underlying real property and
often requires personal guarantees of key members of the congregation and/or key
person life insurance on the pastor of the congregation. The Bank may also
require the church to obtain key person life insurance on specific members of
the church's leadership. Asset quality in the church loan category has been
strong throughout Carver Federal's history. Management believes that Carver
Federal remains a leading lender to churches in its market area.
CONSTRUCTION LENDING. The Bank originates or participates in construction
loans for new construction and renovation of churches, multifamily buildings,
residential developments, community service facilities and affordable housing
programs. Carver Federal also offers construction loans to qualified individuals
and developers for new construction and renovation of one- to four-family,
multifamily or mixed use and commercial real estate in the Bank's market area.
The Bank's construction loans generally have adjustable interest rates and are
underwritten in accordance with the same standards as the Bank's mortgage loans
on existing properties. The loans provide for disbursement in stages as
construction is completed. Participation in construction loans may be at various
stages of funding. Construction terms are usually from 12 to 24 months. The
construction loan interest is capitalized as part of the overall project cost
and is funded monthly from the loan proceeds. Borrowers must satisfy all credit
requirements that apply to the Bank's permanent mortgage loan financing for the
mortgaged property. Carver Federal has established additional criteria for
construction loans to include an engineer's plan and cost review on all
construction budgets with appropriate interest reserves for loans in excess of
$250,000.
Construction financing generally is considered to involve a higher degree
of risk of loss than long term financing on improved and occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the mortgaged property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
project delays and cost overruns. If the estimate of construction costs proves
to be inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with a project having a value that is insufficient to
assure full repayment of such loan. The ability of a developer to sell developed
lots or completed dwelling units will depend on, among other things, demand,
pricing, availability of comparable properties and economic conditions. The Bank
has sought to minimize this risk by limiting construction lending to qualified
borrowers in the Bank's market areas, limiting the aggregate amount of
outstanding construction loans and imposing a stricter LTV ratio requirement
than that required for one- to four-family mortgage loans.
At March 31, 2006, the Bank had $92.5 million (net of $61.0 million of
committed but undisbursed funds) in construction loans outstanding, comprising
18.6% of the Bank's total gross loan portfolio. The balance at March 31, 2006 is
reflective of a $43.9 million, or 90.4 % increase over the last fiscal year,
consistent with management's objective to add higher yielding loans to
portfolio. Purchased construction loans represent 66.9% of total construction
loans in portfolio.
CONSUMER AND BUSINESS LOANS. At March 31, 2006, the Bank had approximately
$1.5 million in consumer and business loans, or 0.3% of the Bank's gross loan
portfolio. At March 31, 2006, $1.2 million, or 83.9% of the Bank's consumer and
business loans, was unsecured and $234,000, or 16.1%, was secured by savings
deposits. At the end of the fiscal year ended March 31, 2005 ("fiscal 2005") the
Bank froze all undrawn available credit lines on its credit card product in an
effort to terminate this product and collect repayments on outstanding balances
and related finance charges. Effective March 31, 2006 all unsecured credit card
accounts were converted to fixed rate installment loans with an amortization
period not to exceed 48 months. The Bank had discontinued the origination of
unsecured commercial business loans during the fourth quarter of the fiscal year
ended March 31, 1999. However, during the fourth quarter of the fiscal year
ended March 31, 2006, Carver Federal's Board of Directors approved the launch of
an unsecured Overdraft Line of Credit ("ODLOC") product for personal account
relationships only and approved the Bank to provide back-up liquidity for highly
rated U.S. corporate commercial paper borrowers ("CP Back-up") where a minority
bank is the administrative agent and is syndicated entirely to a minority bank
group. As of March 31, 2006, Carver Federal originated 17 ODLOCs with $25,450 in
commitments. The Bank subsequent to the fiscal year end entered into one
minority bank CP Back-up facility for $6.325 million with an AAA rated U.S.
corporate borrower and more CP Back-up facilities are anticipated for the fiscal
year ending March 31, 2007. The Bank is paid a commitment fee for this product.
Consumer loans generally involve more risk than first mortgage loans.
Collection of a delinquent loan is dependent on the borrower's continuing
financial stability, and thus is more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Further, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered. These loans may
also give rise to claims and defenses by a borrower against Carver Federal, and
a borrower may be able to assert claims and defenses against Carver Federal
which it has against the seller of the underlying collateral. In underwriting
secured consumer loans other than secured credit cards, Carver Federal considers
the borrower's credit history, an analysis of the borrower's income, expenses
and ability to repay the loan and the value of the collateral. The underwriting
for secured credit cards only takes into consideration the value of the
underlying collateral. See "--Asset Quality--Non-performing Assets."
LOAN PROCESSING. Carver Federal's loan originations are derived from a
number of sources, including referrals by realtors, builders, depositors,
borrowers and mortgage brokers, as well as walk-in customers. Loans are
originated by the Bank's personnel who receive a base salary, commissions and
other incentive compensation. Loan application forms are available at each of
the Bank's offices. All real estate loan and unsecured loan applications are
forwarded to the Bank's Lending Department for underwriting pursuant to
standards established in Carver's loan policy.
The underwriting and loan processing for residential loans is initiated
internally but undergoes subsequent review by an outsourced third party provider
for loans with LTV ratios greater 80% that require private mortgage insurance. A
commercial real estate loan application is completed for all multifamily and
non-residential properties which the Bank finances. Prior to loan approval, the
property is inspected by a loan officer. As part of the loan approval process,
consideration is given to an independent appraisal, location, accessibility,
stability of the neighborhood, environmental assessment, personal credit history
of the applicant(s) and the financial capacity of the applicant(s).
Upon receipt of a completed loan application from a prospective borrower, a
credit report and other verifications are ordered to confirm specific
information relating to the loan applicant's income and credit standing. It is
the Bank's policy to obtain an appraisal of the real estate intended to secure a
proposed mortgage loan from an independent fee appraiser approved by the Bank.
It is Carver Federal's policy to record a lien on the real estate securing
the loan and to obtain a title insurance policy that insures that the property
is free of prior encumbrances. Borrowers must also obtain hazard insurance
policies prior to closing and, when the property is in a flood plain as
designated by the Department of Housing and Urban Development, paid flood
insurance policies must be obtained. Most borrowers are also required to advance
funds on a monthly basis, together with each payment of principal and interest,
to a mortgage escrow account from which the Bank makes disbursements for items
such as real estate taxes and hazard insurance.
LOAN APPROVAL. Except for loans in excess of $5.0 million, mortgage loan
approval authority has been delegated by the Bank's Board of Directors ("Board")
to the Board's Asset Liability and Interest Rate Risk Committee. The Asset
Liability and Interest Rate Risk Committee has delegated to the Bank's
Management Loan Committee, which consists of certain members of executive
management, loan approval authority for loans up to and including $2.0 million.
All one- to four-family mortgage loans that conform to FNMA standards and limits
may be approved by the Residential Mortgage Loan Underwriter. Any loan that
represents an exception to the Bank's lending policies must be ratified by the
next higher approval authority. Loans above $5.0 million must be approved by the
full Board. Purchased loans are subject to the same approval process as
originated loans.
LOANS TO ONE BORROWER. Under the loans-to-one-borrower limits of the Office
of Thrift Supervision ("OTS"), with certain limited exceptions, loans and
extensions of credit to a single or related group of borrowers outstanding at
one time generally may not exceed 15% of the unimpaired capital and surplus of a
savings bank. See "--Regulation and Supervision--Federal Banking
Regulation--Loans to One Borrower Limitations." At March 31, 2006, the maximum
loan to one borrower under this test would be $9.9 million and the Bank had no
relationships that exceeded this limit.
LOAN SALES. Originations of one- to four-family real estate loans are
generally made on properties located within the New York City metropolitan area,
although Carver Federal does occasionally fund loans secured by property in
other areas. All such loans, however, satisfy the Bank's underwriting criteria
regardless of location. The Bank continues to offer one- to four-family
fixed-rate mortgage loans in response to consumer demand but requires that such
loans satisfy applicable secondary market guidelines of either FNMA or SONYMA to
provide opportunity for subsequent sale in the secondary market as desired to
manage interest rate risk exposure.
LOAN ORIGINATIONS AND PURCHASES. Loan originations were $111.3 million in
fiscal 2006 compared to $85.8 million in fiscal 2005 and $87.1 million in the
fiscal year ended March 31, 2004 ("fiscal 2004"). The increase in loan
originations in fiscal 2006 can be attributed to the Bank's commitment to
increasing its market share. The market continues to be challenging as new
lenders enter the already fiercely competitive marketplace.
During fiscal 2006, Carver Federal purchased a total of $96.1 million of
mortgage loans, consisting of performing adjustable-rate one- to four-family,
construction and non-residential mortgage loans to supplement its origination
efforts. This represented 46.5% of Carver Federal's addition to its loan
portfolio during fiscal 2006. The Bank purchases loans in order to increase
interest income and to manage its liquidity position. The Bank continues to
shift its loan production emphasis to take advantage of the higher yields and
better interest rate risk characteristics available on multifamily and
non-residential real estate mortgage loans, including those in construction, as
well as to increase its participation in multifamily and non-residential real
estate mortgage loans with other New York metropolitan area lenders. Loans
purchased in fiscal 2006 decreased $8.1 million, or 7.7%, from loan purchases of
$104.7 million during fiscal 2005.
The following table sets forth certain information with respect to Carver
Federal's loan originations, purchases and sales during the periods indicated.
YEAR ENDED MARCH 31,
--------------------------------------------------------------------------
2006 2005 2004
---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Loans Originated:
One- to four-family $ 15,132 8.18% $ 15,437 8.46% $ 14,284 8.33%
Multifamily 18,063 9.77 15,969 8.75 5,771 3.37
Non-residential 33,582 18.16 30,823 16.89 50,373 29.38
Construction 44,040 23.80 23,351 12.79 12,050 7.02
Consumer and business (1) 532 0.29 221 0.13 4,662 2.72
--------- --------- --------- --------- --------- ---------
Total loans originated 111,349 60.21 85,801 47.02 87,140 50.82
Loans purchased (2) 96,140 51.98 104,734 57.39 93,694 54.64
Loans sold (3) (22,543) (12.19) (8,043) (4.41) (9,358) (5.46)
--------- --------- --------- --------- --------- ---------
Net additions to loan portfolio $ 184,946 100.00% $ 182,492 100.00% $ 171,476 100.00%
========= ========= ========= ========= ========= =========
(1) Comprised of credit card, personal, home improvement and secured business
loans.
(2) Comprised primarily of one- to four-family mortgage loans, multifamily
mortgage loans and construction loans.
(3) Comprised primarily of one- to four-family loans.
Loans purchased by the Bank entail certain risks not necessarily associated
with loans the Bank originates. The Bank's purchased loans are generally
acquired without recourse and in accordance with the Bank's underwriting
criteria for originations. In addition, purchased loans have a variety of terms,
including maturities, interest rate caps and indices for adjustment of interest
rates, that may differ from those offered at the time by the Bank in connection
with the loans the Bank originates. The Bank initially seeks to purchase loans
in its market area, however, the Bank will purchase loans secured by property
secured outside its market area to meet its financial objectives. During fiscal
2006, the properties securing purchased loans were concentrated primarily in New
York and to a lesser extent, Vermont, New Jersey and Massachusetts. The market
areas in which the properties that secure the purchased loans are located may
differ from Carver Federal's market area and may be subject to economic and real
estate market conditions that may significantly differ from those experienced in
Carver Federal's market area. There can be no assurance that economic conditions
in these out-of-state areas will not deteriorate in the future, resulting in
increased loan delinquencies and loan losses among the loans secured by property
in these areas.
In an effort to reduce these risks, the Bank has sought to ensure that
purchased loans satisfy the Bank's underwriting standards and do not otherwise
have a higher risk of collection or loss than loans originated by the Bank. A
Lending Department officer monitors the inspection and confirms the review of
each purchased loan. Carver Federal also requires appropriate documentation and
further seeks to reduce its risk by requiring, in each buy/sell agreement, a
series of warranties and representations as to the underwriting standards and
the enforceability of the related legal documents. These warranties and
representations remain in effect for the life of the loan. Any misrepresentation
must be cured within 90 days of discovery or trigger certain repurchase
provisions in the buy/sell agreement.
INTEREST RATES AND LOAN FEES. Interest rates charged by Carver Federal on
mortgage loans are primarily determined by competitive loan rates offered in its
market area and minimum yield requirements for loans purchased by secondary
market sources. Mortgage loan rates reflect factors such as prevailing market
interest rate levels, the supply of money available to the banking industry and
the demand for such loans. These factors are in turn affected by general
economic conditions, the monetary policies of the federal government, including
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"), the general supply of money in the economy, tax policies and
governmental budget matters.
Carver Federal charges fees in connection with loan commitments and
originations, rate lock-ins, loan modifications, late payments, changes of
property ownership and for miscellaneous services related to its loans. Loan
origination fees are calculated as a percentage of the loan principal. The Bank
typically receives fees of between zero and one point (one point being
equivalent to 1% of the principal amount of the loan) in connection with the
origination of fixed-rate and adjustable-rate mortgage loans. The loan
origination fee, net of certain direct loan origination expenses, is deferred
and accreted into income over the estimated life of the loan using the interest
method. If a loan is prepaid or sold all remaining deferred fees with respect to
such loan are taken into income at such time.
In addition to the foregoing fees, Carver Federal receives fees for
servicing loans for others, which in turn generally are sub-serviced for Carver
Federal by a third party servicer. Servicing activities include the collection
and processing of mortgage payments, accounting for loan repayment funds and
paying real estate taxes, hazard insurance and other loan-related expenses out
of escrowed funds. Income from these activities varies from period to period
with the volume and type of loans originated, sold and purchased, which in turn
is dependent on prevailing market interest rates and their effect on the demand
for loans in the Bank's market area.
LOAN MATURITY SCHEDULE. The following table sets forth information at March
31, 2006 regarding the amount of loans maturing in Carver Federal's portfolio,
including scheduled repayments of principal, based on contractual terms to
maturity. Demand loans, loans having no schedule of repayments and no stated
maturity, and overdrafts are reported as due in one year or less. The table
below does not include any estimate of prepayments, which significantly shorten
the average life of all mortgage loans and may cause Carver Federal's actual
repayment experience to differ significantly from that shown below.
DUE DURING THE YEAR ENDING
MARCH 31, DUE THREE
------------------------------------------ TO FIVE DUE FIVE TO
2007 2008 2009 YEARS TEN YEARS
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Real Estate Loans:
One- to four-family $ 2,251 $ 2,288 $ 1,020 $ 32,744 $ 456
Multifamily 4,407 6,595 16,412 22,945 17,045
Non-residential 10,545 10,299 18,029 78,330 17,590
Construction 73,444 19,067 -- -- --
Consumer and business loans 14 116 48 938 224
------------ ------------ ------------ ------------ ------------
Total $ 90,661 $ 38,365 $ 35,509 $ 134,957 $ 35,315
============ ============ ============ ============ ============
DUE TEN TO DUE AFTER
20 YEARS 20 YEARS TOTAL
------------ ------------ ------------
Real Estate Loans:
One- to four-family $ 2,446 $ 102,228 $ 143,433
Multifamily 11,228 26,086 104,718
Non-residential 8,634 10,617 154,044
Construction -- -- 92,511
Consumer and business loans 103 10 1,453
------------ ------------ ------------
Total $ 22,411 $ 138,941 $ 496,159
============ ============ ============
The following table sets forth as of March 31, 2006 amounts in each loan
category that are contractually due after March 31, 2007 and whether such loans
have fixed or adjustable interest rates. Scheduled contractual principal
repayments of loans do not necessarily reflect the actual lives of such assets.
The average life of long term loans is substantially less than their contractual
terms due to prepayments. In addition, due-on-sale clauses in mortgage loans
generally give Carver Federal the right to declare a conventional loan due and
payable in the event, among other things, that a borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and tends to decrease
when current mortgage loan market rates are substantially lower than rates on
existing mortgage loans.
DUE AFTER MARCH 31, 2007
-----------------------------------------
FIXED ADJUSTABLE TOTAL
------------ ------------ ------------
( IN THOUSANDS )
Real Estate Loans:
One- to four-family $ 7,454 $ 133,728 $ 141,182
Multifamily 33,583 66,728 100,311
Non-residential 36,526 106,973 143,499
Construction -- 19,067 19,067
Consumer and business loans 1,085 354 1,439
------------ ------------ ------------
Total $ 78,648 $ 326,850 $ 405,498
============ ============ ============
Asset Quality
GENERAL. One of the Bank's key operating objectives continues to be to
maintain a high level of asset quality. Through a variety of strategies,
including, but not limited to, monitoring loan delinquencies and borrower
workout arrangements, the Bank has been proactive in addressing problem and
non-performing assets which, in turn, has helped to build the strength of the
Bank's financial condition. Such strategies, as well as the Bank's concentration
on one- to four-family, commercial mortgage lending (which includes multifamily
and non-residential real estate loans) and construction lending, the maintenance
of sound credit standards for new loan originations and a strong real estate
market, have resulted in the Bank maintaining a low level of non-performing
assets.
The underlying credit quality of the Bank's loan portfolio is dependent
primarily on each borrower's ability to continue to make required loan payments
and, in the event a borrower is unable to continue to do so, the value of the
collateral should be adequate to secure the loan. A borrower's ability to pay
typically is dependent primarily on employment and other sources of income,
which, in turn, is impacted by general economic conditions, although other
factors, such as unanticipated expenditures or changes in the financial markets,
may also impact the borrower's ability to pay. Collateral values, particularly
real estate values, are also impacted by a variety of factors, including general
economic conditions, demographics, maintenance and collection or foreclosure
delays.
NON-PERFORMING ASSETS. When a borrower fails to make a payment on a
mortgage loan, immediate steps are taken by Carver Federal and its sub-servicers
to have the delinquency cured and the loan restored to current status. With
respect to mortgage loans, once the payment grace period has expired (in most
instances 15 days after the due date), a late notice is mailed to the borrower
within two business days and a late charge is imposed if applicable. If payment
is not promptly received, the borrower is contacted by telephone and efforts are
made to formulate an affirmative plan to cure the delinquency. Additional calls
are made by the 20th and 25th day of the delinquency. If a mortgage loan becomes
30 days delinquent, a letter is mailed to the borrower requesting payment by a
specified date. If a mortgage loan becomes 60 days delinquent, Carver Federal
seeks to make personal contact with the borrower and also has the property
inspected. If a mortgage becomes 90 days delinquent, a letter is sent to the
borrower demanding payment by a certain date and indicating that a foreclosure
suit will be filed if the deadline is not met. If payment is still not made, the
Bank may pursue foreclosure or other appropriate action.
When a borrower fails to make a payment on a consumer loan, steps are taken
by Carver Federal's loan servicing department to have the delinquency cured and
the loan restored to current status. Once the payment grace period has expired
(15 days after the due date), a late notice is mailed to the borrower
immediately and a late charge is imposed if applicable. If payment is not
promptly received, the borrower is contacted by telephone, and efforts are made
to formulate an affirmative plan to cure the delinquency. If a consumer loan
becomes 30 days delinquent, a letter is mailed to the borrower requesting
payment by a specified date. If the loan becomes 60 days delinquent, the account
is given to an independent collection agency to follow up with the collection of
the account. If the loan becomes 90 days delinquent, a final warning letter is
sent to the borrower and any co-borrower. If the loan remains delinquent, it is
reviewed for charge-off. The Bank's collection efforts generally continue after
the loan is charged off.
The following table sets forth information with respect to Carver Federal's
non-performing assets at the dates indicated.
AT MARCH 31,
------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Loans accounted for on a non-accrual basis (1):
Real estate:
One- to four-family $ 1,098 $ 149 $ 558 $ 1,113 $ 756
Multifamily 763 167 1,532 -- 253
Non-residential -- 665 -- 639 1,754
Construction 865 -- 23 23 23
Consumer and business 4 17 10 27 37
------------ ------------ ------------ ------------ ------------
Total non-accrual loans 2,730 998 2,123 1,802 2,823
------------ ------------ ------------ ------------ ------------
Accruing loans contractually past due 90 days or more -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total of non-accrual and accruing 90-day past due loans $ 2,730 $ 998 $ 2,123 $ 1,802 $ 2,823
------------ ------------ ------------ ------------ ------------
Other non-performing assets (2):
Real estate:
Land 26 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total other non-performing assets 26 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total non-performing assets (3) $ 2,756 $ 998 $ 2,123 $ 1,802 $ 2,823
============ ============ ============ ============ ============
Non-performing loans to total loans 0.55% 0.23% 0.60% 0.61% 0.96%
Non-performing assets to total assets 0.42% 0.16% 0.39% 0.36% 0.63%
(1) Non-accrual status denotes any loan where the delinquency exceeds 90 days
past due and in the opinion of management the collection of additional
interest is doubtful. Payments received on a non-accrual loan are either
applied to the outstanding principal balance or recorded as interest
income, depending on assessment of the ability to collect on the loan.
During the fiscal year ended March 31, 2006, gross interest income of
$79,000 would have been recorded on non-accrual loans had they been current
throughout the year.
(2) Other non-performing assets generally represent property acquired by the
Bank in settlement of loans (i.e., through foreclosure, repossession or as
an in-substance foreclosure). Although the Bank had no foreclosed real
estate, as a result of a property tax redemption, the Bank took fee
ownership of a vacant tract of land in Bayshore, NY. These assets are
recorded at the lower of their fair value or the cost to acquire.
(3) Total non-performing assets consist of non-accrual loans, accruing loans 90
days or more past due and property acquired in settlement of loans.
At March 31, 2006, total non-performing assets increased by $1.8 million to
$2.8 million compared to $998,000 at March 31, 2005. At March 31, 2006 other
non-performing assets of $26,000 relates to one parcel of land that Carver
Federal acquired as a result of a property tax redemption. The increase in total
non-performing assets for fiscal 2006 primarily reflects three additional one-to
four-family residential real estate loans. Increases in non-performing asset
levels are consistent with the growth the Bank experienced in its loan portfolio
during the fiscal year. Management believes the Bank's current level of
non-performing assets to total loans remains within the range of its peers.
There were no accruing loans contractually past due 90 days or more at
March 31, 2006 and March 31, 2005, reflecting the continued practice adopted by
the Bank during the fiscal year ended March 31, 2000 to either write off or
place on non-accrual status all loans contractually past due 90 days or more.
ASSET CLASSIFICATION AND ALLOWANCES FOR LOSSES. Federal regulations and the
Bank's policies require the classification of assets on the basis of quality on
a quarterly basis. An asset is classified as "substandard" if it is determined
to be inadequately protected by the current net worth and paying capacity of the
obligor or the current value of the collateral pledged, if any. An asset is
classified as "doubtful" if full collection is highly questionable or
improbable. An asset is classified as "loss" if it is considered un-collectible,
even if a partial recovery could be expected in the future. The regulations also
provide for a "special mention" designation, described as assets that do not
currently expose a savings institution to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. Assets classified as substandard or
doubtful require a savings institution to establish general allowances for loan
losses. If an asset or portion thereof is classified as a loss, a savings
institution must either establish specific allowances for loan losses in the
amount of the portion of the asset classified loss or charge off such amount.
Federal examiners may disagree with a savings institution's classifications. If
a savings institution does not agree with an examiner's classification of an
asset, it may appeal this determination to the OTS Regional Director.
At March 31, 2006, Carver Federal had $2.2 million of loans classified as
substandard which represented 0.3% of the Bank's total assets. As of March 31,
2005 the Bank had $1.0 million as loans classified as substandard, representing
0.2% of the Bank's total assets. There were no loans classified as doubtful or
loss at March 31, 2006 and March 31, 2005.
The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan losses and
lease losses. The policy statement provides guidance for financial institutions
on both the responsibilities of management for the assessment and establishment
of adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems, that management analyze
all significant factors that affect the ability to collect the portfolio in a
reasonable manner and that management establish acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement. Although
management believes that adequate specific and general loan loss allowances have
been established, actual losses are dependent upon future events and, as such,
further additions to the level of specific and general loan loss allowances may
become necessary. Federal examiners may disagree with the savings institution as
to the appropriate level of the institution's allowance for loan losses. While
management believes Carver Federal has established its existing loss allowances
in accordance with generally accepted accounting principles, there can be no
assurance that regulators, in reviewing Carver Federal's assets, will not
require Carver Federal to increase its loss allowance, thereby negatively
affecting Carver Federal's reported financial condition and results of
operations.
Carver Federal's methodology for establishing the allowance for loan losses
takes into consideration probable losses that have been identified in connection
with specific loans as well as losses that have not been identified but can be
expected to occur. Further, management reviews the ratio of allowances to total
loans (including projected growth) and recommends adjustments to the level of
allowances accordingly. The Internal Asset Review Committee conducts reviews of
the Bank's loans on at least a quarterly basis and evaluates the need to
establish general and specific allowances on the basis of this review. In
addition, management actively monitors Carver Federal's asset quality and
charges off loans and properties acquired in settlement of loans against the
allowances for losses on loans and such properties when appropriate and provides
specific loss reserves when necessary. Although management believes it uses the
best information available to make determinations with respect to the allowances
for losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.
Additionally, the Internal Asset Review Committee reviews Carver Federal's
assets on a quarterly basis to determine whether any assets require
classification or re-classification. The Bank has a centralized loan servicing
structure that relies upon outside servicers, each of which generates a monthly
report of delinquent loans. The Board has designated the Internal Asset Review
Committee to perform quarterly reviews of the Bank's asset quality, and their
report is submitted to the Board for review. The Asset Liability and Interest
Rate Risk Committee of the Board establishes policy relating to internal
classification of loans and also provides input to the Internal Asset Review
Committee in its review of classified assets. In originating loans, Carver
Federal recognizes that credit losses will occur and that the risk of loss will
vary with, among other things, the type of loan being made, the creditworthiness
of the borrower over the term of the loan, general economic conditions and, in
the case of a secured loan, the quality of the security for the loan. It is
management's policy to maintain a general allowance for loan losses based on,
among other things, regular reviews of delinquencies and loan portfolio quality,
character and size, the Bank's and the industry's historical and projected loss
experience and current and forecasted economic conditions. In addition,
considerable uncertainty exists as to the future improvement or deterioration of
the real estate markets in various states, or of their ultimate impact on Carver
Federal as a result of its purchased loans in such states. See "--Lending
Activities--Loan Purchases and Originations." Carver Federal increases its
allowance for loan losses by charging provisions for possible losses against the
Bank's income. General allowances are established by the Board on at least a
quarterly basis based on an assessment of risk in the Bank's loans, taking into
consideration the composition and quality of the portfolio, delinquency trends,
current charge-off and loss experience, the state of the real estate market and
economic conditions generally. Specific allowances are provided for individual
loans, or portions of loans, when ultimate collection is considered improbable
by management based on the current payment status of the loan and the fair value
or net realizable value of the security for the loan.
At the date of foreclosure or other repossession or at the date the Bank
determines a property is an impaired property, the Bank transfers the property
to real estate acquired in settlement of loans at the lower of cost or fair
value, less estimated selling costs. Fair value is defined as the amount in cash
or cash-equivalent value of other consideration that a real estate parcel would
yield in a current sale between a willing buyer and a willing seller. Any amount
of cost in excess of fair value is charged-off against the allowance for loan
losses. Carver Federal records an allowance for estimated selling costs of the
property immediately after foreclosure. Subsequent to acquisition, management
periodically evaluates the property and an allowance is established if the
estimated fair value of the property, less estimated costs to sell, declines.
If, upon ultimate disposition of the property, net sales proceeds exceed the net
carrying value of the property, a gain on sale of real estate is recorded. At
March 31, 2006, the Bank had no foreclosed real estate, however, as a result of
a property tax redemption, the Bank took fee ownership of a vacant tract of land
in Bayshore, NY. See Note 1 of Notes to Consolidated Financial Statements.
The following table sets forth an analysis of Carver Federal's allowance
for loan losses for the periods indicated.
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Balance at beginning of year $ 4,097 $ 4,125 $ 4,158 $ 4,128 $ 3,551
Loans charged-off:
Real Estate:
One- to four-family 17 8 6 2 --
Non-residential -- -- 55 -- --
Consumer and business 100 65 264 226 500
------------ ------------ ------------ ------------ ------------
Total Charge-offs 117 73 325 228 500
------------ ------------ ------------ ------------ ------------
Recoveries:
One- to four-family 5 -- 107 -- 3
Non-residential -- -- 10 -- --
Consumer and business 30 45 175 258 174
------------ ------------ ------------ ------------ ------------
Total Recoveries 35 45 292 258 177
------------ ------------ ------------ ------------ ------------
Net loans charged-off (recovered) 82 28 33 (30) 323
------------ ------------ ------------ ------------ ------------
Provision for losses -- -- -- -- 900
------------ ------------ ------------ ------------ ------------
Balance at end of year $ 4,015 $ 4,097 $ 4,125 $ 4,158 $ 4,128
============ ============ ============ ============ ============
Ratio of net charge-offs to average loans outstanding 0.02% 0.01% 0.01% -0.01% 0.11%
Ratio of allowance to total loans 0.81% 0.96% 1.16% 1.40% 1.41%
Ratio of allowance to non-performing assets (1) 147.07% 410.65% 194.30% 230.74% 146.23%
(1) Non-performing assets consist of non-accrual loans, accruing loans 90 days
or more past due and property acquired in settlement of loans.
The following table allocates the allowance for loan losses by asset
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
AT MARCH 31,
----------------------------------------------------------------------------------------
2006 2005 2004
--------------------------- -------------------------- ---------------------------
% OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
AMOUNT GROSS LOANS AMOUNT GROSS LOANS AMOUNT GROSS LOANS
------------ ------------ ------------ ----------- ------------ ------------
(DOLLARS IN THOUSANDS)
Loans:
Real Estate
One- to four-family $ 565 28.91% $ 528 36.69% $ 355 27.80%
Multifamily 1,084 21.11% 898 23.99% 1,240 33.88%
Non-residential 960 31.05% 1,129 27.49% 853 28.92%
Construction 303 18.64% 212 11.43% 158 7.71%
Consumer and business 442 0.29% 554 0.40% 487 1.69%
Unallocated 661 N/A 776 N/A 1,032 N/A
------------ ------------ ------------ ------------ ------------ ------------
Total Allowance for loan losses $ 4,015 100.00% $ 4,097 100.00% $ 4,125 100.00%
============ ============ ============ ============ ============ ============
----------------------------------------------------------
2003 2002
-------------------------- ---------------------------
% OF LOANS % OF LOANS
IN EACH IN EACH
CATEGORY CATEGORY
TO TOTAL TO TOTAL
AMOUNT GROSS LOANS AMOUNT GROSS LOANS
------------ ------------ ------------ ------------
Loans:
Real Estate
One- to four-family $ 298 24.20% $ 429 41.84%
Multifamily 656 44.45% 1,468 40.39%
Non-residential 1,967 26.74% 729 13.66%
Construction 170 3.89% 76 3.32%
Consumer and business 344 0.72% 377 0.79%
Unallocated 723 N/A 1,049 N/A
------------ ------------ ------------ ------------
Total Allowance for loan losses $ 4,158 100.00% $ 4,128 100.00%
============ ============ ============ ============
INVESTMENT ACTIVITIES
GENERAL. The Bank utilizes mortgage-backed and other investment securities
in its asset/liability management strategy. In making investment decisions, the
Bank considers, among other things, its yield and interest rate objectives, its
interest rate and credit risk position and its liquidity and cash flow.
The Bank must maintain minimum levels of investments that qualify as liquid
assets under OTS regulations. Liquidity may increase or decrease depending upon
the availability of funds and comparative yields on investments in relation to
the return on loans. The Bank's liquidity policy requires that cash flow
projections are regularly reviewed and updated to assure that adequate liquidity
is maintained.
Generally, the investment policy of the Bank is to invest funds among
categories of investments and maturities based upon the Bank's asset/liability
management policies, investment quality, loan and deposit volume and collateral
requirements, liquidity needs and performance objectives. Statement of Financial
Accounting Standards ("SFAS") No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES", requires that securities be classified into three
categories: trading, held-to-maturity, and available-for-sale. Securities that
are bought and held principally for the purpose of selling them in the near term
are classified as trading securities and are reported at fair value with
unrealized gains and losses included in earnings. Debt securities for which the
Bank has the positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost. All other securities not
classified as trading or held-to-maturity are classified as available-for-sale
and reported at fair value with unrealized gains and losses included, on an
after-tax basis, in a separate component of stockholders' equity. At March 31,
2006, the Bank had no securities classified as trading. At March 31, 2006, $81.9
million, or 75.6% of the Bank's mortgage-backed and other investment securities,
was classified as available-for-sale. The remaining $26.4 million, or 24.4%, was
classified as held-to-maturity.
MORTGAGE-BACKED SECURITIES. The Bank has invested in mortgage-backed
securities in order to achieve its asset/liability management goals and
collateral needs. Although mortgage-backed securities generally yield from 60 to
100 basis points less than whole loans, they present substantially lower credit
risk, are more liquid than individual mortgage loans and may be used to
collateralize obligations of the Bank. Because Carver Federal receives regular
payments of principal and interest from its mortgage-backed securities, these
investments provide more consistent cash flows than investments in other debt
securities, which generally only pay principal at maturity. Mortgage-backed
securities also help the Bank meet certain definitional tests for favorable
treatment under federal banking and tax laws. See "--Regulation and
Supervision--Federal Banking Regulation--QTL Test" and "Federal and State
Taxation."
At March 31, 2006, mortgage-backed securities constituted 14.6% of total
assets, as compared to 20.2% of total assets at March 31, 2005. Carver Federal
maintains a significant portfolio of mortgage-backed securities in the form of
Government National Mortgage Association ("GNMA") pass-through certificates,
FNMA and FHLMC participation certificates. GNMA pass-through certificates are
guaranteed as to the payment of principal and interest by the full faith and
credit of the United States Government while FNMA and FHLMC certificates are
each guaranteed by their respective agencies as to principal and interest.
Mortgage-backed securities generally entitle Carver Federal to receive a pro
rata portion of the cash flows from an identified pool of mortgages. The cash
flows from such pools are segmented and paid in accordance with a predetermined
priority to various classes of securities issued by the entity. Carver Federal
has also invested in pools of loans guaranteed as to principal and interest by
the Small Business Administration ("SBA").
The Bank seeks to manage interest rate risk by investing in adjustable-rate
mortgage-backed securities, which at March 31, 2006 constituted $91.7 million,
or 95.6% of the mortgage-backed securities portfolio. Mortgage-backed
securities, however, expose Carver Federal to certain unique risks. In a
declining rate environment, accelerated prepayments of loans underlying these
securities expose Carver Federal to the risk that it will be unable to obtain
comparable yields upon reinvestment of the proceeds. In the event the
mortgage-backed security has been funded with an interest-bearing liability with
maturity comparable to the original estimated life of the mortgage-backed
security, the Bank's interest rate spread could be adversely affected.
Conversely, in a rising interest rate environment, the Bank may experience a
lower than estimated rate of repayment on the underlying mortgages, effectively
extending the estimated life of the mortgage-backed security and exposing the
Bank to the risk that it may be required to fund the asset with a liability
bearing a higher rate of interest.
The following table sets forth the carrying value of Carver Federal's
mortgage-backed securities at the dates indicated.
AT MARCH 31,
-------------------------------
2006 2005 2004
-------- -------- --------
(IN THOUSANDS)
AVAILABLE-FOR-SALE:
GNMA $ 63,007 $ 83,425 $ 55,512
Fannie Mae 4,589 8,149 12,626
FHLMC 2,209 3,908 6,712
-------- -------- --------
Total available-for-sale 69,805 95,482 74,850
-------- -------- --------
HELD-TO-MATURITY:
GNMA $ 809 $ 1,070 $ 1,465
Fannie Mae 7,900 10,780 20,386
FHLMC 17,372 19,115 21,305
Other 323 337 318
-------- -------- --------
Total held-to-maturity 26,404 31,302 43,474
-------- -------- --------
Total mortgage-backed securities $ 96,209 $126,784 $118,324
======== ======== ========
The following table sets forth the scheduled final maturities, book and
fair values for Carver Federal's mortgage-backed securities at March 31, 2006.
Expected maturities will differ from contractual maturities due to scheduled
repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. The following table does not
take into consideration the effects of scheduled repayments or the effects of
possible prepayments.
WEIGHTED
BOOK FAIR AVERAGE
VALUE VALUE RATE
------- ------- --------
(Dollars in thousands)
AVAILABLE-FOR-SALE :
One through five years $ 300 $ 303 6.23%
Five through ten years 1,524 1,471 4.53%
After ten years 68,600 68,031 3.78%
------- ------- --------
$70,424 $69,805 3.81%
======= ======= ========
HELD-TO-MATURITY:
One through five years $ 50 $ 50 5.69%
After ten years 26,354 25,830 5.65%
------- ------- --------
$26,404 $25,880 5.65%
======= ======= ========
OTHER INVESTMENT SECURITIES. In addition to mortgage-backed securities, the
Bank also invests in high-quality assets (primarily government and agency
obligations) with short and intermediate terms (typically seven years or less)
to maturity. Carver Federal is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the Federal Home Loan
Bank ("FHLB"), certificates of deposit in federally insured institutions,
certain bankers' acceptances and federal funds. The Bank may also invest,
subject to certain limitations, in commercial paper having one of the two
highest investment ratings of a nationally recognized credit rating agency, and
certain other types of corporate debt securities and mutual funds. In fiscal
2005, as a result of the attempted acquisition of Independence Federal Savings
Bank ("IFSB"), Carver invested in 150,000 shares of IFSB common stock totaling
$3.1 million. However, on May 11, 2005, subsequent to the termination of that
acquisition agreement, the Company sold its entire equity investment in IFSB for
an aggregate price of $1.6 million.
The following table sets forth the carrying value of Carver Federal's other
securities available-for-sale at the dates indicated.
AT MARCH 31,
---------------------------------
2006 2005 2004
--------- --------- ---------
(IN THOUSANDS)
U.S. Government and Equity securities:
Available-for-sale $ 12,077 $ 22,551 $ 21,553
========= ========= =========
The following table sets forth by scheduled maturities the book and fair
values for Carver Federal's other securities available-for-sale at March 31,
2006.
WEIGHTED
BOOK FAIR AVERAGE
VALUE VALUE RATE
------------ ------------ ------------
(IN THOUSANDS)
Available-for-sale:
Less than one year $ 2,000 $ 1,982 2.43%
One through five years 10,386 10,095 3.85%
------------ ------------ ------------
$ 12,386 $ 12,077 3.62%
============ ============ ============
OTHER EARNING ASSETS. Federal regulations require the Bank to maintain an
investment in FHLB stock and a sufficient amount of liquid assets which may be
invested in cash and specified securities. For additional information, see
"--Regulation and Supervision--Federal Banking Regulation--Liquidity."
The following table sets forth the carrying value of Carver Federal's
investment in FHLB stock and liquid assets at the dates indicated.
AT MARCH 31,
------------------------------
2006 2005 2004
-------- -------- --------
(IN THOUSANDS)
FHLB stock $ 4,627 $ 5,125 $ 4,576
Federal funds sold 8,700 6,800 8,200
Deposit Activity and Other Sources of Funds
GENERAL. Deposits are the primary source of Carver Federal's funds for
lending and other investment purposes. In addition to deposits, Carver Federal
derives funds from loan principal repayments, loan and investment interest
payments, maturing investments and fee income. Loan and mortgage-backed
securities repayments and interest payments are a relatively stable source of
funds, while deposit inflows and outflows are significantly influenced by
prevailing market interest rates, pricing of deposits, competition and general
economic conditions. Borrowed money may be used to supplement the Bank's
available funds, and from time to time the Bank borrows funds from the FHLB and
has borrowed funds through repurchase agreements.
DEPOSITS. Carver Federal attracts deposits principally from within its
market area by offering a variety of deposit instruments, including passbook and
statement accounts and certificates of deposit, which range in term from 91 days
to seven years. Deposit terms vary, principally on the basis of the minimum
balance required, the length of time the funds must remain on deposit and the
interest rate. Carver Federal also offers Individual Retirement Accounts. Carver
Federal's policies are designed primarily to attract deposits from local
residents and businesses through the Bank's branch offices. Carver Federal also
holds deposits from various governmental agencies or authorities and
corporations. At March 31, 2006 the Bank held $10.6 million in brokered
deposits, specifically certificates of deposits.
Deposit interest rates, maturities, service fees and withdrawal penalties
on deposits are established based on the Bank's funds acquisition and liquidity
requirements, the rates paid by the Bank's competitors, current market rates,
the Bank's growth goals and applicable regulatory restrictions and requirements.
The following table sets forth the change in dollar amount of deposits
accounts offered by Carver Federal between the dates indicated. In fiscal 2006
the Bank opened one additional stand-alone ATMs in Bedford Stuyvesant, Brooklyn.
During fiscal 2005 the Bank opened two branch offices as well as two stand-alone
ATMs. The first branch office and ATM was opened in July 2004 at Atlantic
Terminal in Fort Greene, Brooklyn. A second ATM at 116th Street and a branch
office at 145th Street in Harlem were opened in December 2004 and January 2005,
respectively. During fiscal 2004 the Bank opened two stand-alone ATMs in Harlem
and a new branch office in Jamaica, Queens. The Bank's branch offices on 116th
Street and 145th Street in Harlem and in Jamaica operate in New York State
designated Banking Development Districts ("BDD"), which allow Carver Federal to
participate in BDD-related activities, including acquiring New York City and New
York State deposits. As of March 31, 2006, Carver Federal held $136.1 million in
BDD deposits.
YEAR ENDED MARCH 31,
--------------------------------
2006 2005 2004
--------------------------------
(DOLLARS IN THOUSANDS)
Deposits at beginning of year $455,870 $375,519 $349,066
Net increase before interest credited 39,847 74,896 21,804
Interest credited 8,921 5,455 4,649
-------- -------- --------
Deposits at end of year $504,638 $455,870 $375,519
======== ======== ========
Net increase during the year:
Amount $ 48,768 $ 80,351 $ 26,453
======== ======== ========
Percent 10.7% 21.4% 7.6%
======== ======== ========
The following table sets forth the distribution in the various types of the
Bank's deposit accounts and the related weighted average interest rates paid at
the dates indicated.
AT MARCH 31,
----------------------------------------------------------------------------------------------
2006 2005
---------------------------------------------- ----------------------------------------------
PERCENT OF WEIGHTED PERCENT OF WEIGHTED
TOTAL AVERAGE TOTAL AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
-------------- -------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Non-interest-bearing demand $ 31,085 6.2% --% $ 25,570 5.6% --%
NOW demand 27,904 5.5 0.31 24,095 5.3 0.30
Savings and clubs 139,724 27.7 0.68 137,810 30.2 0.62
Money market savings 40,045 7.9 2.41 36,294 8.0 1.34
Certificates of deposit 263,963 52.3 3.76 229,685 50.4 2.30
Other 1,917 0.4 1.47 2,416 0.5 1.13
-------------- -------------- -------------- -------------- -------------- --------------
Total $ 504,638 100.0% 2.37% $ 455,870 100.0% 1.47%
============== ============== ============== ============== ============== ==============
----------------------------------------------
2004
----------------------------------------------
PERCENT OF WEIGHTED
TOTAL AVERAGE
AMOUNT DEPOSITS RATE
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Non-interest-bearing demand $ 20,966 5.6% --%
NOW demand 22,671 6.0 0.30
Savings and clubs 131,120 34.9 0.60
Money market savings 30,842 8.2 0.74
Certificates of deposit 168,066 44.8 1.97
Other 1,854 0.5 1.46
-------------- -------------- --------------
Total $ 375,519 100.0% 1.18%
============== ============== ==============
The following table sets forth the amount and maturities of certificates of
deposit in specified weighted average interest rate categories at March 31,
2006.
PERIOD TO MATURITY MARCH 31,
---------------------------------------------------------------------- ----------------------
LESS THAN AFTER TOTAL PERCENT
RATE ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS 2006 OF TOTAL 2005 2004
- --------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
0% - 0.99% $ 635 $ 16 $ 10 $ 85 $ 746 0.28 % $ 688 $ 29,848
1% - 1.99% 8,826 304 7 -- 9,137 3.46 122,459 69,434
2% - 3.99% 105,120 14,943 7,862 9,677 137,602 52.13 92,181 53,294
4% and over 102,997 4,932 2,577 5,972 116,478 44.13 14,357 15,490
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 217,578 $ 20,195 $ 10,456 $ 15,734 $ 263,963 100.00 % $ 229,685 $ 168,066
========== ========== ========== ========== ========== ========== ========== ==========
Carver Federal's certificates of deposit of $100,000 or more were $183.5
million as of March 31, 2006 compared to $161.7 million at March 31, 2005. These
certificates of deposit over $100,000 include BDD deposits of $136.1 million and
$101.0 million at March 31, 2006 and 2005, respectively. Other deposits with
balances of $100,000 or more totaled $ 80.9 million and $64.8 million at March
31, 2006 and 2005, respectively.
BORROWED MONEY. Deposits are the primary source of funds for Carver
Federal's lending, investment and general operating activities. Carver Federal
is authorized, however, to use advances and securities sold under agreements to
repurchase ("Repos") from the FHLB and approved primary dealers to supplement
its supply of funds and to meet deposit withdrawal requirements. The FHLB
functions as a central bank providing credit for savings institutions and
certain other member financial institutions. As a member of the FHLB system,
Carver Federal is required to own stock in the FHLB and is authorized to apply
for advances. Advances are made pursuant to several different programs, each of
which has its own interest rate and range of maturities. Advances from the FHLB
are secured by Carver Federal's stock in the FHLB and a pledge of Carver
Federal's mortgage loan and mortgage-backed securities portfolios. One of the
elements of Carver Federal's investment strategy is to leverage the balance
sheet by increasing liabilities with FHLB advances and Repos and investing
borrowed funds primarily in adjustable-rate mortgage loan and mortgage-backed
securities products.
On September 17, 2003, Carver Federal Trust I issued 13,000 shares,
liquidation amount $1,000 per share, of floating rate capital securities. Gross
proceeds from the sale of these trust preferred debt securities were $13.0
million and, together with the proceeds from the sale of the trust's common
securities, were used to purchase approximately $13.4 million aggregate
principal amount of the Holding Company's floating rate junior subordinated debt
securities due 2033. The trust preferred debt securities are redeemable
quarterly at the option of the Company beginning on or after July 7, 2007 and
have a mandatory redemption date of September 17, 2033. Cash distributions on
the trust preferred debt securities are cumulative and payable at a floating
rate per annum (reset quarterly) equal to 3.05% over 3-month LIBOR, with a rate
at March 31, 2006 of 7.97%. The subordinated debt securities amounted to $12.9
million at March 31, 2006 and are included in other borrowed money on the
consolidated statement of financial condition. The Bank takes into consideration
the term of borrowed money with the repricing cycle of the mortgage loans on the
balance sheet. At March 31, 2006, Carver Federal had outstanding $93.8 million
in total borrowed money, consisting of the subordinated debt securities and
advances from FHLB.
The following table sets forth certain information regarding Carver
Federal's borrowed money at the dates and for the periods indicated:
AT OR FOR THE YEAR ENDED
MARCH 31,
-------- --------- --------
2006 2005 2004
-------- --------- --------
(DOLLARS IN THOUSANDS)
Amounts outstanding at the end of year:
FHLB-NY advances $ 80,935 $ 102,500 $ 91,516
Guaranteed preferred beneficial interest in junior subordinated debentures 12,857 12,799 12,741
Loan for employee stock ownership plan -- -- 25
Rate paid at year end:
FHLB-NY advances 4.13% 3.78% 3.92%
Guaranteed preferred beneficial interest in junior subordinated debentures 7.97% 6.08% 4.16%
Loan for employee stock ownership plan -- -- 4.00%
Maximum amount of borrowing outstanding at any month end:
FHLB-NY advances $112,488 $ 112,506 $112,030
Guaranteed preferred beneficial interest in junior subordinated debentures 12,857 12,799 12,742
Loan for employee stock ownership plan -- -- 207
Approximate average amounts outstanding for year:
FHLB-NY advances $ 94,798 $ 97,013 $ 99,359
Guaranteed preferred beneficial interest in junior subordinated debentures 12,827 12,768 6,854
Loan for employee stock ownership plan -- -- 137
Approximate weighted average rate paid during the year (1):
FHLB-NY advances 3.81% 3.71% 3.74%
Guaranteed preferred beneficial interest in junior subordinated debentures 7.50% 5.49% 4.78%
Loan for employee stock ownership plan -- -- 4.07%
(1) The approximate weighted average rate paid during the year was computed by
dividing the average amounts outstanding into the related interest expense
for the year.
REGULATION AND SUPERVISION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
its primary regulator, the OTS. The Bank's deposit accounts are insured up to
applicable limits by the Federal Deposit Insurance Corporation ("FDIC") under
the Savings Association Insurance Fund ("SAIF"), and it is a member of the FHLB.
The Bank must file reports with the OTS concerning its activities and financial
condition, and it must obtain regulatory approvals prior to entering into
certain transactions, such as mergers with, or acquisitions of, other depository
institutions. The Holding Company, as a unitary savings and loan holding
company, is subject to regulation, examination and supervision by the OTS and is
required to file certain reports with, and otherwise comply with, the rules and
regulations of the OTS and of the Securities and Exchange Commission (the "SEC")
under the federal securities laws. The OTS and the FDIC periodically perform
safety and soundness examinations of the Bank and the Holding Company and test
our compliance with various regulatory requirements. The OTS has primary
enforcement responsibility over federally chartered savings banks and has
substantial discretion to impose enforcement action on an institution that fails
to comply with applicable regulatory requirements, particularly with respect to
its capital requirements. In addition, the FDIC has the authority to recommend
to the Director of the OTS that enforcement action be taken with respect to a
particular federally chartered savings bank and, if action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.
This regulation and supervision establishes a comprehensive framework to
regulate and control the activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. This
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such laws and regulations whether by the OTS, the FDIC or through
legislation could have a material adverse impact on the Bank and the Holding
Company and their operations and stockholders.
The description of statutory provisions and regulations applicable to
federally chartered savings banks and their holding companies and of tax matters
set forth in this document does not purport to be a complete description of all
such statutes and regulations and their effects on the Bank and the Holding
Company.
FEDERAL BANKING REGULATION
ACTIVITY POWERS. The Bank derives its lending and investment powers from
the Home Owners' Loan Act, as amended ("HOLA"), and the regulations of the OTS.
Under these laws and regulations, the Bank may invest in mortgage loans secured
by residential and commercial real estate, commercial and consumer loans,
certain types of debt securities and certain other assets. The Bank may also
establish service corporations that may engage in activities not otherwise
permissible for the Bank, including certain real estate equity investments and
securities and insurance brokerage. The Bank's authority to invest in certain
types of loans or other investments is limited by federal law.
LOANS TO ONE BORROWER LIMITATIONS. The Bank is generally subject to the
same limits on loans to one borrower as a national bank. With specified
exceptions, the Bank's total loans or extension of credit to a single borrower
or group of related borrowers may not exceed 15% of the Bank's unimpaired
capital and unimpaired surplus, which does not include accumulated other
comprehensive income. The Bank may lend additional amounts up to 10% of its
unimpaired capital and unimpaired surplus if the loans or extensions of credit
are fully secured by readily marketable collateral. The Bank currently complies
with applicable loans to one borrower limitations. At March 31, 2006, the Bank's
limit on loans to one borrower based on its unimpaired capital and surplus was
$9.9 million.
QTL TEST. Under HOLA, the Bank must comply with a qualified thrift lender
("QTL") test. Under this test, the Bank is required to maintain at least 65% of
its "portfolio assets" in certain "qualified thrift investments" on a monthly
basis in at least nine months of the most recent twelve-month period. "Portfolio
assets" means, in general, an association's total assets less the sum of (a)
specified liquid assets up to 20% of total assets, (b) goodwill and other
intangible assets and (c) the value of property used to conduct the Bank's
business. "Qualified thrift investments" include various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities and consumer loans. If
the Bank fails the QTL test, it must either operate under certain restrictions
on its activities or convert from a thrift charter to a bank charter. In
addition, if the Bank does not requalify under the QTL test within three years
after failing the test, the institution would be prohibited from engaging in any
activity not permissible for a national bank and would have to repay any
outstanding advances from the FHLB as promptly as possible. At March 31, 2006,
the Bank maintained approximately 69.3% of its portfolio assets in qualified
thrift investments. The Bank had also met the QTL test in each of the prior 12
months and was, therefore, a qualified thrift lender.
CAPITAL REQUIREMENTS. OTS regulations require the Bank to meet three
minimum capital ratios:
(1) a tangible capital ratio requirement of 1.5% of total assets, as
adjusted under OTS regulations;
(2) a leverage ratio requirement of 4% of core capital to such
adjusted total assets; and
(3) a risk-based capital ratio requirement of 8% of core and
supplementary capital to total risk-weighted assets.
In determining compliance with the risk-based capital requirement, the Bank
must compute its risk-weighted assets by multiplying its assets and certain
off-balance sheet items by risk-weights, which range from 0% for cash and
obligations issued by the U.S. government or its agencies to 100% for consumer
and commercial loans, as assigned by the OTS capital regulations based on the
risks that the OTS believes are inherent in the type of asset.
Generally, tangible capital is defined as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain mortgage
servicing rights) and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank.
Core capital is defined similarly to tangible capital, but also includes
certain qualifying supervisory goodwill less certain disallowed assets.
Supplementary capital includes cumulative and other perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and the allowance for loan and lease losses. In addition, up to 45% of
unrealized gains on available-for-sale equity securities with a readily
determinable fair value may be included in supplementary capital. The allowance
for loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets, and the amount of supplementary
capital that may be included as total capital cannot exceed the amount of core
capital.
In assessing an institution's capital adequacy, the OTS takes into
consideration not only these numeric factors but qualitative factors as well,
and has the authority to establish higher capital requirements for individual
institutions where necessary. The Bank, as a matter of prudent management,
targets as its goal the maintenance of capital ratios which exceed these minimum
requirements and are consistent with the Bank's risk profile. At March 31, 2006,
the Bank exceeded each of its capital requirements with a tangible capital ratio
of 9.4%, leverage capital ratio of 9.4% and total risk-based capital ratio of
13.2%.
The Federal Deposit Insurance Corporation Improvement Act, as amended
("FDICIA"), requires that the OTS and other federal banking agencies revise
their risk-based capital standards, with appropriate transition rules, to ensure
that they take into account interest rate risk, concentrations of risk and the
risks of non-traditional activities. The OTS adopted regulations, effective
January 1, 1994, that set forth the methodology for calculating an interest rate
risk ("IRR") component to be incorporated into the OTS risk-based capital
regulations. On May 10, 2002, the OTS adopted an amendment to its capital
regulations which eliminated the IRR component of the risk-based capital
requirement. Pursuant to the amendment, the OTS will continue to monitor the IRR
of individual institutions through the OTS requirements for IRR management, the
ability of the OTS to impose individual minimum capital requirements on
institutions that exhibit a high degree of IRR, and the requirements of Thrift
Bulletin 13a, which provides guidance on the management of IRR and the
responsibility of boards of directors in that area. In addition, the OTS
monitors the IRR of individual institutions through a variety of means,
including an analysis of the change in portfolio value, or NPV. NPV is defined
as the net present value of the expected future cash flows of an entity's assets
and liabilities and therefore, hypothetically represents the value of an
institution's net worth. The OTS has also used this NPV analysis as part of its
evaluation of certain applications or notices submitted by thrift institutions.
In addition, OTS Bulletin 13a provides guidance on the management of IRR and the
responsibility of boards of directors in that area. The OTS, through its general
oversight of the safety and soundness of savings associations, retains the right
to impose minimum capital requirements on individual institution to the extent
the institution is not in compliance with certain written guidelines established
by the OTS regarding NPV analysis. The OTS has not imposed any such requirements
on the Bank.
PROMPT CORRECTIVE ACTION REGULATIONS. Under the prompt corrective action
regulations, the OTS is authorized and, in some cases, required to take
supervisory actions against undercapitalized savings banks. For this purpose, a
savings bank would be placed in one of the following five categories based on
the bank's regulatory capital: well-capitalized; adequately capitalized;
undercapitalized; significantly undercapitalized; or critically
undercapitalized.
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as a bank's capital decreases
within the three undercapitalized categories. All banks are prohibited from
paying dividends or other capital distributions or paying management fees to any
controlling person if, following such distribution, the bank would be
undercapitalized. Generally, a capital restoration plan must be filed with the
OTS within 45 days of the date a bank receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, various mandatory supervisory actions become
immediately applicable to the institution, including restrictions on growth of
assets and other forms of expansion. Under the OTS regulations, generally, a
federally chartered savings bank is treated as well capitalized if its total
risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio
is 6% or greater, and its leverage ratio is 5% or greater, and it is not subject
to any order or directive by the OTS to meet a specific capital level. When
appropriate, the OTS can require corrective action by a savings association
holding company under the "prompt corrective action" provisions of federal law.
At March 31, 2006, the Bank was considered well-capitalized by the OTS.
LIMITATION ON CAPITAL DISTRIBUTIONS. The OTS imposes various restrictions
on the Bank's ability to make capital distributions, including cash dividends,
payments to repurchase or otherwise acquire its shares and other distributions
charged against capital. A savings institution that is the subsidiary of a
savings and loan holding company, such as the Bank, must file a notice with the
OTS at least 30 days before making a capital distribution. However, the Bank
must file an application for prior approval if the total amount of its capital
distributions (including each proposed distribution), for the applicable
calendar year would exceed the Bank's net income for that year plus the Bank's
retained net income for the previous two years.
The Bank may not pay dividends to the Holding Company if, after paying
those dividends, the Bank would fail to meet the required minimum levels under
risk-based capital guidelines and the minimum leverage and tangible capital
ratio requirements or the OTS notified the Bank that it was in need of more than
normal supervision.
The Bank is prohibited from making capital distributions if:
(1) the Bank would be undercapitalized following the distribution;
(2) the proposed capital distribution raises safety and soundness
concerns; or
(3) the capital distribution would violate a prohibition contained in
any statute, regulation or agreement.
LIQUIDITY. The Bank maintains liquidity levels to meet operational needs.
In the normal course of business, the levels of liquid assets during any given
period are dependent on operating, investing and financing activities. Cash and
due from banks, federal funds sold and repurchase agreements with maturities of
three months or less are the Bank's most liquid assets. The Bank maintains a
liquidity policy to maintain sufficient liquidity to ensure its safe and sound
operations.
BRANCHING. Subject to certain limitations, federal law permits the Bank to
establish branches in any state of the United States. The authority for the Bank
to establish an interstate branch network would facilitate a geographic
diversification of the Bank's activities. This authority under federal law and
OTS regulations preempts any state law purporting to regulate branching by
federal savings associations.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act, as amended
("CRA"), as implemented by OTS regulations, the Bank has a continuing and
affirmative obligation to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for the Bank nor does it limit the
Bank's discretion to develop the types of products and services that it believes
are best suited to its particular community. The CRA does however require the
OTS, in connection with its examination of the Bank, to assess the Bank's record
of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by the Bank.
In particular, the system focuses on three tests:
(1) a lending test, to evaluate the institution's record of making
loans in its assessment areas;
(2) an investment test, to evaluate the institution's record of
investing in community development projects, affordable housing
and programs benefiting low or moderate income individuals and
businesses; and
(3) a service test, to evaluate the institution's delivery of banking
services through its branch offices, ATM centers and other
offices.
The CRA also requires all institutions to make public disclosure of their
CRA ratings. The Bank received an "Outstanding" CRA rating in its most recent
examination conducted in 2004.
Regulations require that we publicly disclose certain agreements that are
in fulfillment of CRA. The Holding Company has no such agreements in place at
this time.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with its "affiliates" and insiders is limited by OTS regulations
and by Sections 23A, 23B, 22 (g) and 22 (h) of the Federal Reserve Act ("FRA").
In general, these transactions must be on terms which are as favorable to the
Bank as comparable transactions with non-affiliates. Additionally, certain types
of these transactions are restricted to an aggregate percentage of the Bank's
capital. Collateral in specified amounts must usually be provided by affiliates
in order to receive loans from the Bank. In addition, OTS regulations prohibit a
savings bank from lending to any of its affiliates that is engaged in activities
that are not permissible for bank holding companies and from purchasing the
securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to its directors, executive officers,
and 10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the Federal Reserve Board ("FRB"). Among other things, these
provisions require that extensions of credit to insiders (a) be made on terms
that are substantially the same as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (b) not exceed certain
limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of the Bank's
capital. In addition, extensions of credit in excess of certain limits must be
approved by the Bank's board of directors. At March 31, 2006, there were no
loans to officers or directors.
The FRB has confirmed its previous interpretations of Sections 23A and 23B
of the FRA with Regulation W. The OTS has also conformed its regulations to
agree with Regulation W. Regulation W made various changes to existing law
regarding Sections 23A and 23B, including expanding the definition of what
constitutes an "affiliate" subject to Sections 23A and 23B and exempting certain
subsidiaries of state-chartered banks from the restrictions of Sections 23A and
23B.
The OTS regulations provide for additional restrictions imposed on savings
associations under Section 11 of HOLA, including provisions prohibiting a
savings association from making a loan to an affiliate that is engaged in
non-bank holding company activities and provisions prohibiting a savings
association from purchasing or investing in securities issued by an affiliate
that is not a subsidiary. The OTS regulations also include certain specific
exemptions from these prohibitions. The FRB and the OTS expect each depository
institution that is subject to Sections 23A and 23B to implement policies and
procedures to ensure compliance with Regulation W and the OTS regulation. These
regulations have had no material adverse effect on our business.
Section 402 of the Sarbanes-Oxley Act prohibits the extension of personal
loans to directors and executive officers of issuers (as defined in the
Sarbanes-Oxley Act). The prohibition, however, does not apply to mortgages
advanced by an insured depository institution, such as the Bank, that is subject
to the insider lending restrictions of Section 22(h) of the FRA.
ASSESSMENT. The OTS charges assessments to recover the cost of examining
savings associations and their affiliates. These assessments are based on three
components: the size of the association, on which the basic assessment is based;
the association's supervisory condition, which results in an additional
assessment based on a percentage of the basic assessment for any savings
institution with a composite rating of 3, 4, or 5 in its most recent safety and
soundness examination; and the complexity of the association's operations, which
results in an additional assessment based on a percentage of the basic
assessment for any savings association that managed over $1 billion in trust
assets, serviced for others loans aggregating more than $1 billion, or had
certain off-balance sheet assets aggregating more than $1 billion. Effective
July 1, 2004, the OTS adopted a final rule replacing examination fees for
savings and loan holding companies with semi-annual assessments. For fiscal
2006, Carver paid $143,000 in OTS assessments.
ENFORCEMENT. The OTS has primary enforcement responsibility over the Bank.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease and desist orders and to remove directors
and officers. In general, these enforcement actions may be initiated in response
to violations of laws and regulations and unsafe or unsound practices.
STANDARDS FOR SAFETY AND SOUNDNESS. The OTS has adopted guidelines
prescribing safety and soundness standards. The guidelines establish general
standards relating to internal controls and information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, asset quality, earnings, and compensation, fees and benefits. In
general, the guidelines require, among other things, appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. In addition, OTS regulations authorize, but do not require, the OTS
to order an institution that has been given notice that it is not satisfying
these safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan
or fails in any material respect to implement an accepted compliance plan, the
OTS must issue an order directing action to correct the deficiency and may issue
an order directing other actions of the types to which an undercapitalized
association is subject under the "prompt corrective action" provisions of
federal law. If an institution fails to comply with such an order, the OTS may
seek to enforce such order in judicial proceedings and to impose civil money
penalties.
INSURANCE OF DEPOSIT ACCOUNTS. The Bank is a member of the SAIF and pays
its deposit insurance assessments to the SAIF. The FDIC also maintains another
insurance fund, BIF, which primarily insures the deposits of banks and state
chartered savings banks. Under federal law, the FDIC established a risk-based
assessment system for determining the deposit insurance assessments to be paid
by insured depository institutions. Under the assessment system, the FDIC
assigns an institution to one of three capital categories based on the
institution's financial information as of the quarter ending three months before
the beginning of the assessment period: (1) well-capitalized, (2) adequately
capitalized and (3) undercapitalized. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. Under
the regulation, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates currently range from 0.0% of
deposits for an institution in the highest category (i.e., well-capitalized and
financially sound, with no more than a few minor weaknesses) to 0.27% of
deposits for an institution in the lowest category (i.e., undercapitalized and
substantial supervisory concern). The FDIC is authorized to raise the assessment
rates as necessary to maintain the required reserve ratio of the deposit
insurance fund to 1.25%.
In addition, all FDIC insured institutions are required to pay assessments
to the FDIC at an annual rate of approximately 1.44% per $100,000 of insured
deposits to fund interest payments on the bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government established to
recapitalize the predecessor to the SAIF. These assessments will continue until
the FICO bonds mature in 2017. The Bank's total expense in fiscal 2006 for FDIC
assessment for FICO bonds interest payments was $61,000. Due to the Bank's
favorable assessment risk classification there was no deposit insurance
assessment on our deposits for fiscal 2006.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB -NY which
is one of the twelve regional FHLBs composing the FHLB System. Each FHLB
provides a central credit facility primarily for its member institutions. The
Bank, as an FHLB member, is required to acquire and hold shares of capital stock
in the FHLB-NY in an amount equal to the greater of (i) 1% of the aggregate
principal amount of its unpaid residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, and (ii) 5% (or
such greater fraction as established by the FHLB) of its outstanding advances
from the FHLB. The Bank was in compliance with this requirement with an
investment in the capital stock of the FHLB at March 31, 2006 of $4.6 million.
Any advances from a FHLB must be secured by specified types of collateral, and
all long term advances may be obtained only for the purpose of providing funds
for residential housing finance.
FHLBs are required to provide funds for the resolution of insolvent thrifts
and to contribute funds for affordable housing programs. These requirements
could reduce the amount of earnings that the FHLBs can pay as dividends to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future FHLB
advances increased, the Bank's net interest income would be adversely affected.
Dividends from FHLB-NY to the Bank amounted to $274,000 for fiscal 2006,
$130,000 for fiscal 2005 and $126,000 for fiscal 2004. In the third quarter of
fiscal 2004, the FHLB-NY suspended dividend payments to stockholders due to
losses in its securities portfolio, but resumed payment in the fourth quarter.
The dividend rate paid on FHLB stock at March 31, 2006 was 5.25%.
Under the Gramm-Leach-Bliley Act, as amended ("Gramm-Leach"), which repeals
historical restrictions and eliminates many federal and state law barriers to
affiliations among banks and securities firms, insurance companies and other
financial service providers, membership in the FHLB system is now voluntary for
all federally-chartered savings banks such as the Bank. Gramm-Leach also
replaces the existing redeemable stock structure of the FHLB system with a
capital structure that requires each FHLB to meet a leverage limit and a
risk-based permanent capital requirement. Two classes of stock are authorized:
Class A (redeemable on six months notice) and Class B (redeemable on five years
notice). Pursuant to regulations promulgated by the Federal Housing Finance
Board, as required by Gramm-Leach, the FHLB-NY has adopted a capital plan that
will change the foregoing minimum stock ownership requirements for FHLB-NY
stock. Under the new capital plan, each member of the FHLB-NY will have to
maintain a minimum investment in FHLB-NY capital stock in an amount equal to the
sum of (1) the greater of $1,000 or 0.20% of the member's mortgage-related
assets and (2) 4.50% of the dollar amount of any outstanding advances under such
member's Advances, Collateral Pledge and Security Agreement with the FHLB-NY.
The FHLB-NY, however, has postponed the implementation of the new capital plan,
and the new implementation date has not yet been determined.
FEDERAL RESERVE SYSTEM. Under the FRB's regulations, the Bank is required
to maintain non-interest-earning reserves against its transaction accounts. FRB
regulations generally require that (a) reserves of 3% must be maintained against
aggregate transaction accounts between $7.0 million and $48.3 million (subject
to adjustment by the FRB), and (b) a reserve of $1.2 million and 10% (subject to
adjustment by the FRB between 8% and 14%) must be maintained against that
portion of total transaction accounts in excess of $48.3 million. The first $7.0
million of otherwise reservable balances are exempted from the reserve
requirements. The Bank is in compliance with these reserve requirements. Because
required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank, or a pass-through
account as defined by the FRB, the effect of this reserve requirement is to
reduce the Bank's interest-earning assets to the extent that the requirement
exceeds vault cash.
PRIVACY PROTECTION. Carver Federal is subject to OTS regulations
implementing the privacy protection provisions of Gramm-Leach. These regulations
require the Bank to disclose its privacy policy, including identifying with whom
it shares "nonpublic personal information," to customers at the time of
establishing the customer relationship and annually thereafter. The regulations
also require the Bank to provide its customers with initial and annual notices
that accurately reflect its privacy policies and practices. In addition, to the
extent its sharing of such information is not exempted, the Bank is required to
provide its customers with the ability to "opt-out" of having the Bank share
their nonpublic personal information with unaffiliated third parties before they
can disclose such information, subject to certain exceptions.
The Bank is subject to regulatory guidelines establishing standards for
safeguarding customer information. These regulations implement certain
provisions of Gramm-Leach. The guidelines describe the agencies' expectations
for the creation, implementation and maintenance of an information security
program, which would include administrative, technical and physical safeguards
appropriate to the size and complexity of the institution and the nature and
scope of its activities. The standards set forth in the guidelines are intended
to insure the security and confidentiality of customer records and information,
protect against any anticipated threats or hazards to the security or integrity
of such records and protect against unauthorized access to or use of such
records or information that could result in substantial harm or inconvenience to
any customer. The Bank has a policy to comply with the foregoing guidelines.
HOLDING COMPANY REGULATION. The Holding Company is a savings and loan
holding company regulated by the OTS. As such, the Holding Company is registered
with and is subject to OTS examination and supervision, as well as certain
reporting requirements. In addition, the OTS has enforcement authority over the
Holding Company and its subsidiaries. Among other things, this authority permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the financial safety, soundness or stability of a subsidiary savings
institution. Unlike bank holding companies, federal savings and loan holding
companies are not subject to any regulatory capital requirements or to
supervision by the FRB.
Gramm-Leach restricts the powers of new unitary savings and loan holding
companies. Unitary savings and loan holding companies that are "grandfathered,"
i.e., unitary savings and loan holding companies in existence or with
applications filed with the OTS on or before May 4, 1999, such as Carver, retain
their authority under the prior law. All other unitary savings and loan holding
companies are limited to financially related activities permissible for bank
holding companies, as defined under Gramm-Leach. Gramm-Leach also prohibits
non-financial companies from acquiring grandfathered unitary savings and loan
holding companies.
RESTRICTIONS APPLICABLE TO ALL SAVINGS AND LOAN HOLDING COMPANIES. Federal
law prohibits a savings and loan holding company, including the Holding Company,
directly or indirectly, from acquiring:
(1) control (as defined under HOLA) of another savings institution
(or a holding company parent) without prior OTS approval;
(2) through merger, consolidation, or purchase of assets, another
savings institution or a holding company thereof, or acquiring
all or substantially all of the assets of such institution (or a
holding company), without prior OTS approval; or
(3) control of any depository institution not insured by the FDIC
(except through a merger with and into the holding company's
savings institution subsidiary that is approved by the OTS).
A savings and loan holding company may not acquire as a separate subsidiary
an insured institution that has a principal office outside of the state where
the principal office of its subsidiary institution is located, except:
(1) in the case of certain emergency acquisitions approved by the
FDIC;
(2) if such holding company controls a savings institution subsidiary
that operated a home or branch office in such additional state as
of March 5, 1987; or
(3) if the laws of the state in which the savings institution to be
acquired is located specifically authorize a savings institution
chartered by that state to be acquired by a savings institution
chartered by the state where the acquiring savings institution or
savings and loan holding company is located or by a holding
company that controls such a state chartered association.
The HOLA prohibits a savings and loan holding company (directly or
indirectly, or through one or more subsidiaries) from acquiring another savings
association or holding company thereof without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of a depository institution that is not
federally insured. In evaluating applications by holding companies to acquire
savings associations, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
FEDERAL SECURITIES LAWS. The Holding Company is subject to the periodic
reporting, proxy solicitation, tender offer, insider trading restrictions and
other requirements under the Securities Exchange Act of 1934, as amended
("Exchange Act").
DELAWARE CORPORATION LAW. The Holding Company is incorporated under the
laws of the State of Delaware. Thus, it is subject to regulation by the State of
Delaware and the rights of its shareholders are governed by the General
Corporation Law of the State of Delaware.
NEW YORK STATE BANKING REGULATIONS. The New York State Banking Department
has adopted Section 6-L to the banking law and regulations which impose
restrictions and limitations on certain high cost home loans made by any
individual or entity, including a federally-chartered savings bank, that
originates more than one high cost home loan in New York State in a 12-month
period. Among other things, the regulations and statute prohibit certain
mortgage loan provisions and certain acts and practices by originators and
impose certain disclosure and reporting requirements. It is unclear whether
these provisions would be preempted by Section 5(a) of HOLA, as implemented by
the lending and investment regulations of the OTS. The OTS has not yet adopted
regulations regarding high-cost mortgage loans and is currently considering
whether it will do so. Although the Bank does not originate loans that meet the
definition of "high-cost mortgage loan" under the proposed regulations, in the
event the Bank determines to originate such loans in the future, the Bank may be
subject to such regulation, if adopted as proposed.
OTHER FEDERAL REGULATION. The Bank is subject to OTS regulations
implementing the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA
PATRIOT Act. The USA PATRIOT Act gives the federal government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA PATRIOT Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.
Title III of the USA PATRIOT Act and the related OTS regulations impose the
following requirements with respect to financial institutions:
o Establishment of anti-money laundering programs.
o Establishment of a program specifying procedures for obtaining
identifying information from customers seeking to open new
accounts, including verifying the identity of customers within a
reasonable period of time.
o Establishment of enhanced due diligence policies, procedures and
controls designed to detect and report money laundering.
o Prohibition on correspondent accounts for foreign shell banks and
compliance with recordkeeping obligations with respect to
correspondent accounts of foreign banks.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Holding Company and the Bank currently file consolidated
federal income tax returns, report their income for tax return purposes on the
basis of a taxable-year ending March 31st, using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations with some exceptions, including in particular the Bank's tax
reserve for bad debts discussed below. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Holding Company.
BAD DEBT RESERVES. Prior to fiscal 2004 the Bank met the requirement as a
"small bank" (one with assets having an adjusted tax basis of $500 million or
less) and was permitted to maintain a reserve for bad debts with respect to
"qualifying loans," which, in general, are loans secured by certain interests in
real property, and to make, within specified formula limits, annual additions to
the reserve which are deductible for purposes of computing the Bank's taxable
income. In fiscal years 2006, 2005 and 2004 the Bank was not considered to be a
small bank as total assets exceeded $500 million.
DISTRIBUTIONS. To the extent that the Bank makes "non-dividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's "base year reserve," i.e., its reserve as of
March 31, 1988, to the extent thereof and then from its supplemental reserve for
losses on loans, and an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not
constitute non-dividend distributions and, therefore, will not be included in
the Bank's taxable income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the non-dividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate.
ELIMINATION OF DIVIDENDS; DIVIDENDS-RECEIVED DEDUCTION. The Holding Company
may exclude from its income 100% of dividends received from the Bank as a member
of the same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Holding Company and the Bank will not file a
consolidated tax return, except that if the Holding Company or the Bank owns
more than 20% of the stock of a corporation distributing a dividend, then 80% of
any dividends received may be deducted.
STATE AND LOCAL TAXATION
STATE OF NEW YORK. The Bank and the Holding Company are subject to New York
State franchise tax on their entire net income or one of several alternative
bases, whichever results in the highest tax. "Entire net income" means federal
taxable income with adjustments. The Bank and the Holding Company file combined
returns and are subject to taxation in the same manner as other corporations
with some exceptions, including the Bank's deductions for additions to its
reserve for bad debts. The New York State franchise tax rate based upon entire
net income for both fiscal years 2006 and 2005 was 9.03%, (including the
Metropolitan Commuter Transportation District Surcharge) of net income. In
general, the Holding Company is not required to pay New York State tax on
dividends and interest received from the Bank or on gains realized on the sale
of Bank stock. 60% of dividend income, and gains and losses from subsidiary
capital are excluded from New York State entire net income. Distributions to
Carver Federal received from Carver Asset Corporation are eligible for the New
York State dividends received deduction. However, the Holding Company has been
subject to a franchise tax rate of 3.51% (including the Metropolitan Commuter
Transportation District Surcharge) for both fiscal years 2006 and 2005 based
upon alternative entire net income. For this purpose, alternative entire net
income is determined by adding back 60% of dividend income, and gains and losses
from subsidiary capital to New York State entire net income.
New York State has enacted legislation that enabled the Bank to avoid the
recapture of the New York State tax bad debt reserves that otherwise would have
occurred as a result of the changes in federal law and to continue to utilize
either the federal method or a method based on a percentage of its taxable
income for computing additions to its bad debt reserve.
NEW YORK CITY. The Bank and the Holding Company are also subject to a
similarly calculated New York City banking corporation tax of 9% on income
allocated to New York City. In this connection, legislation was enacted
regarding the use and treatment of tax bad debt reserves that is substantially
similar to the New York State legislation described above. The Bank and the
Holding Company are subject to New York City banking corporation tax of 3% on
alternative entire net income allocated to New York City.
DELAWARE TAXATION. As a Delaware holding company not earning income in
Delaware, the Holding Company is exempted from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
EXECUTIVE OFFICERS OF THE HOLDING COMPANY
The name, position, term of office as officer and period during which he or
she has served as an officer is provided below for each executive officer of the
Holding Company as of June 15, 2006. Each of the persons listed below is an
executive officer of the Holding Company and the Bank, holding the same office
in each.
DEBORAH C. WRIGHT, age 48, has served as President and Chief Executive
Officer and a Director of the Holding Company and Carver Federal since June 1,
1999. In February 2005, Ms. Wright was elected Chairman of the Board. Prior to
joining Carver, Ms. Wright was President & Chief Executive Officer of the Upper
Manhattan Empowerment Zone Development Corporation, a position she held since
May 1996.
ROY SWAN, age 42, has served Senior Vice President, Corporate Secretary and
Chief of Staff since May 2005. Prior to joining Carver, Mr. Swan served as Vice
President, Finance & Administration at Time Warner Inc. since March 2003.
JAMES H. BASON, age 51, has served as Senior Vice President and Chief
Lending Officer since March 2003. Previously Mr. Bason was Vice President and
Real Estate Loan Officer at The Bank of New York where he had been employed
since 1991. At the Bank of New York, Mr. Bason was responsible for developing
and maintaining relationships with developers, builders, real estate investors
and brokers to provide construction and permanent real estate financing.
FRANK DEATON, age 37, has served as Senior Vice President of Operations
since January 2005 and formerly served as Chief Auditor since May 2001. Mr.
Deaton was previously Vice President and Risk Review Manager with Key Bank in
Cleveland, Ohio where he was responsible for developing the scope and overseeing
completion of credit, operational and regulatory compliance audits for a variety
of business units.
CARMELO FELIX, age 56, has served as Senior Vice President and Chief
Auditor since January 2005. Mr. Felix was previously Deputy General Manager at
Korea Exchange Bank's Regional Headquarters for the Americas where he was
responsible for the administration of the bank's Internal Audit Department in
the Western Hemisphere.
WILLIAM GRAY, age 50, has served as Senior Vice President and Chief
Financial Officer since February 2002. Mr. Gray had been employed at the Dime
Savings Bank of New York since 1992, most recently serving as Vice
President/Director of Business Unit Planning and Support in the Controller's
Department where he was responsible for identifying and evaluating strategic
initiatives for several businesses.
MARGARET D. PETERSON, age 54, has served as Senior Vice President and Chief
Human Resources Officer since June 2002. She joined Carver in October 1999 as
Senior Vice President and Chief Administrative Officer. Ms. Peterson came to
Carver from Deutsche Bank where she had served as a Compensation Planning
Consultant in Corporate Human Resources.
ITEM IA. RISK FACTORS
Risk is an inherent part of Carver's business and activities. The following
is a summary of risk factors relevant to the Company's operations which should
be carefully reviewed. These risk factors do not necessarily appear in the order
of importance.
CHANGES IN INTEREST RATE ENVIRONMENT MAY NEGATIVELY AFFECT CARVER'S NET
INCOME, MORTGAGE LOAN ORIGINATIONS AND VALUATION OF AVAILABLE FOR SALE
SECURITIES. The Company's earnings depend largely on the relationship between
the yield on interest-earning assets, primarily our mortgage loans and
mortgage-backed securities, and the cost of deposits and borrowings. This
relationship, known as the interest rate spread, is subject to fluctuation and
is affected by economic and competitive factors which influence market interest
rates, the volume and mix of interest-earning assets and interest-bearing
liabilities, and the level of non-performing assets. Fluctuations in market
interest rates affect customer demand for products and services. Carver is
subject to interest rate risk to the degree that its interest-bearing
liabilities reprice or mature more slowly or more rapidly or on a different
basis than its interest-earning assets.
In addition, the actual amount of time before mortgage loans and
mortgage-backed securities are repaid can be significantly impacted by changes
in mortgage prepayment rates and prevailing market interest rates. Mortgage
prepayment rates will vary due to a number of factors, including the regional
economy in the area where the underlying mortgages were originated, seasonal
factors, demographic variables and the ability to assume the underlying
mortgages. However, the major factors affecting prepayment rates are prevailing
interest rates, related mortgage refinancing opportunities and competition.
The Company's objective is to fund its liquidity needs primarily through
lower costing deposit growth. However, from time to time Carver Federal borrows
from the FHLB. More recently, the cost of deposits and the rate to borrow have
become significantly higher with the rising interest rate environment, which has
negatively impacted net interest income.
During fiscal 2006, the Federal Open Market Committee ("FOMC") raised the
federal funds rate eight times (a total of 200 basis points). U.S. Treasury
yields have increased in fiscal 2006 from fiscal 2005 with the exception of the
30-year U.S. Treasury yield, which has decreased. Although U.S. Treasury yields
have risen, yields on the longer term maturities have not risen to the same
degree as shorter term yields. This has resulted in a significant flattening of
the U.S. Treasury yield curve. The Bank's short-term borrowings, as well as its
deposits, are generally priced relative to short-term U.S. Treasury yields;
whereas its mortgage loans and mortgage-backed securities are generally priced
relative to medium-term (two-to-five years) U.S. Treasury yields. The flattening
of the yield curve reduces the spread between the yield on our interest-earning
assets and the cost of deposits and borrowings, thereby reducing net income.
Interest rates are expected to continue to fluctuate and the Company cannot
predicT future Federal Reserve Board actions or other factors that will cause
rates to change.
The estimated fair value of our available-for-sale securities portfolio may
increase or decrease depending on changes in interest rates. Carver Federal's
securities portfolio is comprised primarily of adjustable rate securities. As
interest rates have continued to rise, there has been an improvement in the
valuation of the Bank's available for sale securities.
CARVER'S RESULTS OF OPERATIONS ARE AFFECTED BY ECONOMIC CONDITIONS IN THE
NEW YORK METROPOLITAN AREA. At March 31, 2006, a significant portion of the
Bank's lending portfolio was concentrated in the New York metropolitan area. As
a result of this geographic concentration, Carver's results of operations are
largely dependent on economic conditions in this area. Decreases in real estate
values could adversely affect the value of property used as collateral for loans
to its borrowers. Adverse changes in the economy caused by inflation, recession,
unemployment or other factors beyond our control may also have a negative effect
on the ability of borrowers to make timely loan payments, which would have an
adverse impact on our earnings. Consequently, deterioration in economic
conditions in the New York metropolitan area could have a material adverse
impact on the quality of the Bank's loan portfolio, which could result in
increased delinquencies, decreased interest income results as well as an adverse
impact on loan loss experience with probable increased allowance for loan
losses. Such deterioration also could adversely impact the demand for products
and services, and, accordingly, further negatively affect results of operations.
STRONG COMPETITION WITHIN CARVER'S MARKET AREAS COULD HURT EXPECTED PROFITS
AND SLOW GROWTH. The New York metropolitan area has a high density of financial
institutions, a number of which are significantly larger and with greater
financial resources. Additionally, various large out-of-state financial
institutions continue to enter the New York metropolitan area market. All are
considered competitors to varying degrees.
Carver Federal faces intense competition both in making loans and
attracting deposits. Competition for loans, both locally and in the aggregate,
comes principally from mortgage banking companies, commercial banks, savings
banks and savings and loan associations. Most direct competition for deposits
comes from commercial banks, savings banks, savings and loan associations and
credit unions. The Bank also faces competition for deposits from money market
mutual funds and other corporate and government securities funds as well as from
other financial intermediaries such as brokerage firms and insurance companies.
Market area competition is a factor in pricing the Bank's loans and deposits,
which could reduce net interest income. Competition also makes it more
challenging to effectively grow loan and deposit balances. The Company's
profitability depends upon its continued ability to successfully compete in its
market areas.
The Bank's increased emphasis on non-residential and construction real
estate lending may create increased exposure to lending risks. At March 31,
2006, $246.6 million, or 49.7%, of our total loan portfolio consisted of
non-residential and construction real estate loans compared to $165.3 million,
or 38.9% at March 31, 2005. Non-residential and construction real estate loans
generally involve a greater degree of credit risk than one- to-four family loans
because they typically have larger balances and are more sensitive to changes in
the economy. Payments on these loans often depend upon the successful operation
and management of the underlying properties and the businesses which operate
from within them; repayment of such loans may be affected by factors outside the
borrower's control, such as adverse conditions in the real estate market or the
economy or changes in government regulation.
CARVER FEDERAL'S ABILITY TO PAY DIVIDENDS OR LEND FUNDS TO THE COMPANY IS
SUBJECT TO REGULATORY LIMITATIONS WHICH MAY PREVENT THE COMPANY FROM MAKING
FUTURE DIVIDEND PAYMENTS OR PRINCIPAL AND INTEREST PAYMENTS ON ITS DEBT
OBLIGATION. Carver is a unitary savings and loan association holding company
regulated by the OTS and almost all of its operating assets are owned by Carver
Federal. Carver relies primarily on dividends from the Bank to pay cash
dividends to its stockholders, to engage in share repurchase programs and to pay
principal and interest on its trust preferred debt obligation. The OTS regulates
all capital distributions by the Bank to the Company, including dividend
payments. As the subsidiary of a savings and loan association holding company,
Carver Federal must file a notice or an application (depending on the proposed
dividend amount) with the OTS prior to each capital distribution. The OTS will
disallow any proposed dividend that would result in failure to meet the OTS'
minimum capital requirements. Based on Carver Federal's current financial
condition, it is not expected that this provision will have any impact on the
Company's receipt of dividends from the Bank. Payment of dividends by Carver
Federal also may be restricted at any time, at the discretion of the OTS, if it
deems the payment to constitute an unsafe or unsound banking practice.
The Company operates in a highly regulated industry which limits the manner
and scope of its business activities.
ACQUISITIONS MAY NOT PRODUCE REVENUE ENHANCEMENTS AND MAY RESULT IN
UNFORESEEN INTEGRATION DIFFICULTIES. The Company periodically explores
acquisition opportunities through which it seeks to expand market share.
Recently, the Company entered into a definitive agreement to acquire CCB in an
effort to expand its product line by entering the small business market.
Difficulty in integrating this and any other acquired business may result in the
Company not being able to realize expected revenue increases and cost savings,
and may cause disruption of its business, and may otherwise adversely affect its
ability to achieve the anticipated benefits of the acquisition.
CHANGES IN LAWS, GOVERNMENT REGULATION AND MONETARY POLICY MAY HAVE A
MATERIAL EFFECT ON OUR RESULTS OF OPERATIONS. Financial institution regulation
has been the subject of significant legislation and may be the subject of
further significant legislation in the future, none of which is in the Company's
control. Significant new laws or changes in, or repeals of, existing laws,
including with respect to federal and state taxation, may cause results of
operations to differ materially. In addition, cost of compliance could adversely
affect Carver's ability to operate profitably. Further, federal monetary policy
significantly affects credit conditions for Carver Federal, particularly as
implemented through the Federal Reserve System. A material change in any of
these conditions could have a material impact on Carver Federal, and therefore
on the Company's results of operations.
CARVER FACES SYSTEM FAILURE RISKS AND SECURITY RISKS. The computer systems
and network infrastructure the Company and its third party service providers use
could be vulnerable to unforeseen problems. Fire, power loss or other failures
may effect Carver's computer equipment and other technology. Also, the Company's
computer systems and network infrastructure could be damaged by "hacking" and
"identity theft."
OUR BUSINESS COULD SUFFER IF WE FAIL TO RETAIN SKILLED PEOPLE. The
Company's success depends on its ability to attract and retain key employees
reflecting current market opportunities and challenges. Competition for the best
people is intense, and the Company's size and limited resources may present
additional challenges in being able to retain the best possible employees.
ACTS OR THREATS OF TERRORISM, MILITARY ACTIVITY, AND OTHER POLITICAL
ACTIONS COULD ADVERSELY AFFECT GENERAL ECONOMIC OR INDUSTRY CONDITIONS.
Geopolitical conditions may affect the Company's earnings. Furthermore, acts of
terrorism, and the government's reaction to such acts, could affect business and
earnings.
A NATURAL DISASTER COULD HARM CARVER'S BUSINESS. Natural disasters could
harm the Company's operations directly through interference with communications,
as well as through the destruction of facilities and financial information
systems.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES.
The Bank currently conducts its business through one administrative office and
eight branch offices (including the 125th Street office) and five stand-alone
ATM centers and stand-alone ATMs. Carver Federal entered into a license
agreement with Essex Corporation on March 23, 2004 to operate an Investment
Center at the Bank's Malcolm X Boulevard branch office but does not share any
other owned or leased spaces with any other businesses. The following table sets
forth certain information regarding Carver Federal's offices and other material
properties at March 31, 2006. The Bank believes that such facilities are
suitable and adequate for its operational needs.
NET BOOK
LEASE PERCENTAGE VALUE OF
YEAR OWNED OR EXPIRATION SPACE --------------
OPENED LEASED DATE UTILIZATION PROPERTY
-------------- -------------- -------------- -------------- --------------
(In thousands)
MAIN OFFICE
-----------
75 West 125th Street 1996 Owned 100 $ 5,583
New York, NY
BRANCH OFFICES
--------------
1281 Fulton Street
Brooklyn, NY 1989 Owned 70 1,403
1009-1015 Nostrand Avenue
Brooklyn, NY 1975 Owned 100 312
115-02 Merrick Boulevard
Jamaica, NY 1996 Leased 02/2011 75 266
130 Malcolm X Boulevard
New York, NY 2001 Leased 05/2006 100 535
158-45 Archer Avenue
Jamaica, New York 2003 Leased 07/2018 100 847
1 Hanson Place
Brooklyn, NY 2004 Leased 07/2014 100 1100
300 West 145 Street
New York, NY 2004 Leased 12/2009 100 461
ATM CENTERS
-----------
503 West 125th Street
New York, NY 2003 Leased 03/2013 100 133
601 West 137th Street
New York, NY 2003 Leased 10/2013 100 139
1 Hanson Place
Brooklyn, NY 2004 Leased 07/2009 100 15
1400 5th Avenue
New York, NY 2005 Leased 08/2013 100 132
1950 Fulton Street
New York, NY 2005 Leased 01/2010 100 172
--------------
Total $ 11,098
==============
The net book value of Carver Federal's investment in premises and equipment
totaled approximately $13.2 million at March 31, 2006.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, Carver Federal is a party to various legal proceedings
incident to its business. Certain claims, suits, complaints and investigations
involving Carver Federal, arising in the ordinary course of business, have been
filed or are pending. The Company is of the opinion, after discussion with legal
counsel representing Carver Federal in these proceedings, that the aggregate
liability or loss, if any, arising from the ultimate disposition of these
matters would not have a material adverse effect on the Company's consolidated
financial position or results of operations. At March 31, 2006, there were no
material legal proceedings to which the Company or its subsidiaries was a party
or to which any of their property was subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended March 31, 2006, no matter was submitted to a vote
of our security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
The Holding Company's common stock is listed on the American Stock Exchange
under the symbol "CNY." As of June 15, 2006, there were 2,502,247 shares of the
common stock outstanding, held by approximately 1,079 stockholders of record.
The following table shows the high and low per share sales prices of the common
stock and the dividends declared for the quarters indicated.
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
----------- ----------- ----------- ----------- ----------- -----------
FISCAL YEAR 2006 FISCAL YEAR 2005
June 30, 2005 $ 18.75 $ 16.90 $ 0.08 June 30, 2004 $ 23.95 $ 19.15 $ 0.05
September 30, 2005 $ 17.35 $ 16.30 $ 0.08 September 30, 2004 $ 20.45 $ 17.95 $ 0.07
December 31, 2005 $ 16.70 $ 15.00 $ 0.08 December 31, 2004 $ 20.82 $ 18.55 $ 0.07
March 31, 2006 $ 17.32 $ 15.00 $ 0.08 March 31, 2005 $ 20.07 $ 18.38 $ 0.07
The Board initially established the payment of a quarterly dividend to
common shareholders on January 9, 2003. Subsequently, each quarter the Board
meets to decide on the amount per share to be declared. On May 9, 2006, the
Holding Company's Board of Directors declared a $0.08 cash dividend to
shareholders for the fourth quarter of fiscal 2006, this represents a $0.03 per
share increase from the $0.05 paid at inception of the Board establishing
payment of a quarterly dividend.
Under OTS regulations, the Bank will not be permitted to pay dividends to
the Holding Company on its capital stock if its regulatory capital would be
reduced below applicable regulatory capital requirements or if its stockholders'
equity would be reduced below the amount required to be maintained for the
liquidation account, which was established in connection with the Bank's
conversion to stock form. The OTS capital distribution regulations applicable to
savings institutions (such as the Bank) that meet their regulatory capital
requirements permit, after not less than 30 days prior notice to the OTS,
capital distributions during a calendar year that do not exceed the Bank's net
income for that year plus its retained net income for the prior two years. For
information concerning the Bank's liquidation account, see Note 11 of the Notes
to the Consolidated Financial Statements.
Unlike the Bank, the Holding Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent, in part, upon capital distributions
from the Bank. The Holding Company is subject to the requirements of Delaware
law, which generally limit dividends to an amount equal to the excess of the net
assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital, or if there is no such excess, to its
net profits for the current and/or immediately preceding fiscal year.
On August 6, 2002 the Holding Company announced a stock repurchase program
to repurchase up to 231,635 shares of its outstanding common stock. To date,
94,474 shares of its common stock have been repurchased in open market
transactions at an average price of $16.90 per share. The Holding Company
intends to use repurchased shares to fund its stock-based benefit and
compensation plans and for any other purpose the Board deems advisable in
compliance with applicable law. The following table details purchases the
Holding Company made of its common stock during the fourth quarter of fiscal
2006.
Total Number Maximum
Total of Shares Number of Shares
Number of Average Purchased as part that May Yet Be
Shares Price Paid of Publicly Purchased Under the
Purchased per Share Announced Plans Plans
- ------------------------------------------------------------------------------------------------------------------
January 1, 2006 through
January 31, 2006 300 15.44 300 140,361
February 1, 2006 through
February 28, 2006 -- -- -- 140,361
March 1, 2006 through
March 31, 2006 -- -- -- 140,361
- ------------------------------------------------------------------------------------------------------------------
-- 15.44 --
- ------------------------------------------------------------------------------------------------------------------
Carver has three equity compensation plans: (1) The Management Recognition
Plan ("MRP") which provides for automatic grants of restricted stock to certain
employees as of the date the plan became effective in June of 1995.
Additionally, the MRP makes provision for added discretionary grants of
restricted stock to those employees so selected by the Compensation Committee of
the Board who administers the plan. (2) The Incentive Compensation Plan ("ICP")
provides for grants of cash bonuses, restricted stock and stock options to the
employees selected by the Compensation Committee. (3) The Option Plan provides
for automatic option grants to certain employees as of the date the plan became
effective in June of 1995, and like the MRP, also makes provision for added
discretionary option grants to those employees so selected by the Compensation
Committee. Additional information regarding Carver's equity compensation plans
is incorporated by reference from the section entitled "Securities Authorized
for Issuance Under Equity Compensation Plans" in the Proxy Statement.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are our selected consolidated financial and other
data. This financial data is derived in part from, and should be read in
conjunction with our consolidated financial statements and related notes.
AT OR FOR THE FISCAL YEAR ENDED MARCH 31,
----------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
SELECTED FINANCIAL CONDITION DATA:
Assets $660,993 $626,377 $538,830 $509,845 $450,306
Loans, net 493,432 421,987 351,900 292,738 289,710
Securities 108,286 149,335 139,877 165,585 105,464
Cash and cash equivalents 22,904 20,420 22,774 23,160 34,851
Deposits 504,638 455,870 375,519 349,066 327,542
Borrowed funds 93,792 115,299 104,282 108,996 75,651
Long-term Obligations 48,153 84,129 80,506 91,762 60,749
Stockholders' equity $ 48,697 $ 45,801 $ 44,645 $ 41,073 $ 36,742
Number of deposit accounts 41,614 40,199 38,578 41,220 41,200
Number of offices 8 8 6 5 5
OPERATING DATA:
Interest income $ 32,385 $ 28,546 $ 26,234 $ 27,390 $ 28,395
Interest expense 13,493 9,758 8,700 8,983 12,047
-------- -------- -------- -------- --------
Net interest income 18,892 18,788 17,534 18,407 16,348
Provision for loan losses -- -- -- -- 900
-------- -------- -------- -------- --------
Net interest income after provision for loan losses 18,892 18,788 17,534 18,407 15,448
Non-interest income 5,341 4,075 5,278 3,161 4,485
Non-interest expenses 19,134 18,696 15,480 14,704 14,339
-------- -------- -------- -------- --------
Income before income taxes 5,099 4,167 7,332 6,864 5,594
Income taxes 1,329 1,518 2,493 3,033 881
-------- -------- -------- -------- --------
Net income $ 3,770 $ 2,649 $ 4,839 $ 3,831 $ 4,713
======== ======== ======== ======== ========
Basis earnings per common share $ 1.50 $ 1.06 $ 2.03 $ 1.59 $ 1.98
======== ======== ======== ======== ========
Diluted earnings per common share $ 1.47 $ 1.03 $ 1.87 $ 1.52 $ 1.89
======== ======== ======== ======== ========
Cash dividends per common share $ 0.32 $ 0.26 $ 0.20 $ 0.10 $ 0.05
======== ======== ======== ======== ========
SELECTED STATISTICAL DATA:
Return on average assets (1) 0.60% 0.45% 0.93% 0.83% 1.11
Return on average equity (2) 7.93 5.80 11.40 9.77 13.78
Net interest margin (3) 2.97 3.41 3.56 4.26 4.09
Average interest rate spread (4) 3.18 3.26 3.40 4.08 3.89
Efficiency ratio (5) 78.96 81.77 67.86 68.18 77.89
Operating expense to average assets (6) 3.04 3.21 2.97 3.18 3.37
Average equity to average assets 7.54 7.84 8.13 8.48 8.03
Common Dividend payout ratio (7) 20.63 24.64 9.86 3.19 2.55
ASSET QUALITY RATIOS:
Non-performing assets to total assets (8) 0.42% 0.16% 0.39% 0.36% 0.63
Non-performing assets to total loans receivable (8) 0.55 0.23 0.60 0.61 0.96
Allowance for loan losses to total loans receivable 0.81 0.96 1.16 1.40 1.41
(1) Net income divided by average total assets
(2) Net income divided by average total equity
(3) Net interest income divided by average interest-earning assets.
(4) The difference between the weighted average yield on interest-earning
assets and the weighted average cost of interest-bearing liabilities.
(5) Non-interest expense (other than real estate owned expenses) divided by the
sum of net interest income and non-interest income (other than net security
gains and losses and other non-recurring income).
(6) Non-interest expense less real estate owned expenses, divided by average
total assets.
(7) Dividends paid to common stockholders as a percentage of net income
available to common stockholders.
(8) Non-performing assets consist of non-accrual loans, loans accruing 90 days
or more past due, and property acquired in settlement of loans.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
our Consolidated Financial Statements and Notes to Consolidated Financial
Statements presented elsewhere in this report. The Company's results of
operations are significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies,
changes in accounting standards and actions of regulatory agencies.
EXECUTIVE SUMMARY
Carver Bancorp, Inc., is a bank holding company organized under the laws of
the state of Delaware and registered as a "bank holding company" under the Bank
Holding Company Act of 1956, as amended. Carver is committed to providing
superior customer service while offering a range of banking products and
financial services to our retail and commercial customers. The Holding Company's
primary subsidiary is Carver Federal Savings Bank, which operates from eight
branch offices in the New York City boroughs of Manhattan, Brooklyn and Queens.
Consistent with the thrift industry, Carver Federal's net income is
dependent primarily on net interest income, which is the difference between
interest income earned on its loan, investment and mortgage-backed securities
portfolios and the interest paid on its interest-bearing liabilities, such as
deposits and borrowings. In addition, net income is affected by the level of
provision for loan losses, as well as non-interest income and operating
expenses. The interest rate climate in 2006 was a challenging one for the
industry and therefore Carver, as net interest margin declined following
interest rate policy by the Federal Reserve over the last two years, which had
the effect of substantially reducing the margin between earning assets and
liabilities. Carver's core strategy continues to emphasize increasing assets,
namely commercial real estate loans, and liabilities, primarily core deposits,
sourced through our branch offices. In addition, the company is aggressively
working to reduce costs, to improve its efficiency ratio, following investments
in new branch offices and ATM locations, to increase the Bank's presence in its
core marketplace.
MERGER WITH COMMUNITY CAPITAL BANK
In addition to these and other steps to grow organically, Carver is
actively pursuing acquisition opportunities to expand its presence in markets
consistent with its urban niche, which are designed to increase assets and/or
fee income. As a result, on April 5, 2006, the Bank entered into a definitive
agreement to acquire Community Capital Bank ("CCB"), a leader in providing loans
to small businesses in New York City's urban marketplace, in a cash transaction
valued at approximately $11.1 million. The acquisition was approved by CCB
shareholders on June 28, 2006 and is expected to close by September 30, 2006,
subject to customary closing conditions including regulatory approvals.
By providing Carver with a commercial banking platform, the transaction
with CCB will better position the Bank to capitalize on one of the fastest
growing and affluent urban consumer and small business markets in the country.
Small business lending, which is typically a higher margin lending platform than
real estate lending, will enable Carver to increase core deposits and loan
balances, thereby increasing net interest margin and fee income. Efficiencies
are also expected from an in market merger of an institution with two branch
offices in Brooklyn, New York and approximately $162 million in assets.
FISCAL 2006
Throughout fiscal 2006 the interest rate environment continued to
negatively impact the Bank's net interest margin. To stem margin loss, the Bank
successfully implemented a strategy to increase assets when accretive while
replacing securities with higher yielding mortgage loans. Additionally, higher
costing borrowings were replaced with lower costing deposits. The growth in
assets and deposits followed investments in new branch and ATM locations, new
product offerings, and marketing efforts. However, these investments and others
increased the Bank's operating expenses. With diligent cost cutting efforts and
outsourcing strategies the growth in expenses was limited and resulted in modest
improvements to the Bank's efficiency ratio.
In fiscal 2006, the Bank experienced strong growth in its core business
with increases in net loans receivable and deposits, compared to March 31, 2005.
During fiscal 2006, the national and local real estate markets remained strong
and continued to support Carver's lending abilities increasing the loan
portfolio despite the fact that loan repayments remained high, at fiscal 2005
levels. Deposits rose through growth in our checking, money market and
certificate of deposit accounts. Both the securities and borrowings portfolios
were reduced, consistent with our strategy to use normal cash flows from the
repayment of mortgage-backed securities as well as the increase in deposits to
fund higher yielding loans and repay borrowings.
The FOMC raised the federal funds rate eight times resulting in an increase
of 200 basis points during the fiscal year. While short term U.S. treasury
yields have risen, yields on the longer end of the treasury yield curve have not
risen to the same degree as short term yields resulting in a significant
flattening of the U.S. Treasury yield curve. Additionally, there was interest
rate volatility within individual quarters, which resulted in volatility in cash
flows and refinance activity. As a result of this rate environment and despite
the growth in our balance sheet, Carver's net interest income remained
relatively flat while net interest margin declined year over year.
As previously noted, fiscal 2006 reflected strong growth in the Bank's loan
portfolio while maintaining solid asset quality. As a result, the Company did
not provide for additional loan loss reserves as it considers the current
allowance for loan losses to be adequate.
The Bank's strategy to enhance fee income from operations has resulted in
year over year increases in depository fees and charges, primarily ATM fees,
debit card income and commissions from the sale of investments and insurance. In
addition, the Bank benefited from improvements in loan fees and service charges,
primarily loan prepayment penalty income.
Net income for fiscal 2006 was impacted by increased expenses resulting
from the full year effect of expanding the Bank's franchise in fiscal 2005.
During fiscal 2005, the Bank successfully opened two full service
state-of-the-art branch offices, one in Brooklyn and the other in Harlem.
Additionally, the Bank opened two 24/7 ATM banking centers in Harlem and
Brooklyn in fiscal 2005 and stand alone ATMs in Brooklyn in fiscal 2006. These
investments increased operating expenses substantially. During fiscal 2006, in
an effort to control expenses, Carver implemented company-wide cost cutting
initiatives including the outsourcing of several technology functions as well as
a number of corporate administrative functions. These efforts helped hold
expenses to a modest increase in expenses year over year.
FISCAL 2007
The outlook for fiscal 2007 reflects many of the economic and competitive
factors that the Bank and the banking industry faced in fiscal 2006. As a
result, we expect the operating environment to remain challenging with
short-term interest rates continuing to rise while medium- and long term
interest rates remain stable or rise moderately, which could have the effect of
exerting further pressure on the Bank's net interest margin. Structurally, the
Bank's balance sheet exhibits an asset sensitive bias over the long term. As a
result, the Bank's greatest exposure is to a lower rate environment as asset
yields would be expected to decline while deposit costs would be expected to
stabilize. Should rates continue to rise, additional margin compression would be
expected in the near term, however, management anticipates that the Bank's
balance sheet would benefit over time from a prolonged rising rate environment.
In this challenging climate, the Bank will continue to focus on growth in
its core businesses, namely the expansion of commercial real estate loans and
retail deposits. With the acquisition of CCB, we expect to begin to capitalize
on additional new business opportunities noted above. In addition, based on our
success in substantially increasing loans in our urban markets in the last
several fiscal years, Carver Federal has been consistently successful in
competing for attractive resources from the public sector to extend our reach.
Notably, on June 1, 2006, Carver Federal was selected by the U.S.
Department of Treasury to receive an allocation of $59 million in New Markets
Tax Credits ("NMTC") to provide loans to business willing to invest in
low-income communities, including small business and certain real estate loans
and other investments. The allocation was awarded to Carver Community
Development Corporation, a for profit Community Development Entity ("CDE")
created by the Bank. Tax credits awarded by the government through the NMTC
program enable loans to be made with advantaged terms including, in some cases,
below market interest rates, thereby increasing capital to underserved
communities. The NMTC program provides a credit to Carver Federal against
federal income taxes when the Bank makes an equity investment in its CDE, which
in turn uses this investment to make qualified loans in low-income communities,
consistent with Carver's marketplace. The allocations are expected to be made
available during calendar year 2007, and annually thereafter over a seven year
period. During this period, the Bank will be able to receive 39% of the award or
approximately $23 million in tax credits to be claimed over a seven year period,
consistent with the CDE's ability to make loans meeting the Treasury
Department's guidelines. A substantial portion of this benefit will be utilized
for revitalization of our community, pursuant to the goals of the NMTC program.
However, executing this program well is expected to increase our lending in our
marketplace and improve shareholder value by reducing the Bank's taxes. Carver
is gratified to have been selected upon its first application in a highly
competitive selection process.
Deposit growth is expected to follow our new business and marketing effort
to core customer groups including landlords, churches and other non-profits as
residents of the communities we serve. New products were offered to increase
market share in these customer segments during fiscal 2006 including a lock-box
service for landlords to collect rental payments, a checking overdraft line of
credit (in an effort to continue building our checking account deposit base) and
participation in the Certificate of Deposit Account Registry Services program to
more efficiently address the collateral needs of large balance depositors.
Regarding mortgage lending, the strength of originations and the purchase
mortgage market coupled with the anticipated reduced level of loan prepayments
should result in continued strong loan portfolio growth in fiscal 2007. Products
such as sub-prime and jumbo mortgages for sale in the secondary market were
introduced in fiscal 2006 to address the needs of additional prospective
borrowers. Added emphasis to promote these products will be provided in fiscal
2007 in an effort to further fuel fee income growth. Planned net income growth
in fiscal 2007 will be achieved by expanding non-interest income and emphasizing
cost containment measures in fiscal 2007 thereby lowering the Bank's efficiency
ratio. It is anticipated that if further flattening of the U.S. Treasury yield
curve occurs, the Bank may utilize the cash flow of an expansion in its core
business to reduce its securities and borrowing portfolios, thereby limiting
asset growth.
The retail and lending teams of Carver and CCB are developing a strategy to
onboard CCB customers and increase products to deepen those relationships, in
addition to new business activities designed to capitalize on Carver's larger
footprint. In addition we are evaluating strategies to increase efficiencies and
maximize the combination of the Company's balance sheets.
CRITICAL ACCOUNTING POLICIES
Various elements of our accounting policies, by their nature, are
inherently subject to estimation techniques, valuation assumptions and other
subjective assessments. Our policy with respect to the methodologies used to
determine the allowance for loan losses is our most critical accounting policy.
This policy is important to the presentation of our financial condition and
results of operations, and it involves a higher degree of complexity and
requires management to make difficult and subjective judgments, which often
require assumptions or estimates about highly uncertain matters. The use of
different judgments, assumptions and estimates could result in material
differences in our results of operations or financial condition.
See Note 1 of Notes to Consolidated Financial Statements for a description
of our critical accounting policies including those related to allowance for
loan losses and an explanation of the methods and assumptions underlying its
application.
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of Carver Federal's net income,
is determined by the difference or "spread" between the yield earned on
interest-earning assets and the rates paid on its interest-bearing liabilities
and the relative amounts of such assets and liabilities. Because Carver
Federal's interest-bearing liabilities consist primarily of shorter term deposit
accounts, Carver Federal's interest rate spread can be adversely affected by
changes in general interest rates if its interest-earning assets are not
sufficiently sensitive to changes in interest rates. The Bank has sought to
reduce its exposure to changes in interest rates by more closely matching the
effective maturities and repricing periods of its interest-earning assets and
interest-bearing liabilities through a variety of strategies, including the
origination and purchase of adjustable-rate mortgage loans for its portfolio,
investment in adjustable-rate mortgage-backed securities and shorter-term
investment securities and the sale of all long term fixed-rate mortgage loans
originated into the secondary market.
DISCUSSION OF MARKET RISK--INTEREST RATE SENSITIVITY ANALYSIS
As a financial institution, the Bank's primary component of market risk is
interest rate volatility. Fluctuations in interest rates will ultimately impact
both the level of income and expense recorded on a large portion of the Bank's
assets and liabilities, and the market value of all interest-earning assets,
other than those which are short term in maturity. Since all of the Company's
interest-bearing liabilities and virtually all of the Company's interest-earning
assets are held by the Bank, most of the Company's IRR exposure is retained by
the Bank. As a result, all significant IRR management procedures are performed
at the Bank. Based upon the Bank's nature of operations, the Bank is not subject
to foreign currency exchange or commodity price risk. The Bank does not own any
trading assets.
Carver Federal seeks to manage its IRR by monitoring and controlling the
variation in repricing intervals between its assets and liabilities. To a lesser
extent, Carver Federal also monitors its interest rate sensitivity by analyzing
the estimated changes in market value of its assets and liabilities assuming
various interest rate scenarios. As discussed more fully below, there are a
variety of factors which influence the repricing characteristics of any given
asset or liability.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity gap. An asset or liability
is said to be interest rate sensitive within a specific period if it will mature
or reprice within that period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific period of time and the amount of interest-bearing
liabilities repricing within that same time period. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities and is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of falling interest rates, a
negative gap could result in an increase in net interest income, while a
positive gap could adversely affect net interest income. Conversely, during a
period of rising interest rates a negative gap could adversely affect net
interest income, while a positive gap could result in an increase in net
interest income. As illustrated below, Carver Federal had a negative one-year
gap equal to 25.48% of total rate sensitive assets at March 31, 2006. As a
result, Carver Federal's net interest income could be negatively affected by
rising interest rates and positively affected by falling interest rates.
The following table sets forth information regarding the projected
maturities, prepayments and repricing of the major rate-sensitive asset and
liability categories of Carver Federal as of March 31, 2006. Maturity repricing
dates have been projected by applying estimated prepayment rates based on the
current rate environment. The information presented in the following table is
derived in part from data incorporated in "Schedule CMR: Consolidated Maturity
and Rate," which is part of the Bank's quarterly reports filed with the OTS. The
repricing and other assumptions are not necessarily representative of the Bank's
actual results. Classifications of items in the table below are different from
those presented in other tables and the financial statements and accompanying
notes included herein and do not reflect non-performing loans.
OR FOUR TO THROUGH OVER THREE
LESS TWELVE THREE THROUGH
MONTHS MONTHS YEARS FIVE YEARS
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Rate Sensitive Assets:
Loans and mortgage-backed securities $ 95,862 $ 34,878 $ 96,802 $ 56,499
Federal funds sold and interest earning
deposits 9,300 -- -- --
Investment securities 969 3,839 7,847 4,038
-------------- -------------- -------------- --------------
Total interest-earning assets 106,131 38,717 104,649 60,537
Rate Sensitive Liabilities:
NOW demand 4,539 5,236 12,564 10,652
Savings and clubs 9,561 9,647 19,159 12,126
Money market savings 2,437 1,360 8,668 19,895
Certificates of deposit 40,617 176,961 30,680 14,883
Borrowings 18,867 32,484 44,165 --
-------------- -------------- -------------- --------------
Total interest-bearing liabilities $ 76,021 $ 225,688 $ 115,236 $ 57,556
Interest Sensitivity Gap $ 30,110 $ (186,971) $ (10,587) $ 2,981
Cumulative Interest Sensitivity Gap $ 30,110 $ (156,861) $ (167,448) $ (164,467)
Ratio of Cumulative Gap to Total Rate
Sensitive assets 4.89% -25.48% -27.20% -26.71%
OVER FIVE OVER
THROUGH TEN
TEN YEARS YEARS TOTAL
--------- --------- ---------
Rate Sensitive Assets:
Loans and mortgage-backed securities $ 150,598 $ 155,001 $ 589,640
Federal funds sold and interest earning
deposits -- -- 9,300
Investment securities 11 -- 16,704
--------- --------- ---------
Total interest-earning assets 150,609 155,001 615,644
Rate Sensitive Liabilities:
NOW demand 14,085 11,914 58,990
Savings and clubs 29,483 59,747 139,723
Money market savings 3,018 4,667 40,045
Certificates of deposit 818 3 263,962
Borrowings 194 -- 95,710
--------- --------- ---------
Total interest-bearing liabilities $ 47,598 $ 76,331 $ 598,430
Interest Sensitivity Gap $ 103,011 $ 78,670 $ 17,214
Cumulative Interest Sensitivity Gap $ (61,456) $ 17,214 --
Ratio of Cumulative Gap to Total Rate
Sensitive assets -9.98% 2.80%
The table above assumes that fixed maturity deposits are not withdrawn
prior to maturity and that transaction accounts will decay as disclosed in the
table above.
Certain shortcomings are inherent in the method of analysis presented in
the table above. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in the market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, generally have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Additionally, credit
risk may increase as many borrowers may experience an inability to service their
debt in the event of a rise in interest rate. Virtually all of the
adjustable-rate loans in Carver Federal's portfolio contain conditions that
restrict the periodic change in interest rate.
NET PORTFOLIO VALUE ("NPV") ANALYSIS. As part of its efforts to maximize
net interest income while managing risks associated with changing interest
rates, management also uses the NPV methodology.
Under this methodology, IRR exposure is assessed by reviewing the estimated
changes in net interest income ("NII") and NPV that would hypothetically occur
if interest rates rapidly rise or fall along the yield curve. Projected values
of NII and NPV at both higher and lower regulatory defined rate scenarios are
compared to base case values (no change in rates) to determine the sensitivity
to changing interest rates.
Presented below, as of March 31, 2006, is an analysis of the Bank's IRR as
measured by changes in NPV and NII for instantaneous and sustained parallel
shifts of 100 basis points in market interest rates. Such limits have been
established with consideration of the impact of various rate changes and the
Bank's current capital position. The Bank considers its level of IRR for fiscal
2006, as measured by changes in NPV, to be minimal. The information set forth
below relates solely to the Bank; however, because virtually all of the
Company's IRR exposure lies at the Bank level, management believes the table
below also similarly reflects an analysis of the Company's IRR.
NET PORTFOLIO VALUE NPV AS A % OF PV OF ASSETS
------------------------------------------ ---------------------------
CHANGE IN RATE $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
-------------- ------------ ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
+300 bp 69,337 (18,204) -21% 10.55% -226 bp
+200 bp 76,222 (11,319) -13% 11.43% -138 bp
+100 bp 82,270 (5,271) -6% 12.18% -63 bp
0 bp 87,541 -- -- 12.81% --
-100 bp 91,875 4,334 5% 13.31% +50 bp
-200 bp 95,524 7,983 9% 13.71% +90 bp
MARCH 31, 2006
--------------
RISK MEASURES: +200 BP RATE SHOCK
Pre-Shock NPV Ratio: NPV as % of PV of Assets 12.81%
Post-Shock NPV Ratio 11.43%
Sensitivity Measure; Decline in NPV Ratio 138 bp
Certain shortcomings are inherent in the methodology used in the above IRR
measurements. Modeling changes in NPV require the making of certain assumptions,
which may or may not reflect the manner in which actual yields and costs respond
to changes in market interest rates. In this regard, the NPV table presented
assumes that the composition of Carver Federal's interest sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured and also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the duration
to maturity or repricing of specific assets and liabilities. Accordingly,
although the NPV table provides an indication of Carver Federal's IRR exposure
at a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
Carver Federal's net interest income and may differ from actual results.
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to Carver
Federal's average interest-earning assets and average interest-bearing
liabilities and reflects the average yield on assets and the average cost of
liabilities for the years indicated. These yields and costs are derived by
dividing income or expense by the average balances of assets or liabilities,
respectively, for the periods shown. Average balances are derived from average
month-end balances, except for federal funds which are derived from daily
balances. The use of average monthly balances instead of average daily balances
on all other accounts should not result in material differences in the
information presented.
The table also presents information for the years indicated with respect to
the difference between the weighted average yield earned on interest-earning
assets and the weighted average rate paid on interest-bearing liabilities, or
"interest rate spread," which savings institutions have traditionally used as an
indicator of profitability. Another indicator of an institution's profitability
is its "net interest margin," which is its net interest income divided by the
average balance of interest-earning assets. Net interest income is affected by
the interest rate spread and by the relative amounts of interest-earning assets
and interest-bearing liabilities. When interest-earning assets approximate or
exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income.
MONTH ENDED MARCH 31, 2006 YEAR ENDED MARCH 31, 2006
---------------------------- -------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/COST BALANCE INTEREST YIELD/COST
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
Loans (1) $ 487,937 6.77% $ 443,461 $ 26,563 5.99%
Investment securities (2) 18,105 3.84% 25,698 971 3.78%
Mortgage-backed securities 98,366 4.22% 113,574 4,439 3.91%
Federal funds 5,929 4.37% 12,166 412 3.39%
------------- ------------- ------------- ------------- -------------
Total interest-earning assets 610,337 6.25% 594,899 32,385 5.44%
Non-interest-earning assets 34,387 35,198
------------- -------------
Total assets $ 644,724 $ 630,097
============= =============
INTEREST-BEARING LIABILITIES:
Deposits:
NOW demand $ 25,640 0.30% $ 24,397 $ 74 0.30%
Savings and clubs 139,304 0.68% 137,934 919 0.67%
Money market savings 33,806 2.01% 36,583 601 1.64%
Certificates of deposit 259,378 3.76% 237,992 7,297 3.07%
------------- ------------- ------------- ------------- -------------
Total deposits 458,128 2.50% 436,906 8,891 2.03%
Mortgagors deposits 1,789 1.46% 2,044 30 1.47%
Borrowed money 98,407 4.56% 107,551 4,572 4.25%
------------- ------------- ------------- ------------- -------------
Total deposits and interest-bearing
liabilities 558,324 2.86% 546,501 13,493 2.47%
-------------
Non-interest-bearing liabilities:
Demand 30,940 29,079
Other liabilities 6,413 6,980
------------- -------------
Total liabilities 595,677 582,560
Stockholders' equity 49,047 47,537
------------- -------------
Total liabilities and stockholders' equity $ 644,724 $ 630,097
============= =============
Net interest income $ 18,892
=============
Average interest rate spread 3.39% 2.97%
============= =============
Net interest margin 3.52% 3.18%
============= =============
Ratio of average interest-earning assets to
interest-bearing liabilities 109.32% 108.86%
============= =============
(1) Includes non-accrual loans.
(2) Includes FHLB-NY stock.
RATE/VOLUME ANALYSIS
The following table sets forth information regarding the extent to which
changes in interest rates and changes in volume of interest related assets and
liabilities have affected Carver Federal's interest income and expense during
the periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided for changes attributable to:
(1) changes in volume (changes in volume multiplied by new rate); (2) changes in
rates (change in rate multiplied by old volume); and (3) changes in rate/volume.
Changes in rate/volume variance are allocated proportionately between changes in
rate and changes in volume.
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------------
2005 2004
------------------------------------------- -------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
INTEREST EARNING ASSETS: BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
------------- ------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
Loans (1) $ 384,916 $ 22,940 5.96% $ 314,297 $ 20,117 6.40%
Investment securities (2) 29,547 827 2.80% 29,708 1,161 3.91%
Mortgage-backed securities 125,643 4,605 3.67% 126,764 4,789 3.78%
Fed funds sold 10,724 174 1.62% 22,194 167 0.75%
------------- ------------- ------------- ------------- ------------- -------------
Total interest earning assets 550,830 28,546 5.18% 492,963 26,234 5.32%
Non-interest earning assets 31,677 28,423
------------- -------------
Total assets $ 582,507 $ 521,386
============= =============
INTEREST BEARING LIABILITIES:
Deposits
NOW demand $ 22,933 $ 69 0.30% $ 23,286 $ 85 0.37%
Savings and clubs 133,621 801 0.60% 130,509 1,001 0.77%
Money market savings 30,116 302 1.00% 27,662 235 0.85%
Certificates of deposit 208,584 4,258 2.04% 163,382 3,304 2.02%
------------- ------------- ------------- ------------- ------------- -------------
Total deposits 395,254 5,430 1.37% 344,839 4,625 1.34%
Mortgagers deposits 2,217 25 1.15% 1,643 24 1.46%
Borrowed money 109,787 4,303 3.92% 106,350 4,051 3.81%
------------- ------------- ------------- ------------- ------------- -------------
Total interest bearing liabilities 507,258 9,758 1.92% 452,832 8,700 1.92%
------------- -------------
Non-interest-bearing liabilities:
Demand 22,857 19,408
Other liabilities 6,724 6,746
------------- -------------
Total liabilities 536,839 478,986
Stockholders' equity 45,668 42,400
------------- -------------
Total liabilities and stockholders'
equity $ 582,507 $ 521,386
============= =============
Net interest income $ 18,788 $ 17,534
============= =============
Average interest rate spread 3.26% 3.40%
============= =============
Net interest margin 3.41% 3.56%
============= =============
Ratio of avgerage interest-earning
assets to interest-bearing liabilities 108.59% 108.86%
============= =============
(1) Includes non-accrual loans.
(2) Includes FHLB-NY stock.
YEAR ENDED MARCH 31,
---------------------------------------------------------------------------------------
2006 VS. 2005 2005 VS. 2004
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------------------ ------------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
INTEREST EARNING ASSETS:
Loans $ 3,489 $ 134 $ 3,623 $ 4,209 $ (1,386) $ 2,823
Investment securities (1) 145 144 (5) (329) (334)
Mortgage-backed securities (560) 394 (166) (41) (143) (184)
Fed funds 23 215 238 (186) 193 7
------------ ------------ ------------ ------------ ------------ ------------
Total interest earning assets 2,951 888 3,839 3,977 (1,665) 2,312
INTEREST BEARING LIABILITIES:
Deposits
NOW demand (4) (1) (5) 1 15 16
Savings and clubs (26) (83) (109) (19) 219 200
Money market savings (65) (234) (299) (25) (43) (68)
Certificates of deposit (600) (2,448) (3,048) (923) (31) (954)
------------ ------------ ------------ ------------ ------------ ------------
Total deposits (695) (2,766) (3,461) (966) 160 (806)
Mortgagers deposits 2 (7) (5) 7 (8) (1)
Borrowed money 83 (352) (269) (149) (102) (251)
------------ ------------ ------------ ------------ ------------ ------------
Total deposits and interest bearing
liabilities (610) (3,125) (3,735) (1,108) 50 (1,058)
Net change in interest income $ 2,341 $ (2,237) $ 104 $ 2,869 $ (1,615) $ 1,254
============ ============ ============ ============ ============ ============
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2006 AND 2005
At March 31, 2006, total assets increased by $34.6 million, or 5.5%, to
$661.0 million compared to $626.4 million at March 31, 2005. The increase in
total assets was primarily attributable to an increase in loans receivable
partially offset by a reduction in total securities.
Loans receivable, net, increased by $71.4 million, or 16.9%, to $493.4
million as of March 31, 2006 compared to $422.0 million one year ago. The net
loan growth during fiscal 2006 reflects loan originations of $111.3 million and
loan purchases of $96.1 million, offset by principal repayments of $113.5
million and loans sold to various third party purchasers of $22.5 million. One-
to four-family mortgage loans decreased by $12.4 million, or 7.9%, to $143.4
million at March 31, 2006 compared to $155.8 million at March 31, 2005. The
decrease in one- to four-family loans is primarily due to repayments and loan
sales of $36.9 and $22.5 million, respectively, partially offset by loan
originations and purchases of $15.1 and $32.2 million, respectively. Multifamily
real estate loans increased by $2.8 million, or 2.8%, to $104.7 million at March
31, 2006 compared to $101.9 million at March 31, 2005 as originations and
purchases of $18.1 and $9.5 million, respectively, exceeded repayments of $24.8
million. Non-residential real estate loans increased by $37.3 million, or 31.9%,
to $154.0 million at March 31, 2006 compared to $116.8 million at March 31, 2005
primarily as a result of originations and purchases of $33.6 and $27.3 million,
respectively, partially offset by repayments of $23.6 million during the year.
Construction loans increased by $43.9 million, or 90.4%, to $92.5 million at
March 31, 2006 compared to $48.6 million at March 31, 2005 primarily due to
originations and purchases of $44.0 and $27.1 million, respectively, partially
offset by repayments of $27.2 million. The Bank continues to grow its balance
sheet through focusing on the origination of real estate loans in the markets it
serves and will continue to augment these originations with loan purchases.
Consumer and business loans decreased by $244,000, or 14.4%, to $1.5 million at
March 31, 2006 compared to $1.7 million at March 31, 2005 reflecting repayments
of $776,000 partially offset by new originations of $532,000.
Total securities at March 31, 2006 decreased $41.0 million to $108.3
million from $149.3 million at March 31, 2005, reflecting a decline of $36.2
million in available-for-sale securities and a $4.9 million decrease in
held-to-maturity securities. The decrease in available-for-sale securities
primarily reflects $60.6 million of principal repayments and maturities, $1.6
million in proceeds from sales of securities partially offset by purchases of
new available-for-sale securities of $26.8 million. The $4.9 million decrease in
held-to-maturity securities reflects principal payments and maturities.
Available-for-sale securities represented 75.6% of the total securities
portfolio at March 31, 2006 compared to 79.0% at March 31, 2005. The current
strategy is to reduce the investment portfolio through normal cash flows and
reinvest the proceeds into higher yielding loans. However, the Bank may invest
in securities from time to time to help diversify its asset portfolio and
satisfy collateral requirements for certain deposits.
At March 31, 2006, total liabilities increased $31.7 million, or 5.5%, to
$612.3 million compared to $580.6 million at March 31, 2005. Deposits increased
$48.8 million, or 10.7%, to $504.6 million at March 31, 2006 from $455.9 million
at March 31, 2005. The increase in deposits was primarily attributable to
increases of $34.3 million in certificates of deposit, $9.3 million in demand
accounts, $3.8 million in money market accounts and $1.9 million in regular
savings and club accounts. Deposit increases reflects $35.0 million in new
certificates of deposit from the City and the State under New York State`s
Banking Development District program and new money from the Bank's increased
retail depositors from new branch offices. These additional funds from deposit
growth were used to fund loan originations/purchases and repay borrowings. Total
FHLB-NY borrowings decreased $21.6 million, or 21.0%, to $80.9 million at March
31, 2006 from $102.5 million at March 31, 2005 as a result of net repayments of
maturing advances.
At March 31, 2006, stockholders' equity increased $2.9 million, or 6.3%, to
$48.7 million compared to $45.8 million at March 31, 2005. The increase in
stockholders' equity was primarily attributable to additional retained earnings
of $3.0 million and net stock transactions of $349,000 partially offset by
$439,000 additional accumulated other comprehensive loss. The change in
accumulated other comprehensive loss consists of a net loss of $158,000 related
to the mark-to-market of the Bank's available-for-sale securities and a net
reserve of $281,000 for the Company's unfunded employee pension liability. The
Bank's capital levels meet regulatory requirements of a well capitalized
financial institution.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2006 AND 2005
NET INCOME
The Bank reported net income for fiscal 2006 of $3.8 million compared to
$2.6 million for the prior fiscal year. Net income available to common
stockholders for fiscal 2006 was $3.8 million, or $1.47 per diluted common share
compared to $2.5 million, or $1.03 per diluted common share, for fiscal 2005.
The increase in net income was primarily due to higher non-interest income of
$1.3 million, a decline in income tax expense of $189,000 and an increase in net
interest income of $104,000 partially offset by an increase in non-interest
expense of $438,000.
INTEREST INCOME
Interest income increased in fiscal 2006 by $3.8 million, or 13.5% to $32.4
million, from the prior fiscal year. The average balance of interest-earning
assets increased to $594.9 million for fiscal 2006 from $550.8 million for the
prior fiscal year. Adding to the increase was a rise in the average yield on
interest-earning assets to 5.44% for fiscal 2006 compared to 5.18% for fiscal
2005.
Interest income on loans increased by $3.6 million, or 15.8%, to $26.6
million for fiscal 2006 compared to $22.9 million for the prior fiscal year. The
increase in interest income from loans was primarily the result of a $58.5
million increase in average loan balances to $443.5 million for fiscal 2006
compared to $384.9 million for fiscal 2005, coupled with the effects of a 3
basis point increase in the average rate earned on loans to 5.99% for fiscal
2006 from 5.96% for the prior fiscal year. The increase in the average balance
of loans reflects originations and purchases in excess of principal collections.
The minimal increase in the average rate earned on loans was principally due to
the repricing of certain construction loans that are tied to short term rates
that have increased with the rise in the overnight federal funds rate, see "Item
7. Management Discussion and Analysis--Liquidity and Capital Resources."
Interest income on mortgage-backed securities decreased by $166,000, or
3.6%, to $4.4 million for fiscal 2006 compared to $4.6 million for the prior
fiscal year, reflecting a decrease of $12.1 million in the average balance of
mortgage-backed securities to $113.6 million for fiscal 2006 compared to $125.6
million for fiscal 2005. Partially offsetting the decline was an 24 basis point
increase in the average rate earned on mortgage-backed securities to 3.91% for
fiscal 2006 from 3.67% for the prior fiscal year. The decrease in the average
balance of such securities demonstrates Management's commitment to invest
proceeds received from increased deposits and the cash flows from the repayment
of investments into higher yielding assets.
Interest income on investment securities increased by approximately
$144,000, or 17.4%, to $971,000 for fiscal 2006 compared to $827,000 for the
prior fiscal year. The increase in interest income on investment securities
reflects a 98 basis point increase in the average rate earned on investment
securities to 3.78% for fiscal 2006 from 2.80% for the prior fiscal year
partially offset by a decrease of $3.8 million in the average balance of
investment securities to $25.7 million for fiscal 2006 compared to $29.5 million
for fiscal 2005.
Interest income on federal funds increased $238,000, or 136.8%, to $412,000
for fiscal 2006 compared to $174,000 for the prior fiscal year. The increase is
primarily attributable to a 177 basis point increase in the average rate earned
on federal funds coupled with a $1.4 million increase in the average balance of
federal funds year over year. This large increase in the returns on federal
funds was realized as the FRB continually raised the federal funds rate over the
course of the entire fiscal year.
INTEREST EXPENSE
Interest expense increased by $3.7 million, or 38.3%, to $13.5 million for
fiscal 2006 compared to $9.8 million for the prior fiscal year. The increase in
interest expense reflects an increase of $39.2 million in the average balance of
interest-bearing liabilities to $546.5 million in fiscal 2006 from $507.3
million in fiscal 2005. Additionally, the total cost of interest-bearing
liabilities increased 55 basis points to 2.47% in fiscal 2006 compared to 1.92%
in the prior year. The increase in the average balance of interest-bearing
liabilities in fiscal 2006 compared to fiscal 2005 was due to increases in both
the average balance of interest-bearing deposits and the average balance of
borrowed money.
Interest expense on deposits increased $3.5 million, or 63.5%, to $8.9
million for fiscal 2006 compared to $5.5 million for the prior fiscal year. This
increase is attributable to a $41.7 million, or 10.5%, increase in the average
balance of interest-bearing deposits to $436.9 million for fiscal 2006 compared
to $395.3 million for fiscal 2005 coupled with a 66 basis point increase year
over year in the cost of average deposits. The increase in the average balance
of interest-bearing deposits was primarily due to an increase in the average
balance of certificates of deposit of $29.4 million, or 14.1%, an increase in
the average balance of money market accounts of $6.5 million, or 21.5%, an
increase in the average balance of savings and club accounts of $4.3 million, or
3.2%, and an increase in the average balance of checking accounts of $1.5
million, or 6.4%. The increase in the average rate paid on deposits was
principally due to the rise in the interest rate environment throughout fiscal
2006.
Interest expense on borrowed money increased by $269,000 or 6.3%, to $4.6
million for fiscal 2006 compared to $4.3 million for the prior fiscal year. The
increase in interest expense on borrowed money for fiscal 2006 reflects a rise
of 33 basis points in the average cost of borrowed money, primarily the result
of increases in the indexed rate of trust preferred debt securities which adjust
quarterly and have increased in the current interest rate environment. Partially
offsetting the increase was a $2.2 million decline in the average balance of
borrowed money reflecting management's strategy of using deposit growth and cash
flows from the repayment of mortgage-backed securities to repay FHLB-NY
advances.
NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends primarily upon the volume of interest-earning assets and
interest-bearing liabilities and the corresponding interest rates earned and
paid. Our net interest income is significantly impacted by changes in interest
rate and market yield curves. See "--Discussion of Market Risk--Interest Rate
Sensitivity Analysis" for further discussion on the potential impact of changes
in interest rates on our results of operations.
Net interest income before the provision for loan losses increased
$104,000, or 0.6%, to $18.9 million for fiscal 2006 compared to $18.8 million
for the prior fiscal year. This modest increase was achieved as a result of an
increase in both the average balance and the return on average interest-earning
assets of $44.1 million and 26 basis points, respectively. Mainly offsetting the
increase in net interest income was an increase in the average balance and cost
of interest-bearing liabilities of $39.2 million and 55 basis points,
respectively. The result was a 29 basis point decrease in the interest rate
spread to 2.97% for fiscal 2006 compared to 3.26% for the prior fiscal year. The
net interest margin also decreased to 3.18% for fiscal 2006 compared to 3.41%
for fiscal 2005.
PROVISION FOR LOAN LOSSES
During fiscal 2005 no provision was recorded for loan losses. The Bank
records provisions for loan losses, which are charged to earnings, in order to
maintain the allowance for loan losses at a level that is considered appropriate
to absorb probable losses inherent in the existing loan portfolio. Factors
considered when evaluating the adequacy of the allowance for loan losses include
the volume and type of lending conducted, the Bank's previous loan loss
experience, the known and inherent risks in the loan portfolio, adverse
situations that may affect the borrowers' ability to repay, the estimated value
of any underlying collateral and trends in the local and national economy and
trends in the real estate market.
During fiscal 2006, the Bank had net charge-offs of $82,000 compared to
$28,000 for fiscal 2005. At March 31, 2006, non-performing loans totaled $2.8
million or 0.55% of total loans compared to $998,000, or 0.23% of total loans,
at March 31, 2005. At March 31, 2006, the Bank's allowance for loan losses was
$4.0 million compared to $4.1 million at March 31, 2005, resulting in a ratio of
the allowance to non-performing loans of 147.1% at March 31, 2006 compared to
410.7% at March 31, 2005, and a ratio of allowance for possible loan losses to
total loans of 0.81% and 0.96% at March 31, 2006 and March 31, 2005,
respectively. The Bank believes its reported allowance for loan loss at March
31, 2006 is adequate to provide for estimated probable losses in the loan
portfolio. For further discussion of non-performing loans and allowance for loan
losses, see "Item 1--Business--General Description of Business--Asset Quality"
and Note 1 of Notes to the Consolidated Financial Statements.
NON-INTEREST INCOME
Non-interest income is comprised of loan fees and service charges, fee
income from banking services and charges, gains or losses from the sale of
securities, loans and other assets and certain other miscellaneous non-interest
income. Non-interest income increased $1.3 million, or 31.1%, to $5.3 million
for fiscal 2006 compared to $4.1 million for fiscal 2005. The rise in
non-interest income was comprised of an increase of $363,000 in loan fees and
service charges, primarily greater loan prepayment penalty income and late
charge fees. Additional depository fees and charges of $246,000 were achieved
primarily from higher ATM usage, growth in debit card income and commissions
earned on the sale of investments and life insurance. Further contributing to
the rise in non-interest income was additional gains on the sale of loans of
$267,000, predominantly from the bulk sale of $10.7 million of residential
one-to four family mortgage loans. An increase of $77,000 in other income was
also achieved primarily as a result of additional income earned on the Bank's
investment in a bank owned life insurance program. Further contributing to the
increase in non-interest income year over year was the Company's recognition of
a $1.5 million impairment charge deemed other than temporary in the second
quarter of fiscal 2005, resulting from the decline in market price of 150,000
shares of IFSB stock that the Company previously held. Partially offsetting that
impairment charge in fiscal 2005 was the receipt of a net $1.1 million Community
Development Financial Institutions grant from the Department of the Treasury and
a $94,000 gain from the sale of securities.
NON-INTEREST EXPENSE
Non-interest expense increased by $438,000, or 2.3%, to $19.1 million for
fiscal 2006 compared to $18.7 million for the prior fiscal year. The increase in
non-interest expense was primarily attributable to increases in net occupancy
and equipment expenses of $327,000 and $331,000, respectively, resulting from
the full year effect in fiscal 2006 of the new branch office and ATM center
openings in fiscal 2005. Also contributing to the rise in non-interest expense
were increases in retail banking chargeoffs, legal fees and insurance costs of
$196,000, $160,000 and $112,000, respectively. Partially offsetting the increase
in non-interest expense was a charge of $847,000 in fiscal 2005 for merger and
acquisition expenses related to the attempted acquisition of IFSB. Much of the
increase in the Bank's operating expenses was a result of the investment made in
fiscal 2004 and 2005 to grow the franchise. During fiscal 2006, in an effort to
reduce non-interest expenses, the Bank implemented cost cutting strategies by
outsourcing our ATM driving technology as well as a number of corporate
administrative functions.
INCOME TAX EXPENSE
Income tax expense was $1.3 million for fiscal 2006, a decline of $189,000
or 12.5%, from $1.5 million for fiscal 2005 as a result of a $500,000 recovery
of income tax expense in fiscal 2006 attributable to the release of contingency
reserves for closed tax examination years. As a result the effective tax rate in
fiscal 2006 was 26.1%, compared to 36.4% for fiscal 2005. It is anticipated that
the effective tax rate for fiscal 2007 will be more comparative to that of
fiscal 2005.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2005 AND 2004
NET INCOME
The Bank reported net income for fiscal 2005 of $2.6 million compared to
$4.8 million for the prior fiscal year. Net income available to common
stockholders for fiscal 2005 was $2.5 million, or $1.03 per diluted common share
compared to $4.6 million, or $1.87 per diluted common share, for fiscal 2004.
The decrease in net income was primarily due to an increase in non-interest
expense of $3.2 million and a decrease in non-interest income of $1.2 million
partially offset by an increase in net interest income of $1.3 million and a
$975,000 reduction in income tax expense.
INTEREST INCOME
Interest income increased for fiscal 2005 by $2.3 million, or 8.8% to $28.5
million, from the prior fiscal year. The average balance of interest-earning
assets increased to $550.8 million for fiscal 2005 from $493.0 million for the
prior fiscal year. This increase was partially offset by a decline in the
average yield on interest-earning assets to 5.18% for fiscal 2005 compared to
5.32% for fiscal 2004.
Interest income on loans increased by $2.8 million, or 14.0%, to $22.9
million for fiscal 2005 compared to $20.1 million for the prior fiscal year. The
increase in interest income from loans was primarily the result of a $70.6
million increase in average loan balances to $384.9 million for fiscal 2005
compared to $314.3 million for fiscal 2004, the effects of which were partially
offset by a 44 basis point decrease in the average rate earned on loans to 5.96%
for fiscal 2005 from 6.40% for the prior fiscal year. The increase in the
average balance of loans reflects originations and purchases in excess of
principal collections. The decline in the average rate earned on loans was
principally due to the downward pricing on loan products during the low interest
rate environment experienced during most of fiscal 2005.
Interest income on mortgage-backed securities decreased by $184,000, or
3.8%, to $4.6 million for fiscal 2005 compared to $4.8 million for the prior
fiscal year, reflecting the combined effects an 11 basis point decrease in the
average rate earned on mortgage-backed securities to 3.67% for fiscal 2005 from
3.78% for the prior fiscal year, and a decrease of $1.1 million in the average
balance of mortgage-backed securities to $125.6 million for fiscal 2005 compared
to $126.8 million for fiscal 2004. The decrease in the average balance of such
securities demonstrates Management's commitment to invest proceeds received from
increased borrowings and deposits into higher yielding assets.
Interest income on investment securities decreased by approximately
$334,000, or 28.8%, to $827,000 for fiscal 2005 compared to $1.2 million for the
prior fiscal year. The decrease in interest income on investment securities
reflects a 111 basis point decrease in the average rate earned on investment
securities to 2.80% for fiscal 2005 from 3.91% for the prior fiscal year and a
decrease of $161,000 in the average balance of investment securities to $29.5
million for fiscal 2005 compared to $29.7 million for fiscal 2004.
Interest income on federal funds increased $7,000, or 4.2%, to $174,000 for
fiscal 2005 compared to $167,000 for the prior fiscal year. The increase is
primarily attributable to an 87 basis point increase in the average rate earned
on federal funds, partially offset by a $11.5 million decrease in the average
balance of federal funds year over year. This large increase in the returns on
federal funds was realized as the FRB continually increased the federal funds
rate during the entire fiscal year.
INTEREST EXPENSE
Interest expense increased by $1.1 million, or 12.2%, to $9.8 million for
fiscal 2005 compared to $8.7 million for the prior fiscal year. The increase in
interest expense reflects an increase of $54.4 million in the average balance of
interest-bearing liabilities to $507.2 million in fiscal 2005 from $452.8
million in fiscal 2004 as the total cost of interest-bearing liabilities
remained unchanged at 1.92% from year to year. The increase in the average
balance of interest-bearing liabilities in fiscal 2005 compared to fiscal 2004
was due to increases in both the average balance of interest-bearing deposits
and the average balance of borrowed money.
Interest expense on deposits increased $806,000, or 17.3%, to $5.5 million
for fiscal 2005 compared to $4.6 million for the prior fiscal year. This
increase is attributable to a $50.4 million, or 14.6%, increase in the average
balance of interest-bearing deposits to $395.3 million for fiscal 2005 compared
to $344.8 million for fiscal 2004 and, to a much lesser extent, a 3 basis point
increase year over year in the cost of average deposits. The increase in the
average balance of interest-bearing deposits was primarily due to an increase in
the average balance of certificates of deposit of $45.2 million, or 27.7%, an
increase in the average balance of savings and club accounts of $3.1 million, or
2.4%, and an increase in the average balance of money market accounts of $2.5
million, or 8.92%. The increase in average interest-bearing deposits was
achieved largely through deposits generated by the two new branch offices and
two new ATM centers in fiscal 2005. The slight increase in the average rate paid
on deposits was principally due to the ascend in the interest rate environment
towards the end of fiscal 2005.
Interest expense on borrowed money increased by $252,000 or 6.2%, to $4.3
million for fiscal 2005 compared to $4.1 million for the prior fiscal year. The
increase in interest expense on borrowed money for fiscal 2005 reflects a $3.4
million, or 3.2%, increase in the average balance of borrowed money reflecting
the effects of the trust preferred debt securities being outstanding for twelve
months in fiscal 2005 as compared to six months in fiscal 2004, the year they
were issued. Also contributing to the increase in interest expense is a rise of
11 basis points in the average cost of borrowed money primarily the result of
increases in the indexed rate of the trust preferred debt securities which
adjust quarterly and has increased in the current interest rate environment.
NET INTEREST INCOME
Net interest income before the provision for loan losses increased $1.3
million, or 7.2%, to $18.8 million for fiscal 2005 compared to $17.5 million for
the prior fiscal year. This increase was achieved despite a decline in the
return on average interest-earning assets of 14 basis points in fiscal 2005 from
fiscal 2004 while the cost of interest-bearing liabilities used to fund
interest-earning assets remained unchanged from year to year. The result was a
14 basis point decrease in the interest rate spread to 3.26% for fiscal 2005
compared to 3.40% for the prior fiscal year. The net interest margin also
decreased to 3.41% for fiscal 2005 compared to 3.56% for fiscal 2004.
PROVISION FOR LOAN LOSSES
During fiscal 2005 no provision was recorded for loan losses. During fiscal
2005, the Bank had net charge-offs of $28,000 compared to $33,000 for fiscal
2004. At March 31, 2005, non-performing loans totaled $998,000 or 0.2% of total
loans compared to $2.1 million, or 0.6% of total loans, at March 31, 2004. At
March 31, 2005, the Bank's allowance for loan losses was $4.1 million,
substantially unchanged from the allowance at March 31, 2004, resulting in a
ratio of the allowance to non-performing loans of 410.7% at March 31, 2005
compared to 194.3% at March 31, 2004, and a ratio of allowance for possible loan
losses to total loans of 0.96% and 1.16% at March 31, 2005 and March 31, 2004,
respectively.
NON-INTEREST INCOME
Non-interest income decreased $1.2 million, or 22.8%, to $4.1 million for
fiscal 2005 compared to $5.3 million for fiscal 2004. The decrease is primarily
due a $1.5 million impairment charge taken on the IFSB stock held in our
available for sale portfolio. Additionally, with the slow down in loan
refinancing activity, lower loan prepayment penalty income resulted in a decline
in loan fees and service charges of $739,000. Further, other non-interest income
declined $373,000 when compared to the same period last fiscal year when a
recovery of $558,000 was recorded as income in recognition of previously
unrecognized mortgage loan income. Offsetting these reductions to non-interest
income are income from the receipt of a net $1.1 million Community Development
Financial Institutions grant from the Department of Treasury, an increase of
$287,000 in depository fees and charges from additional depositors of our new
branch offices and ATM centers, and a $63,000 gain from securities sale.
NON-INTEREST EXPENSE
Non-interest expense increased by $3.2 million, or 20.8%, to $18.7 million
for fiscal 2005 compared to $15.5 million for the prior fiscal year. The
increase in non-interest expense was primarily attributable to increases of $1.9
million in salaries and employee benefits as a result of additions to staff from
the branch expansion, severance and related costs of $355,000 and increased
costs of benefits plans. Net occupancy and equipment expenses increased $514,000
and $122,000, respectively, mainly as a result of opening the new branch offices
and ATM centers. Additionally, this fiscal year recorded a charge of $847,000
for merger and acquisition expenses related to the attempted acquisition of
IFSB. These increases in non-interest expenses were slightly offset by a year
over year $141,000 decrease in other non-interest expense primarily the net
result of lower consulting, FDIC deposit assessment and loan related expenses
Offset by higher advertising, telephone and retail related expenses.
INCOME TAX EXPENSE
Income tax expense was $1.5 million for fiscal 2005, a decline of $975,000
or 39.1%, decrease from $2.5 million for fiscal 2004 due to a reduction in the
Company's net income before taxes. The effective tax rate in fiscal 2005 was
36.4%, compared to 34.0% for fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Bank's ability to generate adequate cash to
meet financial obligations. The principal cash requirements of a financial
institution are to cover potential deposit outflows, fund increases in its loan
and investment portfolios and cover its ongoing operating expenses. The
Company's primary sources of funds are deposits, borrowed funds, principal and
interest payments on loans, mortgage-backed securities and investment securities
and fee income. While maturities and scheduled amortization of loans,
mortgage-backed securities and investment securities are predictable sources of
funds, deposit flows and loan and mortgage-backed securities prepayments are
strongly influenced by changes in general interest rates, economic conditions
and competition.
Management believes the Bank's short-term assets have sufficient liquidity
to cover loan demand, potential fluctuations in deposit accounts and to meet
other anticipated cash requirements. In addition, as previously discussed, the
Bank has the ability to borrow funds from the FHLB-NY to meet any liquidity
needs. The Bank monitors its liquidity utilizing guidelines that are contained
in a policy developed by management of the Bank and approved by the Bank's Board
of Directors. The Bank's several liquidity measurements are evaluated on a
frequent basis. The Bank was in compliance with this policy as of March 31,
2006.
Congress eliminated the statutory liquidity requirement which required
federal savings banks to maintain a minimum amount of liquid assets of between
4% and 10%, as determined by the Director of the OTS, the Bank's primary federal
regulator. The Bank is required to maintain sufficient liquidity to ensure its
safe and sound operation. As a result of the elimination of the liquidity
requirement, the Bank manages its liquidity through a Board-approved liquidity
policy. The Bank's most liquid assets are cash and short-term investments. The
level of these assets is dependent on the Bank's operating, investing and
financing activities during any given period. At March 31, 2006 and 2005, assets
qualifying for short-term liquidity, including cash and short-term investments,
totaled $25.2 million and $30.2 million, respectively.
The levels of the Bank's short-term liquid assets are dependent on the
Bank's operating, financing and investing activities during any given period.
The most significant liquidity challenge the Bank currently faces is the
variability in its cash flows as a result of mortgage refinance activity. As
mortgage interest rates increase, customers' refinance activities tend to
decline, causing the cash flow from both the mortgage loan portfolio and the
mortgage-backed securities portfolio to decelerate. During fiscal 2005 the
federal funds rate increased seven separate times resulting in a total increase
in the federal funds rate of 175 basis points. The federal funds rate was again
raised in fiscal 2006 eight separate times resulting in an additional increase
in the federal funds rate of 200 basis points. While the Bank experienced
relatively high loan and securities repayments over the last two fiscal years
primarily as a result of increased mortgage loan refinancing activity caused by
the low longer term interest rate environment, management anticipates a leveling
of these prepayments in fiscal 2007 as longer term rates remain at current
levels or begin to climb the effect of which can hinder liquidity.
The Consolidated Statements of Cash Flows present the change in cash from
operating, investing and financing activities. During fiscal 2006, cash and cash
equivalents increased by $2.5 million. Net cash provided by operating activities
was $30.5 million, representing primarily the proceeds from the sale of loans.
Net cash used in investing activities was $54.4 million, which was primarily the
result of originations and purchases of loans and purchases of securities
partially offset by repayments and maturities of loans and securities sales. Net
cash provided by financing activities was $26.4 million, reflecting primarily
net increases in deposits partially offset by repayments of borrowings from the
FHLB-NY and stock dividend payments.
OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business in order to meet the financing needs of its
customers. These instruments involve, to varying degrees, elements of credit,
interest rate and liquidity risk. In accordance with accounting principles
generally accepted in the United States of America ("GAAP"), these instruments
are not recorded in the consolidated financial statements. Such instruments
primarily include lending commitments.
Lending commitments include commitments to originate mortgage and consumer
loans and commitments to fund unused lines of credit. The Bank also has
contractual obligations related to operating leases. Additionally, the Bank has
a contingent liability related to a standby letter of credit. The Bank has
outstanding commitments and contractual obligations as follows:
March 31,
----------------------------
2006 2005
------------ ------------
(Dollars in thousands)
Commitments to originate mortgage loans $ 64,163 $ 44,129
Commitments to originate commercial and
consumer loans 439 515
Letters of credit 1,795 1,908
------------ ------------
Total $ 66,397 $ 46,552
============ ============
The following table presents the Bank's contractual obligations at March 31,
2006.
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 $ 80,935 $ 49,434 $ 31,307 $ -- $ 194
Guaranteed preferred beneficial interest in
junior subordinated debentures 12,857 12,857
------------- ------------- ------------- ------------- -------------
Total long term debt obligations 93,792 49,434 44,164 -- 194
Operating lease obligations:
Lease obligations for rental properties 4,452 657 1,338 1,227 1,230
------------- ------------- ------------- ------------- -------------
Total contractual obligations $ 98,244 $ 50,091 $ 45,502 $ 1,227 $ 1,424
============= ============= ============= ============= =============
REGULATORY CAPITAL POSITION
The Bank must satisfy three minimum capital standards established by the
OTS. For a description of the OTS capital regulation, see "Item 1--Regulation
and Supervision--Federal Banking Regulation--Capital Requirements."
The Bank presently exceeds all capital requirements as currently
promulgated. At March 31, 2006, the Bank had tangible, core, and total
risk-based capital ratios of 9.4%, 9.4% and 13.2%, respectively and was
considered well capitalized.
The following table reconciles the Bank's stockholders' equity at March 31,
2006 under GAAP to regulatory capital requirements.
REGULATORY CAPITAL REQUIREMENTS
------------------------------------------------------------------
GAAP TANGIBLE LEVERAGE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
--------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
Stockholders' Equity at March 31, 2006 (1) $ 61,814 $ 61,814 $ 61,814 $ 61,814
Add:
General valuation allowances -- -- 4,015
Unrealized loss on securities
available-for-sale, net 393 393 393
--------------- --------------- ---------------
Regulatory Capital 62,207 62,207 66,222
Minimum Capital requirement 9,929 26,477 40,074
--------------- --------------- ---------------
Regulatory Capital Excess $ 52,278 $ 35,730 $ 26,148
=============== =============== ===============
(1) Reflects Bank only.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and accompanying notes appearing elsewhere herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of
Carver Federal's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Bank are monetary in nature. As a result, interest
rates have a greater impact on Carver Federal's performance than do the effects
of the general level of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item appears under the caption "Discussion of
Market Risk--Interest Rate Sensitivity Analysis" in Item 7, incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
LETTERHEAD OF KPMG LLP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Carver Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Carver Bancorp, Inc. and subsidiaries as of March 31, 2006 and
2005, and the related consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended March 31, 2006. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Carver
Bancorp Inc. and subsidiaries as of March 31, 2006 and 2005, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 2006, in conformity with U.S. generally accepted
accounting principles.
KPMG LLP
New York, New York
June 29, 2006
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
MARCH 31, MARCH 31,
2006 2005
--------- ---------
ASSETS Cash and cash equivalents:
Cash and due from banks $ 13,604 $ 13,020
Federal funds sold 8,700 6,800
Interest earning deposits 600 600
--------- ---------
Total cash and cash equivalents 22,904 20,420
Securities:
Available-for-sale, at fair value (including pledged as collateral of
$79,211 and $112,503 at March 31, 2006 and 2005, respectively) 81,882 118,033
Held-to-maturity, at amortized cost (including pledged as collateral of
$26,039 and $30,900 at March 31, 2006 and 2005, respectively; fair value
of $25,880 and $31,310 at March 31, 2006 and 2005, respectively) 26,404 31,302
--------- ---------
Total securities 108,286 149,335
Loans receivable:
Real estate mortgage loans 495,994 424,387
Consumer and commercial business loans 1,453 1,697
Allowance for loan losses (4,015) (4,097)
--------- ---------
Total loans receivable, net 493,432 421,987
Office properties and equipment, net 13,194 13,658
Federal Home Loan Bank of New York stock, at cost 4,627 5,125
Bank owned life insurance 8,479 8,173
Accrued interest receivable 2,970 2,702
Other assets 7,101 4,977
--------- ---------
Total assets $ 660,993 $ 626,377
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 504,638 $ 455,870
Advances from the Federal Home Loan Bank of New York and other borrowed money 93,792 115,299
Other liabilities 13,866 9,407
--------- ---------
Total liabilities 612,296 580,576
Stockholders' equity:
Common stock (par value $0.01 per share: 10,000,000 shares authorized;
2,524,691 shares issued; 2,506,822 and 2,501,338 outstanding at March
31, 2006 and 2005, respectively) 25 25
Additional paid-in capital 23,935 23,937
Retained earnings 25,736 22,748
Unamortized awards of common stock under ESOP and management recognition
plan ("MRP") (22) (254)
Treasury stock, at cost (17,869 and 23,353 shares at March 31, 2006 and
2005, respectively) (303) (420)
Accumulated other comprehensive loss (674) (235)
--------- ---------
Total stockholders' equity 48,697 45,801
--------- ---------
Total liabilities and stockholders' equity $ 660,993 $ 626,377
========= =========
See accompanying notes to consolidated financial statements
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
FOR THE YEAR ENDED MARCH 31,
-------------------------------
2006 2005 2004
-------- -------- --------
Interest Income:
Loans $ 26,563 $ 22,940 $ 20,117
Mortgage-backed securities 4,439 4,605 4,789
Investment securities 971 827 1,161
Federal funds sold 412 174 167
-------- -------- --------
Total interest income 32,385 28,546 26,234
Interest expense:
Deposits 8,921 5,455 4,649
Advances and other borrowed money 4,572 4,303 4,051
-------- -------- --------
Total interest expense 13,493 9,758 8,700
Net interest income 18,892 18,788 17,534
Provision for loan losses -- -- --
-------- -------- --------
Net interest income after provision for loan losses 18,892 18,788 17,534
Non-interest income:
Depository fees and charges 2,458 2,212 1,925
Loan fees and service charges 2,231 1,868 2,607
Gain on sale of securities -- 94 31
Impairment of securities -- (1,547) --
Gain on sale of loans 351 84 116
Gain on sale of fixed assets -- -- 2
Grant income -- 1,140 --
Other 301 224 597
-------- -------- --------
Total non-interest income 5,341 4,075 5,278
Non-interest expense:
Employee compensation and benefits 9,512 9,461 7,587
Net occupancy expense 2,284 1,957 1,443
Equipment, net 1,939 1,608 1,486
Merger related expenses -- 847 --
Other 5,399 4,823 4,964
-------- -------- --------
Total non-interest expense 19,134 18,696 15,480
Income before income taxes 5,099 4,167 7,332
Income taxes 1,329 1,518 2,493
-------- -------- --------
Net income $ 3,770 $ 2,649 $ 4,839
Dividends applicable to preferred stock $ -- $ 114 $ 197
-------- -------- --------
Net income available to common stockholders $ 3,770 $ 2,535 $ 4,642
======== ======== ========
Earnings per common share:
Basic $ 1.50 $ 1.06 $ 2.03
======== ======== ========
Diluted $ 1.47 $ 1.03 $ 1.87
======== ======== ========
See accompanying notes to consolidated financial statements
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands)
ACCUMULATED COMMON COMMON TOTAL
ADDITIONAL OTHER STOCK STOCK STOCK-
PREFERRED COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED BY ACQUIRED BY HOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) ESOP MRP EQUITY
--------- ------ ---------- -------- -------- ------------- ----------- ----------- --------
Balance - March 31, 2003 $ 1 $ 23 $ 23,781 $ 16,712 $ (190) $ 750 $ -- $ (4) $ 41,073
Comprehensive income:
Net income -- -- -- 4,839 -- -- -- -- 4,839
Change in net unrealized
gain on available-for-sale
securities, net of taxes -- -- -- -- -- (492) -- -- (492)
--------- ------ ---------- -------- -------- ------------- ----------- ----------- --------
Comprehensive income, net of
taxes: 4,347
Dividends paid -- -- -- (659) -- -- -- -- (659)
Purchase of treasury stock -- -- 82 -- (200) -- -- -- (118)
Purchase of shares for MRP -- -- 19 -- -- -- -- (17) 2
--------- ------ ---------- -------- -------- ------------- ----------- ----------- --------
BALANCE - MARCH 31, 2004 1 23 23,882 20,892 (390) 258 -- (21) 44,645
Comprehensive income :
Net income -- -- 2,649 -- -- -- -- 2,649
Change in net unrealized
gain on available-for-sale
securities, net of taxes -- -- -- -- -- (493) -- -- (493)
--------- ------ ---------- -------- -------- ------------- ----------- ----------- --------
Comprehensive income, net of
taxes: 2,156
Dividends paid -- -- -- (793) -- -- -- -- (793)
Preferred stock redemption (1) 2 --
Treasury stock activity -- -- 55 -- (30) -- -- -- 25
Allocation of ESOP Stock -- -- -- -- -- -- (126) -- (126)
Purchase of shares for MRP -- -- -- -- -- -- -- (107) (107)
--------- ------ ---------- -------- -------- ------------- ----------- ----------- --------
BALANCE--MARCH 31, 2005 -- 25 23,937 22,748 (420) (235) (126) (128) 45,801
Comprehensive income :
Net income -- -- 3,770 -- -- -- -- 3,770
Loss on pension liability (281) (281)
Change in net unrealized
loss on available-for-sale
securities, net of taxes -- -- -- -- -- (158) -- -- (158)
--------- ------ ---------- -------- -------- ------------- ----------- ----------- --------
Comprehensive income, net of
taxes: 3,331
Dividends paid -- -- -- (782) -- -- -- -- (782)
Treasury stock activity -- -- (2) -- 117 -- -- -- 115
Allocation of ESOP Stock -- -- -- -- -- -- 116 -- 116
Purchase of shares for MRP -- -- -- -- -- -- -- 116 116
--------- ------ ---------- -------- -------- ------------- ----------- ----------- --------
BALANCE--MARCH 31, 2006 $ -- $ 25 $ 23,935 $ 25,736 $ (303) $ (674) $ (10) $ (12) $ 48,697
========= ====== ========== ======== ======== ============= =========== =========== ========
See accompanying notes to consolidated financial statements.
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEAR ENDED MARCH 31,
-----------------------------------
2006 2005 2004
--------- --------- ---------
Cash flows from operating activities:
Net income $ 3,770 $ 2,649 $ 4,839
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses -- -- --
ESOP and MRP expense 233 358 128
Depreciation expense 1,546 1,423 1,146
Amortization of intangibles -- -- 178
Other amortization 863 1,502 1,848
Impairment charge on securities 1,547 --
Gain from sale of securities -- (94) (31)
Gain on sale of loans (351) (277) (116)
Changes in assets and liabilities:
Proceeds from loans sold 22,908 8,404 9,590
(Increase) decrease in accrued interest receivable (268) (213) 857
(Increase) decrease in other assets (2,430) (7,618) 4,478
Increase (decrease) in other liabilities 4,249 (4,452) 3,481
--------- --------- ---------
Net cash provided by operating activities 30,520 3,229 26,398
--------- --------- ---------
Cash flows from investing activities:
Purchases of securities:
Available-for-sale (26,811) (83,219) (58,477)
Held-to-maturity (19) -- (19,859)
Proceeds from principal payments, maturities and
calls of securities:
Available-for-sale 60,645 51,383 65,060
Held-to-maturity 4,816 11,996 12,693
Proceeds from sales of available-for-sale securities 1,575 7,288 23,902
Disbursements for loan originations (111,349) (85,801) (87,140)
Loans purchased from third parties (96,140) (104,734) (93,694)
Principal collections on loans 113,468 112,518 111,821
Redemption (purchase) of FHLB-NY stock 498 (549) 864
Additions to premises and equipment (1,082) (3,399) (2,779)
--------- --------- ---------
Net cash used in investing activities (54,400) (94,517) (47,609)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposits 48,768 79,789 26,501
Net (repayment of)/proceeds from FHLB advances and
other borrowed money (21,507) 10,959 (4,714)
Common stock repurchased (115) (1,021) (303)
Dividends paid (782) (793) (659)
--------- --------- ---------
Net cash provided by financing activities 26,364 88,934 20,825
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 2,484 (2,354) (386)
Cash and cash equivalents at beginning of the year 20,420 22,774 23,160
--------- --------- ---------
Cash and cash equivalents at end of the year $ 22,904 $ 20,420 $ 22,774
========= ========= =========
Supplemental information:
Noncash Transfers-
Change in unrealized loss on valuation of
available-for-sale
investments, net $ (158) $ (493) $ (492)
Cash paid for-
Interest $ 13,502 $ 9,718 $ 8,739
Income taxes $ 2,107 $ 2,395 $ 2,825
========= ========= =========
See accompanying notes to consolidated financial statements
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Carver Bancorp, Inc. (on a stand-alone basis, the "Holding Company" or
"Registrant"), was incorporated in May 1996 and its principal wholly owned
subsidiary is Carver Federal Savings Bank (the "Bank" or "Carver Federal").
Carver Statutory Trust I (the "Trust") is another wholly owned subsidiary of the
Holding Company. The Trust, which was formed in September 2003, exists for the
sole purpose of issuing trust preferred debt securities and investing the
proceeds in an equivalent amount of subordinated debentures of the Holding
Company. CFSB Realty Corp., CFSB Credit Corp. and Carver Community Development
Corp. are wholly owned subsidiaries of the Bank. CFSB Credit Corp. is currently
inactive. The Bank owns a majority interest in Carver Asset Corporation, a real
estate investment trust formed in February 2004. The Bank was chartered in 1948
and began operations in 1949 as Carver Federal Savings and Loan Association, a
federally chartered mutual savings and loan association. The Bank converted to a
federal savings bank in 1986 and changed its name at that time. On October 24,
1994, the Bank converted from mutual to stock form and issued 2,314,275 shares
of its common stock, par value $0.01 per share. On October 17, 1996, the Bank
completed its reorganization into a holding company structure (the
"Reorganization") and became a wholly owned subsidiary of the Holding Company.
In connection with the Reorganization, each share of the Bank's outstanding
common stock was exchanged for one share of the Holding Company's common stock,
par value $0.01 per share. On January 11, 2000, the Holding Company sold in a
private placement, pursuant to a Securities Purchase Agreement dated January 11,
2000, 40,000 shares of Series A Convertible Preferred Stock (the "Series A
Preferred Stock") to Morgan Stanley & Co. Incorporated ("MSDW") and 60,000
Shares of Series B Convertible Preferred Stock (the "Series B Preferred Stock")
to Provender Opportunities Fund L.P. ("Provender"). On June 1, 2004, Provender
sold all 60,000 of its Series B Preferred Stock to Keefe Bruyette & Woods, Inc
("KBW"). On October 15, 2004, both MSDW and KBW elected to convert their
Preferred Shares into shares of Holding Company's common stock, thus an
additional 208,333 shares of common stock were issued to these parties. See Note
11 of Notes to the Consolidated Financial Statements. Collectively, the Holding
Company, the Bank and the Holding Company's other direct and indirect
subsidiaries are referred to herein as the "Company" or "Carver."
Carver Federal's principal business consists of attracting deposit accounts
through its branch offices and investing those funds in mortgage loans and other
investments permitted by federal savings banks. The Bank has eight branch
offices located throughout the City of New York that primarily serve the
communities in which they operate.
BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the Holding
Company, Carver Statutory Trust I, the Bank and the Bank's wholly owned or
majority owned subsidiaries, Carver Asset Corporation, CFSB Realty Corp. and
CFSB Credit Corp. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated statement of financial condition
and revenues and expenses for the period then ended. Estimates that are
particularly susceptible to significant changes in the near-term relate to
prepayment assumptions on mortgage-backed securities and mortgage loans, the
determination of the allowance for loan losses and, if applicable, the valuation
of real estate owned. Actual results could differ significantly from those
estimates.
Management believes that prepayment assumptions on mortgage-backed
securities and mortgage loans are appropriate and the allowance for loan losses
is adequate. While management uses available information to recognize losses on
loans, future additions to the allowance for loan losses or future write downs
of real estate owned may be necessary based on changes in economic conditions in
the areas where Carver Federal had extended mortgages and other credit
instruments.
In addition, the Office of Thrift supervision ("OTS") our regulator, as an
integral part of its examination process, periodically reviews Carver Federal's
allowance for loan losses and, if applicable, real estate owned valuations. The
OTS may require Carver Federal to recognize additions to the allowance for loan
losses or additional write downs of real estate owned based on their judgments
about information available to them at the time of their examination.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and amounts due from depository
institutions and federal funds sold which are generally sold for one-day
periods. The amounts due from depository institutions include a non-interest
bearing account held at the Federal Reserve Bank ("FRB") where any additional
cash reserve required on demand deposits would be maintained. Currently, this
reserve requirement is zero since the Bank's vault cash satisfies cash reserve
requirements for deposits.
SECURITIES
The Bank does not have trading securities but does differentiate between
held-to-maturity securities and available-for-sale securities. When purchased,
securities are designated in either the securities held-to-maturity portfolio or
securities available-for-sale portfolio. Securities should be classified as
held-to-maturity and carried at amortized cost only if the Bank has a positive
intent and ability to hold such securities to maturity. If not classified as
held-to-maturity, such securities are classified as securities
available-for-sale demonstrating management's ability to sell in response to
actual or anticipated changes in interest rates and resulting prepayment risk or
any other factors. Available-for-sale securities are reported at fair value.
Unrealized holding gains or losses for securities available-for-sale are to be
excluded from earnings and reported net of deferred income taxes as a separate
component of accumulated other comprehensive (loss) income, a component of
Stockholders' Equity. Any impairment in the available-for-sale securities deemed
other-than-temporary, is written down against the cost basis and charged to
earnings. No impairment charge was recorded for fiscal 2006, however, during
fiscal 2005 Carver recorded a $1.5 million charge to earnings for impairment in
available-for-sale securities deemed other-than-temporary on the 150,000 shares
of Independence Federal Savings Bank common stock ("IFSB") that it held in
portfolio.
Securities held-to-maturity are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts using the level-yield
method over the remaining period until maturity.
Gains or losses on sales of securities of all classifications are
recognized based on the specific identification method.
LOANS RECEIVABLE
Loans receivable are carried at unpaid principal balances plus unamortized
premiums and certain deferred direct loan origination costs, less the allowance
for loan losses and deferred loan fees and discounts.
The Bank defers loan origination fees and certain direct loan origination
costs and accretes such amounts as an adjustment of yield over the expected
lives of the related loans using methodologies which approximate the interest
method. Premiums and discounts on loans purchased are amortized or accreted as
an adjustment of yield over the contractual lives, adjusted for prepayments when
applicable, of the related loans using methodologies which approximate the
interest method.
Loans are generally placed on non-accrual status when they are past due 90
days or more as to contractual obligations or when other circumstances indicate
that collection is questionable. When a loan is placed on non-accrual status,
any interest accrued but not received is reversed against interest income.
Payments received on a non-accrual loan are either applied to the outstanding
principal balance or recorded as interest income, depending on an assessment of
the ability to collect the loan. A non-accrual loan is restored to accrual
status when principal and interest payments become less than 90 days past due
and its future collectibility is reasonably assured.
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level considered adequate
to provide for potential loan losses. Management is responsible for determining
the adequacy of the allowance for loan losses and the periodic provisioning for
estimated losses included in the consolidated financial statements. The
evaluation process is undertaken on a quarterly basis, but may increase in
frequency should conditions arise that would require management's prompt
attention, such as business combinations and opportunities to dispose of
non-performing and marginally performing loans by bulk sale or any development
which may indicate an adverse trend.
Carver Federal maintains a loan review system, which allows for a periodic
review of its loan portfolio and the early identification of potential problem
loans. Such system takes into consideration, among other things, delinquency
status, size of loans, type of collateral and financial condition of the
borrowers. Loan loss allowances are established for problem loans based on a
review of such information and/or appraisals of the underlying collateral. On
the remainder of its loan portfolio, loan loss allowances are based upon a
combination of factors including, but not limited to, actual loan loss
experience, composition of loan portfolio, current economic conditions and
management's judgment. Although management believes that adequate loan loss
allowances have been established, actual losses are dependent upon future events
and, as such, further additions to the level of the loan loss allowance may be
necessary in the future.
The methodology employed for assessing the appropriateness of the allowance
consists of the following criteria:
o Establishment of reserve amounts for all specifically identified
criticized loans that have been designated as requiring attention by
management's internal loan review program, bank regulatory
examinations or the external auditors.
o An average loss factor, giving effect to historical loss experience
over several years and linked to cyclical trends, is applied to
smaller balance homogenous types of loans not subject to specific
review. These loans include residential one- to four-family,
multifamily, nonresidential and construction loans and also include
consumer and business loans.
Recognition is also given to the changed risk profile brought about by
business combinations, customer knowledge, the results of ongoing credit quality
monitoring processes and the cyclical nature of economic and business
conditions. An important consideration in applying these methodologies is the
concentration of real estate related loans located in the New York City
metropolitan area.
The initial allocation or specific-allowance methodology commences with
loan officers and underwriters grading the quality of their loans on an
nine-category risk classification scale. Loans identified from this process as
below investment grade are referred to the Internal Asset Review Committee for
further analysis and identification of those factors that may ultimately affect
the full recovery or collectibility of principal and/or interest. These loans
are subject to continuous review and monitoring while they remain in the
criticized category. Additionally, the Internal Asset Review Committee is
responsible for performing periodic reviews of the loan portfolio that are
independent from the identification process employed by loan officers and
underwriters. Gradings that fall into criticized categories are further
evaluated and reserve amounts, if necessary, are established for each loan.
The second allocation or loss factor approach to common or homogeneous
loans is made by applying the average loss factor based on several years of loss
experience to the outstanding balances in each loan category. It gives
recognition to the loss experience of acquired businesses, business cycle
changes and the real estate components of loans. Since many loans depend upon
the sufficiency of collateral, any adverse trend in the real estate markets
could seriously affect underlying values available to protect against loss.
Other evidence used to support the amount of the allowance and its
components are as follows:
o Regulatory examinations
o Amount and trend of criticized loans
o Actual losses
o Peer comparisons with other financial institutions
o Economic data associated with the real estate market in the Company's
market area
o Opportunities to dispose of marginally performing loans for cash
consideration
A loan is considered to be impaired, as defined by Statement of Financial
Accounting Standards ("SFAS") No. 114, "ACCOUNTING BY CREDITORS FOR IMPAIRMENT
OF A LOAN" ("SFAS 114"), when it is probable that Carver Federal will be unable
to collect all principal and interest amounts due according to the contractual
terms of the loan agreement. Carver Federal tests loans covered under SFAS 114
for impairment if they are on non-accrual status or have been restructured.
Consumer credit non-accrual loans are not tested for impairment because they are
included in large groups of smaller-balance homogeneous loans that, by
definition along with leases, are excluded from the scope of SFAS 114. Impaired
loans are required to be measured based upon the present value of expected
future cash flows, discounted at the loan's initial effective interest rate, or
at the loan's market price or fair value of the collateral if the loan is
collateral dependent. If the loan valuation is less than the recorded value of
the loan, an impairment reserve must be established for the difference. The
impairment reserve is established by either an allocation of the reserve for
credit losses or by a provision for credit losses, depending on various
circumstances. Impairment reserves are not needed when credit losses have been
recorded so that the recorded investment in an impaired loan is less than the
loan valuation.
CONCENTRATION OF RISK
The Bank's principal lending activities are concentrated in loans secured
by real estate, a substantial portion of which is located in the State of New
York. Accordingly, the ultimate collectibility of a substantial portion of the
Company's loan portfolio is susceptible to changes in New York's real estate
market conditions.
PREMISES AND EQUIPMENT
Premises and equipment are comprised of land, at cost, and buildings,
building improvements, furnishings and equipment and leasehold improvements, at
cost, less accumulated depreciation and amortization. Depreciation and
amortization charges are computed using the straight-line method over the
following estimated useful lives:
Buildings and improvements 10 to 25 years
Furnishings and equipment 3 to 5 years
Leasehold improvements Lesser of useful life or remaining term
of lease
Maintenance, repairs and minor improvements are charged to non-interest
expense in the period incurred.
BANK OWNED LIFE INSURANCE
Bank Owned Life Insurance ("BOLI") is carried at its cash surrender value
on the balance sheet and is classified as a non-interest-earning asset. Death
benefits proceeds received in excess of the policy's cash surrender value are
recognized to income. Returns on the BOLI assets are added to the carrying value
and included as non-interest income in the consolidated statement of operations.
Any receipt of benefit proceeds is recorded as a reduction to the carrying value
of the BOLI asset. At March 31, 2006, Carver held no policy loans against its
BOLI cash surrender values or restrictions on the use of the proceeds.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights ("MSR") on mortgage loans are recognized at the
sale of mortgage loans where servicing rights are retained. At recognition, this
asset is recorded onto the balance sheet as a non-interest-earning asset. The
initial recognition of MSR is based on the fair value of total estimated income
from the servicing of these loans. The asset is then amortized over the
estimated life of the serviced loans.
REAL ESTATE OWNED
Real estate acquired by foreclosure or deed in lieu of foreclosure is
recorded at the fair value at the date of acquisition and thereafter carried at
the lower of cost or fair value less estimated selling costs. The fair value of
such assets is determined based primarily upon independent appraisals and other
relevant factors. The amounts ultimately recoverable from real estate owned
could differ from the net carrying value of these properties because of economic
conditions.
Costs incurred to improve properties or prepare them for sale are
capitalized. Revenues and expenses related to the holding and operating of
properties are recognized in operations as earned or incurred. Gains or losses
on sale of properties are recognized as incurred. At March 31, 2006, the Bank
had no foreclosed real estate, however as a result of a property tax redemption,
the Bank took fee ownership of a vacant tract of land in Bayshore, NY with a
carrying amount of $10,000 and is included with other assets on the statement of
condition.
IDENTIFIABLE INTANGIBLE ASSETS
Carver Federal adopted Statement of Financial Accounting Standards No.142
("SFAS No. 142"), "GOODWILL AND OTHER INTANGIBLE ASSETS" on January 1, 2002.
SFAS 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually.
Identifiable intangible assets relate primarily to core deposit premiums,
resulting from the valuation of core deposit intangibles acquired in the
purchase of branch offices. These identifiable intangible assets are amortized
using the straight-line method over periods not exceeding the estimated average
remaining life of the existing customer deposits acquired. Amortization periods
range from 5 to 15 years. Amortization periods for intangible assets are
monitored to determine if events and circumstances require such periods to be
reduced.
At March 31, 2006 Carver had no goodwill or identifiable intangible assets
on its books.
INCOME TAXES
Carver Federal accounts for income taxes using the asset and liability
method. Temporary differences between the basis of assets and liabilities for
financial reporting and tax purposes are measured as of the balance sheet date.
Deferred tax liabilities or recognizable deferred tax assets are calculated on
such differences, using current statutory rates, which result in future taxable
or deductible amounts. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
IMPAIRMENT
The Company annually evaluates long-lived assets, certain identifiable
intangibles, deferred costs for indication of impairment in value. There was no
impairment on these assets for the past three years and when required, asset
impairment will be recorded as an expense in the current period.
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings per share ("EPS") is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding. Diluted EPS includes any additional common shares as if all
potentially dilutive common shares were issued (e.g. outstanding share awards
under the Company's stock option plan). For the purpose of these calculations,
unreleased shares of the Carver Federal Savings Bank Employee Stock Ownership
Plan ("ESOP") are not considered to be outstanding.
TREASURY STOCK
Treasury stock is recorded at cost and is presented as a reduction of
stockholders' equity.
PENSION PLANS
In February 1998, the FASB issued SFAS No. 132, "EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS" ("SFAS 132"). SFAS 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans.
STOCK-BASED COMPENSATION PLANS
Compensation expense is recognized for the Bank's ESOP equal to the fair
value of shares committed to be released for allocation to participant accounts.
Any difference between the fair value at that time and the ESOP's original
acquisition cost is charged or credited to stockholders' equity (additional
paid-in capital). The cost of unallocated ESOP shares (shares not yet committed
to be released) is reflected as a reduction of stockholders' equity.
The Holding Company grants "incentive stock options" only to its employees
and grants "nonqualified stock options" to employees and non-employee directors.
Under Accounting Principle Board Opinion ("APB") 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. In December 2004, the FASB issued a
revised Statement of Financial Accounting Standards No. 123 "ACCOUNTING FOR
STOCK BASED COMPENSATION, SHARE BASED PAYMENT", ("SFAS 123R") which requires
that compensation cost relating to share-based payment transactions be
recognized in the financial statements. The associated costs will be measured
based on the fair value of the equity instruments issued. SFAS 123R covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights and
employee share purchase plans. SFAS 123R is effective as of the first annual
reporting period beginning after June 15, 2005. Carver Federal will adopt SFAS
123R as of April 1, 2006.
The Holding Company's management recognition and retention plan ("MRP") is
also accounted for in accordance with APB Opinion No. 25. The fair value of the
shares awarded, measured at the grant date, is recognized as unearned
compensation (a deduction from stockholders' equity) and amortized to
compensation expense as the shares become vested. When MRP shares become vested,
the Company records a credit to additional paid-in capital for tax benefits
attributable to any MRP deductions in excess of the grant-date fair value
charged to expense, for financial reporting purposes.
Carver Federal applies APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES," and related interpretations in accounting for our stock-based Plan
under which there is no charge to earnings for stock option awards and the
dilutive effect of outstanding options is reflected as additional share dilution
in the computation of earnings per share.
The following table illustrates net income and earnings per common share
pro forma results with the application of SFAS 123R for Carver's Stock Option
Plan, for the years ended March 31:
2006 2005 2004
------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Income available to common shareholders:
As reported $ 3,770 $ 2,535 $ 4,642
Total stock-based employee compensation expense
expense determined under fair value based methods
for all awards, net of related tax effects (105) (124) (158)
------------- ------------- -------------
Pro forma $ 3,665 $ 2,411 $ 4,484
============= ============= =============
Basic earnings per share:
As reported $ 1.50 $ 1.06 $ 2.03
Pro forma 1.46 1.01 1.96
Diluted earnings per share:
As reported $ 1.47 $ 1.03 $ 1.87
Pro forma 1.43 0.98 1.81
Weighted average number of shares outstanding 2,506,029 2,381,980 2,283,802
The fair value of the option grants was estimated on the date of the grant
using the Black-Scholes option pricing model applying the following weighted
average assumptions: risk-free interest rates of 4.50%, 3.50% and 2.50%, for the
relevant fiscal years ended March 31, 2006, 2005 and 2004 ("fiscal 2006",
"fiscal 2005" and "fiscal 2004"), respectively; volatility of 19% for fiscal
2006 and 35% fiscal 2005 and 45% fiscal 2004; expected dividend yield was
calculated using annual dividends of $0.32 per share for fiscal 2006, $0.28 for
fiscal 2005 and $0.20 for fiscal 2004; and an expected life of seven years for
employees and directors option grants.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements presented for
prior years have been reclassified to conform to the current year presentation.
NOTE 2. SECURITIES
The following is a summary of securities at March 31, 2006:
GROSS UNREALIZED
--------------------------
AMORTIZED ESTIMATED
COST GAINS LOSSES FAIR-VALUE
--------- --------- --------- ----------
(IN THOUSANDS)
Available-for-Sale:
Mortgage-backed securities:
Pass-through certificates:
Government National Mortgage Association $ 63,499 $ 48 $ (540) $ 63,007
Federal Home Loan Mortgage Corporation 2,229 8 (28) 2,209
Federal National Mortgage Association 4,696 3 (110) 4,589
--------- --------- --------- ----------
Total mortgage-backed securities 70,424 59 (678) 69,805
U.S. Government Agency Securities 12,386 -- (309) 12,077
--------- --------- --------- ----------
Total available-for-sale 82,810 59 (987) 81,882
--------- --------- --------- ----------
HELD-TO-MATURITY:
Mortgage-backed securities:
Pass-through certificates:
Government National Mortgage Association 809 36 -- 845
Federal Home Loan Mortgage Corporation 17,372 15 (500) 16,887
Federal National Mortgage Association 7,900 34 (107) 7,827
Small Business Administration 323 -- (2) 321
--------- --------- --------- ----------
Total held-to-maturity 26,404 85 (609) 25,880
--------- --------- --------- ----------
Total securities $ 109,214 $ 144 $ (1,596) $ 107,762
========= ========= ========= ==========
The following is a summary of securities at March 31, 2005:
GROSS UNREALIZED
-------------------------
AMORTIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
AVAILABLE-FOR-SALE:
Mortgage-backed securities:
Pass-through certificates:
Government National Mortgage Association $ 83,861 $ 98 $ (534) $ 83,425
Federal Home Loan Mortgage Corporation 3,922 14 (28) 3,908
Federal National Mortgage Association 8,247 17 (115) 8,149
---------- ---------- ---------- ----------
Total mortgage-backed securities 96,030 129 (677) 95,482
Equity Securities 1,575 -- -- 1,575
U.S. Government Agency Securities 21,144 -- (168) 20,976
---------- ---------- ---------- ----------
Total available-for-sale 118,749 129 (845) 118,033
---------- ---------- ---------- ----------
HELD-TO-MATURITY:
Mortgage-backed securities:
Pass-through certificates:
Government National Mortgage Association 1,070 59 -- 1,129
Federal Home Loan Mortgage Corporation 19,115 32 (71) 19,076
Federal National Mortgage Association 10,780 110 (120) 10,770
Small Business Administration 337 -- (2) 335
---------- ---------- ---------- ----------
Total held-to-maturity 31,302 201 (193) 31,310
---------- ---------- ---------- ----------
Total securities $ 150,051 $ 330 $ (1,038) $ 149,343
========== ========== ========== ==========
The net unrealized loss on available-for-sale securities was $928,000
($575,000 after taxes) at March 31, 2006 and $716,000 ($444,000 after taxes) at
March 31, 2005. On November 30, 2002 the Bank transferred $22.8 million of
mortgage-backed securities from available-for-sale to held-to-maturity as a
result of management's intention to hold these securities in portfolio until
maturity. A related unrealized gain of $468,000 was recorded as a separate
component of stockholders' equity and is being amortized over the remaining
lives of the securities as an adjustment to yield. As of March 31, 2006 the
carrying value of these securities was $16.0 million and a related net
unrealized gain of $183,000 continues to be reported. Changes in unrealized
holding gains and losses between fiscal 2006 and fiscal 2005 resulted in an
after-tax decrease in stockholders' equity of $158,000. These gains and losses
will continue to fluctuate based on changes in the portfolio and market
conditions.
There were no gains or losses resulting from the sale of available-for-sale
securities in fiscal 2006. In fiscal 2005, an other than temporary impairment
charge related to the investment in IFSB common stock was recorded and was
subsequently sold in fiscal 2006. Additionally, sales of available-for-sale
securities in fiscal 2005 and 2004 resulted in gross realized gains of $94,000
and $31,000, respectively.
At March 31, 2006 the Bank pledged securities of $38.3 million as
collateral for advances from the Federal Home Loan Bank of New York ("FHLB-NY").
The following is a summary of the carrying value (amortized cost)
and fair value of securities at March 31, 2006, by remaining period to
contractual maturity (ignoring earlier call dates, if any). Actual maturities
may differ from contractual maturities because certain security issuers have the
right to call or prepay their obligations.
BOOK VALUE FAIR VALUE WEIGHTED AVG RATE
---------- ---------- -----------------
(Dollars in Thousands)
AVAILABLE-FOR-SALE:
Less than one year $ 2,000 $ 1,982 2.43%
One through five years 10,687 10,398 3.92%
Five through ten years 1,524 1,471 4.53%
After ten years 68,599 68,031 3.78%
---------- ---------- -----------------
$ 82,810 $ 81,882 3.78%
========== ========== =================
HELD-TO-MATURITY:
One through five years $ 50 $ 50 5.69%
After ten years 26,354 25,830 5.65%
---------- ---------- -----------------
$ 26,404 $ 25,880 5.65%
========== ========== =================
The unrealized losses and fair value of securities in an unrealized loss
position at March 31, 2006 for less than 12 months and 12 months or longer were
as follows:
MARCH 31, 2005
--------------------------------------------------------------------------------
Less than 12 months 12 months or longer Total
------------------------ ------------------------ ------------------------
Unrealized Fair Unrealized Fair Unrealized Fair
Losses Value Losses Value Losses Value
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
AVAILABLE-FOR-SALE:
Mortgage-backed securities $ (152) $ 19,051 $ (526) $ 39,795 $ (678) $ 58,846
U.S. Government Agency Securities (141) 5,725 (168) 6,352 (309) 12,077
---------- ---------- ---------- ---------- ---------- ----------
Total available-for-sale (293) 24,776 (694) 46,147 (987) 70,923
---------- ---------- ---------- ---------- ---------- ----------
HELD-TO-MATURITY:
Mortgage-backed securities (502) 16,777 (107) 6,224 (609) 23,001
---------- ---------- ---------- ---------- ---------- ----------
Total securities $ (795) $ 41,553 $ (801) $ 52,371 $ (1,596) $ 93,924
========== ========== ========== ========== ========== ==========
The unrealized losses and fair value of securities in an unrealized loss
position at March 31, 2005 for less than 12 months and 12 months or longer were
as follows:
------------------------ ----------------------- ------------------------
Less than 12 months 12 months or longer Total
------------------------ ------------------------ ------------------------
Unrealized Fair Unrealized Fair Unrealized Fair
Losses Value Losses Value Losses Value
---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
AVAILABLE-FOR-SALE:
Mortgage-backed securities $ (225) $ 42,625 $ (452) $ 27,522 $ (677) $ 70,147
U.S. Government Agency Securities (168) 20,976 -- -- (168) 20,976
---------- ---------- ---------- ---------- ---------- ----------
Total available-for-sale (393) 63,601 (452) 27,522 (845) 91,123
---------- ---------- ---------- ---------- ---------- ----------
HELD-TO-MATURITY:
Mortgage-backed securities (3) 1,186 (190) 10,475 (193) 11,661
---------- ---------- ---------- ---------- ---------- ----------
Total securities $ (396) $ 64,787 $ (642) $ 37,997 $ (1,038) $ 102,784
========== ========== ========== ========== ========== ==========
A total of 46 securities had an unrealized loss at March 31, 2006 compared
to 33 at March 31, 2005. Based on estimated fair value, all the securities in an
unrealized loss position were United States government agency-backed securities,
which represents 86.7% and 68.8% of total securities at March 31, 2006 and 2005,
respectively. The cause of the temporary impairment is directly related to the
change in interest rates. In general, as interest rates rise, the fair value of
securities will decline, and conversely as interest rates decline, the fair
value of securities will increase. Management considers fluctuations in fair
value as a result of interest rate changes to be temporary, which is consistent
with the Bank's experience. The impairments are deemed temporary based on the
direct relationship of the decline in fair value to movements in interest rates,
the life of the investments and their high credit quality.
NOTE 3. LOANS RECEIVABLE, NET
A summary of loans receivable, net follows:
MARCH 31,
-----------------------------------------------
2006 2005
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One- to four-family $ 143,433 28.91% $ 155,797 36.69%
Multifamily 104,718 21.11 101,899 23.99
Nonresidential 154,044 31.05 116,769 27.49
Construction 92,511 18.64 48,579 11.43
Consumer and business 1,453 0.29 1,697 0.40
--------- --------- --------- ---------
Total gross loans 496,159 100.00% 424,741 100.00%
========= =========
ADD:
Premium on loans 1,890 1,743
LESS:
Deferred fees and loan discounts (602) (400)
Allowance for loan Losses (4,015) (4,097)
--------- ---------
Total $ 493,432 $ 421,987
========= =========
At March 31, 2006, 82.3% of the Company's real estate loans receivable was
principally secured by properties located in the State of New York.
The mortgage loan portfolios serviced for Federal National Mortgage
Association ("FNMA") and other third parties are not included in the
accompanying consolidated financial statements. The unpaid principal balances of
these loans aggregated $33.2 million, $17.9 million and $11.7 million at March
31, 2006, 2005 and 2004, respectively. Custodial escrow balances, maintained in
connection with the above-mentioned loan servicing, were approximately $114,000,
$56,000 and $40,000 at March 31, 2006, 2005 and 2004, respectively. During the
year ended March 31, 2006 the Bank sold $22.5 million in loans with a recognized
gain of $158,000, as compared to $8.0 million in loans sold during fiscal 2005
with an $84,000 gain recognized. Also recognized from these loan sales were
gains of $193,000 for both fiscal 2006 and 2005 from other mortgage servicing
rights since the loans were sold with servicing retained.
At March 31, 2006 the Bank pledged $141.8 million in total mortgage loans
as collateral for borrowings from the FHLB-NY.
The following is an analysis of the allowance for loan losses:
Year ended March 31,
------- ------- -------
2006 2005 2004
------- ------- -------
Balance at beginning of the year $ 4,097 $ 4,125 $ 4,158
Provision charged to operations -- -- --
Recoveries of amounts previously charged-off 35 45 292
Charge-offs of loans (117) (73) (325)
------- ------- -------
Balance at end of the year $ 4,015 $ 4,097 $ 4,125
======= ======= =======
Non-accrual loans consist of loans for which the accrual of interest has
been discounted as a result of such loans becoming 90 days or more delinquent as
to principal and/or interest payments. Interest income on non-accrual loans is
recorded when received. Restructured loans consist of loans where borrowers have
been granted concessions in regards to the terms of their loans due to financial
or other difficulties, which rendered them unable to repay their loans under the
original contractual terms.
At March 31, 2006, 2005 and 2004 the recorded investment in impaired loans
was $2.8 million, $998,000 and $2.1 million, respectively, all of which
represented non-accrual loans. The related allowance for credit losses was
approximately $276,000, $160,000 and $317,000 at March 31, 2006, 2005 and 2004,
respectively. The impaired loan portfolio is primarily collateral dependent. The
average recorded investment in impaired loans during the fiscal years ended
March 31, 2006, 2005 and 2004 was approximately $2.2 million, $1.6 million and
$2.0 million, respectively. For the fiscal years ended March 31, 2006, 2005 and
2004, the Company did not recognize any interest income on these impaired loans.
Interest income of $79,000, $83,000 and $185,000, respectively, for the fiscal
years ended March 31, 2006, 2005 and 2004 would have been recorded on impaired
loans had they performed in accordance with their original terms.
At March 31, 2006, 2005 and 2004, there were no loans to officers or
directors.
NOTE 4. PREMISES AND EQUIPMENT, NET
The detail of premises and equipment is as follows:
MARCH 31,
-----------------
2006 2005
------- -------
(IN THOUSANDS)
Land $ 415 $ 415
Building and improvements 9,391 9,195
Leasehold improvements 4,404 3,939
Furniture and Equipment 8,367 7,734
------- -------
22,577 21,283
Less accumulated depreciation and amortization 9,383 7,625
------- -------
$13,194 $13,658
======= =======
Depreciation and amortization charged to operations for the fiscal years
ended March 31, 2006, 2005 and 2004 amounted to $1.5 million, $1.4 million and
$1.1 million, respectively.
NOTE 5. ACCRUED INTEREST RECEIVABLEGRAPHIC OMITTED]
The detail of accrued interest receivable is as follows:
MARCH 31,
---------------
2006 2005
------ ------
(IN THOUSANDS)
Loans receivable $2,300 $1,895
Mortgage-backed securities 482 576
Investments and other interest bearing assets 188 231
------ ------
Total accrued interest receivable $2,970 $2,702
====== ======
NOTE 6. DEPOSITS
Deposit balances and weighted average stated interest rates at March 31
follow:
2006 2005
---------------------------------- --------------------------------
PERCENT OF WEIGHTED PERCENT OF WEIGHTED
TOTAL AVERAGE TOTAL AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
----------- ---------- -------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
Non-interest -bearing demand $ 31,085 6.2% --% $ 25,570 5.6% --%
NOW demand 27,904 5.5 0.31 24,095 5.2 0.30
Savings and clubs 139,724 27.7 0.68 137,810 30.2 0.62
Money market savings 40,045 7.9 2.41 36,294 8.0 1.34
Certificates of deposit 263,963 52.3 3.76 229,685 50.4 2.30
Other 1,917 0.4 1.47 2,416 0.5 1.13
----------- ---------- -------- --------- ---------- --------
Total $ 504,638 100.0% 2.37% $ 455,870 100.0% 1.47%
=========== ========== ========= ==========
Scheduled maturities of certificates of deposit follow:
MARCH 31,
-------------------
2006 2005
-------- --------
(IN THOUSANDS)
Certificates of deposit by remaining
term to contractual maturity:
Within one year $217,578 $186,585
After one but within two years 20,195 13,412
After two but within three years 10,456 8,512
After three years 15,734 21,176
-------- --------
Total $263,963 $229,685
======== ========
The aggregate amount of certificates of deposit with minimum denominations
of $100,000 or more was approximately $183.5 million at March 31, 2006 compared
to $161.7 million at March 31, 2005.
Interest expense on deposits for the years ended March 31 follows:
2006 2005 2004
------- ------- -------
(IN THOUSANDS)
NOW demand $ 74 $ 69 $ 85
Savings and clubs 919 801 1,001
Money market savings 601 302 235
Certificates of deposit 7,321 4,268 3,315
------- ------- -------
8,915 5,440 4,636
Mortgagors deposits 30 25 24
Penalty for early withdrawal of
certificates of deposit (24) (10) (11)
------- ------- -------
Total interest expense $ 8,921 $ 5,455 $ 4,649
======= ======= =======
NOTE 7. BORROWED MONEY
FEDERAL HOME LOAN BANK ADVANCES. FHLB-NY advances and weighted average
interest rates by remaining period to maturity at March 31 as follow:
2006 2005
------------------------- --------------------------
(DOLLARS IN THOUSANDS)
Maturing
YEAR ENDED WEIGHTED WEIGHTED
March 31, AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT
------------ ------------ ------------ ------------ ------------
2006 --% $ -- 3.41% $ 34,840
2007 4.40 49,434 4.21 36,134
2008 3.65 16,200 3.65 16,200
2009 3.78 15,107 3.78 15,107
2012 3.50 194 3.50 219
------------ ------------ ------------ ------------
4.13% $ 80,935 3.78% $ 102,500
============ ============ ============ ============
As a member of the FHLB-NY, the Bank may have outstanding FHLB-NY
borrowings in a combination of term advances and overnight funds of up to 25% of
its total assets, or approximately $165 million at March 31, 2006. Borrowings
are secured by the Bank's investment in FHLB-NY stock and by a blanket security
agreement. This agreement requires the Bank to maintain as collateral certain
qualifying assets (principally mortgage loans and securities) not otherwise
pledged. At March 31, 2006, advances were secured by pledges of the Bank's
investment in the capital stock of the FHLB-NY totaling $4.6 million and a
blanket assignment of the Bank's unpledged qualifying mortgage loans of $141.8
million and mortgage-backed and investment securities of $38.3 million. Included
in the total assets held at the FHLB-NY as collateral for borrowings is excess
borrowing capacity of $23.2 million.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. In securities sold under
agreements to repurchase, the Bank borrows funds through the transfer of debt
securities to the FHLB-NY, as counterparty, and concurrently agrees to
repurchase the identical securities at a fixed price on a specified date.
Repurchase agreements are collateralized by the securities sold and, in certain
cases, by additional margin securities. At March 31, 2006 and 2005 there were no
securities sold under agreements to repurchase outstanding.
SUBORDINATED DEBT SECURITIES. On September 17, 2003, Carver Statutory Trust
I, issued 13,000 shares, liquidation amount $1,000 per share, of floating rate
capital securities. Gross proceeds from the sale of these trust preferred debt
securities were $13.0 million, and, together with the proceeds from the sale of
the trust's common securities, were used to purchase approximately $13.4 million
aggregate principal amount of the Holding Company's floating rate junior
subordinated debt securities due 2033. The trust preferred debt securities are
redeemable quarterly at the option of the Company beginning on or after July 7,
2007 and have a mandatory redemption date of September 17, 2033. Cash
distributions on the trust preferred debt securities are cumulative and payable
at a floating rate per annum resetting quarterly with a margin of 3.05% over the
three-month LIBOR. At March 31, 2006 and 2005 the rate paid on these trust
preferred debt securities was 7.97% and 6.08%, respectively.
The following table sets forth certain information regarding Carver
Federal's borrowings at the dates and for the periods indicated:
AT OR FOR THE YEAR ENDED
MARCH 31,
------------------------------------
2006 2005 2004
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Amounts outstanding at the end of year:
FHLB advances $ 80,935 $ 102,500 $ 91,516
Guaranteed preferred beneficial interest in junior subordinated debentures 12,857 12,799 12,741
Loan for employee stock ownership plan -- -- 25
Rate paid at year end:
FHLB advances 4.13% 3.78% 3.92%
Guaranteed preferred beneficial interest in junior subordinated debentures 7.97% 6.08% 4.16%
Loan for employee stock ownership plan -- -- 4.00%
Maximum amount of borrowing outstanding at any month end:
FHLB advances $ 112,488 $ 112,506 $112,030
Guaranteed preferred beneficial interest in junior subordinated debentures 12,857 12,799 12,742
Loan for employee stock ownership plan -- -- 207
Approximate average amounts outstanding for year:
FHLB advances $ 94,798 $ 97,013 $ 99,359
Guaranteed preferred beneficial interest in junior subordinated debentures 12,827 12,768 6,854
Loan for employee stock ownership plan -- -- 137
Approximate weighted average rate paid during year (1):
FHLB advances 3.81% 3.71% 3.74%
Guaranteed preferred beneficial interest in junior subordinated debentures 7.50% 5.49% 4.78%
Loan for employee stock ownership plan -- -- 4.07%
(1) The approximate weighted average rate paid during the year was computed by
dividing the average amounts outstanding into the related interest expense
for the year
NOTE 8. INCOME TAXES
The components of income tax expense for the years ended March 31 are as
follows:
2006 2005 2004
------- ------- -------
(IN THOUSANDS)
Federal income tax expense (benefit):
Current $ 1,155 $ 1,978 $ 1,634
Deferred 35 (782) 427
------- ------- -------
1,190 1,196 2,061
------- ------- -------
State and local income tax expense (benefit):
Current 196 418 342
Deferred (57) (96) 90
------- ------- -------
139 322 432
------- ------- -------
Valuation allowance -- -- --
Total provision for income tax expense $ 1,329 $ 1,518 $ 2,493
======= ======= =======
The reconciliation of the expected federal income tax rate to the
consolidated effective tax rate for fiscal years ended March 31 follows:
2006 2005 2004
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Statutory Federal income tax $ 1,734 34.0% $ 1,417 34.0% $ 2,493 34.0%
State and local income taxes, net of 92 1.8 213 5.1 285 3.9
Federal tax benefit
General business credit (73) (1.5) -- -- -- --
Release of Contingency Reserve (500) (9.8) -- -- -- --
Other 76 1.5 (112) (2.7) (285) (3.9)
------- ------- ------- ------- ------- -------
Total income tax expense $ 1,329 26.0% $ 1,518 36.4% $ 2,493 34.0%
======= ======= ======= ======= ======= =======
Carver Federal's stockholders' equity includes approximately $2.8 million
at each of March 31, 2006, 2005 and 2004, which has been segregated for federal
income tax purposes as a bad debt reserve. The use of this amount for purposes
other than to absorb losses on loans may result in taxable income for federal
income taxes at the then current tax rate.
Tax effects of existing temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at March 31 of the
years indicated follow:
2006 2005
-------- --------
(IN THOSANDS)
Deferred Tax Assets
Income from affiliate $ 1,975 $ 1,873
Allowance for loan losses 1,365 1,393
Deferred loan fees 235 137
Compensation and benefits 113 384
Non-accrual loan interest 284 274
Reserve for losses on other assets 65 32
Investment security impairment -- 588
Capital loss carryforward 591 --
Unrealized loss on available-for-sale securities 240 144
Minimum pension liability 173 --
Other 2 --
-------- --------
Total Deferred Tax Assets 5,043 4,825
Deferred Tax Liabilities
Depreciation 352 428
-------- --------
Total Deferred Tax Liabilities 352 428
-------- --------
Net Deferred Tax Assets $ 4,691 $ 4,397
======== ========
A valuation allowance against the deferred tax assets at March 31, 2006 and
2005 was not established since it is more likely than not that the results of
future operations will generate sufficient future taxable income to realize the
deferred tax asset.
NOTE 9. EARNINGS PER COMMON SHARE
The following table reconciles the earnings available to common
shareholders (numerator) and the weighted average common stock outstanding
(denominator) for both basic and diluted earnings per share for the periods
presented:
YEAR ENDED MARCH 31,
----------------------------
2006 2005 2004
------- ------- -------
(IN THOUSANDS)
Net income $ 3,770 $ 2,649 $ 4,839
Preferred stock dividends -- (114) (197)
------- ------- -------
Net income - basic 3,770 2,535 4,642
Impact of conversion/potential conversion of
convertible preferred stock to common stock -- 114 197
------- ------- -------
Net income - diluted $ 3,770 $ 2,649 $ 4,839
======= ======= =======
Weighted average common shares outstanding - basic 2,506 2,382 2,284
Effect of dilutive options 59 84 97
Effect of dilutive securities convertible preferred stock -- 113 208
------- ------- -------
Weighted average common shares outstanding - diluted 2,565 2,579 2,589
======= ======= =======
NOTE 10. STOCKHOLDERS' EQUITY
CONVERSION AND STOCK OFFERING. On October 24, 1994, the Bank issued in an
initial public offering 2,314,375 shares of common stock, par value $0.01 (the
"Common Stock"), at a price of $10 per share resulting in net proceeds of $21.5
million. As part of the initial public offering, the Bank established a
liquidation account at the time of conversion, in an amount equal to the surplus
and reserves of the Bank at September 30, 1994. In the unlikely event of a
complete liquidation of the Bank (and only in such event), eligible depositors
who continue to maintain accounts shall be entitled to receive a distribution
from the liquidation account. The total amount of the liquidation account may be
decreased if the balances of eligible deposits decreased as measured on the
annual determination dates. The balance of the liquidation account was
approximately $2.1 million (unaudited) at both March 31, 2006 and 2005, based on
an assumed decrease of 15.25% of eligible deposits per annum. On October 17,
1996, the Bank completed the Reorganization and became the wholly owned
subsidiary of the Holding Company. Pursuant to an Agreement and Plan of
Reorganization, dated May 21, 1996, each share of the Bank's outstanding common
stock was exchanged for one share of the Holding Company's common stock. In
connection with the Reorganization, a shareholder of the Bank exercised
appraisal rights and 100 shares of the Bank's common stock were purchased from
such shareholder in the fourth fiscal quarter of 1997. Accordingly, 2,314,275
shares of the Holding Company's common stock were issued in exchange for each
outstanding share of Bank common stock. The Bank is not permitted to pay
dividends to the Holding Company on its capital stock if the effect thereof
would cause its net worth to be reduced below either: (i) the amount required
for the liquidation account, or (ii) the amount required for the Bank to comply
with applicable minimum regulatory capital requirements.
CONVERTIBLE PREFERRED STOCK. On January 11, 2000, the Holding Company sold
in a private placement, pursuant to a Securities Purchase Agreement, dated
January 11, 2000, 40,000 shares of Series A Convertible Preferred Stock (the
"Series A Preferred Stock") to Morgan Stanley & Co. Incorporated ("MSDW") and
60,000 Shares of Series B Convertible Preferred Stock (the "Series B Preferred
Stock") to Provender Opportunities Fund L.P. ("Provender"). In addition, Carver
Federal entered into a Registration Rights Agreement, dated January 11, 2000,
with MSDW and Provender. The gross proceeds from the private placement were $2.5
million. On June 1, 2004, Provender sold all 60,000 of its Series B Preferred
Stock to Keefe Bruyette & Woods, Inc.
The Series A Preferred Stock and Series B Preferred Stock (collectively the
"Preferred Stock") accrued annual dividends at $1.97 per share. Dividends were
paid semi-annually on June 15 and December 15 of each year. Each share of
Preferred Stock was convertible at the option of the holder, at any time, into
2.08333 shares of Carver Federal's Common Stock, subject to certain antidilution
adjustments. The Holding Company had the option to redeem the Preferred Stock
beginning January 15, 2004. In the event of any liquidation, dissolution or
winding up of Carver Federal, whether voluntary or involuntary, the holders of
the shares of Preferred Stock would be entitled to receive $25 per share of
Preferred Stock plus all dividends accrued and unpaid thereon. Each share of
Preferred Stock would be entitled to one vote for each share of Common Stock
into which the Preferred Stock would be converted. On September 15, 2004, the
Holding Company issued a press release and mailed a Notice of Redemption and a
related Letter of Transmittal to the holders of the Preferred Stock, stating
that it would redeem all 40,000 outstanding shares of its Series A Convertible
Preferred Stock and all 60,000 outstanding shares of its Series B Convertible
Preferred Stock. The Preferred Stock shares were to be redeemed on October 15,
2004 ("Redemption Date") at a redemption price of $26.97 per share plus $0.65 in
accrued and unpaid dividends to, but excluding, the Redemption Date for an
aggregate redemption price of $27.62 per Preferred Share. Dividends on the
Preferred Shares would have ceased to accrue on the Redemption Date. On October
15, 2004 the holders of all 40,000 outstanding shares of its Series A
Convertible Preferred Stock and all 60,000 outstanding shares of its Series B
Convertible Preferred Stock, elected, prior to the Redemption Date, pursuant to
the Certificate of Designations, Preferences and Rights of the Preferred Shares,
to convert their Preferred Shares into shares of Carver's common stock, par
value $0.01 (the "Common Stock"). Upon conversion of their Preferred Shares, the
holders were issued an aggregate of 208,333 shares of Common Stock.
REGULATORY CAPITAL. The operations and profitability of the Bank are
significantly affected by legislation and the policies of the various regulatory
agencies. The OTS has promulgated capital requirements for financial
institutions consisting of minimum tangible and core capital ratios of 1.5% and
3.0%, respectively, of the institution's adjusted total assets and a minimum
risk-based capital ratio of 8.0% of the institution's risk weighted assets.
Although the minimum core capital ratio is 3.0%, the Federal Deposit Insurance
Corporation Improvement Act, as amended ("FDICIA"), stipulates that an
institution with less than 4.0% core capital is deemed undercapitalized. At
March 31, 2006 and 2005, the Bank exceeded all of its regulatory capital
requirements.
The following is a summary of the Bank's actual capital amounts and ratios
as of March 31, 2006 and 2005 compared to the OTS requirements for minimum
capital adequacy and for classification as a well-capitalized institution:
MINIMUM CAPITAL CLASSIFICATION AS
BANK ACTUAL ADEQUACY WELL CAPITALIZED
---------------- ---------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------- ------- ------- ------- -------
March 31, 2006 (DOLLARS IN THOUSANDS)
Tangible capital $62,207 9.4% $ 9,929 1.5% N/A N/A%
Leverage capital 62,207 9.4 26,477 4.0 33,096 5.0
Risk-based capital:
Tier 1 $62,207 12.4 $20,037 4.0 $30,056 6.0
Total 66,222 13.2 40,074 8.0 $50,093 10.0
March 31, 2005
Tangible capital $57,684 9.2% $ 9,404 1.5% N/A N/A%
Leverage capital 57,684 9.2 25,078 4.0 31,348 5.0
Risk-based capital:
Tier 1 $57,684 14.6 $15,877 4.0 $23,753 6.0
Total 61,781 15.6 31,670 8.0 39,587 10.0
The following table reconciles the Bank's stockholders' equity at March 31,
2006, in accordance with accounting principles generally accepted in the U.S. to
regulatory capital requirements:
REGULATORY CAPITAL REQUIREMENTS
-------------------------------------------
GAAP TANGIBLE LEVERAGE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- -------- ----------
(IN THOUSANDS)
Stockholders' Equity at March 31, 2006 (1) $ 61,814 $ 61,814 $ 61,814 $ 61,814
Add:
General valuation allowances -- -- 4,015
Deduct:
Unrealized loss on securities available-for-sale, net 393 393 393
-------- -------- ----------
Regulatory Capital 62,207 62,207 66,222
Minimum Capital requirement 9,929 26,477 40,074
-------- -------- ----------
Regulatory Capital Excess $ 52,278 $ 35,730 $ 26,148
======== ======== ==========
(1) Reflects Bank only.
COMPREHENSIVE INCOME. Comprehensive income represents net income and
certain amounts reported directly in stockholders' equity, such as the net
unrealized gain or loss on securities available for sale and loss on pension
liability. The Holding Company has reported its comprehensive income for fiscal
2006, 2005 and 2004 in the Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income. Carver Federal's accumulated other
comprehensive income or loss (other than net income or loss) included net
unrealized losses on securities at March 31, 2006 and 2005 of $393,000 and
$235,000, respectively. Included in the amounts at March 31, 2006 and 2005 were
unrealized gains of $183,000 and $209,000, respectively, relating to
available-for-sale securities that were transferred during fiscal 2003 to
held-to-maturity. This unrealized gain is an unrealized gain reported as a
separate component of stockholders' equity and is amortized over the remaining
lives of the securities as an adjustment to yield. Also included in accumulated
other comprehensive income or loss at March 31, 2006 was a loss on the Bank's
employee pension plan liability of $281,000, net of taxes.
NOTE 11. EMPLOYEE BENEFIT AND STOCK COMPENSATION PLANS
PENSION PLAN. Carver Federal has a non-contributory defined benefit pension
plan covering all eligible employees. The benefits are based on each employee's
term of service. Carver Federal's policy was to fund the plan with contributions
which equal the maximum amount deductible for federal income tax purposes. The
plan was curtailed during the fiscal year ended March 31, 2001.
The following table sets forth the plan's changes in benefit obligation,
changes in plan assets and funded status and amounts
MARCH 31,
2006 2005
------- -------
(IN THOUSANDS)
Change in projected benefit obligation during the year
Projected benefit obligation at the beginning of year $ 2,785 $ 2,736
Interest cost 163 167
Actuarial loss 197 136
Benefits paid (253) (254)
------- -------
Projected benefit obligation at end of year $ 2,892 $ 2,785
======= =======
Change in fair value of plan assets during the year
Fair value of plan assets at beginning of year $ 2,950 $ 3,068
Actual return on plan assets 173 136
Benefits paid (253) (254)
------- -------
Fair value of plan assets at end of year $ 2,870 $ 2,950
======= =======
Funded status $ (22) $ 165
Unrecognized loss / (gain) 454 203
------- -------
Accrued pension cost $ 432 $ 368
======= =======
recognized in Carver Federal's consolidated financial statements at March 31:
Net periodic pension benefit included the following components for the
years ended March 31 are:
2006 2005 2004
----- ----- -----
(IN THOUSANDS)
Interest cost $ 164 $ 167 $ 172
Expected return on plan assets (227) (236) (223)
Amortization of:
Unrecognized (gain) -- -- --
----- ----- -----
Net periodic pension (benefit) $ (63) $ (69) $ (51)
===== ===== =====
Significant actuarial assumptions used in determining plan benefits for the
years ended March 31 are:
YEAR ENDED MARCH 31,
2006 2005 2004
------- ------- -------
Annual salary increase (1) N/A N/A N/A
Expected long-term return on assets 8.00% 8.00% 8.00%
Discount rate used in measurement of benefit obligations 5.75% 6.38% 6.50%
(1) The annual salary increase rate is not applicable as the plan is frozen.
SAVINGS INCENTIVE PLAN. Carver has a savings incentive plan, pursuant to
Section 401(k) of the Code, for all eligible employees of the Bank. Pursuant to
the plan, Carver may make an annual non-elective contribution to the 401(k) plan
on behalf of each eligible employee up to 2% of the employee's annual pay,
subject to IRS limitations. This non-elective Carver contribution may be made
regardless of whether or not the employee makes a contribution to the 401(k)
plan. To be eligible for the non-elective Carver contribution, the employee must
be 21 years of age, have completed at least one year of service and be employed
as of the last day of the plan year, December 31. In addition, Carver matches
contributions to the plan equal to 100% of pre-tax contributions made by each
employee up to a maximum of 4% of their pay, subject to IRS limitations. All
such matching contributions to the plan will be fully vested and non-forfeitable
at all times regardless of the years of service. However, the non-elective
Carver contribution, if awarded, vests over a five-year period. Total savings
incentive plan expenses for the years ended March 31, 2006, 2005 and 2004 were
$198,000, $174,000 and $95,000, respectively.
DIRECTORS' RETIREMENT PLAN. Concurrent with the conversion to the stock
form of ownership, Carver Federal adopted a retirement plan for non-employee
directors. The plan was curtailed during the fiscal year ended March 31, 2001.
The benefits are payable based on the term of service as a director. The
following table sets forth the plan's changes in benefit obligation, changes in
plan assets and funded status and amounts recognized in Carver Federal's
consolidated financial statements at March 31:
2006 2005
----- -----
(IN THOUSANDS)
Change in projected benefit obligation during the year
Projected benefit obligation at beginning of year $ 136 $ 169
Interest cost 7 9
Actuarial (gain) loss (7) 1
Benefits paid (34) (43)
----- -----
Projected benefit obligation at end of year $ 102 $ 136
===== =====
Change in fair value of plan assets during the year
Fair value of plan assets at beginning of year $ -- $ --
Employer contributions 34 43
Benefits paid (34) (43)
----- -----
Fair value of plan assets at end of year $ -- $ --
===== =====
Funded Status $(102) $(136)
Unrecognized (gain) (22) (16)
----- -----
Accrued pension cost $(124) $(152)
===== =====
Net periodic pension cost for the years ended March 31, 2006, 2005 and 2004
included the following:
2006 2005 2004
----- ----- -----
(IN THOUSANDS)
Interest cost $ 6 $ 9 $ 12
----- ----- -----
Net periodic pension cost $ 6 $ 9 $ 12
===== ===== =====
The actuarial assumptions used in determining plan benefits include a
discount rate of 5.75%, 6.1% and 6.4% for the years ended March 31, 2006, 2005
and 2004, respectively.
BOLI. The Bank owns one BOLI plan which was formed to offset future
employee benefit costs and provide additional benefits due to its tax exempt
nature. Only officer level employees are covered under this program.
An initial investment of $8.0 million was made to the BOLI program on
September 21, 2004. At March 31, 2006 the Consolidated Statement of Conditions
reflects a net cash surrender value of $8.5 million. The related income is
reflected in the Consolidated Statement of Operations as a component of other
non-interest income.
MANAGEMENT RECOGNITION PLAN ("MRP"). The MRP provides for automatic grants
of restricted stock to certain employees as of the September 12, 1995 adoption
of the MRP. On March 28, 2005 the plan was amended for all future awards. The
MRP provides for additional discretionary grants of restricted stock to those
employees selected by the committee established to administer the MRP. Awards
granted prior to March 28, 2005, generally vest in three to five equal annual
installments commencing on the first anniversary date of the award, provided the
recipient is still an employee of the Holding Company or the Bank on such date.
Under the amended plan awards granted after March 28, 2005 vest based on a
five-year performance-accelerated vesting schedule. Ten percent of the awarded
shares vest in each of the first four years and the remainder in the fifth year.
Using a performance-accelerated vesting schedule, with return on assets ("ROA")
as the performance measure, the vesting period can be accelerated in years three
and four if the Bank meets or exceeds the three-year average ROA for its peer
group. Awards will become 100% vested upon termination of service due to death
or disability. When shares become vested and are distributed, the recipients
will receive an amount equal to any accrued dividends with respect thereto. On
September 23, 2003, the MRP was amended to increase the number of shares
available to 119,431. Pursuant to the MRP, the Bank recognized $134,000,
$158,000 and $128,000 as expense for the years ended March 31, 2006, 2005 and
2004, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN. Effective upon conversion, an ESOP was
established for all eligible employees. The ESOP used $1,821,320 in proceeds
from a term loan obtained from a third-party institution to purchase 182,132
shares of Bank common stock in the initial public offering. The term loan
principal was payable over forty equal quarterly installments through September
2004. Interest on the term loan was payable quarterly, initially at a rate of
3.0% over the average federal funds rate. On May 20, 2002, the term loan was
modified to provide for interest at a fixed rate of 4.0% per annum. Each year
until the loan paid off in June of 2004, the Bank made discretionary
contributions to the ESOP, which were equal to principal and interest payments
required on the term loan less any dividends received by the ESOP on unallocated
shares.
Shares purchased with the loan proceeds were initially pledged as
collateral for the term loan. Currently, shares are purchased in the open market
in accordance with Carver's common stock repurchase program and are held in a
suspense account for future allocation among the participants on the basis of
compensation, as described by the Plan, in the year of allocation. Accordingly,
the ESOP shares pledged as collateral are reported as unearned ESOP shares in
the consolidated statements of financial condition. As shares are committed to
be released from collateral, the Bank reports compensation expense equal to the
current market price of the shares, and the shares become outstanding for net
income per common share computations. ESOP compensation expense was $200,000,
$200,000 and $0 for the years ended March 31, 2006, 2005 and 2004, respectively.
The ESOP shares at March 31 follow:
2006 2005
------ ------
(IN THOUSANDS)
Allocated shares 72 78
Unallocated shares 1 5
------ ------
Total ESOP shares 73 83
====== ======
Fair value of unallocated shares $ 10 $ 95
====== ======
STOCK OPTION PLAN. During 1995, the Holding Company adopted the 1995 Stock
Option Plan (the "Plan") to advance the interests of the Bank through providing
stock options to select key employees and directors of the Bank and its
affiliates. The number of shares reserved for issuance under the plan is
338,862. At March 31, 2006, there were 238,061 options outstanding and 144,836
were exercisable. Options are granted at the fair market value of Carver Federal
common stock at the time of the grant for a period not to exceed ten years.
Under the Plan option grants generally vest on an annual basis ratably over
either three or five years, commencing after one year of service and, in some
instances, portions of option grants vest at the time of the grant. On March 28,
2005, the plan was amended and vesting of future awards is based on a five-year
performance-accelerated vesting schedule. Ten percent of the awarded options
vest in each of the first four years and the remainder in the fifth year. Using
a performance-accelerated vesting schedule, ROA as the performance measure, the
vesting period can be accelerated in years three and four if the Bank meets or
exceeds the three-year average ROA for its peer group. All options are
exercisable immediately upon a participant's disability, death or a change in
control, as defined in the Plan.
Information regarding stock options as of and for the years ended March 31
follows:
2006 2005 2004
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- -------- -------- -------- -------- --------
Outstanding, beginning of year 225,292 $ 12.37 229,636 $ 11.25 192,176 $ 10.07
Granted 35,277 16.98 39,347 19.65 43,638 16.35
Exercised (9,903) 9.57 (35,954) 12.75 (77) 12.06
Forfeited (12,605) 17.44 (7,737) 14.38 (6,101) 10.39
-------- -------- -------- -------- -------- --------
Outstanding, end of year 238,061 12.90 225,292 12.37 229,636 11.25
======== ======== ======== ======== ======== ========
Exercisable at year end 144,836 151,846 108,925
======== ======== ========
Information regarding stock options at March 31, 2006 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- ------------------- --------- --------- --------- --------- ---------
$ 8.00$ 8.99 60,000 4 years $ 8.17 60,000 $ 8.17
9.00 9.99 38,060 5 years 9.92 38,060 9.92
10.00 10.99 6,000 5 years 10.52 6,000 10.52
12.00 12.99 40,576 6 years 12.10 39,776 12.09
13.00 13.99 1,000 2 years 13.81 1,000 13.81
15.00 15.99 2,265 10 years 15.10 -- --
16.00 16.99 30,480 7 years 16.47 -- --
17.00 17.99 29,327 9 years 17.13 -- --
19.00 19.99 29,243 8 years 19.64 -- --
20.00 20.99 729 9 years 20.00 -- --
21.00 21.99 381 8 years 21.76 -- --
--------- ---------
Total 238,061 144,836
========= =========
NOTE 12. COMMITMENTS AND CONTINGENCIES
CREDIT RELATED COMMITMENTS. The Bank is a party to financial instruments
with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers.
These financial instruments primarily include commitments to extend credit
and to sell loans. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
statements of financial condition. The contract amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies making commitments as it does for on-balance-sheet
instruments.
The Bank has outstanding various commitments as follows:
March 31,
-----------------
2006 2005
------- -------
(In thousands)
Commitments to originate mortgage loans $64,163 $44,129
Commitments to originate commercial and consumer loans 439 515
Letters of credit 1,795 1,908
------- -------
Total $66,397 $46,552
======= =======
At March 31, 2006, of the $64.2 million in outstanding commitments to
originate mortgage loans, $61.0 million represented construction loans at an
average rate of 5.70%, $1.3 million represented commitments to originate
non-residential mortgage loans at rates within a range of 6.50% to 7.00% and
$1.9 million represented the balance of one-four residential loans at rates
between 6.38% and 7.25%.
The balance of commitments on commercial and consumer loans at March 31,
2006 is primarily undisbursed funds from approved unsecured commercial lines of
credit. All such lines carry adjustable rates mainly tied to prime. At March 31,
2006, the Bank maintained one letter of credit in the amount of $1.8 million.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the counter-party.
LEASE COMMITMENTS. Rentals, including real estate taxes, under long term
operating leases for certain branch offices aggregated approximately $717,000,
$479,000, and $245,000 for the years ended March 31, 2006, 2005 and 2004,
respectively. As of March 31, 2005, minimum rental commitments under all
noncancellable leases with initial or remaining terms of more than one year and
expiring through 2018 follow:
YEAR ENDING MINIMUM
March 31, RENTAL
----------- -----------
(In Thousands)
2007 657
2008 677
2009 662
2010 621
2011 605
Thereafter 1,230
-----------
$ 4,452
===========
The Bank also has, in the normal course of business, commitments for
services and supplies. Management does not anticipate losses on any of these
transactions.
LEGAL PROCEEDINGS. From time to time, Carver Federal is a party to various
legal proceedings incident to its business. Certain claims, suits, complaints
and investigations involving Carver Federal, arising in the ordinary course of
business, have been filed or are pending. The Company is of the opinion, after
discussion with legal counsel representing Carver Federal in these proceedings,
that the aggregate liability or loss, if any, arising from the ultimate
disposition of these matters would not have a material adverse effect on the
Company's consolidated financial position or results of operations. At March 31,
2006, there were no material legal proceedings to which the Company or its
subsidiaries was a party or to which any of their property was subject.
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107 "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS" requires
the Bank to disclose, in addition to the carrying value, the fair value of
certain financial instruments, both assets and liabilities recorded on and off
balance sheet, for which it is practicable to estimate fair value. SFAS 107
defines financial instrument as cash, evidence of ownership of an entity, or a
contract that conveys or imposes on an entity the contractual right or
obligation to either receive or deliver cash or another financial instrument.
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced or liquidation sale and is best evidenced by a quoted market
price if one exists. In cases where quoted market prices are not available,
estimated fair values have been determined by the Bank using the best available
data and estimation methodology suitable for each category of financial
instrument. For those loans and deposits with floating interest rates, it is
presumed that estimated fair values generally approximate their recorded book
balances. The estimation methodologies used and the estimated fair values and
carrying values of the Bank's financial instruments are set forth below:
CASH AND CASH EQUIVALENTS AND ACCRUED INTEREST RECEIVABLE
The carrying amounts for cash and cash equivalents and accrued interest
receivable approximate fair value because they mature in three months or less.
SECURITIES
The fair values for securities available-for-sale, mortgage-backed
securities held-to-maturity and investment securities held-to-maturity are based
on quoted market or dealer prices, if available. If quoted market or dealer
prices are not available, fair value is estimated using quoted market or dealer
prices for similar securities.
LOANS RECEIVABLE
The fair value of loans receivable is estimated by discounting future cash
flows, using current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities of such loans.
MORTGAGE SERVICING RIGHTS
The fair value of mortgage servicing rights is estimated by discount future
cash flows, using current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities of
such loans.
DEPOSITS
The fair value of demand, savings and club accounts is equal to the amount
payable on demand at the reporting date. The fair value of certificates of
deposit is estimated using rates currently offered for deposits of similar
remaining maturities. The fair value estimates do not include the benefit that
results from the low-cost funding provided by deposit liabilities compared to
the cost of borrowing funds in the market.
BORROWINGS
The fair values of advances from the Federal Home Loan Bank of New York,
securities sold under agreement to repurchase and other borrowed money are
estimated using the rates currently available to the Bank for debt with similar
terms and remaining maturities.
COMMITMENTS
The fair market value of unearned fees associated with financial
instruments with off-balance sheet risk at March 31, 2005 approximates the fees
received. The fair value is not considered material.
The carrying amounts and estimated fair values of the Bank's financial
instruments for the following years:
AT MARCH 31,
-------------------------------------------------
2006 2005
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Financial Assets:
Cash and cash equivalents $ 22,904 $ 22,904 $ 20,420 $ 20,420
Investment securities available-for-sale 12,078 12,078 22,551 22,551
Mortgage backed securities available-for-sale 69,804 69,804 95,482 95,482
Mortgage backed securities held-to-maturity 26,404 25,880 31,302 31,310
Loans receivable 493,432 488,258 421,987 424,886
Accrued interest receivable 2,970 2,970 2,702 2,702
Mortgage servicing rights 339 325 179 161
Financial Liabilities:
Deposits $ 504,638 $ 506,886 $ 453,454 $ 451,752
Advances from FHLB of New York 80,935 79,848 102,500 101,651
Other borrowed money 12,857 12,857 12,799 12,799
LIMITATIONS
The fair value estimates are made at a discrete point in time based on
relevant market information about the financial instruments. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the entire holdings of a particular financial instrument. Because no
quoted market value exists for a significant portion of the Bank's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
In addition, the fair value estimates are based on existing off balance
sheet financial instruments without attempting to value anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets and liabilities include premises and equipment and
advances from borrowers for taxes and insurance. In addition, the tax
ramifications related to the realization of unrealized gains and losses can have
a significant effect on fair value estimates and have not been considered in any
of the estimates.
Finally, reasonable comparability between financial institutions may not be
likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
introduces a greater degree of subjectivity to these estimated fair values.
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly financial data for fiscal
years ended March 31, 2006 and 2005:
THREE MONTHS ENDED
------------------------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 2006
Interest income $ 7,752 $ 7,748 $ 8,210 $ 8,676
Interest expense (3,052) (3,213) (3,438) (3,791)
------------ ------------ ------------ ------------
Net interest income 4,700 4,535 4,772 4,885
Provision for loan losses -- -- -- --
Non-interest income 1,399 1,031 1,123 1,788
Non-interest expense (4,795) (4,636) (4,668) (5,037)
Income tax expense (464) (329) 60 (595)
------------ ------------ ------------ ------------
Net income $ 840 $ 601 $ 1,287 $ 1,041
============ ============ ============ ============
Earnings per common share
Basic $ 0.34 $ 0.24 $ 0.51 $ 0.42
Diluted $ 0.33 $ 0.23 $ 0.50 $ 0.41
FISCAL 2005
Interest income $ 6,712 $ 7,013 $ 7,223 $ 7,597
Interest expense (2,168) (2,368) (2,485) (2,737)
------------ ------------ ------------ ------------
Net interest income 4,544 4,645 4,738 4,860
Provision for loan losses -- -- -- --
Non-interest income 1,139 1,198 1,203 901
Non-interest expense (3,938) (5,069) (4,507) (5,179)
Income tax expense (663) (291) (514) (190)
------------ ------------ ------------ ------------
Net income $ 1,082 $ 483 $ 920 $ 392
============ ============ ============ ============
Earnings per common share
Basic $ 0.45 $ 0.09 $ 0.37 $ 0.16
Diluted $ 0.42 $ 0.09 $ 0.36 $ 0.15
NOTE 15. CARVER BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31,
-----------------
2006 2005
------- -------
(IN THOUSANDS)
ASSETS
Cash on deposit with the Bank $ 59 $ 289
Investment securities -- 1,575
Investment in subsidiaries 62,219 57,851
Other assets 3 140
------- -------
TOTAL ASSETS $62,281 $59,855
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings $13,260 $13,202
Accounts payable to subsidiaries 66 667
Other liabilities 258 185
------- -------
Total liabilities $13,584 $14,054
------- -------
Stockholders' equity 48,697 45,801
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $62,281 $59,855
======= =======
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
------------------------------
2006 2005 2004
-------- -------- --------
(IN THOUSANDS)
INCOME
Equity in net income from Subsidiaries $ 6,758 $ 7,119 $ 8,328
Interest income from deposit with the Bank 5 7 9
Other income 22 23 9
-------- -------- --------
Total income 6,785 7,149 8,346
EXPENSES
Interest Expense on Borrowings 985 721 337
Salaries and employee benefits 287 225 169
Legal expense -- -- --
Shareholder expense 407 488 458
Other 7 1,548 50
-------- -------- --------
Total expense 1,686 2,982 1,014
Income before income taxes 5,099 4,167 7,332
Income tax expense 1,329 1,518 2,493
-------- -------- --------
NET INCOME $ 3,770 $ 2,649 $ 4,839
======== ======== ========
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
--------------------------------
2006 2005 2004
-------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,770 $ 2,649 $ 4,839
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Equity in net income of Subsidiaries (6,758) (7,119) (8,328)
Income taxes from the Bank 1,329 1,518 2,493
(Decrease) increase in accounts payable to Bank (443) 645 21
Increase (decrease) in other liabilities 40 (14) 131
Other, net 299 2,534 1,772
-------- -------- --------
Net cash (used in ) provided by operating activities (1,763) 213 928
CASH FLOWS FROM INVESTING ACTIVITIES
Dividends Received from Bank 850 4,866 --
Additional Investment in Bank & other subsidiaries -- -- (13,153)
Proceeds from sale of investment securities 1,575 -- --
Purchase of investment securities -- (3,074) (59)
-------- -------- --------
Net cash provided by (used in) investing activities 2,425 1,792 (13,212)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Sub Debt -- -- 13,144
Purchase of treasury stock, net (115) (1,021) (200)
Dividends paid (777) (788) (654)
-------- -------- --------
Net cash (used in) provided by financing activities (892) (1,809) 12,290
-------- -------- --------
Net (decrease) increase in cash (230) 196 6
Cash and cash equivalents - beginning 289 93 87
-------- -------- --------
Cash and cash equivalents - ending $ 59 $ 289 $ 93
======== ======== ========
NOTE 16. RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS
In March, 2006 FASB issued SFAS 156, ACCOUNTING FOR SERVICING OF FINANCIAL
ASSETS, which amends SFAS.140, ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
The Statement addresses the recognition and measurement of separately recognized
servicing assets and liabilities and provides an approach to simplify efforts to
obtain hedge-like (offset) accounting.
SFAS 156 is effective as of the beginning of the first fiscal year that begins
after September 15, 2006. Earlier adoption is permitted as of the beginning of
an entity's fiscal year, provided the entity has not yet issued financial
statements, including financial statements for any interim period for that
fiscal year. CARVER will adopt this pronouncement as of April 1, 2007 and it is
not expected to have a material impact on the Company's consolidated financial
condition or results of operations.
THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN
INVESTMENTS
In November 2005, the FASB issued Staff Position No. FASB 115-1 and FAS
124-1, "THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO
CERTAIN INVESTMENTS" (FSP FAS 115-1 AND FAS 124-1), which amends FASB Statements
No. 115, Accounting for Certain Investments in Debt and Equity Securities, and
No. 124, Accounting for Certain Investments Held by Not-for-Profit
Organizations, and APB Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock. FSP FAS 115-1 and FAS 124-1 addresses the
determination of when an investment is considered impaired; whether the
impairment is other than temporary; and how to measure an impairment loss and
also addresses accounting considerations subsequent to the recognition of an
other-than-temporary impairment on a debt security, and requires certain
disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Under FSP FAS 115-1 and FAS 124-1, impairment
losses must be recognized in earnings equal to the entire difference between the
security's cost and it fair share value at the financial statement date, without
considering partial recoveries subsequent to that date. FSP FAS 115-1 and FAS
124-1 also requires that an investor recognize an other-than-temporary
impairment loss when a decision to sell a security has been made and the
investor does not expect the fair value of the security to fully recover prior
to the expected time of sale. This pronouncement is effective for reporting
periods beginning after December 15, 2005. The Company does not expect
application to have any impact on its financial condition, results of operations
or financial statement disclosures.
ACCOUNTING CHANGES AND ERROR CORRECTIONS
In May 2005, the FASB issued SFAS No. 154, "ACCOUNTING CHANGES AND ERROR
CORRECTIONS"(SFAS No. 154), which replaces APB Opinion No. 20, "Accounting
Changes," or APB No. 20, and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements," and changes the requirements for the accounting
for and reporting of a change in accounting principle. SFAS No. 154 applies to
all voluntary changes in accounting principle and to changes required by an
accounting pronouncement when the pronouncement does not include specific
transaction provisions. SFAS No. 154 requires retrospective application of
changes in accounting principle to prior periods' financial statements unless it
is impracticable to determine either the period-specific effects or the
cumulative effect of the change. APB No. 20 previously required that most
voluntary changes in accounting principle be recognized by including the
cumulative effect of the change in net income for the period of the change in
accounting principle. SFAS No. 154 carries forward without change the guidance
contained in APB No. 20 for reporting the correction of an error in previously
issued financial statements and a change in accounting estimate. SFAS No. 154
also carries forward the guidance in APB No. 20 requiring justification of a
change in accounting principle on the basis of preferability. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005, with early adoption permitted. Carver will
adopt this pronouncement as of April 1, 2006.
ACCOUNTING FOR STOCK BASED COMPENSATION
In December 2004, the FASB issued SFAS 123R "ACCOUNTING FOR STOCK BASED
COMPENSATION, SHARE BASED PAYMENT", which replaces the guidance prescribed in
SFAS 123. SFAS 123R requires that compensation cost relating to share-based
payment transactions be recognized in the financial statements. The associated
costs will be measured based on the fair value of the equity or liability
instruments issued. SFAS 123R covers a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans. SFAS 123R
is effective as of the first interim or annual reporting period beginning after
June 15, 2005. Carver will adopt this pronouncement as of April 1, 2006 and it
is not expected to have a material impact on the Company's consolidated
financial condition or results of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission (the "SEC"). As of March 31, 2006, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective and timely in alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning Executive Officers of the Company which responds to
this Item is incorporated by reference from the section entitled "Executive
Officers and Key Managers of Carver and Carver Federal" in the Holding Company's
definitive proxy statement for the Annual Meeting of Stockholders for the fiscal
year ended March 31, 2006 (the "Proxy Statement"). The information that responds
to this Item with respect to Directors is incorporated by reference from the
section entitled "Election of Directors" in the Proxy Statement. Information
with respect to compliance by the Company's Directors and Executive Officers
with Section 16(a) of the Exchange Act is incorporated by reference from the
subsection entitled "Section 16 (a) Beneficial Ownership Reporting Compliance"
in the Proxy Statement.
AUDIT COMMITTEE FINANCIAL EXPERT
Information regarding the audit committee of the Company's Board of
Directors, including information regarding audit committee financial experts
serving on the audit committee, is presented under the heading "Corporate
Governance" in the Company's Proxy Statement and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in response to this Item is incorporated by
reference from the section entitled "Compensation of Directors and Executive
Officers" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required in response to this Item is incorporated by
reference from the section entitled "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in response to this Item is incorporated by
reference from the section entitled "Transactions with Certain Related Persons"
in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required in response to this Item is incorporated by
reference from the section entitled "Auditor Fee Information" in the Proxy
Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) List of Documents Filed as Part of this Annual Report on Form 10-K
(1) The following consolidated financial statements are in Item 8 of this
annual report:
o Report of Independent Registered Public Accounting Firm
o Consolidated Statement of Financial Condition as of March 31, 2006 and
2005
o Consolidated Statements of Operations for the years ended as of March
31, 2006, 2005 and 2004
o Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the years ended March 31, 2006, 2005 and 2004
o Consolidated Statements of Cash Flows for the years ended March 31,
2006, 2005 and 2004
o Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. All financial statement schedules have
been omitted, as the required information is either inapplicable or
included under Item 8, "Financial Statement and Supplementary Data".
(b) Exhibits required by Item 601 of Regulation S-K:
(1) See Index of Exhibits on page E-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CARVER BANCORP, INC.
June 29, 2006 By /s/ Deborah C. Wright
-----------------------------------------------
Deborah C. Wright
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below on June 28, 2006 by the following persons on
behalf of the Registrant and in the capacities indicated.
/s/ Deborah C. Wright
- ------------------------
Deborah C. Wright Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ William Gray
- ------------------------
William Gray Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Carol Baldwin Moody
- ------------------------
Carol Baldwin Moody Director
/s/ David L. Hinds
- ------------------------
David L. Hinds Director
/s/ Robert Holland, Jr.
Robert Holland, Jr. Director
/s/ Pazel Jackson
- ------------------------
Pazel G. Jackson, Jr. Director
/s/ Edward B. Ruggiero
- ------------------------
Edward B. Ruggiero Director
/s/ Strauss Zelnick
- ------------------------
Strauss Zelnick Director
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
2.2 Agreement and Plan of Merger dated as of April 6, 2006
by and between Carver Bancorp, Inc., Carver Federal
Savings Bank and Community Capital Bank (2.2)
3.1 Certificate of Incorporation of Carver Bancorp, Inc. (1)
3.2 Amended and Restated Bylaws of Carver Bancorp, Inc. (12)
4.1 Stock Certificate of Carver Bancorp, Inc. (1)
4.2 Federal Stock Charter of Carver Federal Savings Bank (1)
4.3 Bylaws of Carver Federal Savings Bank (1)
4.4 Amendments to Bylaws of Carver Federal Savings Bank (2)
4.5 Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock (4)
4.6 Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock (4)
10.1 Carver Bancorp, Inc. 1995 Stock Option Plan, effective
as of September 12, 1995 (1)
10.2 Carver Federal Savings Bank Retirement Income Plan, as
amended and restated effective as of January 1, 1997 and
as further amended through January 1, 2001 (9)
10.3 Carver Federal Savings Bank 401(k) Savings Plan in RSI
Retirement Trust, as amended and restated effective as
of January 1, 1997 and including provisions effective
through January 1, 2002 (9)
10.4 Carver Bancorp, Inc. Employee Stock Ownership Plan,
effective as of January 1, 1994, incorporating Amendment
No. 1, incorporating Second Amendment, incorporating
Amendment No. 2, incorporating Amendment No. 2A,
incorporating Amendment No. 3 and incorporating
Amendment No. 4 (9)
10.5 Carver Federal Savings Bank Deferred Compensation Plan,
effective as of August 10, 1993 (1)
10.6 Carver Federal Savings Bank Retirement Plan for
Nonemployee Directors, effective as of October 24, 1994
(1)
10.7 Carver Bancorp, Inc. Management Recognition Plan,
effective as of September 12, 1995 (1)
10.8 Carver Bancorp, Inc. Incentive Compensative Plan,
effective as of September 12, 1995 (1)
10.9 Employment Agreement by and between Carver Federal
Savings Bank and Deborah C. Wright, entered into as of
June 1, 1999 (3)
10.10 Employment Agreement by and between Carver Bancorp, Inc.
and Deborah C. Wright, entered into as of June 1, 1999
(3)
10.11 Securities Purchase Agreement by and among Carver
Bancorp, Inc., Morgan Stanley & Co. Incorporated and
Provender Opportunities Fund L.P. (5)
10.12 Registration Rights Agreement by and among Carver
Bancorp, Inc., Morgan Stanley & Co. Incorporated and
Provender Opportunities Fund L.P. (5)
10.13 Settlement Agreement and Mutual Release by and among BBC
Capital Market, Inc., The Boston Bank of Commerce, Kevin
Cohee and Teri Williams; Carver Bancorp, Inc., Deborah
C. Wright, David N. Dinkins, Linda H. Dunham, Robert J.
Franz, Pazel G. Jackson, Jr., Herman Johnson and David
R. Jones; Morgan Stanley & Co., Incorporated; and
Provender Opportunities Fund, L.P. and Frederick O.
Terrell (5)
10.14 Amendment to the Carver Bancorp, Inc. 1995 Stock Option
Plan (6)
10.15 Amended and Restated Employment Agreement by and between
Carver Federal Savings Bank and Deborah C. Wright,
entered into as of June 1, 1999 (7)
10.16 Amended and Restated Employment Agreement by and between
Carver Bancorp, Inc. and Deborah C. Wright, entered into
as of June 1, 1999 (7)
10.17 Form of Letter Employment Agreement between Executive
Officers and Carver Bancorp, Inc. (7)
10.18 Employment Agreement by and between Carver Federal
Savings Bank and Catherine A. Papayiannis, entered into
as of April 22, 2002 (7)
10.19 Carver Bancorp, Inc. Compensation Plan for Non-Employee
Directors (9)
10.20 Amendment Number One to Carver Federal Savings Bank
Retirement Income Plan, as amended and restated
effective as of January 1, 1997 and as further amended
through January 1, 2001 (9)
10.21 First Amendment to the Restatement of the Carver Federal
Savings Bank 401(k) Savings Plan (9)
10.22 Second Amendment to the Restatement of the Carver
Federal Savings Bank 401(k) Savings Plan for EGTRRA (9)
10.23 Guarantee Agreement by and between Carver Bancorp, Inc.
and U.S. Bank National Association, dated as of
September 17, 2003 (8)
10.24 Amended and Restated Declaration of Trust by and among,
U.S. Bank National Association, as Institutional
Trustee, Carver Bancorp, Inc., as Sponsor, and Linda
Dunn, William Gray and Deborah Wright, as
Administrators, dated as of September 17, 2003 (8)
10.25 Indenture, dated as of September 17, 2003, between
Carver Bancorp, Inc., as Issuer, and U.S. Bank National
Association, as Trustee (8)
10.26 Second Amendment to the Carver Bancorp, Inc. Management
Recognition Plan, effective as of September 23, 2003
(11)
10.27 Amended Share Voting Stipulation and Undertaking made by
Carver Bancorp, Inc. in favor of the OTS, made as of
April 22, 2004 (11)
10.28 Trust Agreement between Carver Bancorp, Inc. and
American Stock & Transfer Trust Company, dated May 3,
2004 (11)
10.29 First Amendment to Employment Agreement by and between
Carver Federal Savings Bank and Catherine A.
Papayiannis, entered into as of May 27, 2004 (11)
10.30 First Amendment to the Carver Bancorp, Inc. Retirement
Income Plan, effective as of March 28, 2005 (12)
10.31 Sixth Amendment to the Carver Bancorp, Inc. Employee
Stock Ownership Plan, effective as of March 28, 2005
(12)
14 Code of ethics (*)
21.1 Subsidiaries of the Registrant (11)
23.2 Consent of KPMG LLP (*)
31.1 Certifications of Chief Executive Officer (*)
31.2 Certifications of Chief Financial Officer (*)
32.1 Written Statement of Chief Executive Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350 (*)
32.2 Written Statement of Chief Financial Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350 (*)
(*) Filed herewith. Copies of these exhibits are available at no charge
through the SEC website at http://www.sec.gov.
(1) Incorporated herein by reference to Registration Statement No. 333-5559
on Form S-4 of the Registrant filed with the Securities and Exchange
Commission on June 7, 1996.
(2) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1998.
(2.2) Incorporated herein by reference to the Exhibits to the Registrant's
Report on Form 8-K, dated April 6, 2006.
(3) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1999.
(4) Incorporated herein by reference to the Exhibits to the Registrant's
Report on Form 8-K, dated January 14, 2000.
(5) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2000.
(6) Incorporated herein by reference to the Registrant's Proxy Statement
dated January 25, 2001.
(7) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2002.
(8) Incorporated herein by reference to the Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the three months ended September 30,
2003.
(9) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2003.
(10) Incorporated herein by reference to the Exhibits to the Registrant's
Report on Form 8-K, dated March 16, 2004.
(11) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2004.
(12) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2005.