UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-21487
CARVER BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3904174
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
75 WEST 125TH STREET, NEW YORK, NEW YORK 10027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 876-4747
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE AMERICAN STOCK EXCHANGE
(TITLE OF CLASS) (NAME OF EACH EXCHANGE ON
WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] 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. [ ]
As of May 31, 1998, there were 2,314,275 shares of Common Stock of the
registrant issued and outstanding. The aggregate market value of the
Registrant's common stock held by non-affiliates (based on the closing sales
price of $13 5/8 per share of the registrant's Common Stock on MAY 29, 1998) was
approximately $28.6 million.
1
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET FOR THE COMMON STOCK
The Common Stock is listed on the American Stock Exchange under the
symbol "CNY." Prior to May 21, 1997, the Common Stock traded on the National
Market of The Nasdaq Stock Market under the symbol "CARV." As of June 30, 1998,
there were 2,314,275 shares of the Common Stock outstanding, held by
approximately 1,200 holders of record. The following table shows the high and
low per share sales prices of the Common Stock.
CLOSING SALES PRICE QUARTER ENDED (1)
High Low
---- ---
Year Ended March 31, 1998
First Quarter $11 3/4 $ 9 5/8
Second Quarter $12 5/8 $12 3/8
Third Quarter $17 5/8 $12 3/4
Fourth Quarter $15 1/8 $14 1/4
Year Ended March 31, 1997
First Quarter $ 9 $ 7 5/8
Second Quarter $ 9 $ 7 3/4
Third Quarter $ 8 5/8 $ 7 3/4
Fourth Quarter $10 5/8 $ 8 1/4
(1) Prior to October 18, 1996, the prices indicated are for the common stock of
Carver Federal Savings Bank. On that date, the Holding Company became the
parent company of the Bank and each outstanding share of the Bank's common
stock was converted into one share of the Holding Company's common stock.
The Board of Directors declared Carver's first cash dividend of $0.05
(five cents) per share on June 17, 1997 for stockholders of record on July 2,
1997. The Board has not determined to establish a regular dividend at this time,
but will review the Company's position after each quarter for the possible
declaration of additional dividends. The timing and amount of future dividends
will be within the discretion of Carver's Board of Directors and will depend on
the earnings of the Company and its subsidiaries, their financial condition,
liquidity and capital requirements, applicable governmental regulations and
policies and other factors deemed relevant by the Board of Directors.
The Bank will not be permitted to pay dividends to the Holding Company
on its capital stock if its stockholders' equity would be reduced below
applicable regulatory capital requirements or the amount required to be
maintained for the liquidation account. The OTS capital distribution regulations
applicable to savings institutions (such as the Bank) that meet their regulatory
capital requirements, generally limit dividend payments in any year to the
greater of (i) 100% of year-to-date net income plus an amount that would reduce
surplus capital by one-half or (ii) 75% of net income for the most recent four
quarters. Surplus capital is the excess of actual capital at the beginning of
the year over the institution's minimum regulatory capital requirement. For
information concerning the Bank's liquidation account, see Note 2 of the Notes
to 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 dividends from the
Bank. The Holding Company is subject to the requirements of Delaware law, which
generally limit dividends
2
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.
ITEM 6. SELECTED FINANCIAL DATA.
AT MARCH 31,
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
FINANCIAL CONDITION DATA:
TOTAL AMOUNT OF:
Assets $437,458 $423,614 $367,657 $367,962 $308,507
Loans, net 274,954 197,918 82,608 48,460 51,020
Mortgage-backed securities 91,116 110,853 131,105 181,134 153,843
Investment securities 0 1,675 8,937 18,035 12,018
Securities available for sale(1) 28,407 83,863 114,328 93,328 71,572
Excess of cost over assets acquired 1,246 1,456 1,669 1,899 2,141
Cash and cash equivalents 15,120 4,231 10,026 11,818 9,053
Deposits 274,894 266,471 256,952 248,446 252,474
Borrowed funds 124,946 121,101 73,948 82,318 39,930
Stockholders' equity 35,534 33,984 34,765 34,801 14,170
NUMBER OF:
Deposit accounts 51,550 49,142 45,815 44,324 44,593
Offices 7 7 8 8 8
3
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Interest income $ 27,828 $ 22,847 $ 23,529 $ 19,750 $17,464
Interest expense 15,019 12,483 13,594 10,532 10,167
---------- ---------- ---------- ---------- -------
Net interest income 12,809 10,364 9,935 9,218 7,297
Provision for loan losses 1,260 1,690 131 334 19
---------- ---------- ---------- ---------- -------
Net interest income after provision
for loan losses 11,549 8,764 9,804 8,884 7,278
---------- ---------- ---------- ---------- -------
Non-interest income:
Gain (loss) on sales of asset 188 (927) -- -- 1,127
Other 2,163 1,040 608 576 565
---------- ---------- ---------- ---------- -------
Total non-interest income 2,351 113 608 576 1,692
---------- ---------- ---------- ---------- -------
Non-interest expenses:
Loss on sale of foreclosed real estate -- 38 77 34 159
Other 11,651 11,764 8,976 7,907 7,690
---------- ---------- ---------- ---------- -------
Total non-interest expense 11,651 11,802 9,053 7,941 7,849
---------- ---------- ---------- ---------- -------
Income loss before income taxes,
Extraordinary income and cumulative
effect of change in accounting
principle 2,249 (3,015) 1,359 1,519 1,121
---------- ---------- ---------- ---------- -------
Income taxes 1,203 (1,275) 606 674 613
---------- ---------- ---------- ---------- -------
Income loss before extraordinary
income and cumulative effect of
change in accounting principle 1,046 (1,740) 753 845 508
Extraordinary income, net of income
taxes -- -- -- -- 323
---------- ---------- ---------- ---------- -------
Income before cumulative effect of
change in accounting principle 1,046 (1,740) 753 845 831
Cumulative effect of change in
accounting principle -- -- -- -- 252
---------- ---------- ---------- ---------- -------
Net income (loss) $ 1,046 $ (1,740) $ 753 $ 845 $ 1,083
========== ========== ========== ========== =======
Net (loss) income per common share 0.48 (0.80) $0.35 $0.40(1) $NA
Weighted average number of common
shares outstanding 2,187,619 2,156,346 2,169,276 2,136,615 NA
(1) Historical net income per common share for fiscal 1995 is based on net
income from October 24, 1994 (the date of the Bank's conversion to stock
form) to March 31, 1995 was $0.17.
4
AT OR FOR THE YEAR ENDED MARCH 31,
----------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
KEY OPERATING RATIOS:
Return on average assets(1)(2) .25% (0.47)% 0.21% 0.25% 0.35%
Return on average equity(2)(3) 3.00 (5.00) 2.16 3.61 7.88
Interest rate spread(4) 3.14 2.90 2.57 2.74 2.38
Net interest margin(5) 3.27 3.04 2.85 2.91 2.43
Operating expenses to average
assets(2)(6) 2.80 3.22 2.48 2.38 2.46
Equity-to-assets(7) 8.12 8.03 9.45 9.46 4.59
Efficiency Ratio(2)(8) 76.85 96.78 85.87 81.08 87.32
Average interest-earning assets
to average Interest-
bearing liabilities 1.03x 1.04x 1.07x 1.05x 1.02x
ASSET QUALITY RATIOS:
Non-performing assets to total
assets(9) 1.58% 1.52% 0.97% 0.56% 1.24%
Non-accrual loans and accruing
loans 90 days or more past due
to total loans 2.47 3.11 3.85 3.39 6.73
Allowance for loan losses to
total loans 1.11 1.09 1.42 2.10 2.35
Allowance for loan losses to
non-performing loans 45.30 35.06 37.05 61.79 34.95
Allowance for loan losses to
non-accrual loans 56.34 68.38 59.29 70.17 57.56
Net loan charge-offs to average
loans outstanding .15 0.69 0.00 1.06 0.65
(1) Net income divided by average total assets.
(2) Excluding the SAIF assessment the return on average assets, return on
average equity, operating expenses to average assets and net interest
income to operating expenses for the fiscal year ended March 31, 1998 were
(0.022%), (2.29%), 2.77% and 1.02x, respectively.
(3) Net income divided by average total equity.
(4) Combined weighted average interest rate earned less combined weighted
average interest rate cost.
(5) Net interest income divided by average interest-earning assets.
(6) Non-interest expenses less loss on foreclosed real estate, divided by
average total assets.
(7) Total equity divided by assets at period end.
(8) Efficiency ratio represents operating expenses divided by the sum of net
interest income plus operating income.
(9) Non-performing assets consist of non-accrual loans, accruing loans 90 days
or more past due and property acquired in settlement of loans.
5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Carver's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loan, investment
and mortgage-backed securities portfolios and the interest paid on its
interest-bearing liabilities, such as deposits and borrowings. Carver has
undertaken a restructuring of its balance sheet and is now placing primary
emphasis on its whole loan portfolio through the origination of loans, as well
as the purchase of whole loans. As a result of this effort, the loan portfolio
has substantially increased as a percentage of total assets. In addition, Carver
is placing increased emphasis on the origination of consumer loans. Therefore,
Carver's future earnings will be derived from direct lending and purchase
activities replacing investing in securities. During fiscal 1998, Carver's net
income was also increased by the generation of non-interest income, such as loan
fees and service charges. In addition, net income is affected by the level of
provision for loan losses, as well as operating expenses.
The operations of the Bank and the entire thrift industry are
significantly affected by prevailing economic conditions, competition and the
monetary and fiscal policies of governmental agencies. Lending activities are
influenced by the demand for and supply of housing, competition among lenders,
the level of interest rates and the availability of funds. Deposit flow and
costs of funds are influenced by prevailing market rates of interest, primarily
on competing investments, account maturities, and the levels of personal income
and savings nationwide.
RECAPITALIZATION OF THE SAVINGS ASSOCIATION INSURANCE FUND (SAIF)
During the second quarter of fiscal 1997, Carver experienced a one
time pre-tax assessment of $1.6 million for recapitalization of the SAIF
pursuant to legislation which was signed into law in September of 1996. The
legislation to recapitalize the SAIF was anticipated by the industry and reduced
Carver Federal's deposit insurance premium from 23 basis points, on insured
deposits of approximately $248.4 million, to 6.5 basis points effective January
1, 1997.
As a result of the legislation, Carver's deposit insurance premium
decreased by $356,000 or 73.94% to $126,000 for the twelve month period ended
March 31, 1998 ("fiscal 1998") compared to $482,000 for the twelve month period
ended March 31, 1997 ("fiscal 1997").
RESTRUCTURING OF BALANCE SHEET
During fiscal 1998, Carver continued to pursue the strategy designed
by the Board of Directors in December 1996 to reallocate the Company's assets by
increasing loans and decreasing the Company's portfolio of investment securities
(the "Restructuring").
As a result of the Restructuring, the Company's loan portfolio
increased by 140% from $82.6 million at March 31, 1996, to $197.9 million at
March 31, 1997, an increase of $115.3 million. During fiscal 1998, the Company
continued to reallocate assets into loans. At March 31, 1998 the loan portfolio
totaled $275.0 million or 62.85% of total assets. Carver added approximately
$1.6 million to its provisions for loan losses during the fourth quarter of
fiscal 1997 and an additional $1.3 million during fiscal 1998 in order to
maintain the allowance for loan losses at an adequate level consistent with the
Bank's policies. At March 31, 1998, the allowance for loan losses as a
percentage of total loans was 1.11% as compared to 1.09% at March 31, 1997. See
"Comparison of Operating Results for the Years Ended March 31, 1998 and
1997--Provision for Loan Losses."
6
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of Carver'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's
interest-bearing liabilities consist primarily of shorter term deposit accounts,
Carver'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. Management has sought to reduce Carver's 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 loans for its portfolio, investment in
adjustable-rate and shorter-term mortgage-backed securities and the sale of all
long-term fixed-rate loans originated into the secondary market. Carver Federal
has also reduced interest rate risk through its origination and purchase of
primarily adjustable rate mortgage loans. During fiscal year 1998, loan
portfolio increased by $77.0 million, or 38.92%. The growth in the loan
portfolio was funded primarily by matched funding from FHLB advances and reverse
repurchase agreements. See "--Restructuring of Balance Sheet."
DISCUSSION OF MARKET RISK--INTEREST RATE SENSITIVITY ANALYSIS
As a financial institution, the Company'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
Company's assets and liabilities, and the market value of all interest-earning
assets, other than those which possess a short term to maturity. Since all of
the Company's interest-bearing liabilities and virtually all of the Company's
interest-earning assets are located at the Bank, virtually all of the Company's
interest rate risk exposure lies at the Bank level. As a result, all significant
interest rate risk management procedures are performed at the Bank level. Based
upon the Bank's nature of operations, the Bank is not subject to foreign
currency exchange or commodity price risk. The Bank does not own any trading
assets.
The Company seeks to manage its interest risk by monitoring and
controlling the variation in repricing intervals between its assets and
liabilities. To a lesser extent, the Company 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 rate-sensitive assets exceeds the amount of rate-sensitive
liabilities and is considered negative when the amount of interest rate
sensitive liabilities exceed the amount of 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, and 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 had a negative
one-year gap equal to 5.54% of total rate-sensitive assets at March 31, 1998, as
a result of which its net interest income could be adversely affected by rising
interest rates, and positively affected by falling interest rates.
7
The following table sets forth information regarding the projected
maturities, prepayments and repricing of the major rate-sensitive asset and
liability categories of Carver as of March 31, 1998. Maturity repricing dates
have been projected by applying the assumptions set forth below to contractual
maturity and repricing dates. The information presented in the following table
is derived from data incorporated in "Schedule CMR: Consolidated Maturity and
Rate," which is part of the Bank's quarterly reports filed with OTS. The
repricing and other assumptions are not necessarily representative of the Bank's
actual results. Classifications of items in the table below are different from
those presented in other tables and the financial statements and accompanying
notes included herein and do not reflect non-performing loans.
THREE OVER ONE
OR FOUR TO THROUGH OVER THREE OVER FIVE OVER
LESS TWELVE THREE THROUGH THROUGH TEN
MONTHS MONTHS MONTHS YEARS FIVE YEARS TEN YEARS YEARS TOTAL
- ------ ------ ------ ----- ---------- --------- ----- -----
(DOLLARS IN THOUSANDS)
RATE-SENSITIVE ASSETS:
Loans $79,737 $ 57,740 $ 46,742 $ 38,493 $ 32,995 $ 19,247 $274,954
Federal Funds Sold $ 3,000 -- -- -- -- -- 3,000
Investment Securities(1) -- -- -- -- -- -- --
Mortgage-Backed Securities -- 6,506 -- -- 11,585 101,432 119,523
Total 82,737 64,246 46,742 38,493 44,580 120,679 397,477
RATE-SENSITIVE LIABILITIES:
Deposits 30,238 46,731 57,728 38,486 60,477 41,234 274,894
Borrowings 27,700 64,320 31,000 373 -- 369 123,762
Other Borrowings -- -- -- -- 1,184 -- 1,184
Total 57,938 111,051 88,728 38,859 61,661 41,603 399,840
Interest Sensitivity Gap $24,799 $(46,805) $(41,986) $ (366) $(17,081) $ 79,076 $ (2,363)
Cumulative Interest Sensitivity Gap $24,799 $(22,006) $(63,992) $(64,358) $(81,439) $ (2,363) --
Ratio of Cumulative Gap to Total
Rate-Sensitive Assets 6.24% (5.54)% (16.10)% (16.19)% (20.49)% (0.59)%
(1) Includes securities available-for-sale.
The preceding table was prepared utilizing certain assumptions
regarding prepayment and decay rates as determined by the OTS for savings
associations nationwide as of December 31, 1995. While management does not
believe that these assumptions will be materially different from Carver's actual
experience, the actual interest rate sensitivity of the Bank's assets and
liabilities could vary significantly from the information set forth in the table
due to market and other factors. The following assumptions were used: (i)
adjustable-rate first mortgage loans will prepay at the rate of 6% per year; and
(ii) fixed-rate first mortgage loans will prepay annually as follows:
ANNUAL PREPAYMENT RATE
----------------------
5-YEAR
COUPON RATE 30-YEAR 15-YEAR BALLOON
- ----------- ------- ------- -------
6.50% 9.00% 8.00% 13.00%
7.00 9.00 9.00 16.00
7.50 11.00 11.00 19.00
8.00 13.00 14.00 25.00
8.50 16.00 -- --
9.00 20.00 -- --
9.50 25.00 -- --
10.00 28.00 -- --
In addition, it is assumed that fixed maturity deposits are not
withdrawn prior to maturity, transaction accounts will decay at a rate of 37.00%
in the first year and passbook accounts will decay at a rate of 17.00% in the
first year, and money market accounts will reflect a 79.00% decay rate in year
one.
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
8
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 which restrict changes in interest rates on a short-term basis and over
the life of the asset. In the event of a change in interest rates, prepayments
and early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. Additionally, an increased credit risk may
result as the ability of many borrowers to service their debt may decrease in
the event of an interest rate increase. Virtually all of the adjustable-rate
loans in Carver's portfolio contain conditions which restrict the periodic
change in interest rate.
The ratio of cumulative gap to total rate sensitivity assets was
negative 5.54% at March 31, 1998 compared to negative 9.95% at March 31, 1997.
Adjustable rate assets represented 65.96% of the Bank's total interest sensitive
assets at March 31, 1998.
NPV ANALYSIS. As part of its efforts to maximize net interest income
and manage the risks associated with changing interest rates, management uses
the "market value of portfolio equity" ("NPV") methodology which the OTS has
adopted as part of its capital regulations.
Under this methodology, interest rate risk exposure is assessed by
reviewing the estimated changes in Net Interest Income ("NII") and NPV which
would hypothetically occur if interest rates rapidly rise or fall all along the
yield curve. Projected values of NII and NPV at both higher and lower regulatory
defined rate scenarios are compared to base case values (no change in rates) to
determine the sensitivity to changing interest rates.
Presented below, as of March 31, 1998, is an analysis of the Bank's
interest rate risk ("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
information set forth below relates solely to the Bank; however, because
virtually all of the Company's interest rate risk exposure lies at the Bank
level, management believes the table below also accurately reflects an analysis
of the Company's IRR.
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
NET PORTFOLIO VALUE NPV AS % OF PV OF ASSETS
------------------- ------------------------
CHANGE IN RATE $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
- -------------- -------- -------- -------- --------- ------
+400 bp 38,137 (10,025) (21)% 8.85 (189) bp
+300 bp 42,534 (5,627) (12) 9.73 (101) bp
+200 bp 46,036 (2,125) (4) 10.41 (34) bp
+100 bp 48,128 (33) -- 10.78 4 bp
-- bp 48,161 10.74
(100) bp 48,634 473 +1 10.79 5 bp
(200) bp 50,044 1,882 +4 11.01 27 bp
(300) bp 51,695 3,534 +7 11.28 54 bp
(400) bp 54,299 6,138 +13 11.73 99 bp
3/31/98 12/31/97 3/31/97
------- -------- -------
RISK MEASURES: 200 BP RATE SHOCK
Pre-Shock NPV Ratio: NPV as % of PV of Assets 10.74% 9.43% 9.76%
Post-Shock NPV Ratio 10.41 9.26 7.36
Sensitivity Measure; Decline in NPV Ratio 34 bp 17 bp 240 bp
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs
9
respond to changes in market interest rates. In this regard, the NPV Table
presented assumes that the composition of the Company'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 the Company's
interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of changes
in market interest rates on the Company's net interest income and will differ
from actual results.
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to
Carver's average interest-earning assets and average interest-bearing
liabilities and reflects the average yield on assets and the average cost of
liabilities for the years indicated. Such yields and costs are derived by
dividing income or expense by the average balances of assets or liabilities,
respectively, for the periods shown. Average balances are derived from average
month-end balances, except for federal funds which are derived from daily
balances. Management does not believe that the use of average monthly balances
instead of average daily balances on all other accounts has caused any material
difference in the information presented.
The table also presents information for the years indicated with
respect to the difference between the weighted average yield earned on
interest-earning assets and the weighted average rate paid on interest-bearing
liabilities, or "interest rate spread," which savings institutions have
traditionally used as an indicator of profitability. Another indicator of an
institution's net interest income 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.
10
AT MARCH 31, YEAR ENDED MARCH 31,
------------ --------------------
1998 1998 1997
---- ---- ----
AVERAGE AVERAGE AVERAGE
YIELD AVERAGE YIELD AVERAGE YIELD
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
------- ---- ------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
ASSETS:
Loans(1) $274,954 7.54% $242,948 $ 18,311 7.54% $ 94,346 7,844 8.31%
Investment Securities(2) 5,795 7.04 12,117 671 5.54 85,040 4,742 5.25
Mortgage-Backed Securities(3) 119,523 6.35 130,927 8,523 6.51 156,454 9,979 6.38
Federal Funds Sold 3,000 5.50 5,735 323 5.63 5,202 282 5.42
-------- ---- -------- -------- ---- -------- ----- ----
Total Interest-earning assets 403,272 7.16% 391,727 27,828 7.10 341,042 22,847 6.70
Non Interest Earning Assets 34,186 23,746 25,453
-------- -------- -------
Total Assets $437,458 $415,473 $366,495
======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits
DDA $ 9,687 0.00% $ 8,625 $ 0 0.00% $ 4,774 $ -- $ --
Now 19,230 2.23 18,725 354 1.89 19,909 311 1.56
Savings and Clubs 145,448 2.50 144,466 3,601 2.49 142,410 3,542 2.49
Money Market Accounts 21,496 3.22 21,514 692 3.22 20,398 658 3.23
Certificate of deposits 79,033 5.24 76,990 3,949 5.13 74,583 3,844 5.15
Total deposits 274,894 3.24 270,320 8,596 3.18 262,074 8,355 3.19
Borrowed money 124,946 5.87% 108,970 6,423 5.89 66,403 4,128 6.22
-------- ---- -------- -------- ---- -------- ------ -----
Total interest-bearing Liabilities 399,840 4.06% 379,290 15,019 3.96 328,477 12,483 3.80
Non-interest-bearing Liabilities 2,083 1,310 3,239
-------- ------- --------
Total liabilities 401,923 380,600 331,716
Stockholders' equity 35,535 34,873 34,779
-------- ------- -------
Total liabilities and Stockholders'
equity $437,458 $415,473 $366,495
======== ======== ========
Net interest income $ 12,809 $10,364
======== =======
Interest rate spread 3.10% 3.14% 2.90%
==== ==== =====
Net interest margin 3.27% 3.04%
==== =====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.03x 1.04x
==== =====
YEAR ENDED MARCH 31,
--------------------
1996
----
AVERAGE
AVERAGE YIELD
BALANCE INTEREST COST
------- -------- ----
(DOLLARS IN THOUSANDS)
ASSETS:
Loans(1) $ 58,136 $ 4,800 8.26%
Investment Securities(2) 91,639 5,807 6.34
Mortgage-Backed Securities(3) 188,136 12,217 6.49
Federal Funds Sold 11,949 705 5.90
------- ------- ----
Total Interest-earning assets 349,860 23,529 6.73
Non Interest Earning Assets 13,977
--------
Total Assets $363,837
========
INTEREST-BEARING LIABILITIES:
Deposits
DDA $ 4,761 $ -- $ --
Now 15,539 314 2.02
Savings and Clubs 140,204 3,507 2.50
Money Market Accounts 18,770 599 3.19
Certificate of deposits 74,060 3,970 5.36
Total deposits 253,334 8,390 3.31
Borrowed money 73,253 5,204 7.10
-------- ------- ----
Total interest-bearing Liabilities 326,587 13,594 4.16
Non-interest-bearing Liabilities 2,230
--------
Total liabilities 328,817
Stockholders' equity 35,020
--------
Total liabilities and Stockholders'
equity $363,837
========
Net interest income $ 9,935
=======
Interest rate spread 2.57%
====
Net interest margin
2.85%
====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.07x
====
(1) Includes non-accrual loans
(2) Includes FHLB stock and fair value of investments available for sale of
$5.8 million at March 31, 1998.
(3) Includes fair value of mortgage-backed securities available for sale of
28.4 million at March 31, 1998.
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'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
(i) changes in volume (changes in volume multiplied by new rate), (ii) changes
in rates (change in rate multiplied by old volume), and (iii) total change.
Changes in rate/volume (changes in rate multiplied by the changes in volume) are
allocated proportionately between changes in rate and changes in volume.
YEAR ENDED MARCH 31,
--------------------
1998 VS. 1997 1997 VS. 1996
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------ ------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans $11,201 $(734) $10,468 $ 3,013 $ 31 $ 3,044
Investment securities(1) (4,040) (34) (4,074) (335) (730) (1,065)
Mortgage-backed securities(1) (1,674) 219 (1,455)
Securities -- -- -- (2,024) (214) (2,238)
Federal funds sold 30 11 41 (441) 18 (423)
------- ----- ------- ------- ----- -------
Total interest-earning
assets 5,517 (538) 4,979 213 (895) (682)
------- ----- ------- ------- ----- -------
Interest-bearing liabilities:
NOWs (22) 68 45 4 (7) (3)
Savings and Clubs 52 0 52 49 (14) 35
Money Market Accounts 36 (2) 34 66 (7) 59
Certificate of Deposits 123 (15) 109 (92) 36 (56)
------- ----- ------- ------- ----- -------
Total Deposits 189 51 239 27 8 35
Borrowed money 2,507 (212) 2,295 638 438 1,076
------- ----- ------- ------- ----- -------
Total interest-bearing
liabilities 2,696 (162) 2,534 665 446 1,111
------- ----- ------- ------- ----- -------
Net change in net interest income $ 2,821 $(376) $ 2,445 $ 878 $(449) $ 429
======= ===== ======= ======= ===== =======
(1) Includes securities available for sale.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND 1997
At March 31, 1998 total assets increased by $13.8 million, or 3.27% to
$437.5 million compared to $423.6 million at March 31, 1997. The increase in
total assets was primarily attributable to increases in cash and equivalents,
loans receivable net, and other assets which include accounts receivable, loan
clearing accounts, offset in part by decreases in securities available for sale
and mortgage-backed securities ("MBS") held to maturity. Securities held as
available for sale decreased by $55.5 million, or 66.14%, to $28.4 million at
March 31, 1998 compared to $83.9 million at March 31, 1997. The decrease was
primarily due to the sale of $49.0 million of mutual funds, the maturity of
investment securities, and the principal repayments on MBS securities held as
available for sale. The balance of this portfolio at the end of fiscal 1998
consisted solely of mortgage-backed securities held as available for sale.
Mortgage-backed securities held to maturity decreased by $19.7 million, or
17.8%, to $91.1 million at March 31, 1998, from $110.9 million at March 31,
1997, primarily due to principal repayments. Investment securities held to
maturity decreased by $1.7 million due to the maturation of such securities; at
March 31, 1998 the Bank held no securities in this category. Carver's loans
receivable at March 31, 1998 increased by $77.0 million or 38.92% to $275.0
million compared to $197.9 million at March 31, 1997. In fiscal 1998, Carver
Federal purchased $80.2 million of one- to four-
family mortgage loans. These shifts in the Company's balance sheet reflect the
ongoing Restructuring. See "Restructuring of Balance Sheet."
12
Carver's total liabilities increased by $12.3 million, or 3.16%, to
$401.9 million at March 31, 1998 compared to $389.6 million at March 31, 1997.
The increase was due to a $8.4 million or 3.16% increase in total deposits
coupled with a $3.8 million or 3.17% increase in total borrowings. At March 31,
1998, the Bank's Federal Home Loan Bank of New York ("FHLB") advances decreased
by $8.7 million, or 19.07%, to $36.7 million, compared to $45.4 million at March
31, 1997. At March 31, 1998 securities sold under agreements to repurchase
("reverse repurchases") increased $12.7 million or 17.06%, to $87.0 million
compared to $74.3 million at March 31, 1997. The Company reduced its FHLB
advances and increased reverse repurchases to reduce the cost of borrowings.
Carver used the additional borrowings to fund loan originations and loan
purchases. During fiscal 1998, deposits increased from $266.5 million to $274.9
million primarily due to interest credited to depositors.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
NET INCOME (LOSS)
The Company reported net income for the fiscal year ended March 31,
1998 of $1.0 million or $.48 per share, compared to a net loss of $1.7 million
or $.80 per share for the fiscal year ended March 31, 1997.
Earnings for fiscal 1997 were adversely affected by three unusual
events. During the second quarter of fiscal 1997, Carver experienced a one time
pre-tax assessment of $1.6 million for the recapitalization of the Savings
Association Insurance Fund ("SAIF") pursuant to legislation which was enacted in
September of 1996. During the fourth quarter of fiscal 1997, Carver experienced
a one time pre-tax charge of $1.0 million as a result of the disposition of
approximately $72 million of money market rate investment securities, or mutual
funds. Carver's operating results for the year were also impacted by increases
in net interest income, provision for loan losses, and non-interest expense.
INTEREST INCOME
Interest income increased by $5.0 million or 21.80% to $27.8 million
for the twelve months ended March 31, 1998 compared to $22.8 million for the
twelve months ended March 31, 1997. The increase in interest income was
primarily attributable to a $50.7 million or 14.86% increase in average balance
of interest earning assets to $391.7 million for the twelve months ended March
31, 1998 compared to $341.0 million for twelve months ended March 31, 1997,
coupled with a 40 basis point increase in the yield on average interest earning
assets to 7.10% the twelve months ended March 31, 1998 compared to 6.70% for the
same period last year.
The growth in total interest earning assets was concentrated interest
income received from loans. Interest income on loans increased by $10.5 million,
or 133.45%, to $18.3 million for the twelve months ended March 31, 1998 compared
to $7.8 million for the same period last year. The increase in interest income
from loans reflects a $148.8 million or 157.51% increase in the average balance
of loans to $243.0 million at March 31, 1998 compared to $94.3 million at March
31, 1997 was partially offset by a 77 basis point decrease from 8.31% to 7.54%
in the average yield on loans due to lower market rates of interest. Interest
income on mortgage-backed securities held to maturity and MBS available for sale
decreased by $1.5 million or 14.59% to $8.5 million for the twelve months ended
March 31, 1998 compared to $10.0 million for the same period last year
reflecting a decrease of $25.5 million in the average balance of total MBS and a
three basis point decrease in the average yield on MBS. Interest income on
investment securities decreased by approximately $4.1 million or 85.84% to
$671,000 for the twelve months ended March 31, 1998 compared to $4.4 million for
the same period last year. The decrease in interest income on investment
securities is primarily due to $72.9 million or 85.75% decrease in the average
balance of investment securities to $12.1 million for the twelve months ended
March 31, 1998 compared to $85.0 million for the same period last year. The
declines in the average balances of investment
13
securities and MBS reflect the Company's strategy to shift assets into higher
yielding loans.
INTEREST EXPENSE.
Total interest expense increased by $2.5 million or 20.32% to $15.0
million for the twelve months ended March 31, 1998 compared to $12.5 million for
the same period last year. The increase in interest expense reflects a $50.8
million or 15.47% increase in the average balance of interest bearing
liabilities coupled with a 16 basis point increase in the average cost of such
liabilities. This increase reflects the use of borrowings primarily to fund the
origination and purchase of loans.
Interest expense on deposits increased by $241,000 or 2.89% to $8.6
million for the twelve months ended March 31, 1998 compared to $8.4 million for
the same period last year primarily due to an $8.2 million or 3.15% increase in
the average balance of deposits to $270.3 million, offset in part by a 1 basis
point decrease in the cost of deposits.
Interest expense on borrowings increased by $2.3 million or 55.60% to
$6.4 million for the twelve months ended March 31, 1998 compared to $4.1 million
for the same period last year. The increase in interest expense on borrowings
reflects a $42.6 million or 64.10% increase in the average balance of borrowings
to $109.0 for the twelve months ended March 31, 1998 compared to $66.4 million
for the same period last year partially offset by a 33 basis point decrease in
the average cost of borrowings from 6.22% to 5.89%.
NET INTEREST INCOME.
Net interest income before provision for loan losses for the year
ended March 31, 1998, increased $2.4 million, or 23.59%, to $12.8 million
compared to $10.4 million for the same period last year. The increase was
primarily attributable to a 24 basis point increase in the Company's interest
rate spread for the twelve months ended March 31, 1998 to 3.14 % from 2.90%,
coupled with a $50.7 million increase in the balance of average interest earning
assets offset in part by a $50.8 million increase in the average balance of
interest bearing liabilities. The Company's net interest margin increased by 23
basis points to 3.27 % from 3.04%, however, average interest-earning assets to
interest-bearing liabilities decreased to 1.03x for the twelve months 1998, from
1.04x for the same period last year.
PROVISION FOR LOAN LOSSES.
The provision for loan losses decreased by $430,000 to $1.3 million,
for the year ended March 31, 1998, from $1.7 million for the year ended March
31, 1997. When determining the provision for loan losses, management assesses
the risk inherent in its loan portfolio based on the information available at
such time relating to trends in the local and national economy, trends in the
real estate market and the Company's level on non performing loans and assets
and net charge offs. Non performing loans increased from $6.4 million at March
31, 1997 to $6.8 million at March 31, 1998 and net charge-offs decreased from
$649,000 to $368,000 over the same period last year. The net effect of the
increased provision and the charge-offs for fiscal 1998 was an increase in the
allowance for loan losses from $2.2 million at March 31, 1997, to $3.1 million
at March 31, 1998. The allowance for loan losses equaled 1.11% of the gross loan
portfolio at March 31, 1998 compared 1.09% at March 31, 1997.
NON-INTEREST INCOME.
Non-interest income is composed of loan fees and service charges,
gains or (losses) from the sale of securities, and fee income for banking
services. Non-interest income increased by $2.2 million to $2.4 million for the
twelve month period ended March 31, 1998 compared to $113,000 the twelve month
period ended March 31, 1997. Non interest income for the period ended March 31,
1997 was reduced by approximately
14
$927,000 as the result of a loss on the sale of securities related to the
Restructuring. Non interest income increased by $1.3 million or 126.06% for the
twelve month period ended March 31, 1998 compared to the same period last year
before posting the loss on the sale of securities. The increase in non interest
income reflects a gain of $184,000 on the sale of securities held as available
for sale during the fourth quarter combined with an increase of $2.1 million in
other income which consist of fees for banking services and products.
NON-INTEREST EXPENSE.
Non interest expense for the twelve month period ended March 31, 1998
was $11.7 million. Non-interest expense for fiscal 1997, contained a one-time
pre-tax assessment of $1.6 million for the recapitalization of SAIF, pursuant to
the Funds Act. Excluding the SAIF assessment, total non-interest expense would
have been $10.2 million for fiscal 1997. Non interest expense increased by $1.5
million or 14.71% for the twelve month period ended March 31, 1998 compared to
the same period last year before posting the SAIF assessment. During the twelve
month period ended March 31, 1998 the Company continued to invest substantially
in improving its infrastructure. These investments encompassed upgrading
technology, increasing staff and expanding marketing efforts. These investments
increased operating expenses for the fiscal year 1998. Salaries and employee
benefits for fiscal year 1998 increased by $694,000, or 17.17%, to $4.7 million
from $4.0 million for fiscal 1997. This increase was primarily due to a general
increase in staff, incentive compensation and ESOP expense. Equipment expense
for fiscal 1998 increased by $167,000, or 15.35%, to $1.3 million from $1.1
million in fiscal 1997, reflecting the increased depreciation and maintenance
cost for new furniture, fixtures and computers for Carver's headquarters and
certain branches. Legal expenses increased by $214,000 or 136.54% to $371,000
for fiscal 1998 compared to $157,000 for fiscal 1997. Bank charges increased by
$74,000 or 21.67% to $415,000 for fiscal 1998 compared to $341,000 for fiscal
1997. These increases in non-interest expenses were offset in part by a $356,000
or 73.94% decrease in deposit insurance premiums to $135,000 for fiscal 1998
compared to $482,000 for fiscal 1997.
INCOME TAX EXPENSE.
Income tax expense totaled $1.2 million for fiscal year 1998, compared
to a benefit of $1.3 million for fiscal year 1997. The Company's effective tax
rates were 45.7% and 42.3% for the years then ended March 31, 1998 and 1997,
respectively.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND 1996
Carver's total assets increased by $56.0 million, or 15.23%, from
$367.6 million at March 31, 1996 to $423.6 million at March 31, 1997. The
increase in assets was primarily due to the restructuring of the investment and
loan portfolios and leveraging the Company's balance sheet. Carver's portfolio
of securities available for sale decreased by $30.5 million, or 26.68%, to $83.8
million at March 31, 1997, from $114.3 million at March 31, 1996. The reason for
this significant change in the portfolio was the sale of the Company's portfolio
of mutual funds (which was included in securities available for sale), in
accordance with the Company's restructuring program. Accordingly the balance of
this portfolio at year end consisted of mortgage-backed securities available for
sale. Mortgage-backed securities held to maturity decreased by $20.3 million, or
15.48%, to $110.8 million at March 31, 1997, from $131.1 million at March 31,
1996, primarily due to principal repayments. Investment securities held to
maturity decreased by $7.3 million, or 82.02%, to $1.6 million at March 31,
1997, from $8.9 million at March 31, 1996. This decrease in investment
securities was due primarily to the call back of certain bonds totaling $7.0
million. Carver's loans receivable increased to $197.9 million at March 31,
1997, as compared to $82.6 million at March 31, 1996. In fiscal year 1997,
Carver Federal purchased $83.0 million of one- to four-family mortgage loans.
See "Restructuring of Balance Sheet."
15
Carver's total liabilities increased by $56.8 million, or 17.07%, from
$332.8 million at March 31, 1996, to $389.6 million at March 31, 1997, as a
result of an increase in borrowings as well as increased deposits. At March 31,
1997, the Bank's FHLB advances were $45.4 million, an increase of $20.0 million,
or 78.74%, as compared to advances of $25.4 million at March 31, 1996.
Securities sold under agreements to repurchase increased $27.3 million, or
58.09%, to $74.3 million at March 31, 1997, from $47.0 million at March 31,
1996. Carver used the proceeds from the principal payments of securities to
decrease its borrowings and thereby reduce the cost of funds.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
NET INCOME (LOSS).
For fiscal 1997, the Company experienced a net loss of $1.7 million,
as compared to net income of $753,000 for the year ended March 31, 1996.
Earnings for fiscal 1997 were adversely affected by three unusual events. During
the second quarter of fiscal 1997, Carver experienced a one time pre-tax
assessment of $1.6 million for the recapitalization of the Savings Association
Insurance Fund ("SAIF") pursuant to legislation which was enacted in September
of 1996. During the fourth quarter of fiscal 1997, Carver experienced a one time
pre-tax charge of $1.0 million as a result of the disposition of approximately
$72 million of money market rate investment securities, or mutual funds. During
the fourth quarter of fiscal 1997, the Company added approximately $1.6 million
to its provision for loan losses. Carver's operating results for the year were
also impacted by an increase in net interest income and an increase in
non-interest expense.
NET INTEREST INCOME.
Net interest income before provision for loan losses for the year
ended March 31, 1997, increased $429,000, or 4.32%, to $10.3 million as compared
to $9.9 million for the year ended March 31, 1996 ("fiscal 1996"). Carver's
interest rate spread widened from 2.57% in fiscal 1996 to 2.90% in fiscal 1997,
and its interest margin increased from 2.85% in fiscal 1996, to 3.04% in fiscal
1997. These increases in interest rate spread and net interest margin resulted
in part from the decreased cost of deposits and borrowed money. These increases
also reflect the replacement of certain investment and mortgage-backed
securities with higher yielding loans. The ratio of the Company's average
interest-earning assets to interest-bearing liabilities decreased to 1.04x in
fiscal 1997, from 1.07x in fiscal 1996. The changes in this ratio primarily
reflects the increase in average interest earning assets.
INTEREST INCOME.
Carver's interest income for the fiscal year ended March 31, 1997,
decreased by $682,000, or 2.90%, to $22.8 million as compared to $23.5 million
for the fiscal year ended March 31, 1996. The decrease in interest income
resulted primarily from a 3 basis point decrease in the average yield on
interest-bearing assets, from 6.73% during fiscal year 1996, to 6.70% during
fiscal year 1997 and a decline of $8.8 million in the average balance of
interest-earning assets. The decline in average yield resulted from a lower
interest rate environment.
The decrease in interest income resulted in part from a $2.2 million,
or 18.31%, decrease in income from mortgage-backed securities, reflecting a
decrease of 11 basis points in the average yield to 6.38% in fiscal 1997 from
6.49% in fiscal 1996. The decrease in interest income also resulted in part from
a $1.1 million or an 18.33% decrease in interest income from investment
securities, primarily due to a decrease of 76 basis points in the average yield
to 5.58% during fiscal 1997 from 6.34% during fiscal 1996. A decline in the
general level of interest rates lead these assets, which are primarily
adjustable rate, to reprice to lower yields during fiscal 1997. The decline in
average yields resulted in a decline in interest income. The impact of these
declines in the average yields was offset in part by a shift in Carver's
interest earning assets. The shift was reflected in the declines in the average
balances of
16
investment securities and mortgage-backed securities which were offset by a
significant increase in the average balance of higher yielding mortgage loans.
In addition, the average yield on mortgage loans increased slightly from 8.26%
for fiscal 1996 to 8.31% during fiscal 1997.
INTEREST EXPENSE.
Total interest expense decreased by $1.1 million, or 8.18%, to $12.4
million for fiscal 1997, as compared to $13.5 million for fiscal 1996. The
decrease was primarily attributable to a decrease of 88 basis points in the
average cost of borrowings during the fiscal 1997 as well as a decrease in
average balance on borrowings, of $6.8 million, or 9.29%, to $66.4 million for
fiscal 1997, as compared to $73.2 million for fiscal 1996. The interest expense
on deposits for the year ended March 31, 1997, decreased nominally by $35,000,
or 0.42%, from $8.39 million for the year ended March 31, 1996 to $8.36 million
for the year ended March 31, 1997 despite an increase in average deposits of
$8.7 million, or 3.43% to $262.0 million for fiscal year 1997, as compared to
$253.3 million for fiscal 1996. The decrease in average balance was offset by a
12 basis point decrease in the average cost of deposits, from 3.31% for the year
ended March 31, 1996 to 3.19% for fiscal year 1997. The increase in deposits
costs is due principally to a decline in the average cost of certificate of
deposit accounts in the lower interest rate environment.
PROVISION FOR LOAN LOSSES.
The provision for loan losses increased by $1.6 million from $131,000,
for the year ended March 31, 1996, to $1.7 million for the year ended March 31,
1997. In addition, the decision to increase the provision reflects the increase
in non-performing loans from $3.3 million at March 31, 1996 to $6.4 million at
March 31, 1997, net charge-offs of $649,000 during fiscal 1997, compared to a
net recovery of $19,000 in fiscal 1996, and the increase in the loan portfolio
to $197.8 million at March 31, 1997 from $82.6 million at March 31, 1996. The
net effect of the increased provision and the charge-offs for fiscal 1997 was an
increase in the allowance for loan losses from $1.2 million at March 31, 1996,
to $2.2 million at March 31, 1997, and equaled 1.09% of the gross loan portfolio
compared to 1.42% at March 31, 1996. The decline in the ratio of allowances to
total loans is the result of the significant increase in gross loans at March
31, 1997. In determining its provision for loan losses, management establishes
specific loss allowances on identified problem loans and general loss allowance
on the remainder of the loan portfolio.
NON-INTEREST INCOME.
Non-interest income is composed of loan fees and service charges,
gains or (losses) from the sale of securities, and fee income for banking
services. Non-interest income for fiscal year 1997, decreased by $495,000, or
81.44%, to $113,000, from $608,000 for fiscal year 1996. The decrease was due to
loss of $1.0 million on the sale of Carver's mutual fund investments, as part of
the asset restructuring during fiscal 1997 substantially offset by increased
loan and fee services, charges, and other fees loan fee and service charge
income increased by $116,000 or 149.33% due a substantial increase in loan
obligations. Fee income for banking services increased by $315,000 or 59.53%,
primarily due to an increase in the fees charged for selected services and
income from automatic teller machines.
NON-INTEREST EXPENSE.
Non-interest expense increased by $2.7 million, or 30.37%, to $11.8
million for fiscal 1997, as compared to $9.1 million for fiscal year 1996. This
increase was primarily attributable to a one-time pre-tax assessment of $1.6
million for the recapitalization of SAIF, pursuant to the Funds Act. Excluding
the SAIF assessment, total non-interest expense would have been $10.2 million
for fiscal 1997. During the fiscal year 1997 Carver invested substantially in
improving its infrastructure. These investments encompassed upgrading
technology, increasing staff and expanding marketing
17
efforts. These investments increased operating expenses for the fiscal year
1997. Salaries and employee benefits for fiscal year 1997 increased by $562,000,
or 16.13%, to $4.0 million from $3.4 million for fiscal year 1996. This increase
was primarily due to a general increase in staff, incentive compensation and
ESOP expense. Equipment expense for fiscal 1997 increased by $403,000, or
58.72%, to $1.1 million from $686,000 in fiscal year 1996, reflecting the
increased depreciation and maintenance cost for new furniture, fixtures and
computers for Carver's new headquarters and certain branches. Net occupancy
expense for fiscal year 1997 increased by $136,000, or 13.92%, to $1.1 million
from $976,000 in fiscal year 1996. Increase in rent, cleaning expenses and
depreciation of leasehold expenses account for the increase in occupancy
expense. These increases in non-interest expenses were offset in part by
decreased deposit insurance premiums from $618,000 during fiscal 1996 to
$482,000 for fiscal 1997. This $137,000 or 22.9%, decrease was due to decreased
assessment rates which became effective as of the fourth quarter of fiscal 1997.
See "Impact of Recent Legislation--Recapitalization of the Savings Association
Insurance Fund SAIF." Legal expenses during fiscal year 1997, decreased by
$194,000, or 55.26%, to $157,000 from $351,000 during fiscal year 1996. The
decrease in legal cost was due mainly to capitalization of the costs incurred in
connection with the Reorganization of approximately $225,000. This amount is
being depreciated on a straight line basis over sixty months. Other non-interest
expense increased $314,000, or 16.33%, due to increases on a variety of
miscellaneous expense categories, including, among other items, travel and
expense, employee training and charitable contribution expenses.
INCOME TAX EXPENSE.
Income tax expense (benefit) for fiscal year 1997, was a benefit of
$1.2 million, compared to $606,000 for fiscal year 1996, due to the net loss for
fiscal 1977. The Company's effective tax rates were 42.3% and 44.59% for the
years then ended March 31, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Carver Federal's primary sources of funds are deposits, FHLB advances,
and proceeds from principal and interest payments on loans, mortgage-backed
securities. While maturities and scheduled amortization of loans and investments
are predictable sources of funds, deposit flow and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition.
The Bank is required to maintain an average daily balance of liquid
assets and short term liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings as defined by OTS regulation. The minimum
required liquidity and short-term liquidity ratio is 4%. The Bank's liquidity
ratios were 12.26% and 21.86% at March 31, 1998 and 1997, respectively.
The Bank's most liquid assets are cash and short-term investments. The
level of these assets are dependent on the Bank's operating, financing lending
and investing activities during any given period. At March 31,1998, and 1997,
assets qualifying for short-term liquidity, including cash and short-term
investments, totaled $21.5 million and $83.2 million, respectively.
The primary investment activity of the Bank is the origination and
purchase of loans and, to a lesser extent, purchase of investment and
mortgage-backed securities. During fiscal year 1998, Carver purchased $80.2
million in whole loan mortgages, $6.4 million in investment securities and
mortgage-backed securities, and sold $5.0 million in investment securities and
mortgage-backed securities. During fiscal year 1997 the Bank purchased $84.7
million of whole loan mortgages and originated $51.3 million mortgage and other
loans. During fiscal year 1997 no securities were purchased. During fiscal years
1998 and 1997, the Bank received $38.3 million and $27.5 million, respectively,
in principal payments. During fiscal year 1998 there was a cash flow of $2.0
million due to call back of government agency preferred stock.
18
At March 31, 1998, the Bank had outstanding loan commitments of $9.6
million. Certificates of deposit which are scheduled to mature in one year or
less from March 31, 1998 totaled $23.8 million. Management believes that a
significant percentage of such deposits will remain with the Bank.
THE YEAR 2000 PROBLEM
The Year 2000 Problem centers on the inability of computer systems to
recognize the year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial providers, the Company and its operations may be significantly
affected by the Year 2000 Problem due to the nature of financial information.
Software, hardware, and equipment both within and outside the Company's direct
control and with whom the Company electronically or operationally interfaces
(e.g. third party vendors providing data processing, information system
management, maintenance of computer systems and credit bureau information) are
likely to be affected. Furthermore, if computer systems are not adequately
changed to identify the year 2000, many computer applications could fail or
create erroneous results. As a result, many calculations which rely on the date
field information, such as interest, payment or due dates and other operating
functions, will generate results which could be significantly misstated, and the
Company could experience a temporary inability to process transactions, send
invoices or engage in similar normal business activities. In addition, under
certain circumstances, failure to adequately address the Year 2000 Problem could
adversely affect the viability of the Company's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Year
2000 Problem could result in a significant adverse impact on the Company's
products, services and competitive condition.
The OTS and the other federal banking regulators have issued
guidelines to be followed by insured depository institutions, such as the Bank,
to assure resolution of any Year 2000 problems. Any institution's failure to
address appropriately the Year 2000 Problem could result in supervisory action.
The Company recently received a "Satisfactory" rating in a review of
its Year 2000 Problem compliance by the OTS, which represents the highest
possible rating eligible to be received. The Company is currently scheduled to
begin testing on its loan and deposit systems beginning in July, 1998, and is
currently in the process of obtaining software modifications deemed necessary
for compliance in all other systems. The Company has initiated formal
communications with all of its significant suppliers to determine the extent to
which the Company is vulnerable to those third parties' failure to resolve their
own Year 2000 Problem. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 Problem will be
mitigated without causing a material adverse effect on the operations of the
Company. However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Problem could have an impact on the Company's
operations. At this time, management believes that any such impact and any
resulting costs will not be material.
Monitoring and managing the Year 2000 Problem will result in
additional direct and indirect costs to the Company. Direct costs include
potential charges by third party software vendors for product enhancements,
costs involved in testing software products for Year 2000 compliance and any
resulting costs for developing and implementing contingency plans for critical
software products which are not enhanced. Indirect costs will principally
consist of the time devoted by existing employees in monitoring software vendor
progress, testing enhanced software products and implementing any necessary
contingency plans. Such costs have not been material to date. The Company
believes that any such costs to be incurred in the future will not have a
material effect on its results of operations. Both direct and indirect costs of
addressing the Year 2000 Problem will be charged to earnings as incurred.
19
REGULATORY CAPITAL POSITION
The Bank must satisfy three minimum capital standards established by
the OTS. For a description of the OTS capital regulation, see "Regulation and
Supervision--Regulation of Savings Associations--Capital Requirements."
The Bank presently exceeds all capital requirements as currently
promulgated. At March 31, 1998, the Bank had tangible, core, and Tier 1 to
risk-weighted assets, and risk-based capital ratios of 6.90%, 6.91%, 6.93% and
16.00% respectively.
The following table reconciles the Bank's stockholders equity at March
31, 1998, under generally accepted accounting principles to regulatory capital
requirements:
REGULATORY CAPITAL REQUIREMENTS
-------------------------------
GAAP TANGIBLE TIER/CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
------- ------- ------- -------
(IN THOUSANDS)
Stockholders' Equity at March
31, 1998(1) $31,434 $31,434 $31,434 $31,434
Add:
Unrealized loss on securities
available for sale, net 13 13 13
General valuation allowances -- -- 1,522
Qualifying intangible assets -- 48 48
Deduct: -- -- --
Goodwill (1,246) (1,246) (1,246)
------- ------- -------
Excess of net deferred tax
assets -- -- (40)
Asset required to be deducted -- -- --
Regulatory capital 30,201 30,249 31,731
Minimum capital requirement 6,562 13,124 $15,856
------- ------- -------
Regulatory capital excess $23,639 $17,125 $15,875
======= ======= =======
(1) Reflects Bank only.
The Bank presently exceeds all capital requirements as currently
promulgated. At March 31, 1998, the Bank had tangible, core, and Tier 1 to
risk-weighted assets, and risk-based capital ratios of 6.90%, 6.91%, 6.93% and
16.00%, respectively.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and accompanying notes appearing elsewhere
herein have been prepared in accordance with generally accepted accounting
principles, 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's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a greater impact on
Carver'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.
IMPACT OF RECENT LEGISLATION
SAIF RECAPITALIZATION. For the period from January 1, through
September 30, 1996, there existed a disparity of 23 cents per $100 of deposits
in the minimum deposit insurance assessment rates applicable to deposits insured
by the Bank Insurance Fund ("BIF") and the higher assessment rates applicable to
deposits insured by the Savings Association Insurance Fund ("SAIF"). In response
to this disparity, on September 30, 1996 the Deposit Insurance Funds Act of 1996
(the "Funds Act") was enacted into law.
20
The Funds Act authorized the Federal Deposit Insurance Corporation ("FDIC") to
impose a special assessment on all financial institutions with SAIF-assessable
deposits in the amount necessary to recapitalize the SAIF. Pursuant to such
authority, the FDIC imposed a special assessment of 65.7 basis points per $100
of an institution's SAIF-assessable deposits held on March 31, 1995. The
Company's special SAIF assessment of $1.6 million was charged to expense in
September 1996 and paid in November 1996. In view of the recapitalization of the
SAIF, the FDIC reduced the assessment rates for SAIF-assessable deposits. For
the calendar year 1997, the SAIF assessment rates range from 0 to 27 basis
points, which is the same range of rates applicable to the BIF. Prior to the
SAIF recapitalization, all SAIF-insured institutions were subject to a minimum
assessment of 23 basis points. The Funds Act also expanded the assessment base
to include BIF-insured, as well as SAIF-insured, institutions to fund payments
on the bonds issued by the Financing Corporation ("FICO bonds") to recapitalize
the now defunct Federal Savings and Loan Insurance Corporation. In order to fund
such interest payments, a separate assessment of 1.3 basis points for
BIF-assessable deposits and 6.48 basis points for SAIF-assessable deposits
became effective on January 1, 1997. The Funds Act requires that, until December
31, 1999 or such earlier date on which the last savings association ceases to
exist, the rates of assessment for FICO bond payments imposed on BIF-assessable
deposits will be one-fifth of the rate imposed on SAIF-assessable deposits. As a
result of the lower overall assessment rates, the Company's non-interest expense
for the year ended March 31, 1998 was reduced by $137,000 compared to the same
period in 1997.
The Funds Act also provides for the merger of the BIF and SAIF on
January 1, 1999, with such merger being conditioned upon the prior elimination
of the thrift charter. The Funds Act required the Secretary of Treasury to
conduct a study of relevant factors with respect to the development of a common
charter for all insured depository institutions and the abolition of separate
charters for banks and thrifts and to report the Secretary's conclusions and the
findings to Congress. The Secretary of the Treasury has recommended that the
separate charter for thrifts be eliminated only if other legislation is adopted
that permits bank holding companies to engage in certain non-financial
activities. Absent legislation permitting such non-financial activity, the
Secretary of the Treasury recommended retention of the thrift charter. Other
proposed legislation has been introduced in Congress that would require thrift
institutions to convert to bank charters. The Secretary of the Treasury also
recommended that the BIF and the SAIF be merged irrespective of the elimination
of the thrift charter.
TAX BAD DEBT RESERVES. Federal tax law changes were enacted in August
1996 to eliminate the "thrift bad debt" method of calculating bad debt
deductions for tax years after 1995 and to require thrifts to recapture into
taxable income (over a six-year period) all bad debt reserves accumulated after
1987. Since the Bank's federal bad debt reserves approximated the 1987 base-year
amounts, this recapture requirement had no significant impact. The tax law
changes also provide that taxes associated with the recapture of pre-1988 bad
debt reserves would become payable under more limited circumstances than under
prior law. For example, such taxes would no longer be payable in the event that
the thrift charter is eliminated and the Bank is required to convert to a bank
charter.
Amendments to the New York state and New York City tax laws
redesignate the Bank's state and New York City bad debt reserves at December 31,
1995 as the base-year amount and also provide for future additions to each of
the base-year reserve using the percentage-of-taxable-income method. This change
eliminated the excess New York state and New York City reserves for which the
Company had recognized a deferred tax liability. Management does not expect
these changes to have a significant impact on the Bank. Taxes associated with
the recapture of the and New York City state base-year reserve would still
become payable under various circumstances, including conversion to a bank
charter or failure to meet various thrift definition tests.
21
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post-retirement Benefits," which provides
improved disclosures about pensions and other post-retirement benefits. The
disclosures will provide information that is more comparable, understandable and
concise, and that would better serve users' needs. This statement is effective
for fiscal years beginning after December 15, 1997. The adoption of this
statement is not anticipated to have a material impact on Carver's financial
position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities." This
statement also requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and those
instruments at fair value. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The adoption of this statement is
not anticipated to have a material impact on the financial position or results
of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
22
LETTERHEAD OF MITCHELL & TITUS LLP
To The Board of Directors and Stockholders
Carver Bancorp Inc.,
We have audited the accompanying consolidated statements of financial
condition of Carver Bancorp Inc., and subsidiaries (the "Company") as of March
31, 1998 and 1997 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three years
ended March 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the overall
consolidated 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 and subsidiaries as of March 31, 1998 and 1997, and the results of their
operations and cash flows for each of the years in the three years ended March
31, 1998 in conformity with generally accepted accounting principles.
MITCHELL & TITUS LLP
July 10, 1998
New York, New York
23
CARVER BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31,
---------------
1998 1997
---- ----
ASSETS
Cash and amounts due from depository institutions $ 12,120,071 $ 4,230,757
Federal funds sold 3,000,000 --
------------ -----------
Total cash and cash equivalents (Notes 1 and 19) 15,120,071 4,230,757
Securities available for sale (Notes 1, 3, 13 and 19) 28,407,505 83,892,617
Investment securities held to maturity, net
(estimated fair value of $1,673,000 in 1997
(Notes 1, 4, 13, 18 and 19) -- 1,675,181
Mortgage-backed securities held to maturity,
net (estimated fair value of $107,719,000
in 1997) (Notes 1, 5, 12, 13, 18 and 19) 91,115,861 110,852,668
Loans receivable, net (Notes 1, 6, 13 and 19) 274,954,337 197,917,673
Real estate owned, net (Note 1) 82,198 82,198
Property and equipment, net (Notes 1 and 8) 11,545,627 11,342,678
Federal Home Loan Bank of New York stock,
at cost (Note 13) 5,754,600 5,535,000
Accrued interest receivable, net (Notes 1, 9 and 19) 2,762,843 2,978,365
Excess of cost over net assets acquired,
net (Notes 1 and 10) 1,246,116 1,456,000
Other assets (Notes 14 and 16) 6,469,053 3,650,366
------------ ------------
Total assets $437,458,211 $423,613,503
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Notes 11 and 19) $274,894,232 $266,471,487
Securities sold under agreements to repurchase
(Notes 12 and 19) 87,020,000 74,335,000
Advances from Federal Home Loan Bank of New York
(Notes 13 and 19) 36,741,686 45,400,000
Other borrowed money (Notes 17 and 19) 1,183,858 1,365,990
Advance payments by borrowers for taxes and insurance 659,995 670,502
Other liabilities (Notes 14 and 16) 1,424,096 1,386,802
------------ -----------
Total liabilities 401,923,867 389,629,781
------------ -----------
Commitments and contingencies (Notes 18 and 19) -- --
STOCKHOLDERS' EQUITY: (Note 15) Preferred stock,
$0.01 par value per share; 1,000,000
authorized; none issued -- --
Common stock; $0.01 par value per share; 5,000,000
authorized; 2,314,275 issued and outstanding (Note 2) 23,144 23,144
Additional paid-in capital (Note 2) 21,418,897 21,410,167
Retained earningssubstantially restricted
(Notes 2 and 14) 15,289,632 14,359,060
Common stock acquired by Employee Stock Ownership
Plan ("ESOP") (Notes 2 and 17) (1,183,858) (1,365,990)
Unrealized (loss) on securities available
for sale, net of taxes (13,470) (442,659)
------------ ------------
Total stockholders' equity 35,534,345 33,983,722
------------ ------------
Total liabilities and stockholders' equity $437,458,211 $423,613,503
============ ============
See Notes to Consolidated Financial Statements
24
CARVER BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
---- ---- ----
INTEREST INCOME:
Loans (Note 1) $18,311,042 $ 7,843,822 $ 4,800,482
Mortgage-backed securities 8,522,922 9,978,660 12,217,281
Debt and equity securities 323,243 4,416,362 5,415,806
Other interest-earning assets 670,509 607,903 1,095,336
----------- ----------- -----------
Total interest income 27,827,716 22,846,747 23,528,905
----------- ----------- -----------
INTEREST EXPENSE:
Deposits (Note 11) 8,596,358 8,355,168 8,390,201
Advances and other borrowed money 6,422,666 4,127,743 5,204,068
----------- ----------- -----------
Total interest expense 15,019,024 12,482,911 13,594,269
----------- ----------- -----------
Net interest income 12,808,692 10,363,836 9,934,636
Provision for loan losses (Notes 1 and 6) 1,259,531 1,689,508 130,892
----------- ----------- -----------
Net interest income after
provision for loan losses 11,549,161 8,674,328 9,803,744
----------- ----------- -----------
NON-INTEREST INCOME:
Loan fees and service charges 559,960 194,689 78,084
Gain (loss) on sale of securities
held for sale (Notes 4 and 5) 188,483 (927,093) --
Other 1,603,096 845,287 529,873
----------- ----------- -----------
Total non-interest income 2,351,539 112,883 607,957
----------- ----------- -----------
NON-INTEREST EXPENSES:
Salaries and employee benefits
(Notes 16 and 17) 4,739,069 4,044,718 3,482,928
Net occupancy expense (Notes 1 and 18) 1,118,467 1,111,602 975,795
Equipment (Note 1) 1,255,301 1,088,258 685,657
Loss on foreclosed real estate (Note 1) -- 37,995 76,582
Advertising 289,061 172,795 168,084
Federal deposit insurance premium 125,506 481,646 618,169
Amortization of intangibles (Note 1) 209,892 213,073 229,898
Legal expenses 371,430 157,023 350,921
Bank charges 415,223 341,272 308,391
Security service 290,431 286,036 234,856
SAIF assessment -- 1,632,290 --
Other 2,836,568 2,235,249 1,921,462
----------- ----------- -----------
Total non-interest expenses 11,650,948 11,801,957 9,052,743
----------- ----------- -----------
Income (loss) before income taxes 2,249,752 (3,014,746) 1,358,958
Income taxes (Notes 1 and 14) 1,203,466 (1,275,078) 605,874
----------- ----------- -----------
Net income (loss) $ 1,046,286 $(1,739,668) $ 753,084
=========== =========== ===========
Net income (loss) per common share $ 0.48 $ (0.80) $ 0.35
=========== =========== ===========
Weighted average number of
shares outstanding (Note 1) 2,187,619 2,169,276 2,156,346
See Notes to Consolidated Financial Statements
25
CARVER BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
RETAINED COMMON (LOSS) ON
ADDITIONAL EARNINGS STOCK SECURITIES
COMMON PAID-IN SUBSTANTIALLY ACQUIRED AVAILABLE
STOCK CAPITAL RESTRICTED BY ESOP FOR SALE NET TOTAL
----- ------- ---------- ------- ------------ -----
Balance--March 31, 1995 $23,144 $21,465,072 $15,345,644 $(1,730,254) $ (302,455) $34,801,161
Net income for the
year ended
March 31, 1996 -- -- 753,084 -- -- 753,084
Allocation of ESOP stock -- (28,837) -- 182,132 -- 153,295
Increase in unrealized
(loss) in securities
available for sale, net -- -- -- -- (942,759) (942,759)
------- ----------- ----------- ----------- ----------- -----------
BalanceMarch 31, 1996 23,144 21,436,235 16,098,728 (1,548,122) (1,245,204) 34,764,781
Net loss for the
year ended
March 31, 1997 -- -- (1,739,668) -- -- (1,739,668)
------- ----------- ----------- ----------- ----------- -----------
Allocation of ESOP stock -- (26,068) -- 182,132 -- 156,064
Decrease in unrealized,
loss in securities
available for sale, net -- -- -- -- 802,545 802,545
------- ----------- ----------- ----------- ----------- -----------
BalanceMarch 31, 1997 23,144 21,410,167 14,359,060 (1,365,990) (442,659) 33,983,722
------- ----------- ----------- ----------- ----------- -----------
Net Income for the
year ended March 31, 1998 -- -- 1,046,286 -- -- 1,046,286
Allocation of ESOP Stock -- 58,566 182,132 -- 240,698
Dividends paid -- (115,714) (115,714)
Options exercised (49,836) -- -- -- (49,836)
Decrease in unrealized,
loss in Securities
available for sale, net -- -- -- -- 429,189 429,189
------- ----------- ----------- ----------- ----------- -----------
BalanceMarch 31, 1998 $23,144 $21,418,897 $15,289,632 $(1,183,858) $ (13,470) $35,534,345
======= =========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements
26
CARVER BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ 1,046,286 $ (1,739,668) $ 753,084
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization 695,192 664,750 301,918
Amortization of intangibles 209,892 213,082 229,888
Other amortization and accretion, net 402,662 1,143,308 651,014
Provision for loan losses 1,259,531 1,689,508 130,892
Gain from sale of real estate owned -- (26,229) --
Proceeds from sale of loans 1,459,491 -- 1,948,143
Net loss on sale of securities available for sale (188,483) 927,093 --
Deferred income taxes 58,555 (387,456) (380,541)
Allocation of ESOP stock 240,698 156,064 153,295
(Increase) decrease in accrued interest receivable 215,522 (290,166) 19,310
Increase (decrease) in refundable income taxes -- (286,000) 238,157
(Increase) decrease in other assets 2,818,687 (1,493,435) (72,455)
Increase (decrease) in other liabilities 37,294 (510,154) 731,784
------------ ------------ ------------
Net cash provided by operating activities 8,255,327 60,697 4,704,489
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments on investments
held to maturity 194,476 311,894 96,335
Principal repayments on securities available for sale 5,061,181 5,357,790 2,965,441
Purchases of securities available for sale (17,000,000) (57,508,308) --
Proceeds from sales and call of
securities held for sale 55,485,112 84,052,091 9,000,000
Purchase of investment securities held to maturity (1,946,326) (50,000) --
Proceeds from maturities and calls
of investment securities held to maturity 8,480,705 7,000,000
Principal repayment of mortgage-backed
securities held to maturity 19,313,831 19,302,028 23,663,432
Purchase of loans (68,153,900) (84,708,587) (26,911,379)
Net change in loans receivable (8,882,764) (32,265,562) (9,357,887)
Proceeds from sale of real estate owned 0 258,292 --
Additions to premises and equipment (897,030) (2,050,447) (5,930,518)
Purchase) Federal Home Loan Bank stock (219,600) (2,415,000) --
------------ ------------ ------------
Net cash (used in) provided by investing activities (8,564,315) (62,715,809) (6,474,576)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 8,422,745 9,519,604 8,505,919
Net increase (decrease) in short-term borrowings (942,404) 58,335,000 (19,188,000)
Proceeds of long-term borrowings 12,685,000 -- 11,000,000
Repayment of long-term borrowings (45,400,000) (11,000,000) --
Advances from Federal Home Loan of New York 36,741,314 -- --
Repayment of other borrowed money (182,132) (182,132) --
Dividends Paid (115,714) -- --
Increase (Decrease) in advance
payments by borrowers for taxes and insurance (10,507) 187,447 (339,687)
------------ ------------ ------------
Net cash provided by (used in)
financing activities (11,198,302) 56,859,919 (21,768)
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents 10,889,314 (5,795,193) (1,791,855)
Cash and cash equivalents--beginning 4,230,757 10,025,950 11,817,805
------------ ------------ ------------
Cash and cash equivalents--ending $ 15,120,071 $ 4,230,757 $ 10,025,950
============ ============ ============
Supplemental disclosure of non-cash activities:
Transfers of mortgage-backed securities $ -- $ -- $ 25,891,771
============ =========== =============
Unrealized Gain (loss) on securities
available for sale:
Unrealized Gain (loss) (25,417) 835,206 (1,778,783)
Deferred income taxes 11,947 (397,547) 836,033
------------ ------------ ------------
$ 13,470 $ 442,659 $ (942,760)
============ ============ ============
Loans receivable transferred to
real estate owned $ -- $ 32,729 $ 449,197
============ ============ ============
Supplemental disclosure of cash
flow information:
Cash paid for:
Interest $ 15,019,024 $ 12,361,162 $ 13,344,140
============ ============ ============
Federal, state and city income taxes $ 515,457 $ 286,000 $ --
============ ============ ============
See Notes to Consolidated Financial Statements
27
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Carver Bancorp, Inc. ("Carver" or the "Holding Company") is a bank holding
company that was incorporated in May 1996 and whose principal wholly owned
subsidiary is Carver Federal Savings Bank (the "Bank"). CFSB Realty Corp. and
CFSB Credit Corp. are wholly owned subsidiaries of the Bank. 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, Carver Federal Savings Bank converted from mutual
stock form and issued 2,314,375 shares of its common stock, par value $0.01 per
share. In connection with an agreement and plan of reorganization whereby the
Bank would become a wholly owned subsidiary of Carver, the Bank incorporated
Carver on May 9, 1996 under the General Corporation Law of the State of
Delaware. Pursuant to the Reorganization, each outstanding share of the
outstanding common stock of the Bank was converted on a one-to-one basis for
Carver's common stock, except for 100 shares with regard to which a stockholder
of the Bank exercised dissenters' rights of appraisal. Accordingly, 2,314,275
shares of Carver's common stock are presently issued and outstanding.
NATURE OF OPERATIONS
Carver's banking subsidiary's principal business consists of attracting
passbook and other savings accounts through its branch offices and investing
those funds in mortgage loans and other investments permitted federal savings
banks. Carver's banking subsidiary has seven branches located throughout the
City of New York that primarily serves the communities in which they operate.
BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Carver, the
Bank and its wholly owned subsidiaries, 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
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
consolidated statement of financial condition and revenues and expenses for the
period then ended. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
changes in the near-term relate to prepayment assumptions on mortgage-backed
securities, the determination of the allowance for loan losses and the valuation
of real estate owned.
Management believes that prepayment assumptions on mortgage-backed
securities are appropriate, the allowance for loan losses is adequate and real
estate owned is properly valued. While management uses available information to
recognize losses on loans and real estate owned, future additions to the
allowance for loan losses or future write downs of real estate owned may be
necessary based on changes in economic conditions in the areas where Carver had
extended mortgages and other credit instruments.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Carver's allowance for loan losses and
real estate owned
28
valuations. Such agencies may require Carver to recognize additions to the
allowance for loan losses or additional write downs of real estate owned based
on their judgments about information available to them at the time of their
examination.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and amounts due from depository
institutions and federal funds sold. Generally, federal funds sold are sold for
one-day periods.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
When purchased, securities are classified in either the investments held to
maturity portfolio or the securities available for sale portfolio. Securities
can be classified as held to maturity and carried at amortized cost only if the
reporting entity has a positive intent and ability to hold those securities to
maturity. If not classified as held to maturity, such securities must be
classified as securities available for sale. 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 retained earnings.
Investment and mortgage-backed 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 on the specific identification method.
LOANS RECEIVABLE
Loans receivable are carried at unpaid principal balances plus unamortized
premiums, less the allowance for loan losses and deferred loan fees and
discounts.
Carver defers loan origination fees and certain direct loan origination
costs and accretes such amounts as an adjustment of yield over the contractual
lives of the related loans by use of the interest method. Premiums and discounts
on loans purchased are amortized and accreted, respectively, as an adjustment of
yield over the contractual lives of the related loans by use of the interest
method.
Loans are placed on non-accrual status when they are past due three months
or more as to contractual obligations. When a loan is placed on non-accrual
status, any interest accrued but not received is reversed against interest
income. A non-accrual loan is restored to accrual status when principal and
interest payments become less than three months past due.
A loan is considered to be impaired, as defined by FAS No. 114, "Accounting
by Creditors for Impairment of a Loan," when it is probable that Carver will be
unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement. Carver tests loans covered under FAS
No. 114 for impairment if they are on nonaccrual status or have been
restructured. Consumer credit nonaccrual 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 FAS No.
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 the adequacy of
the reserve for credit losses. Impairment reserves are not needed when interest
payments have been applied to reduce principal, or when credit losses have been
recorded so that the recorded investment in an impaired loan is less than the
loan valuation.
29
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level considered adequate
to absorb future loan losses. Management, in determining the allowance for loan
losses, considers the risks inherent in its loan portfolio and changes in the
nature and volume of its loan activities, along with the general economic and
real estate market conditions.
Carver 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.
CONCENTRATION OF RISK
The Bank's principle lending activities are concentrated in loans secured
by real estate a substantial portion of which is located in the State of New
York, and the State of California. See "Purchases of Loans."
PREMISES AND EQUIPMENT
Premises and equipment are comprised of land and construction in progress,
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 50 years
Furnishings and equipment 3 to 10 years
Leasehold improvements The lesser of useful life or remaining term
of lease
Significant renewals and betterments are charged to the property and
equipment account. Maintenance and repairs are charged to expense in the year
incurred.
REAL ESTATE OWNED
Real estate acquired by foreclosure or deed in lieu of foreclosure is
recorded at the lower of cost or fair value at the date of acquisition and
thereafter carried at the lower of cost or fair value less estimated selling
costs. The amounts ultimately recoverable from real estate owned could differ
from the net carrying value of these properties because of economic conditions
and the current softness in the local real estate market.
Costs incurred to improve properties or get them ready for sale are
capitalized. Revenues and expenses related to the holding and operating of
properties are recognized in operations as earned or incurred. Gain or loss on
sale of properties is recognized as incurred.
EXCESS OF COST OVER NET ASSETS ACQUIRED
In connection with the acquisition of two branches, core deposit
premiums paid and other capitalized acquisition costs are being amortized to
expense over periods from five to fifteen years using the straight-line method.
30
INTEREST-RATE RISK
The Bank is principally engaged in the business of attracting deposits
from the general public and using these deposits, together with borrowings and
other funds, to originate loans secured by real estate and to purchase
investment and mortgage-backed securities. The potential for interest-rate risk
exists as a result of the shorter duration of interest-sensitive liabilities
compared to the generally longer duration of interest-sensitive assets. In a
rising rate environment, liabilities will reprice faster than assets, thereby
reducing the market value of long-term assets and net interest income. For this
reason, management regularly monitors the maturity structure of the assets and
liabilities in order to measure its level of interest-rate risk and plan for
future volatility.
INCOME TAXES
Federal, state and city income taxes have been provided on the basis of
reported income. The amounts reflected on the tax returns differ from these
provisions due principally to temporary differences in the treatment of certain
items of income and expense for financial statement and income tax reporting
purposes.
Deferred income taxes in the consolidated statement of condition are
adjusted each year to reflect the cumulative taxable and deductible temporary
differences and net operating loss and tax credit carryforwards at the then
existing income tax rates.
NET INCOME PER COMMON SHARE
Net income per common share for each of the years in the three years
ended March 31, 1998 is based on net income for the entire year dividend by
weighted average shares outstanding during the year. For the purpose of these
calculations, unreleased ESOP shares are not considered to be outstanding.
NOTE 2. CONVERSION TO STOCK FORM OF OWNERSHIP AND REORGANIZATION INTO A HOLDING
COMPANY
On October 24, 1994, the Bank issued an initial offering of 2,314,375
shares of common stock (par value $0.01) at a price of $10 per share resulting
in net proceeds of $21,519,000. As part of the initial public offering and in
order to grant priority to eligible depositors, 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 $4,884,000, and $5,763,000 at March 31, 1998 and 1997,
respectively. On October 17, 1996, the Bank completed a reorganization into a
holding company structure (the "Reorganization") and became the wholly-owned
subsidiary of Carver Bancorp, Inc., a savings and loan 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 Company's common stock remain outstanding.
The Bank's shareholder approved the Reorganization at the Bank's annual meeting
of shareholders held on July 29, 1996. As a result of the Reorganization, the
Bank will not be 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.
31
NOTE 3. SECURITIES AVAILABLE FOR SALE
MARCH 31,1998
-------------
GROSS UNREALIZED
CARRYING ---------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
----- ----- ------ ----------
Mortgage--backed securities $28,407,505 $-- $ 25,417 $28,382,089
Interest rate agreement for
a notional amount of
$5,000,000 0 -- -- 0
----------- --- -------- -----------
$28,407,505 -- $ 25,417 $28,382,089
=========== === ======== ===========
MARCH 31,1997
-------------
GROSS UNREALIZED
CARRYING ---------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
----- ----- ------ ----------
Mortgage--backed securities $33,469,963 $-- $845,206 $32,624,757
Equity securities:
Mutual funds 49,108,306 -- -- 49,108,306
Common and preferred
stock 2,049,898 -- -- 2,048,898
Interest rate agreement
for a notional amount
of $5,000,000. 29,750 --
Interest rate agreement
for a notional amount
of $20,000,000. 79,906 -- 79,906
----------- --- -------- -----------
$84,737,823 $ $845,206 $83,892,617
=========== === ======== ===========
Proceeds from sales of investment securities held for sale during the
year ended March 31, 1998 were $5,188,483, resulting in gross gains of $188,000.
There were no sales of investment securities held for sale during the years
ended March 31, 1997 and 1996.
32
NOTE 5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY, NET
MARCH 31, 1998
--------------
PRINCIPAL UNAMORTIZED UNEARNED CARRYING
BALANCE PREMIUMS DISCOUNTS VALUE
------- -------- --------- -----
Government National Mortgage
Association $ 8,918,901 $ 0 $ 64,260 $ 8,854,642
Federal Home Loan Mortgage
Corporation 35,141,886 872,418 112,803 35,901,501
Federal National Mortgage
Association 36,264,031 529,740 109,146 36,684,625
Small Business Administration 1,782,199 -- 11,847 1,770,352
Collateralized mortgage
obligations:
Resolution Trust Corporation 6,478,542 85,901 -- 6,564,443
Federal Home Loan Mortgage
Corporation 1,340,298 -- -- 1,340,298
Others 629,118 -- -- --
----------- ---------- -------- -----------
$89,925,857 $1,488,059 $298,056 $91,115,861
=========== ========== ======== ===========
MARCH 31, 1997
--------------
PRINCIPAL UNAMORTIZED UNEARNED CARRYING
BALANCE PREMIUMS DISCOUNTS VALUE
------- -------- --------- -----
Government National Mortgage
Association $ 11,797,496 $ 40 $108,430 $ 11,689,106
Federal Home Loan Mortgage
Corporation 43,789,880 1,132,946 154,798 44,768,028
Federal National Mortgage
Association 41,007,256 603,316 144,713 41,465,859
Small Business
Administration 2,263,969 -- 15,251 2,248,718
Collateralized mortgage
obligations:
Resolution Trust
Corporation 8,240,457 113,289 -- 8,353,746
Federal Home Loan
Mortgage Corporation 1,690,298 -- -- 1,690,298
Others 629,118 7,795 -- 636,913
------------ ---------- -------- ------------
$109,418,474 $1,857,386 $423,192 $110,852,668
============ ========== ======== ============
A summary of gross unrealized gains and losses and estimated fair value
follows:
33
MARCH 31, 1998
--------------
CARRYING GROSS UNREALIZED ESIMATED
VALUE GAINS LOSSES FAIR VALUE
----- ----- ------ ----------
Government National Mortgage
Association $ 8,854,642 $ -- $ 39,022 $ 88,156,620
Federal Home Loan Mortgage
Corporation 35,901,501 -- 585,759 35,315,741
Federal National Mortgage
Association 36,684,625 -- 206,223 36,478,402
Small Business
Administration 1,770,352 40,744 -- 1,811,096
Collateralized mortgage
obligations:
Resolution Trust
Corporation 1,340,298 116,838 1,329,408
Federal Home Loan
Mortgage Corporation $ 6,564,443 $ -- $ 10,890 $ 6,447,605
----------- ------- -------- -----------
$91,115,861 $40,744 $958,732 $90,197,873
=========== ======= ======== ===========
MARCH 31, 1997
--------------
CARRYING GROSS UNREALIZED ESIMATED
VALUE GAINS LOSSES FAIR VALUE
----- ----- ------ ----------
Government National Mortgage
Association $ 11,689,106 $149,141 $ 475,567 $ 11,362,680
Federal Home Loan Mortgage
Corporation 44,768,028 -- 937,810 43,830,218
Federal National Mortgage
Association 41,465,859 -- 1,480,513 39,985,346
Small Business
Administration 2,248,718 38,806 -- 2,287,524
Collateralized mortgage
obligations:
Resolution Trust Corporation 8,353,746 268,352 8,085,394
Federal Home Loan Mortgage
Corporation 1,690,298 -- 29,581 1,660,717
Others 636,913 -- 7,795 629,118
------------ --------- ----------- -------------
$110,852,668 $187,947 $3,199,618 $107,840,997
============ ========= =========== =============
The following is a schedule of final maturities as of March 31,1998:
CARRYING ESTIMATED
VALUE FAIR VALUE
----- ----------
(IN THOUSANDS)
After one through five years $19,501 $19,428
After five through ten years 71,615 70,770
------- -------
$91,116 $90,198
======= =======
There were no sales of mortgage-backed securities held to maturity
during the years ended March 31,1998, 1997 and 1996.
34
NOTE 6. LOANS RECEIVABLE, NET
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
---- ---- ----
Real estate mortgage:
One- to four- family $188,761,350 $139,961,350 $59,466,442
Multi-family 49,289,001 19,935,991 2,490,355
Non-residential 12,789,230 22,415,427 11,138,426
Equity and second mortgages 443,907 586,300 364,085
------------ ------------ -----------
251,283,488 182,899,068 73,459,308
------------ ------------ -----------
Agency for International Development -- -- 9,441
------------ ------------ -----------
Real estate construction 15,993,381 14,386,137 6,965,301
------------ ------------ -----------
Commercial loans 1,442,158 3,192,251 1,090,941
------------ ------------ -----------
Consumer:
Passbook or certificate 997,804 954,635 1,011,371
Student education 174,313 974,892 1,094,351
Other 12,478,147 3,600,859 931,319
------------ ------------ -----------
13,650,264 5,530,386 3,037,041
------------ ------------ -----------
Total loans 282,369,290 206,007,842 84,562,032
------------ ------------ -----------
Add: Premium 1,555,397 1,804,938 882,138
Less: Loans in process 4,752,246 6,854,591 1,406,150
Allowance for loan losses 3,138,000 2,245,746 1,205,496
Deferred loan fees and discounts 1,080,104 794,770 224,459
------------ ------------ -----------
(7,414,953) (9,895,107) (2,836,105)
------------ ------------ -----------
$274,954,337 $197,917,673 $82,608,065
============ ============ ===========
The following is an analysis of the allowance for loan losses:
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
---- ---- ----
Balance--beginning $2,245,746 $1,204,496 $1,074,604
Provision charged to operations 1,259,532 1,698,508 130,892
Recoveries of amounts previously charged off -- 49,940 --
Loans charged off (367,278) (699,198) --
---------- ---------- ----------
Balance--ending $3,138,000 $2,245,746 $1,205,496
========== ========== ==========
Non-accrual loans consist of loans for which the accrual of interest has
been discounted as a result of such loans becoming three months 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
service their loans under the original contractual terms. Such loans are
performing in accordance with their restructured terms. The balances of
non-accrual and restructured loans and their impact in interest income are as
follows:
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Non-accrual loans $5,568 $2,872 $2,034
Restructured loans 807 413 --
------ ------ ------
$6,375 $3,285 $2,034
====== ====== ======
35
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Interest income which would have been recorded
had loans performed in accordance with
original contracts $762 $393 $138
Interest income received 285 147 26
---- ---- ----
Interest income lost 477 246 $112
==== ==== ====
At March 31, 1998, loans to officers totaled approximately $850,000. In
addition, the Bank carried two loans to former officers totaling approximately
$244,000 one of which for $122,000 was originated during fiscal 1998.
The following is a summary of loans to the Bank's directors and officers
(and to any associates of such persons), exclusive of loans to any such person
which in aggregate did not exceed $60,000:
YEAR ENDED MARCH 31,
--------------------
1998 1997
---- ----
(IN THOUSANDS)
Balance--beginning $ 649,607 $428,429
Loans originated 464,488 235,200
Other (243,789)
Repayments (20,111) (14,022)
--------- --------
Balance--ending $ 850,195 $649,607
========= ========
NOTE 11. DEPOSITS
MARCH 31,
---------
1998 1997
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT PERCENT RATE AMOUNT PERCENT
---- ------ ------- ---- ------ -------
(DOLLARS IN THOUSANDS)
DEMAND:
Interest bearing 2.23% $19,230 6.99% 1.89% $ 18,579 6.97%
Non-interest-bearing 0.00 9,687 3.52 0.00 7,677 2.88
---- ----- ---- ---- ----- ----
1.48 28,917 10.52 1.34 26,256 9.85
---- ------ ----- ---- ------ ----
Savings and club 2.50 145,448 52.93 2.50 142,953 53.65
Money Management 3.22 21,496 7.82 3.15 21,078 7.91
Certificates of Deposit 5.24 79,033 28.74 5.18 76,184 28.59
---- ------ ----- ---- ------ -----
3.46 246,072 89.48 3.41 240,215 90.15
---- ------- ----- ---- ------- -----
3.24% $274,894 100.00% 3.28% $266,471 100.00%
==== ======== ====== ==== ======== ======
The scheduled maturities of certificates of deposits are as follows:
MARCH 31,
1998 1997
---- ----
(IN THOUSANDS)
One year or less $23,765 $36,028
After one year to three years 38,605 25,639
After three years to five years 29 14,447
After five years 16,634 71
------- -------
$79,033 $76,185
======= =======
The aggregate amount of certificates of deposit with minimum
denominations of $100,000 or more was approximately $11,625,000 and $9,430,000
at March 31,1998 and 1997, respectively.
36
Interest expense on deposits consists of the following:
FOR YEAR ENDED MARCH 31,
------------------------
1998 1997 1996
---- ---- ----
Demand $ 364,774 $ 332,393 $ 330,562
Savings and clubs 3,601,095 3,542,024 3,507,068
Money Management 691,939 657,529 599,280
Certificates of deposit 3,948,687 3,844,009 3,965,252
---------- ---------- ----------
8,606,495 8,375,955 8,402,162
Penalty for early withdrawals of
certificate of deposit (10,137) (20,787) (11,961)
---------- ---------- ----------
$8,596,358 $8,355,168 $8,390,201
========== ========== ==========
NOTE 12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
INTEREST MARCH 31,
LENDER MATURITY RATE 1998 1997
- ------ -------- ---- ---- ----
Federal Home Loan Bank April 30, 1997 5.69% 8,000,000
Federal Home Loan Bank May 30, 1997 5.73% 7,000,000
Federal Home Loan Bank June 30, 1997 5.76% 8,000,000
Federal Home Loan Bank July 11, 1997 5.56% 6,000,000
Federal Home Loan Bank July 29, 1997 5.81% 4,000,000
Federal Home Loan Bank August 15, 1997 5.82% 4,000,000
Federal Home Loan Bank September 10, 1997 5.51% 6,000,000
Federal Home Loan Bank September 16, 1997 5.56% 5,000,000
Federal Home Loan Bank October 14, 1997 5.79% 5,000,000
Federal Home Loan Bank November 3, 1997 5.59% 4,000,000
Federal Home Loan Bank November 26, 1997 5.58% 5,835,000
Federal Home Loan Bank December 3, 1997 5.56% 6,500,000
Federal Home Loan Bank December 22, 1997 5.77% 5,000,000
Federal Home Loan Bank April 13, 1998 5.77% 5,700,000
Federal Home Loan Bank May 26, 1998 5.98% 6,000,000
Federal Home Loan Bank June 23, 1998 5.89% 5,000,000
Federal Home Loan Bank June 23, 1998 5.98% 6,000,000
Federal Home Loan Bank July 28, 1998 5.89% 6,000,000
Federal Home Loan Bank July 29, 1998 5.91% 8,000,000
Morgan Stanley Repo August 14, 1998 5.91% 4,000,000
Federal Home Loan Bank September 3, 1998 5.91% 6,500,000
Federal Home Loan Bank October 27, 1998 5.92% 6,000,000
Morgan Stanley Repo November 26, 1998 5.58% 4,820,000
Federal Home Loan Bank February 26, 1999 5.81% 8,000,000
Federal Home Loan Bank December 20, 1999 5.79% 5,000,000
Federal Home Loan Bank January 26, 2000 5.75% 9,000,000
Federal Home Loan Bank March 2, 2000 5.82% 7,000,000
-----------
5.85% $87,020,000 $74,335,000
---- =========== ===========
Information concerning borrowings collateralized by securities sold
under agreements to repurchase are summarized as follows:
FOR THE YEAR ENDED
MARCH 31,
1998 1997
---- ----
(IN THOUSANDS)
Average balance during the year $75,280 $26,650
Average interest rate during the year 5.80% 5.73%
Maximum month-end balance during the year 83,335 74,335
Mortgage-backed securities underlying the agreements
at year end:
Carrying value $59,065 $ 4,898
Estimated fair value $59,090 $ 4,757
37
NOTE 14. INCOME TAXES
The Bank qualifies as a thrift institution under the provisions of the
Code and is therefore permitted to deduct from taxable income an allowance for
bad debts based on the greater of: (1) actual loan losses (the "experience
method"); or (2) eight percent of taxable income before such bad debt deduction
less certain adjustments (the "percentage of taxable income method"). For the
tax years ended December 31,1996 and 1995, the deduction for bad debts was
computed using the experience method. For the years ended March 31, 1998 and
March 31, 1997, the deductions for bad debt was computed using the percentage
method.
Retained earnings at March 31, 1998, includes approximately $4,183,000
of such bad debts, for which federal income taxes have not been provided. If
such amount is used for purpose other than bad debts losses, including
distributions in liquidation, it will be subject to federal income tax at the
current rate.
The components of income taxes are summarized as follows:
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
---- ---- ----
Current $ 966,000 $(1,348,259) $785,816
Deferred 237,466 73,181 (75,869)
---------- ----------- --------
$1,203,466 $(1,275,078) $674,297
========== =========== ========
The following table presents a reconciliation between the reported
income taxes and the federal income taxes which would be computed by applying
the normal federal income tax rate of 34% to income before income taxes:
38
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
Income taxes $ 765,000 34.00 $(1,025,014) (34.00) $462,046 34.00
Increases (reductions)
in income taxes
resulting from:
Statutory bad debts deduction 303,000 13.47 -- -- (36,000) (2.65)
Amortization of intangibles (34,000) (1.51) (43,324) (1.44) (37,600) (2.77)
Dividend exclusion (85,200) (3.79) (373,400) (12.39) (190,845) 14.04
State and city income
taxes, net of federal
income tax effect (304,660) 12.47 (166,660) (5.53) 190,845 14.04
Other items, net (49,334) (2.15) 26,583 1.96
----------- ----- ----------- ----- ------- -----
Effective income taxes $(1,203,466) 53.49 $(1,275,078) 72.30 $605,874 44.58
=========== ===== =========== ===== ======== =====
At March 31, 1997, income taxes payable of $379,076 are included in
other liabilities. The tax effects of existing temporary differences that give
rise to significant portions of deferred tax assets and deferred tax liabilities
are as follows:
MARCH 31,
---------
1998 1997
---- ----
(IN THOUSANDS)
DEFERRED TAX ASSETS
Reserve for uncollected interest $114,360 $ 89,767
Loan and real estate owned losses
in excess of bad debts deduction 188,000 (46,808)
Deferred loan fees 151,400 354,388
Accrued pension (63,165) 229,535
Write down of common stock 19,829 19,829
Reserve for losses on other assets 98,741 149,985
Unrealized loss on securities available for sale 40,410 392,547
Other 65,165 64,579
------- ---------
612,740 1,253,822
------- ---------
DEFERRED TAX LIABILITIES
Savings premium 209,883 282,685
Depreciation 330,800 521,721
-------- ---------
Sub total 540,683 1,099,380
-------- ----------
Net deferred tax assets included in other assets $ 72,057 $ 154,442
======== ==========
39
NOTE 16. BENEFIT PLANS
PENSION PLAN
Carver has a non-contributory defined benefit pension plan covering all
eligible employees. The benefits are based on each employee's term of service.
Carver's policy is to fund the plan with contributions which equal the maximum
amount deductible for federal income tax purposes. The following table sets
forth the plan's funded status:
MARCH 31,
---------
1998 1997
---- ----
(IN THOUSANDS)
Actuarial present value of benefit obligation
including vested benefits of $2,054,535 and
$1,690,000. $2,382,850 $2,097,345
Projected benefit obligation 2,796,385 2,425,891
--------- ---------
Plan assets at fair value 3,275,671 2,900,146
Plan assets in excess of projected benefit
obligation 474,255 474,255
Unrecognized net obligation being amortized
over 19.75 years 330,567 366,279
Unrecognized prior service cost 18,678 20,812
Unrecognized net (gain) (947,721) (1,008,762)
--------- ----------
(Accrued) pension cost included other liabilities (119,181) 147,416
========= ==========
Net periodic pension cost included the following components:
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
---- ---- ----
Service cost $ 158,235 $ 115,541 $ 95,323
Interest cost 182,273 158,379 137,100
Return on plan assets (387,657) (318,555) (174,058)
Net deferral and amortization 133,928 157,672 (94,665)
--------- --------- ---------
Net periodic pension cost $ 86,779 $ 55,057 $ 36,300)
========= ========= =========
Significant actuarial assumptions used in determining plan benefits
are:
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
---- ---- ----
Annual salary increase 5.50% 5.00% 6.00%
Long-term return on assets 8.00% 8.00% 8.00%
Discount rate used in measurement of
benefit obligations 7.50% 7.00% 8.25%
SAVINGS INCENTIVE PLAN
The Bank has a savings incentive plan, pursuant to Section 401(k) of the
Code, for all eligible employees of the Bank. Employees may elect to defer up to
15% of their compensation and may receive a percentage matching contribution
from the Bank with respect to 50% of the eligible employee's contributions up to
the maximum allowed by law. Total incentive plan expenses for the years ended
March 31, 1998, 1997 and 1996 were $73,000, $63,500 and $52,700, respectively.
DIRECTORS' RETIREMENT PLAN
Concurrent with the conversion to the stock form of ownership, the Bank
adopted a retirement plan for non-employee directors. The benefits are payable
based on the term of service as a director.
40
MARCH 31,
---------
1998 1997
---- ----
(IN THOUSANDS)
Actuarial present value of benefit
obligation including vested benefits
of $2,054,535 and $1,690,000. $327,815 $360,564
======== ========
Projected benefit obligation $479,672 $401,463
Plan assets at fair value -- --
-------- --------
Projected benefit obligation in excess of plan assets 479,672 401,463
Unrecognized past service cost 165,700 (220,936)
Additional minimum liability 13,843 180,037
-------- --------
Accrued liability included in other liabilities $327,815 $360,564
======== ========
Net periodic pension cost for the years ended March 31,1998, 1997 and
1996 included the following:
1998 1997 1996
---- ---- ----
Service cost $ 42,403 $ 24,330 $ 18,267
Interest cost 31,562 31,395 28,417
Net deferral and amortization 58,758 55,324 55,236
-------- -------- --------
Net pension cost $132,723 $111,049 $101,920
======== ======== ========
The actuarial assumptions used in determining plan benefits include
annual fee at 2.80% for each of the three years ended March 31, 1998, and a
discount rate of 8.00%, 7.50% and 8.00%, for the years ended March 31, 1998,
1997 and 1996, respectively. The additional minimum liability included as an
intangible asset in other assets are $165,700 and $221,093 for the years ended
March 31, 1998 and 1997, respectively.
MANAGEMENT RECOGNITION PLAN
Pursuant to the management recognition plan approved at the stockholders
meeting held on September 12, 1995, the Bank recognized $93,000 and $75,000 as
expense for the years ended March 31, 1998 and 1997.
NOTE 18. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing need 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 in excess of the amount recognized in the
statement 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.
41
The Bank has outstanding various loan commitments as follows:
MARCH 31,
---------
1998 1997
---- ----
Commitments To Originate Loans Mortgage $9,585,776 $13,443,419
========== ===========
Commitments To Purchase Loans Mortgage $ -- $32,544,057
========== ===========
Commitments to Sell Loans Mortgage -- $ --
Consumer Loans $ -- --
========== ===========
Total $ -- $ --
========== ===========
At March 31,1998, of the $9,585,776 in outstanding commitments to
originate mortgage loans, $1,334,776 are at fixed rates within a range of 6.50%
to 8.00%, $7,626,000 are for balloon loans with 5 years maturity, whose rates
range between 8.50% to 9.50% and $625,000 are for commercial loans with
adjustable rate whose initial rates range between 8.00% to 8.25%.
At March 31,1998, undisbursed from approved commercial lines of credit
totaled $2,107,000. All such lines are secured, including $1,100,000 in
warehouse lines of credit secured by the underlying warehoused mortgages,
expired within one year, and carry interest rates that float at from 1.50% to
2.00% above the prime rate.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the counter-party. Collateral held consists primarily of
residential real estate, but may include income-producing commercial properties.
Rentals, including real estate taxes, under long-term operating leases
for certain branch offices aggregated approximately $263,000, $285,000 and
$302,000 for the years ended March 31, 1998, 1997, and 1996, respectively. As of
March 31, 1998, minimum rental commitments under all noncancellable leases with
initial or remaining terms of more than one year and expiring through 2011 are
as follows:
MINIMUM RENTAL
YEAR ENDED MARCH 31 (IN THOUSANDS)
------------------- --------------
1998 $ 263
1999 266
2000 293
2001 296
2002 296
2003 296
Thereafter 1,330
------
$2,744
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.
On January 2, 1996, the United States District Court for the Southern
District of New York dismissed the class action encaptioned DOUGHERTY V. CARVER
FEDERAL SAVINGS BANK for lack of subject matter jurisdiction. The class action
alleged that the offering circular, used by Carver to sell its stock in its
public offering, contained material misstatements and omissions. Further, the
complaint alleged that the Bank's shares were not appraised by an independent
appraiser. By separate order on the same date, the court made its ruling
applicable to GOMBERG V. CARVER FEDERAL SAVINGS BANK
42
and UMINER V. CARVER FEDERAL SAVINGS BANK, two other class actions filed in the
Southern District of New York which asserted claims essentially identical to
those asserted in the Dougherty suit.
The plaintiffs filed a consolidated notice of appeal on January 29, 1996
with the United States Court of Appeals for the Second Circuit. In April 1997
the Circuit Court concluded that the District had subject matter jurisdiction
over the plaintiffs' complaint, the Circuit Court reversed and remanded the case
back to the District Court. On July 10, 1997, upon request of all counsel, the
trial judge directed that discovery be completed by March 31, 1998 and that the
case be ready for trial in May of 1998. As of the date hereof, no trial date has
been set by the court. Carver believes that the allegations made in this action
are without merit and intends to aggressively defend its interest with respect
to this matter.
In the conduct of the Company's business, it is also involved in normal
litigation matters. In the opinion of management, the ultimate disposition of
such litigation should not have a material adverse effect on the financial
position or results of operations of the Company.
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Carver Bancorp, Inc.
--------------------
(Registrant)
Date: August 13, 1998 By: /s/ Thomas L. Clark, Jr.
--------------------------
Thomas L. Clark, Jr.
President and Chief Executive Officer
(Duly Authorized Representative)