OFFICE OF THRIFT SUPERVISION
WASHINGTON, D.C. 20552
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Office of Thrift Supervision Docket Number: 5273
CARVER FEDERAL SAVINGS BANK
------------------------------------------------------
(Exact name of registrant as specified in its charter)
UNITED STATES 13-1592005
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
75 WEST 125TH STREET, NEW YORK, NEW YORK 10027
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 876-4747
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 ninety days. Yes X No
---- ----
As of November 12, 1996, 1,000 shares of the registrant's common stock
were issued and outstanding.
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
September 30, and March 31, 1996 (unaudited)..................................3
Consolidated Statement of Operations for the Three and
Six Months Ended September 30, 1996 and 1995 (unaudited)......................4
Consolidated Statement of Cash Flows for the Six Months
Ended September 30, 1996 and 1995 (unaudited).................................5
Notes to Consolidated Financial Statements, (unaudited)................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................7
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings..............................................................................13
Item 2. Changes in Securities..........................................................................13
Item 3. Defaults upon Senior Securities................................................................13
Item 4. Submission of Matters to a Vote of Security Holders............................................14
Item 5. Other Information..............................................................................15
Item 6. Exhibits and Reports on Form 8-K...............................................................15
SIGNATURES
2
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
As of As of
September 30, March 31,
1996 1996
------------- -------------
ASSETS
- ------
Cash and amounts due from depository institutions........................... $6,197,886 $3,225,950
Federal funds sold.......................................................... 3,600,000 6,800,000
--------- ---------
Total cash and cash equivalents............................................. 9,797,886 10,025,950
Securities available for sale............................................... 116,457,349 114,328,245
Investment securities held to maturity, net
(estimated fair values of $8,743,000 and $8,814,000 at
September 30, 1996 and March 31, 1996)................................... 8,805,476 8,937,075
Mortgage-backed securities held to maturity, net
(estimated fair values of $116,957,000 and $129,813,000 at
September 30, 1996 and March 31, 1996)..................................... 120,058,099 131,105,405
Loans receivable, net....................................................... 91,273,884 82,608,065
Real estate owned, net...................................................... 94,698 314,261
Property and equipment, net................................................. 10,942,693 9,956,981
Federal Home Loan Bank of New York stock, at cost........................... 2,435,000 3,120,000
Accrued interest receivable, net............................................ 2,691,539 2,688,199
Excess of cost over net assets acquired, net................................ 1,562,546 1,669,082
Other assets................................................................ 936,764 2,904,078
------- ---------
Total assets............................................................ 365,055,934 $367,657,341
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits.................................................................. $262,891,178 $256,951,883
Securities sold under agreement to repurchase............................. 37,000,000 47,000,000
Advances from Federal Home Loan Bank of New York.......................... 25,400,000 25,400,000
Other borrowed money...................................................... 1,457,056 1,548,122
Advance payments by borrowers for taxes and insurance..................... 549,651 483,055
Other liabilities......................................................... 3,146,396 1,509,500
--------- ---------
Total liabilities...................................................... 330,444,281 332,892,560
=========== ===========
Stockholders' Equity:
Preferred stock, $0.01 par value per share;
1,000,000 shares authorized; none issued......................... -- --
Common stock, $0.01 par value per share; 5,000,000 shares
authorized; 2,314,375 shares issued and outstanding................ 23,144 23,144
Additional paid-in capital 21,419,551 21,436,235
Retained earnings-substantially restricted 15,578,519 16,098,728
Common stock acquired by Employee Stock Ownership Plan (1,457,056) (1,548,122)
Unrealized (loss) net, on securities available for sale (952,505) (1,245,204)
--------- -----------
Total stockholders' equity 34,611,653 34,764,781
---------- ----------
Total liabilities and stockholders' equity $365,055,934 $367,657,341
============ ============
See Notes to Consolidated Financial Statements.
3
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
September 30, September 30,
1996 1995 1996 1995
------------------ ----------------
Interest income:
Loans receivable.................................. $1,823,247 $1,048,624 $3,540,116 $2,070,422
Mortgage-backed securities.................. 2,472,529 3,114,510 5,210,692 6,303,562
Debt and equity securities.................. 1,149,935 1,452,038 2,319,554 2,929,835
Other interest-earning assets............... 163,028 321,320 349,786 546,798
------- ------- ------- -------
Total interest income....................... 5,608,739 5,936,492 11,420,148 11,850,617
--------- --------- ---------- ----------
Interest expense:
Deposits.................................... 2,108,632 2,161,698 4,181,932 4,214,789
Advances and other borrowed money........... 1,023,995 1,392,258 2,082,921 2,796,252
--------- --------- --------- ---------
Total interest expense................... 3,132,627 3,553,956 6,264,853 7,011,041
--------- --------- --------- ---------
Net interest income............................... 2,476,112 2,382,536 5,155,295 4,839,576
(Recovery of) provision for loan losses........... 32,779 5,052 84,641 (14,056)
------ ----- ------- -------
Net interest income after (recovery of)
provision for loan losses....................... 2,443,333 2,377,484 5,070,654 4,853,632
--------- --------- --------- ---------
Non-interest income:
Loan fees and service charges............... 62,910 23,268 101,329 46,046
Other....................................... 219,060 129,831 508,708 237,971
--------- --------- --------- ---------
Total non-interest income.................. 281,970 153,099 610,037 284,017
--------- --------- --------- ---------
Non-interest expenses:
Salaries and employee benefits.............. 1,076,824 903,527 2,044,433 1,783,404
Net occupancy expenses...................... 260,415 309,615 569,803 536,080
Equipment................................... 250,539 166,241 503,336 328,329
Loss on foreclosed real estate.............. 2,450 27,990 8,500 28,876
Advertising................................. 34,049 9,199 79,221 82,415
Federal deposit insurance premium........... 146,009 141,515 290,658 328,947
Amortization of intangibles................. 53,268 60,479 106,536 120,958
Legal expenses ............................. 18,341 142,162 73,341 189,250
Bank charges................................ 101,937 50,100 179,066 127,258
Security service............................ 81,939 48,459 155,801 98,129
SAIF assessment ............................ 1,632,290 0 1,632,290 0
Other....................................... 499,677 542,128 978,521 921,679
--------- --------- --------- ---------
Total non-interest expenses............... 4,157,738 2,401,415 6,621,506 4,545,325
--------- --------- --------- ---------
Income (Loss) before income taxes................. (1,432,435) 129,168 (940,815) 592,324
Income taxes (Benefit)............................ (648,742) 52,711 (420,607) 250,126
--------- --------- --------- ---------
Net income (Loss)................................ $(783,693) $76,457 $(520,209) $ 342,198
========== ======= ========== =========
Net income (Loss) per common share................ $(0.36) $0.036 $(0.24) $0.16
========= ========= ========== =========
Weighted average number of common shares
outstanding....................................... 2,167,135 2,147,454 2,164,879 2,145,199
========= ========= ========== =========
See Notes to Consolidated Financial Statements.
4
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
September 30,
----------------------------
1996 1995
------------ -----------
Cash flows from operating activities:
Net income .............................................................. $ (520,209) $ 342,198
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises and equipment ............... 310,661 162,704
Amortization of intangibles ........................................... 106,536 120,958
Other amortization and accretion, net ................................. 539,906 326,208
Provision for (recovery of) loan losses ............................... 84,641 (14,056)
Deferred income taxes ................................................. 0 144,295
Allocation of ESOP .................................................... 74,382 73,042
Changes in:
Accrued interest receivable, net ...................................... 3,340 12,884
Refundable income taxes ............................................... 0 (207,578)
Other assets .......................................................... 1,967,314 283,902
Other liabilities ..................................................... 0 (74,899)
------------ ------------
Net cash provided by operating activities .......................... 3,524,924 1,169,658
------------ ------------
Cash flows from investing activities:
Purchase of securities available for sale ............................. (8,500,000) 0
Principal repayments on securities available for sale ................. 3,214,458 901,830
Proceeds from sale of securities available for sale ................... 3,614,321 0
Gain from sale of securities available for sale ......................... 91,713 0
Purchase of investment securities held to maturity .................... (50,000) 0
Proceeds from maturities and calls of investment
securities held to maturity ....................................... 174,099 4,000,000
Principal repayment on mortgage-backed securities
held to maturity ................................................... 10,884,181 10,570,272
Net change in loans receivable ........................................ (8,674,772) (539,508)
Proceeds from sale of real estate owned ............................... 252,292 0
Loss from sale of real estate owned ................................... 20,292 0
Additions to premises and equipment ................................. (1,379,397) (2,320,738)
Redemption of Federal Home Loan Bank stock .......................... 685,000 0
------------ ------------
Net cash (used in) provided by investing activities ................. 332,187 12,611,856
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in deposits ................................... 5,939,295 6,607,682
Repayment of securities sold under agreements to repurchase ........... (41,000,000) 0
Repayment of advances from Federal Home Loan Bank of New York ......... 0 (13,000,000)
Securities sold under agreement to repurchase ........................ 31,000,000 0
Repayment of other borrowed money .................................... (91,066) (45,533)
Net increase (decrease) in advance payments by borrowers for taxes and
insurance ............................................................... 66,596 (363,253)
------------ ------------
Net cash provided by (used in) financing activities ..................... (4,085,175) (6,801,104)
------------ ------------
Net increase (decrease) in cash and cash equivalents .................... (228,064) 6,980,410
Cash and cash equivalents -- beginning .................................. 10,025,950 11,817,805
------------ ------------
Cash and cash equivalents -- ending ..................................... $ 9,797,886 $ 18,798,215
============ ============
Supplemental disclosure of non-cash activities:
Unrealized Gain (loss) securities available for sale: ............... $ 552,263 $ (492,663)
Deferred income taxes ............................................... 259,564 231,552
------------ ------------
Loans receivable transferred to real estate owned ..................... $ 32,729 $ 11,869
============ ============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest ............................................................ $ 6,321,685 $ 7,117,848
============ ============
Federal, state and city income taxes ................................ $ 286,000 $ 330,367
============ ============
See Notes to Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X promulgated by the
Securities and Exchange Commission. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete
consolidated financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring adjustments) necessary
for fair presentation have been included. The consolidated results of
operations and other data for the six month period ended September 30,
1996 are not necessarily indicative of results that may be expected for
the entire fiscal year ending March 31, 1997. The unaudited
consolidated financial statements include the accounts of the Bank and
its wholly owned subsidiaries, C.F.S.B. Realty Corp. and C.F.S.B.
Credit Corp. All significant intercompany accounts and transactions
have been eliminated in consolidation.
(2) STOCK CONVERSION
On August 31, 1993, the Board of Directors of the Bank approved a plan
to convert the Bank from a federally chartered mutual savings bank to a
federally chartered stock savings bank. As a result of the promulgation
by the Office of Thrift Supervision ("OTS") of new regulations
governing stock conversions of federal savings banks, however, the Bank
rescinded this plan of conversion and adopted a new plan of conversion
effective June 21, 1994. The plan of conversion ("Plan") was approved
by the OTS in August 1994 and by the Bank's members in October 1994. As
a result of the receipt of such approvals, the Bank consummated its
stock offering simultaneously with its mutual to stock conversion on
October 24, 1994 and issued 2,314,375 shares of common stock at $10.00
per share.
(3) EARNINGS PER SHARE CALCULATION
Net income per share for the three months and six months ended
September 30, 1995 and 1996 are calculated based on weighted average
number of shares outstanding during the period.
(4) CONTINGENCIES
On February 6, 1995, the New York State Banking Department (the
"Department") took possession of Nationar Trust Company ("Nationar"), a
trust company owned by sixty-seven New York State savings banks. The
Department will manage the business of Nationar until a suitable buyer
is found. As of February 6, 1995, Carver had invested $1,366,000 in
federal funds and $600,000 in certificate of deposits, or a total of
$1,966,000, with Nationar. This $1,966,000 investment has been
reclassified, net of a $256,000 allowance for estimated losses, to
other assets on Carver's statement of financial condition. At a hearing
on April 10, 1996, pursuant to the recommendation of the Superintendent
of Banks of the Department (the "Superintendent"), the judge in the
instant case entered an order directing the return of the $600,000 in
certificates of deposits that had been deposited with Nationar. The
Bank received these funds, plus interest, in early June 1996. As a
result, the Bank will recover the valuation allowance of 13.0% on the
$600,000 amount. Subsequently, the Bank received 40% of the $1,366,000
plus interest in July, 1996 as part of its first distribution.
(5) SUBSEQUENT EVENT
On October 17, 1996, the Bank completed its reorganization into a
holding company structure (the "Reorganization") and became the wholly
owned subsidiary of Carver Bancorp, Inc. ("Bancorp"), 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 Bancorp common
stock. The Bank's stockholders approved the Reorganization at the
Bank's annual meeting of stockholders held on July 29, 1996.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Bank's total assets at September 30, 1996 decreased approximately
$2.6 million, or 0.71%, to $365.1 million from $367.7 million at March 31, 1996.
The decrease was primarily attributable to a decrease in the Bank's portfolio of
mortgage-backed securities held to maturity and federal funds sold, offset in
part by increases in securities available for sale and loans receivable, net.
The Bank's portfolio of mortgage-backed securities held to maturity decreased by
$11.1 million, or 8.43%, to $120.0 million at September 30, 1996 from $131.1
million at March 31, 1996, reflecting the receipt of principal repayments on
such securities. The Bank used these repayments, together with the increased
liquidity provided by earnings, an increase in deposits and reduction of federal
funds, to originate loans and repay outstanding loans under reverse repurchase
agreements from the Federal Home Loan Bank ("FHLB") of New York. Total cash and
cash equivalents decreased by $228,000, or 2.11%, to $9.8 million at September
30, 1996 from $10.0 million at March 31, 1996. This decrease was due to payoffs
of FHLB of New York borrowings and investment in loans. Securities available for
sale increased $2.1 million or 1.86% to $116.5 million at September 30, 1996
from $114.3 million at March 31, 1996. This increase in securities available for
sale was due to purchases of mutual funds totaling $8.5 million in June, 1996
and a decrease in unrealized loss of $293,000, partly offset by the principal
payments. The Bank's net loans receivable increased to $91.3 million at
September 30, 1996 as compared to $82.6 million at March 31, 1996. The increase
was due to increases in loan originations partly offset by principal payments.
The Bank's total liabilities decreased by $2.4 million, or 0.74%, from
$332.9 million at March 31, 1996 to $330.4 million at September 30, 1996 as the
result of decreased borrowings in the form of securities sold under agreement to
repurchase, partially offset by an increase in deposits. Deposits increased $5.9
million, or 2.31%, to $262.9 million at September 30, 1996 from $256.9 million
at March 31, 1996. The Bank used its excess liquidity to repay its borrowings.
Stockholders' equity decreased by $153,000, or .44%, to $34.6 million
at September 30, 1996 from $34.8 million at March 31, 1996. Retained earnings of
the Bank at September 30, 1996 decreased $520,000, or 3.23%, to $15.6 million
from $16.1 million at March 31, 1996, as a result of a loss for the three months
ended September 30, 1996 due to a one-time special pre-tax assessment of $1.6
million for the recapitalization of the Savings Association Insurance Fund
("SAIF") pursuant to the Deposit Insurance Funds Act of 1996 ("Funds Act"),
which was signed into law on September 30, 1996. Under Statement of Financial
Accounting Standards ("SFAS") No. 115, unrealized losses on securities available
for sale are recorded net of deferred income taxes as a reduction to retained
earnings. At September 30, 1996, such unrealized losses were approximately
$953,000, a decrease of $293,000, or 23.51%, as compared to $1.2 million at
March 31, 1996. The decrease in unrealized loss is attributable primarily to the
falling interest rate environment, which has continued to increase the value of
the Bank's portfolio of securities available for sale. In accordance with SFAS
No. 115, such losses will not be reflected as a charge to earnings until the
underlying securities are sold, and then only to the extent of the amount of
loss, if any, actually realized at the time of sale.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
For the three months ended September 30, 1996 the Bank had net losses
of $784,000 as compared to net income of $77,000 for the three months ended
September 30, 1995. The decrease in net income was due primarily to a one-time
special pre-tax assessment of $1.6 million for the recapitalization of the SAIF
pursuant to the Funds Act which was signed into law on September 30, 1996 and an
increase in non-interest expense, partially offset by
7
increases in net interest income and non-interest income. Net income for the
three months ended September 30, 1996 without the one-time special pre-tax
assessment of $1.6 million increased by $33,000, or 43.42%, to $109,000 as
compared to $76,000 for the three months ended September 30, 1995. The increase
in net income was due to increases in net interest income and non-interest
income partially offset by increased non-interest expense and provision for loan
losses.
Net interest income increased $94,000, or 3.93%, to $2.5 million for
the three months ended September 30, 1996 as compared to $2.4 million for the
three months ended September 30, 1995. The increase in net interest income is
attributable to a $421,000, or 11.86%, decrease in interest expense, which
offsets a $328,000, or 5.52%, decrease in interest income.
Interest income decreased by $328,000 or 5.5%, to $5.6 million for the
three months ended September 30, 1996 from $5.9 million for the three months
ended September 30, 1995. This decrease was primarily due to a decrease in
average interest-earning assets of $4.2 million and a decrease of 30 basis
points in the average yield on interest-earning assets. Interest income from
mortgage-backed securities decreased $642,000, or 20.61%, to $2.5 million for
three months ended September 30, 1996, compared to $3.1 million for the three
months ended September 30, 1995. This decrease is primarily attributable to a
decrease of $34.6 million in the average balance of mortgage-backed securities
and a decrease of 21 basis points in the average yield on mortgage-backed
securities. Income from investment securities and other interest-earning assets
decreased by $460,000, or 25.96%, to $1.3 million during the three months ended
September 30, 1996 as compared to $1.8 million for the same period in 1995. The
average balance of investment securities and other interest-earning assets
decreased by $9.6 million and the average yield on these assets decreased by 125
basis points. Interest income on loans receivable increased by $775,000, or
73.87%, to $1.8 million for the three months ended September 30, 1996, compared
to $1.0 million for the three months ended September 30, 1995. This increase is
primarily attributable to an increase in average loan portfolio balances of
$40.0 million, partially offset by a decrease of 41 basis points in the average
yield on the loan portfolio.
Interest expense decreased by $421,000, or 11.86%, to $3.1 million for
the three months ended September 30, 1996, as compared to $3.5 million for the
same period in 1995. Interest expense on deposits decreased by $53,000 or 2.45%
during the three months ended September 30, 1996 as compared to the three months
ended September 30, 1995, primarily due to a decrease in costs of deposits of 19
basis points, partially offset by an increase in average deposit balances of
$8.3 million. Interest expense on FHLB advances and other borrowings decreased
to $1.0 million for the quarter ended September 30, 1996, from $1.4 million for
the same period in 1995. The decrease is attributable to a decrease in average
borrowings of $8.1 million and a decrease in the average cost of borrowings of
132 basis points.
The Bank's interest rate spread increased to 2.73% for the quarter
ended September 30, 1996 from 2.51% for the quarter ended September 30, 1995 and
net interest margin increased by 15 basis points over the same period. These
increases are primarily due to an increase in higher yielding mortgage loans, a
decrease in cost of deposits and a decrease in cost of borrowed money as higher
cost FHLB advances matured. The Bank's ratio of interest-earning assets to
interest-bearing liabilities decreased from 1.06x to 1.05x due to the receipt of
principal payments on mortgage-backed securities and a reduction in investment
portfolio, partially offset by an increase in loans receivable and a decrease in
borrowed funds.
During the three months ended September 30, 1996, the Bank provided a
$33,000 provision for loan losses, compared to a $5,000 provision for the three
months ended September 30, 1995. $35,000 was for general allowance provision for
loan losses and $2,000 was a recovery of loan previously written off.
Non-interest income increased by $129,000, or 84.17%, to $282,000 for
the three months ended September 30, 1996 as compared to $153,000 for the three
months ended September 30, 1995. The increase was due primarily to an increase
in loan fee and service charges and other non-interest income.
8
Non-interest expenses were $4.2 million for the three months ended
September 30, 1996, an increase of $1.8 million or 73.14%, from $2.4 million for
the same period in 1995. The increase principally reflects a one-time special
pre-tax assessment of $1.6 million for the recapitalization of SAIF and also
includes an increase of $173,000 or 19.18% in salaries and employee benefits
expense, due to ordinary increases in salary and provision for the Bank's
management recognition plan. Non-interest expense also reflects an increase of
$84,000 or 50.71% in equipment expense due to increased depreciation and
maintenance cost for new furniture, fixtures, computers, for the Bank's new
headquarter a building. These increases in non-interest expenses were partially
offset by a decrease of $42,000 in other expense.
Income tax recovery for the three months ended September 30, 1996 was
$648,700 compared to income tax expense of $250,000 for the three months ended
September 30, 1995 because of a pre-tax loss of $1.4 million due to a one-time
special pre tax assessment of $1.6 million pursuant to the Funds Act during the
quarter. Even though this special assessment of $1.6 million is tax deductible
this expense has created an overall loss for the Bank and the Bank is entitled
to recover income tax previously paid. The Bank's effective tax rates were
45.29% and 42.23% for the three months ended September 30, 1996 and 1995,
respectively.
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net income for the six months ended September 30, 1996 decreased by
$862,000, or 252.02%, to a loss of $520,000, as compared to income of $342,000
for the same period in 1995. This decrease was primarily attributable to the
previously mentioned one-time special pre-tax assessment of $1.6 million for the
recapitalization of SAIF, pursuant to the Funds Act. The decrease also reflects
an increase in non-interest expense which offset increases in net interest
income after provision for loan losses and non-interest income.
Net interest income increased $316,000, or 6.52%, to $5.2 million for
the six months ended September 30, 1996 as compared to $4.8 million for the six
months ended September 30, 1995. The increase in net interest income was
attributable to a $746,000, or 10.64%, decrease in interest expense which offset
a $430,000, or 3.63%, decrease in interest income.
Interest income decreased to $11.4 million for the six months ended
September 30, 1996, from $11.9 million for the six months ended September 30,
1995. This decrease was primarily due to a decrease in average interest-earning
assets of $3.8 million and a decrease of 18 basis points in the average yield on
interest-earning assets. Interest income from mortgage-backed securities
decreased $1.1 million, or 17.34%, to $5.2 million for the six months ended
September 30, 1996, compared to $6.3 million for the six months ended September
30, 1995. This decrease is primarily attributable to a decrease in average
balances of mortgage-backed securities, supplemented by a 6 basis point decrease
in the average yield on mortgage-backed securities. Income from debt and equity
securities and other interest-earning assets decreased by $807,000, or 23.22%,
to 2.7 million during the six months ended September 30, 1996 as compared to
$3.5 million for the same period in 1995. Average debt and equity securities and
other interest-earning assets decreased by $9.3 million, and the average yield
on these assets decreased by 105 basis points. Interest on loans receivable
increased by $1.5 million, or 70.99%, to $3.5 million for the six months ended
September 30, 1996, compared to $2.1 million for the six months ended September
30, 1995. This increase is primarily attributable to an increase in average
loans receivable of $37.5 million, partially offset by a decrease of 31 basis
points in the average yield on loans receivable.
Interest expense decreased to $6.3 million for the six months ended
September 30, 1996 as compared to $7.0 million for the same period in 1995.
Interest expense on deposits decreased by $33,000 or .78% for the six months
ended September 30, 1996 as compared to the six months ended September 30, 1995,
primarily due to a decrease in the average cost of funds of 13 basis points,
partially offset by an increase in average deposit balances of $8.6 million.
Interest on FHLB of New York advances and other borrowed money decreased to $2.1
million for the six months ended September 30, 1996 from $2.8 million for the
same period in 1995. The decrease is attributable to
9
a decrease in average borrowings by $7.4 million supplemented by a decrease in
the average cost of borrowings of 128 basis points.
The Bank's interest rate spread increased from 2.54% for the six months
ended September 30, 1995 to 2.83% for the six months ended September 30, 1996
and its net interest margin increased by 21 basis points. These increases are
primarily due to a lower cost of funds and an increase in higher yielding
average loan balances. The Bank's ratio of interest-earning assets to
interest-bearing liabilities decreased from 1.07x to 1.05x due to lower average
interest-earning assets and higher average interest-bearing liabilities.
During the six months ended September 30, 1996, the Bank recovered
$85,000 in loan losses, compared to a recovery of $14,000 in loan losses for the
six months ended September 30, 1995. $57,300 was for general provision for loan
losses and $27,200 was provided for credit card loss. In addition the Bank had
net charge-offs during the six months ended September 30, 1996 of $339,000,
resulting in a net decrease in allowance for loan losses from $1.2 million at
March 31, 1996 to $952,000 at September 30, 1996. The ratio of the allowance for
loan to non-performing loans at September 30, 1996 21.08% compared to 37% at
March 31, 1996.
Non-interest income increased by $326,000, or 114.79%, to $610,000 for
the six months ended September 30, 1996 as compared to $284,000 for the six
months ended September 30, 1995. The increase was primarily due to a gain of
$75,000 on sales of GNMA securities from the Bank's securities available for
sale portfolio and increases in loans fees and service charges and other
non-interest income. The increase in non-interest income also reflects $42,000
in interest income recovered in connection with the receipt of funds from the
Superintendent that were previously held by Nationar.
Non-interest expenses were $6.6 million for the six months ended
September 30, 1996, an increase of $2.1 million, or 45.67%, from $4.5 million
for the same period in 1995. The increase principally reflects a $1.6 million
one-time special pre-tax assessment for the recapitalization of the SAIF
pursuant to the Deposit Funds Act. The increase also reflects an increase of
$261,000 or 14.64% in salaries and employee benefits expense due to increases in
salary and provision for the Bank's management recognition plan, an increase of
$175,000, or 53.30% in equipment expenses reflecting increased depreciation and
maintenance cost for new furniture, fixtures and computers for the Bank's new
headquarters building and certain branches. These increases were offset in part
by declines in advertising, legal, and federal deposit insurance premium
expenses.
Income tax expense for the six months ended September 30, 1996 declined
to negative $421,000 from $250,000 for the six months ended September 30, 1995
due to the net loss for the six months ended September 30, 1996. The Bank's
effective tax rates were 44.71% and 42.23% for the six months ended September
30, 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits and principal and
interest payments on loans, mortgage-backed securities and investment
securities. While maturities and scheduled amortization of loans,
mortgage-backed securities and investment securities are predictable sources of
funds, deposit flows and loan and mortgage-backed securities prepayments are
strongly influenced by changes in general interest rates, economic conditions
and competition.
The Bank's most liquid assets are cash and cash equivalents and
short-term investments including mutual funds. The levels of the Bank's cash and
cash equivalents are dependent on the Bank's operating, financing, lending and
investing activities during any given period. At September 30, 1996, the Bank's
cash and cash equivalents totaled $9.8 million, compared to $10.0 million at
March 31, 1996. The decrease in cash and cash equivalents reflects primarily a
decline in federal funds balances and pay offs of borrowing upon maturity.
10
At September 30, 1996, the Bank exceeded all fully phased-in regulatory
capital requirements. The table below presents certain information relating to
the Bank's capital compliance at September 30, 1996 and March 31, 1996.
AT SEPTEMBER 30, 1996 AT MARCH 31, 1996
----------------------- ----------------------
AMOUNT % OF ASSETS AMOUNT % OF ASSETS
------ ----------- ------ -----------
(Dollars in thousands)
TANGIBLE CAPITAL:
Tangible Capital ..................... $34,375 9.35% $33,462 9.13%
Tangible Capital Requirement ......... 5,513 1.50% 5,495 1.50%
------- ---- ------- ----
Excess Above Requirement ............. 28,862 7.85% 27,967 7.63%
CORE CAPITAL:
Core Capital ......................... $34,439 9.37% $33,522 9.15%
Core Capital Requirement ............. 11,027 3.00% 10,992 3.00%
------- ---- ------- ----
Excess Above Requirement ............. $23,412 6.37% $22,530 6.15%
RISK BASED CAPITAL:
Risk Based Capital ................... $34,718 28.82% $33,801 28.06%
Risk Based Capital Requirement ....... 9,636 8.00% 9,638 8.00%
------- ---- ------- ----
Excess Above Requirement ............. $25,082 20.82% $24,163 20.06%
RECENT LEGISLATION FOR RECAPITALIZATION OF SAIF
For the first three quarters of 1996, SAIF-insured institutions paid
deposit insurance assessment rates of $0.23 to $0.31 per $100 of deposits. In
contrast, institutions insured by the FDIC's Bank Insurance Fund (the "BIF")
that were well capitalized and without any significant supervisory concerns paid
the minimum annual assessment of $2,000, and all other BIF-insured institutions
paid deposit insurance assessment rates of $0.03 to $0.27 per $100 of deposits.
In response to the disparity between the SAIF and BIF assessments, the
Deposit Insurance Funds Act of 1996 was enacted into law on September 30, 1996.
The Funds Act amended the Federal Deposit Insurance Act (the "FDIA") in several
ways to recapitalize the SAIF and reduce the disparity in the assessment rates
for the BIF and the SAIF. The Funds Act authorized the FDIC to impose a special
assessment on all institutions with SAIF-assessable deposits in the amount
necessary to recapitalize the SAIF. As implemented by the FDIC, institutions
with SAIFassessable deposits will pay a special assessment, subject to
adjustment, of 65.7 basis points per $100 of the institution's SAIF-assessable
deposits. The special assessment is payable on November 27, 1996. The special
assessment is based on the amount of SAIF-assessable deposits held on March 31,
1995. The Funds Act provides that the amount of the special assessment will be
deductible for federal income tax purposes for the taxable year in which the
special assessment is paid. Based on the foregoing, the Bank recorded an accrual
for the special assessment of $1.6 million at September 30, 1996. The impact on
operations, net of related tax effects, reduced reported earnings by $893,000
for the quarter ended September 30, 1996.
In view of the recapitalization of the SAIF, the FDIC proposed on
October 8, 1996, to reduce the assessment rate for SAIF-assessable deposits for
periods beginning on October 1, 1996. The proposed assessment rates for SAIF-
11
assessable deposits would range from 18 to 27 basis points for the last quarter
of 1996 and would range from 0 to 27 basis points for assessment periods
thereafter.
In addition, the Funds Act expanded the assessment base for the
payments on the bonds (the "FICO bonds") issued in the late 1980s by the
Financing Corporation to recapitalize the now defunct Federal Savings and Loan
Insurance Corporation to include the deposits of both BIF-and SAIF-insured
institutions beginning January 1, 1997. Until December 31, 1999, or such earlier
date on which the last savings association ceases to exist, the rate of
assessment for BIF-assessable deposits will be one-fifth of the rate imposed on
SAIF-assessable deposits. It has been estimated that the rates of assessment for
the payment of interest on the FICO bonds will be approximately 1.3 basis points
for BIF-assessable deposits and approximately 6.4 basis points for
SAIF-assessable deposits.
The Funds Act also provides that the FDIC cannot assess regular
insurance assessments for an insurance fund unless required to maintain or to
achieve the designated reserve ratio 1.25%, except on those of its member
institutions that are not classified as "well capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Bank has not been so classified by the FDIC or the
Office of Thrift Supervision. Accordingly, assuming that the designated reserve
ratio is maintained by the SAIF after the collection of the special SAIF
assessment, the Bank, as long as it maintains its current regulatory status,
will have to pay substantially lower regular SAIF and FICO assessments compared
to those paid by the Bank in recent years.
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 Secretary of the Treasury is required to conduct a
study of relevant factors with respect to the development of a common charter
for all insured depository institutions and abolition of separate charters for
banks and thrifts and to report the Secretary's conclusions and findings to the
Congress on or before March 31, 1997.
RECENT TAX LEGISLATION REGARDING TAX BAD DEBT RESERVES
Prior to the enactment, on August 20, 1996, of the Small Business Job
Protection Act of 1996 (the "Small Business Act"), for federal income tax
purposes, thrift institutions such as the Bank, which met certain definitional
tests primarily relating to their assets and the nature of their business, were
permitted to establish tax reserves for bad debts and to make annual additions
thereto, which additions could, within specified limitations, be deducted in
arriving at their taxable income. The Bank's deduction with respect to
"qualifying loans," which are generally loans secured by certain interests in
real property, could be computed using an amount based on a six-year moving
average of the Bank's actual loss experience (the "Experience Method"), or a
percentage equal to 8.0% of the Bank's taxable income (the "PTI Method"),
computed without regard to this deduction and with additional modifications and
reduced by the amount of any permitted addition to the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the Bank
will be required to use the Experience Method of computing additions to its bad
debt reserve for taxable years beginning with the Bank's taxable year beginning
April 1, 1996. In addition, the Bank will be required to recapture (i.e., take
into taxable income) over a six-year period, beginning with the Bank's taxable
year beginning April 1, 1996, the excess of the balance of its bad debt reserves
(other than the supplemental reserve) as of March 31, 1996 over the lesser of
(a) the balance of such reserves as of December 31, 1987 or (b) an amount that
would have been the balance of such reserves as of March 31, 1996 had the Bank
always computed the additions to its reserves using the six-year moving average
Experience Method. However, under the Small Business Act such recapture
requirements will be suspended for each of the two successive taxable years
beginning April 1, 1996 in which the Bank originates a minimum amount of certain
residential loans during such years that is not less than the average of the
principal amounts of such loans made by the Bank during its six taxable years
preceding April 1, 1996. This legislation will result in no recapture of bad
debt reserves for the Bank.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, Carver Federal is a party to various legal
proceedings incident to its business. At June 30, 1996, except as set forth
below, there were no legal proceedings to which the Bank or its subsidiaries was
a party, or to which any of their property was subject, which were expected by
management to result in a material loss.
STOCKHOLDER LITIGATION
On April 5, 1995, a class action was filed against Carver in federal
court alleging that the Offering Circular used in the Bank's conversion to a
stock-form institution was materially false and misleading. The suit, which
management thinks is without merit and will vigorously defend, seeks rescission,
restitution and unspecified damages.
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
complaint contained allegations of material misrepresentations and omissions of
material facts in the Bank's prospectus for its initial public offering and the
failure to have the appraisal of the Bank's shares prepared by an independent
appraiser. By separate order on the same date, the court made its ruling
applicable to GOMBERG V. CARVER FEDERAL SAVINGS BANK 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 in DOUGHERTY V. CARVER FEDERAL SAVINGS BANK
appealed to the United States Court of Appeals for the Second Circuit. The oral
argument of this appeal was heard on September 4, 1996, at which time the Court
of Appeals reserved decision. Since that date the Court of Appeals has requested
amicus curie briefs of the Office of Thrift Supervision and the Securities and
Exchange Commission. No briefs have been filed yet.
NATIONAR
On September 19, 1995, Carver filed an action for declaratory judgment
for damages for breach of contract and for breach of a contractual trust against
Nationar and the Superintendent in the Supreme Court of New York State, County
of New York. When the Superintendent sold Carver's ESOP loan to a third party
purchaser, it did not transfer Carver's $1,966,000 in collateral along with the
loan. The $1,966,000 in collateral consisted of two separate sums in the amounts
of $1,366,000 and $600,000. The purpose of the lawsuit was to secure the return
of the entire $1,966,000 in collateral rather than a portion of it. The Bank
believes that it has adequate reserves at 13.0% of the claims, against possible
loss on these claims.
By order entered April 10, 1996, on the recommendations of the
Superintendent, the Court directed the return of the $600,000 in collateral. The
Bank received these funds, plus interest, in early June 1996. As a result, the
Bank will recover the valuation allowance of 13.0% on the $600,000 amount. Since
the Bank expects that it will receive 90% of the $1,366,000 amount as a general
creditor, the lawsuit has been discontinued. Subsequently, the Bank received 40%
of the $1,366,000 plus interest in July, 1996 as part of the first distribution.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Bank's annual meeting of stockholders held on July 29, 1996, the
following matters were voted upon, with the results of the voting on
such matters indicated:
1. Election of the following persons to serve a three-year term as
directors of the Company:
BOARD OF DIRECTORS NOMINEES FOR AGAINST
--------------------------- --- -------
David N. Dinkins 1,799,206 122,683
David R. Jones 1,799,356 122,533
Linda H. Dunham 1,794,772 127,117
STOCKHOLDER NOMINEE FOR AGAINST
------------------- --- -------
Mark R. Lilien 28,678 1,600
2. Ratification of the appointment of Mitchell & Titus, LLP as
independent auditors for the fiscal year ending March 31, 1997:
For: 1,787,857
Against: 101,983
Abstain: 32,049
Broker Non-Vote: None
3. Adoption and approval of Agreement and Plans of Reorganization:
For: 1,371,140
Against: 114,663
Abstain: 24,414
Broker Non-Vote: 411,672
4. Ratification of the appointment of Mitchell & Titus, LLP as
independent auditors for the fiscal year ending March 31, 1996:
For: 1,787,857
Against: 101,983
Abstain: 32,049
Broker Non-Vote: None
14
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant had duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Carver Federal Savings Bank
Date: November 14, 1996 /s/ Biswarup Mukherjee
-------------------------------
Biswarup Mukherjee
Executive Vice President and
Chief Financial Officer
16
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
FOR THE THREE MONTHS ENDED
--------------------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
--------------------- ------------------------
Net income/(Loss).................................... $ (783,693) $ 76,457
Weighted average common shares....................... 2,167,135 2,147,454
Earnings/(Loss) per common share..................... $ (0.36) $ 0.036
===================== ========================
FOR THE THREE MONTHS ENDED
--------------------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
--------------------- ------------------------
Net income/(Loss).................................... $ (520,209) $ 342,198
Weighted average common shares....................... 2,164,879 2,145,199
Earnings/(Loss) per common share..................... $ (0.24) $ 0.16
===================== =========================