-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GhGpkVAhUjl+k354OkUOpDiDm+n2lPpk+kpY9qFVzjh9gCW7UkvuUDDSXuvYtRVz SBFPfH3Wd0x4rkMHs2YDDQ== 0000882377-04-001298.txt : 20040629 0000882377-04-001298.hdr.sgml : 20040629 20040629135357 ACCESSION NUMBER: 0000882377-04-001298 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARVER BANCORP INC CENTRAL INDEX KEY: 0001016178 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 133904174 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13007 FILM NUMBER: 04887999 BUSINESS ADDRESS: STREET 1: 75 W 125TH ST CITY: NEW YORK STATE: NY ZIP: 10027-4512 BUSINESS PHONE: 2128764747 MAIL ADDRESS: STREET 1: 75 W 125TH ST CITY: NEW YORK STATE: NY ZIP: 10027-4512 10-K 1 d240086.txt CARVER BANCORP INC UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2004 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________ Commission File Number: 0-21487 CARVER BANCORP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3904174 (State or Other Jurisdiction of (I.R.S. Employer 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. |X| Yes |_| No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). |_| Yes |X| No As of May 31, 2004, there were 2,286,380 shares of common stock of the registrant outstanding. The aggregate market value of the Registrant's common stock held by non-affiliates (based on the closing sales price of $21.00 per share of the registrant's common stock on May 28, 2004) was approximately $48.0 million. DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's proxy statement for the Annual Meeting of stockholders for the fiscal year ended March 31, 2004 are incorporated by reference into Part III of this Form 10-K. CARVER BANCORP, INC. 2004 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
Part I Page ------ ---- Item 1. Business........................................................................ 2 Item 2. Properties...................................................................... 27 Item 3. Legal Proceedings............................................................... 27 Item 4. Submission of Matters to a Vote of Security Holders............................. 28 Part II ------- Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities................. 29 Item 6. Selected Financial Data......................................................... 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 31 Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................... 44 Item 8. Financial Statements and Supplementary Data..................................... 45 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................... 76 Item 9A. Controls and Procedures......................................................... 76 Part III -------- Item 10. Directors and Executive Officers of Carver Bancorp, Inc......................... 76 Item 11. Executive Compensation.......................................................... 76 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters................................ 77 Item 13. Certain Relationships and Related Transactions.................................. 77 Item 14. Principal Accountant Fees and Services.......................................... 77 PART IV ------- Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................................................... 77 SIGNATURES ................................................................................ 78 EXHIBIT INDEX............................................................................... E-1
FORWARD-LOOKING STATEMENTS Statements contained in this Annual Report on Form 10-K, including information incorporated by reference, which are not historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition, senior management may make forward looking statements orally to analysts, investors, the media and others. These forward-looking statements may be identified by the use of such words as "believe," "expect," "anticipate," "intend," "should," "will," "would," "could," "may," "planned," "estimated," "potential," "outlook," "predict," "project" and similar terms and phrases, including references to assumptions. Forward-looking statements are based on various assumptions and analyses made by the Company (as defined below) in light of the management's experience and its perception of historical trends, current conditions and expected future developments, as well as other factors believed to be appropriate under the circumstances. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, many of which are beyond the Company's control, that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Factors which could result in material variations include, without limitation, the following: o the Company's success in implementing its initiatives, including expanding its product line, adding new branches and ATM centers, successfully re-branding its image and achieving greater operating efficiencies; o increases in competitive pressure among financial institutions or non-financial institutions; o legislative or regulatory changes which may adversely affect the Company's business; o technological changes which may be more difficult or expensive than we anticipate; o changes in interest rates which may reduce net interest margins and net interest income; o changes in deposit flows, loan demand or real estate values which may adversely affect the Company's business; o changes in accounting principles, policies or guidelines which may cause the Company's condition to be perceived differently; o litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, which may delay the occurrence or non-occurrence of events longer than anticipated; o the ability of the Company to originate and purchase loans with attractive terms and acceptable credit quality; o the ability of the Company to realize cost efficiencies; o the Company's costs or difficulties in completing its planned acquisition of Independence Federal Savings Bank; and o general economic conditions, either nationally or locally in some or all areas in which the Company does business, or conditions in the securities markets or the banking industry which could affect liquidity in the capital markets, the volume of loan origination, deposit flows, real estate values, the levels of non-interest income and the amount of loan losses. The forward-looking statements contained herein are made as of the date of this report, and the Company assumes no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. You should consider these risks and uncertainties in evaluating forward-looking statements and you should not place undue reliance on these statements. PART I ITEM 1. BUSINESS GENERAL DESCRIPTION OF BUSINESS CARVER BANCORP, INC. Carver Bancorp, Inc., a Delaware corporation (on a stand-alone basis, the "Holding Company" or "Registrant"), is the holding company for Carver Federal Savings Bank, a federally chartered savings bank, and its subsidiaries (collectively, the "Bank" 2 or "Carver Federal"), Carver Statutory Trust I (the "Trust") and Alhambra Holding Corporation, a Delaware corporation ("Alhambra"). The Trust, which was formed in September 2003, exists for the sole purpose of issuing trust preferred securities and investing the proceeds in an equivalent amount of subordinated debentures of the Holding Company. The Holding Company formed Alhambra to hold the Holding Company's investment in a commercial office building that was subsequently sold in March 2000. Alhambra is currently inactive. Collectively, the Holding Company, the Bank and the Holding Company's other direct and indirect subsidiaries are referred to herein as the "Company" or "Carver." On October 17, 1996, the Bank completed its reorganization into a holding company structure (the "Reorganization") and became a wholly owned subsidiary of the Holding Company. Pursuant to an Agreement and Plan of Reorganization, dated May 21, 1996, each share of the Bank's outstanding common stock was exchanged for one share of common stock of the Holding Company. The Holding Company conducts business as a unitary savings and loan holding company, and the principal business of the Holding Company consists of the operation of its wholly owned subsidiary, the Bank. The Holding Company's executive offices are located at the home office of the Bank at 75 West 125th Street, New York, New York 10027. The Holding Company's telephone number is (212) 876-4747. CARVER FEDERAL SAVINGS BANK Carver Federal was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally chartered mutual savings and loan association, at which time it obtained federal deposit insurance and became a member of the Federal Home Loan Bank (the "FHLB") of New York. Carver Federal converted to a federal savings bank in 1986 and changed its name at that time to Carver Federal Savings Bank. On October 24, 1994, Carver Federal converted from mutual to stock form and issued 2,314,275 shares of its common stock at a price of $10 per share. Carver Federal was founded as an African-American operated institution to provide residents of under-served communities with the ability to invest their savings and obtain credit. Carver Federal's principal business consists of attracting deposit accounts through its six branch offices and investing those funds in mortgage loans and other investments permitted to federal savings banks. Based on asset size as of March 31, 2004, Carver Federal is the largest African-American operated financial institution in the United States. On March 8, 1995, Carver Federal formed CFSB Realty Corp. as a wholly owned subsidiary to hold real estate acquired through foreclosure pending eventual disposition. At March 31, 2004, this subsidiary had $220,000 in total capital and a net operating loss of approximately $1,300. At March 31, 2004 there was no real estate owned pending disposition. Carver Federal also owns CFSB Credit Corp., currently an inactive subsidiary originally formed to undertake the Bank's credit card issuance. During the fourth quarter of the fiscal year ended March 31, 2003 ("fiscal 2003"), Carver Federal formed Carver Asset Corporation, a wholly owned subsidiary which qualifies as a real estate investment trust ("REIT") pursuant to the Internal Revenue Code of 1986, as amended. This subsidiary may, among other things, be utilized by Carver Federal to raise capital in the future. Upon its formation, Carver Federal transferred approximately $119 million of mortgage loans to Carver Asset Corporation. Carver Federal's current operating strategy consists primarily of: (1) the origination and purchase of one- to four-family residential, commercial, construction and multifamily real estate in its primary market area; (2) investing funds not utilized for loan originations or purchases in the purchase of United States Government Agency securities and mortgage-backed securities; (3) expanding its branch network by opening de novo branches and stand-alone ATM centers; (4) generating fee income by attracting and retaining high transaction core deposit accounts; and (5) continuing to lower its expense ratio by efficiently utilizing personnel, branch facilities and alternative delivery channels (telephone banking, online banking, and ATMs) to service its customers. Carver Federal plans to generate additional fee income by utilizing third party providers to sell non-deposit investment products and to offer a Carver Federal credit card. The business is not operated in such a way that would require segment reporting. Carver Federal's primary market area for deposits consists of the areas served by its six branches. Carver Federal considers its primary lending market to include Bronx, Kings, New York, Queens and Richmond counties, together comprising New York City, and lower Westchester County, New York. See "Item 2--Properties." Although Carver Federal's branches are located in areas that were historically underserved by other financial institutions, Carver Federal is facing increasing competition for deposits and residential mortgage lending in its immediate market areas. Management believes that this competition has become more intense as a result of an increased examination emphasis by federal banking regulators on financial institutions' fulfillment of their responsibilities under the Community Reinvestment Act ("CRA") and the improving economic conditions in its market area. The Bank's competition for loans comes principally from mortgage banking companies, commercial banks, savings banks and savings and loan associations. The Bank's most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions. Competition for deposits also comes from money market mutual funds and other corporate and government securities funds as well as from other financial intermediaries such as brokerage firms and insurance companies. Many of Carver Federal's competitors have substantially greater resources than Carver Federal and offer a wider array of financial services and products than Carver Federal. At times, these larger financial institutions may offer below market interest rates on mortgage loans and above market interest rates for deposits. These pricing 3 concessions combined with competitors' larger presence in the New York market add to the challenges Carver Federal faces in expanding its current market share. The Bank believes that it can compete with these institutions by offering a competitive range of products and services as well as through personalized attention and community involvement. As of March 31, 2004, Carver Federal had 132 full-time equivalent employees, of whom 45 are officers and 87 are non-officers, none of whom was represented by a collective bargaining agreement. The Bank considers its employee relations to be satisfactory. AVAILABLE INFORMATION The Company makes available on or through its internet website, http://www.carverbank.com, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Such reports are free of charge and are available as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission ("SEC"). The public may read and copy any materials the Company files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC, 20549. Information may be obtained on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including the Company, at http://www.sec.gov. In addition, on or before September 21, 2004, the date of our annual meeting of stockholders, we will post on our website certain other basic corporate documents, including our Corporate Governance Principles, Code of Ethics, Code of Ethics for Senior Financial Officers and the charters of our Finance and Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee. Printed copies of these documents are also available free of charge to any stockholder who requests them. Stockholders seeking additional information should contact the Corporate Secretary's office by mail at 75 West 125th Street, New York, NY 10027 by mail, or by e-mail at linda.dunn@carverbank.com. PENDING MERGER WITH INDEPENDENCE FEDERAL SAVINGS BANK On March 15, 2004, the Company entered into a definitive merger agreement to acquire Independence Federal Savings Bank ("Independence"). Independence is a federally chartered savings bank with approximately $201 million in assets as of March 31, 2004 and five branches located in greater Washington, D.C. At the time of announcement, the cash transaction was valued at approximately $33 million. The transaction is currently expected to close before the end of 2004. It remains subject to both regulatory and shareholder approvals. See "Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations" for a more detailed discussion of the pending merger. Except as specifically noted otherwise, the information contained or incorporated by reference in this Form 10-K does not give effect to the proposed transaction. LENDING ACTIVITIES GENERAL. Carver Federal's principal lending activity is the origination or purchase of mortgage loans for the purpose of purchasing or refinancing one- to four-family residential, multifamily, and commercial properties. Carver Federal also originates or participates in loans for the construction or renovation of commercial properties and residential housing developments. Carver Federal also provides permanent and end loan financing upon completion of construction. To a lesser extent, Carver Federal originates secured consumer and business loans. Carver Federal continued to engage in first-mortgage loan purchases during the fiscal year ended March 31, 2004 ("fiscal 2004"), which accounted for 54.6% of net loan additions. Loan purchases are used to supplement originations. LOAN PORTFOLIO COMPOSITION. Gross loans receivable increased by $58.5 million, or 19.7%, to $354.9 million at March 31, 2004 compared to $296.4 million at March 31, 2003. Carver Federal's net loan portfolio as a percentage of total assets increased to 65.3% at March 31, 2004 compared to 57.4% at March 31, 2003. One- to four-family mortgage loans totaled $98.6 million, or 27.8% of Carver Federal's total gross loan portfolio, multifamily loans totaled $120.3 million, or 33.9% of total gross loans, non-residential real estate loans, which includes commercial and church loans, totaled $102.6 million, or 28.9% of total gross loans, and construction loans, net of loans in process, totaled $27.4 million, or 7.7% of total gross loans. Consumer (credit card loans, personal loans, home equity loans and home improvement loans) and business loans totaled $6.0 million, or 1.7% of total gross loans. Carver Federal pays a premium when the effective yield on the loans being purchased is greater than the current market rate for comparable loans. These premiums are amortized as the loan is repaid. It is possible that, in a declining interest rate environment, the rate or speed at which loans repay may increase which may have the effect of accelerating the amortization of the premium and therefore reducing the effective yield of the loan. Premium on loans increased by $397,000, or 45.8%, to $1.3 million at March 31, 2004 compared to $867,000 at March 31, 2003. The increase was attributable to additional premiums recorded on new loans purchased. 4 Allowance for loan losses was substantially unchanged at $4.1 million at March 31, 2004 compared to March 31, 2003, reflecting $33,000 in net charge-offs during fiscal 2004; there were no provisions for loan losses made during fiscal 2004. See "--Asset Quality--Asset Classification and Allowance for Losses." The following table sets forth selected data relating to the composition of Carver Federal's loan portfolio by type of loan at the dates indicated.
AT MARCH 31, --------------------------------------------------------------------------------------- 2004 2003 2002 2001 ----------------- ------------------ ----------------- --------------------- Amount Percent AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- --------------------- (DOLLARS IN THOUSANDS) REAL ESTATE LOANS: One- to four-family $ 98,645 27.80% $ 71,735 24.20% $ 122,814 41.84% $ 157,767 54.94% Multifamily 120,252 33.88% 131,749 44.45% 118,589 40.39% 83,620 29.13% Non-residential 102,641 28.92% 79,244 26.74% 40,101 13.66% 36,113 12.58% Construction 27,376 7.71% 11,539 3.89% 9,742 3.32% 5,821 2.03% Consumer and business (1) 6,010 1.69% 2,125 0.72% 2,328 0.79% 3,781 1.32% -------- ------ -------- ------ --------- ------ ----------- --------- Total gross loans 354,924 100.00% 296,392 100.00% 293,574 100.00% 287,102 100.00% ====== ====== ====== ========= ADD: Premium on loans 1,264 867 906 705 LESS: Deferred fees and loan discounts (163) (363) (642) (819) Allowance for loan Losses (4,125) (4,158) (4,128) (3,551) --------- --------- --------- ----------- Net loan portfolio $ 351,900 $ 292,738 $ 289,710 $ 283,437 ========= ========= ========= ===========
AT MARCH 31, -------------------- 2000 -------------------- AMOUNT PERCENT -------------------- (DOLLARS IN THOUSANDS) REAL ESTATE LOANS: One- to four-family $ 152,458 55.76% Multifamily 86,184 31.52% Non-residential 22,721 8.31% Construction 5,331 1.95% Consumer and business (1) 6,725 2.46% ---------- --------- Total gross loans 273,419 100.00% ========= ADD: Premium on loans 582 LESS: Deferred fees and loan discounts (918) Allowance for loan Losses (2,935) ---------- Net loan portfolio $ 270,148 ========== (1) Includes automobile, personal, credit card, home equity, home improvement and business loans. ONE- TO FOUR-FAMILY RESIDENTIAL LENDING. Traditionally, Carver Federal's lending activity had been the origination and purchase of loans secured by first mortgages on existing one- to four-family residences. Carver Federal originates and purchases one- to four-family residential mortgage loans in amounts that usually range between $35,000 and $750,000. Approximately 82% of Carver Federal's one- to four-family residential mortgage loans at March 31, 2004 had adjustable rates and approximately 18% had fixed rates. Carver Federal's one- to four-family residential mortgage loans are generally for terms of 30 years, amortized on a monthly basis, with principal and interest due each month. Residential mortgage loans often remain outstanding for significantly shorter periods than their contractual terms. These loans customarily contain "due-on-sale" clauses that permit the Bank to accelerate repayment of a loan upon transfer of ownership of the mortgaged property. Also, borrowers may refinance or prepay one- to four-family residential loans at their option without penalty. The Bank's lending policies generally limit the maximum loan-to-value ("LTV") ratio on one- to four-family residential mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised value or purchase price, with private mortgage insurance required on loans with LTV ratios in excess of 80%. Under certain special loan programs, Carver Federal originates and sells loans secured by single-family homes purchased by first time home buyers where the LTV ratio may be up to 97%. Carver Federal's fixed-rate, one- to four-family residential mortgage loans are underwritten in accordance with applicable guidelines and requirements for sale to the Federal National Mortgage Association ("Fannie Mae") or the State of New York Mortgage Agency ("SONYMA") in the secondary market. From time to time the Bank has sold such loans to Fannie Mae and to SONYMA. The Bank also originates, to a limited extent, loans underwritten according to Federal Home Loan Mortgage Corporation ("FHLMC") standards. Loans are sold with limited recourse on a servicing retained basis to Fannie Mae and on a servicing released basis to SONYMA. Carver Federal uses several sub-servicing firms to service mortgage loans, whether held in portfolio or sold with the servicing retained. At March 31, 2004, the Bank, through its sub-servicers, serviced $11.7 million in loans for Fannie Mae. Carver Federal offers one-year, three-year, five/one-year and five/three-year adjustable-rate one- to four-family residential mortgage loans. These loans are retained in Carver Federal's portfolio and are not sold on the secondary market. They are indexed to the weekly average rate on one-year, three-year and five-year U.S. Treasury securities, respectively, adjusted to a constant maturity (usually one year), plus a margin of 275 basis points. The rates at which interest accrues on these loans are adjustable every one, three or five years, generally with limitations on adjustments of two percentage points per adjustment period and six percentage points over the life of a one-year adjustable-rate mortgage and four percentage points over the life of three-year and five-year adjustable-rate mortgages. 5 The retention of adjustable-rate loans in Carver Federal's portfolio helps reduce Carver Federal's exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the event of upward repricing of adjustable-rate loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate loans may increase due to increases in interest costs to borrowers. Although adjustable-rate loans allow the Bank to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest rate sensitivity is limited by periodic and lifetime interest rate adjustment limitations. Accordingly, there can be no assurance that yields on the Bank's adjustable-rate loans will fully adjust to compensate for increases in the Bank's cost of funds. Adjustable-rate loans increase the Bank's exposure to decreases in prevailing market interest rates, although decreases in the Bank's cost of funds would tend to offset this effect. MULTIFAMILY REAL ESTATE LENDING. Carver Federal offers competitive rates with flexible terms that make this product attractive to borrowers. Multifamily property lending entails additional risks compared to one- to four-family residential lending. For example, such loans are dependent on the successful operation of such buildings and can be significantly impacted by supply and demand conditions in the market for multifamily residential units. Over the past several years, Carver Federal has expanded its presence in the multifamily lending market in the New York City metropolitan area. At March 31, 2004, multifamily loans totaled $120.3 million, or 33.9% of Carver Federal's gross loan portfolio. The Bank intends to continue its emphasis on multifamily mortgage lending, which has enabled the Bank to benefit from these higher yielding loans compared to lower yielding one- to four- family loans while still serving the community. Carver Federal's multifamily product guidelines generally require that the maximum LTV not exceed 75% based on the appraised value of the mortgaged property. The Bank generally requires a debt service coverage ratio ("DSCR") of at least 1.3 on multifamily loans, which requires the properties to generate cash flow after expenses and allowances in excess of the principal and interest payment. Carver Federal originates and purchases multifamily mortgage loans, the predominance of which are adjustable rate loans that generally amortize on the basis of a 15-, 20-, 25- or 30-year period that require a balloon payment after the first five years, or the borrower may have an option to extend the loan for two additional five-year periods. The Bank, on a case-by-case basis, originates ten-year fixed rate loans. To help ensure continued collateral protection and asset quality for the term of multifamily real estate loans, Carver Federal employs a loan risk-rating system. Under the risk-rating system, all commercial real estate loans with balances over $250,000 are risk rated by an independent consulting firm. Separate reviews of the multifamily real estate loan portfolio are performed annually, resulting in written management summary reports. NON-RESIDENTIAL REAL ESTATE LENDING. Carver Federal's non-residential real estate lending activity consists predominantly of loans for the purpose of purchasing or refinancing office, mixed-use (properties used for both commercial and residential purposes but predominantly commercial), retail and church buildings in its market area. Non-residential real estate lending entails additional risks compared with one- to four-family residential lending. For example, such loans typically involve large loan balances to single borrowers or groups of related borrowers, and the payment experience on such loans typically is dependent on the successful operation of the commercial property. Carver Federal's maximum LTV on non-residential real estate mortgage loans is generally 75% based on the appraised value of the mortgaged property. The Bank generally requires a DSCR of at least 1.3 on non-residential real estate loans. The Bank requires the assignment of rents of all tenants' leases in the mortgaged property which serves as additional security for the mortgage loan. At March 31, 2004, non-residential real estate mortgage loans (including loans to churches) totaled $102.6 million, or 28.9% of the gross loan portfolio. Carver Federal originates non-residential real estate first mortgage loans in its market area. All non-residential real estate loans with balances over $250,000 are risk rated internally. Independent third party reviews of the non-residential loan portfolio are performed at least annually, resulting in written management summary reports. Historically, Carver Federal has been a New York City metropolitan area leader in the origination of loans to churches. At March 31, 2004, loans to churches totaled $13.9 million, or 3.9% of the Bank's gross loan portfolio. These loans generally have five-, seven- or ten-year terms with 15-, 20- or 25-year amortization periods and a balloon payment due at the end of the term and generally have no greater than a 70% LTV ratio. The Bank provides construction financing for churches and generally provides permanent financing upon completion of construction. There are currently 24 church loans in the Bank's loan portfolio. Loans secured by real estate owned by faith based organizations generally are larger and involve greater risks than one- to four-family residential mortgage loans. Because payments on loans secured by such properties are often dependent on voluntary contributions by members of the church's congregation, repayment of such loans may be subject to a greater extent to adverse conditions in the economy. The Bank seeks to minimize these risks in a variety of ways, including reviewing the organization's financial condition, limiting the size of such loans and establishing the quality of the collateral securing such loans. The Bank determines the appropriate amount and type of security for such loans based in part upon the governance structure of the particular organization, the length of time the church has been established in the community and a cash flow analysis of the church to determine its ability to service the proposed loan. Carver Federal will obtain a first mortgage on the underlying real property and usually requires personal guarantees of key members of the congregation and/or key person life insurance on the pastor of the congregation. The Bank may also require the church to obtain key person life insurance on specific members of the church's leadership. Asset 6 quality in the church loan category has been exceptional throughout Carver Federal's history. Management believes that Carver Federal remains a leading lender to churches in its market area. CONSTRUCTION LENDING. The Bank originates construction loans for new construction and renovation of churches, multifamily buildings, residential developments, community service facilities and affordable housing programs. Carver Federal also offers construction loans to qualified individuals and developers for new construction and renovation of one- to four-family residences in the Bank's market area. The Bank's construction loans generally have adjustable interest rates and are underwritten in accordance with the same standards as the Bank's mortgage loans on existing properties. The loans provide for disbursement in stages as construction is completed. Construction terms are usually from 12 to 24 months. The construction loan interest is capitalized as part of the overall project cost and is funded monthly from the loan proceeds. Borrowers must satisfy all credit requirements that apply to the Bank's permanent mortgage loan financing for the mortgaged property. Carver Federal has established additional criteria for construction loans to include an engineer's review on all construction budgets in excess of $500,000 and appropriate interest reserves for loans in excess of $250,000. Construction financing generally is considered to involve a higher degree of risk of loss than long-term financing on improved and occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the mortgaged property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in project delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with a project having a value that is insufficient to assure full repayment of such loan. The ability of a developer to sell developed lots or completed dwelling units will depend on, among other things, demand, pricing, availability of comparable properties and economic conditions. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers in the Bank's market areas, limiting the aggregate amount of outstanding construction loans and imposing a stricter LTV ratio requirement than that required for one- to four-family mortgage loans. At March 31, 2004, the Bank had $27.4 million (net of $6.3 million of committed but undisbursed funds) in construction loans outstanding, comprising 7.7% of the Bank's total gross loan portfolio. CONSUMER AND BUSINESS LOANS. At March 31, 2004, the Bank had approximately $6.0 million in consumer and business loans, or 1.7% of the Bank's gross loan portfolio. At March 31, 2004, $4.5 million, or 75.0% of the Bank's consumer and business loans, was secured (primarily by letters of credit) and $1.5 million, or 25.0%, was unsecured. The Bank discontinued the origination of unsecured commercial business loans during the fourth quarter of the fiscal year ended March 31, 1999. During fiscal 2004, the Bank originated four secured business loans, each for $1.0 million. Consumer loans generally involve more risk than first mortgage loans. Collection of a delinquent loan is dependent on the borrower's continuing financial stability, and thus is more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Further, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered. These loans may also give rise to claims and defenses by a borrower against Carver Federal, and a borrower may be able to assert claims and defenses against Carver Federal which it has against the seller of the underlying collateral. In underwriting secured consumer loans other than secured credit cards, Carver Federal considers the borrower's credit history, an analysis of the borrower's income, expenses and ability to repay the loan and the value of the collateral. The underwriting for secured credit cards only takes into consideration the value of the underlying collateral. See "--Asset Quality--Non-performing Assets." LOAN PROCESSING. Carver Federal's loan originations are derived from a number of sources, including referrals by realtors, builders, depositors, borrowers and mortgage brokers, as well as walk-in customers. Loans are originated by the Bank's personnel who receive a base salary, commissions and other incentive compensation. Loan application forms are available at each of the Bank's offices. All real estate loan applications are forwarded to the Bank's Lending Department located in the Bank's main office. The Bank has established underwriting standards for all loan products. The underwriting and loan processing for residential loans is outsourced to a third party provider. A commercial non-residential real estate loan application is completed for all multifamily and non-residential properties which the Bank finances. Prior to loan approval, the property is inspected by a loan officer. As part of the loan approval process, consideration is given to an independent appraisal, location, accessibility, stability of the neighborhood, environmental assessment, personal credit history of the applicant(s) and the financial capacity of the applicant(s). Upon receipt of a completed loan application from a prospective borrower, a credit report and other verifications are ordered to confirm specific information relating to the loan applicant's income and credit standing. It is the Bank's policy to obtain an appraisal of the real estate intended to secure a proposed mortgage loan from an independent fee appraiser approved by the Bank. It is Carver Federal's policy to record a lien on the real estate securing the loan and to obtain a title insurance policy that insures that the property is free of prior encumbrances. Borrowers must also obtain hazard insurance policies prior to closing and, 7 when the property is in a flood plain as designated by the Department of Housing and Urban Development, paid flood insurance policies must be obtained. Most borrowers are also required to advance funds on a monthly basis, together with each payment of principal and interest, to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes and hazard insurance. LOAN APPROVAL. Except for loans in excess of $5.0 million, mortgage loan approval authority has been delegated by the Bank's Board of Directors ("Board") to the Bank's Asset Liability and Interest Rate Risk Committee, a committee of the Board. The Asset Liability and Interest Rate Risk Committee has delegated to the Bank's Management Loan Committee, which consists of certain members of executive management, loan approval authority for loans up to and including $2.0 million. All one- to four-family mortgage loans that conform to Fannie Mae standards and limits may be approved by the Residential Mortgage Loan Underwriter. Any loan that represents an exception to the Bank's lending policies must be ratified by the next higher approval authority. Loans above $5.0 million must be approved by the full Board. LOANS TO ONE BORROWER. Under the loans-to-one-borrower limits of the Office of Thrift Supervision ("OTS"), with certain limited exceptions, loans and extensions of credit to a single or related group of borrowers outstanding at one time generally may not exceed 15% of the unimpaired capital and surplus of a savings bank. See "--Regulation and Supervision--Federal Banking Regulation--Loans to One Borrower Limitations." At March 31, 2004, the maximum loan under this test would be $8.6 million. At March 31, 2004 there were no relationships that exceeded the $8.6 million limit. LOAN SALES. Originations of one- to four-family real estate loans are generally made on properties located within the New York City metropolitan area, although Carver Federal does occasionally fund loans secured by property in other areas. All such loans, however, satisfy the Bank's underwriting criteria regardless of location. The Bank continues to offer one- to four-family fixed-rate mortgage loans in response to consumer demand but requires that such loans satisfy guidelines of either Fannie Mae or SONYMA to provide opportunity for subsequent sale in the secondary market as desired to manage interest rate risk exposure. LOAN PURCHASES AND ORIGINATIONS. During fiscal 2004 Carver Federal purchased a total of $93.7 million of mortgage loans, consisting of performing multifamily, construction and adjustable-rate one- to four-family mortgage loans to supplement its origination efforts. This represented 54.6% of Carver Federal's net addition to its loan production during fiscal 2004. The Bank purchases loans in order to increase interest income and to manage its liquidity position. The Bank continues to shift its loan production emphasis to take advantage of the higher yields and better interest rate risk characteristics available on multifamily and non-residential real estate mortgage loans as well as to increase its participation in multifamily and non-residential real estate mortgage loans with other New York metropolitan area lenders. Loans purchased in fiscal 2004 increased $51.4 million, or 121.7%, from loan purchases of $42.3 million during the fiscal 2003. Loan originations were $87.1 million in fiscal 2004 compared to $59.6 million in fiscal 2003 and $65.9 million in the fiscal year ended March 31, 2002 ("fiscal 2002"). The increase in loan originations in fiscal 2004 can be attributed to the Bank's commitment to invest in its market area which was brought about by successfully staffing its Lending Department. In addition, the market experienced increased mortgage refinance activity resulting from a lower interest rate environment which increased loan demand. The following table sets forth certain information with respect to Carver Federal's loan originations, purchases and sales during the periods indicated.
YEAR ENDED MARCH 31, ---------------------------------------------------------------------------------------- 2004 2003 2002 ---------------------------- --------------------------- --------------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------------- ------------- ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS) Loans Originated: One- to four-family $14,284 8.33 % $5,985 6.02 % $4,144 3.78 % Multifamily 5,771 3.37 19,979 20.10 27,225 24.80 Non-residential 50,373 29.38 24,524 24.67 25,583 23.31 Construction 12,050 7.02 9,006 9.06 8,910 8.12 Consumer and business (1) 4,662 2.72 101 0.10 53 0.05 ------------- ------------- ------------- ------------- ------------- ------------- Total loans originated 87,140 50.82 59,595 59.95 65,915 60.06 Loans purchased (2) 93,694 54.64 42,260 42.51 45,203 41.18 Loans sold (3) (9,358) (5.46) (2,453) (2.46) (1,361) (1.24) ------------- ------------- ------------- ------------- ------------- ------------- Net additions to loan portfolio $171,476 100.00 % $99,402 100.00 % $109,757 100.00 % ============= ============= ============= ============= ============= =============
(1) Comprised of automobile, credit card, personal, home improvement and secured business loans. (2)Comprised primarily of one- to four-family mortgage loans, multifamily mortgage loans and construction loans. (3) Comprised primarily of fixed rate one- to four-family loans and automobile loans. 8 Loans purchased by the Bank entail certain risks not necessarily associated with loans the Bank originates. The Bank's purchased loans are generally acquired without recourse and in accordance with the Bank's underwriting criteria for originations. In addition, purchased loans have a variety of terms, including maturities, interest rate caps and indices for adjustment of interest rates, that may differ from those offered at the time by the Bank in connection with the loans the Bank originates. The Bank initially seeks to purchase loans in its market area, however, the Bank will purchase loans secured by property secured outside its market area to meet its financial objectives. During fiscal 2004, the properties securing purchased loans were concentrated in New York, New Jersey, Connecticut and California. The market areas in which the properties that secure the purchased loans are located may differ from Carver Federal's market area and may be subject to economic and real estate market conditions that may significantly differ from those experienced in Carver Federal's market area. There can be no assurance that economic conditions in these out-of-state areas will not deteriorate in the future, resulting in increased loan delinquencies and loan losses among the loans secured by property in these areas. In an effort to reduce these risks, with its existing personnel and through the use of a quality control/loan review firm, the Bank has sought to ensure that purchased loans satisfy the Bank's underwriting standards and do not otherwise have a higher risk of collection or loss than loans originated by the Bank. A Lending Department officer monitors the inspection and confirms the review of each purchased loan. Carver Federal also requires appropriate documentation and further seeks to reduce its risk by requiring, in each buy/sell agreement, a series of warranties and representations as to the underwriting standards and the enforceability of the related legal documents. These warranties and representations remain in effect for the life of the loan. Any misrepresentation must be cured within 90 days of discovery or trigger certain repurchase provisions in the buy/sell agreement. INTEREST RATES AND LOAN FEES. Interest rates charged by Carver Federal on mortgage loans are primarily determined by competitive loan rates offered in its market area and minimum yield requirements for loans purchased by Fannie Mae and SONYMA. Mortgage loan rates reflect factors such as prevailing market interest rate levels, the supply of money available to the savings industry and the demand for such loans. These factors are in turn affected by general economic conditions, the monetary policies of the federal government, including the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the general supply of money in the economy, tax policies and governmental budget matters. Carver Federal charges fees in connection with loan commitments and originations, rate lock-ins, loan modifications, late payments, changes of property ownership and for miscellaneous services related to its loans. Loan origination fees are calculated as a percentage of the loan principal. The Bank typically receives fees of between zero and one point (one point being equivalent to 1% of the principal amount of the loan) in connection with the origination of fixed-rate and adjustable-rate mortgage loans. The loan origination fee, net of certain direct loan origination expenses, is deferred and accreted into income over the contractual life of the loan using the interest method. If a loan is prepaid, refinanced or sold, all remaining deferred fees with respect to such loan are taken into income at such time. In addition to the foregoing fees, Carver Federal receives fees for servicing loans for others, which in turn generally are sub-serviced for Carver Federal by a third party servicer. Servicing activities include the collection and processing of mortgage payments, accounting for loan repayment funds and paying real estate taxes, hazard insurance and other loan-related expenses out of escrowed funds. Income from these activities varies from period to period with the volume and type of loans originated, sold and purchased, which in turn is dependent on prevailing market interest rates and their effect on the demand for loans in the Bank's market area. LOAN MATURITY SCHEDULE. The following table sets forth information at March 31, 2004 regarding the amount of loans maturing in Carver Federal's portfolio, including scheduled repayments of principal, based on contractual terms to maturity. Demand loans, loans having no schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. The table below does not include any estimate of prepayments, which significantly shorten the average life of all mortgage loans and may cause Carver Federal's actual repayment experience to differ significantly from that shown below.
DUE DURING THE YEAR ENDING MARCH 31, DUE THREE ----------------------------------- TO FIVE DUE FIVE TO DUE TEN TO DUE AFTER 2005 2006 2007 YEARS TEN YEARS 20 YEARS 20 YEARS TOTAL ----------- ---------- ----------- ------------ ------------ ----------- ------------ ------------ (DOLLARS IN THOUSANDS) Real Estate Loans: One- to four-family $4,843 $4,305 $3,037 $5,073 $1,285 $6,186 $73,916 $98,645 Multifamily 4,581 4,181 10,300 39,334 11,983 11,795 38,078 120,252 Non-residential 5,632 8,157 10,117 40,279 17,660 7,860 12,936 102,641 Construction 26,534 500 342 - - - - 27,376 Consumer and business loans 4,575 1,037 44 206 42 92 14 6,010 ----------- ---------- ----------- ------------ ------------ ----------- ------------ ------------ Total $46,165 $18,180 $23,840 $84,892 $30,970 $25,933 $124,944 $354,924 =========== ========== =========== ============ ============ =========== ============ ============
The following table sets forth as of March 31, 2004 amounts in each loan category that are contractually due after March 31, 2005 and whether such loans have fixed rates or adjustable interest rates. Scheduled contractual principal repayments of loans do not 9 necessarily reflect the actual lives of such assets. The average life of long-term loans is substantially less than their contractual terms due to prepayments. In addition, due-on-sale clauses in mortgage loans generally give Carver Federal the right to declare a conventional loan due and payable in the event, among other things, that a borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and tends to decrease when current mortgage loan market rates are substantially lower than rates on existing mortgage loans. DUE AFTER MARCH 31, 2005 ------------------------------------ FIXED ADJUSTABLE TOTAL ---------- ------------ ---------- (IN THOUSANDS) Real Estate Loans One- to four-family $ 17,514 $ 76,288 $ 93,802 Multifamily 38,929 76,742 115,671 Non-residential 47,386 49,623 97,009 Construction - 842 842 Consumer and business loans 1,412 23 1,435 ---------- ------------ ---------- Total $105,241 $203,518 $308,759 ========== ============ ========== ASSET QUALITY GENERAL. One of the Bank's key operating objectives continues to be to maintain a high level of asset quality. Through a variety of strategies, including, but not limited to, monitoring loan delinquencies, borrower workout arrangements and marketing of foreclosed properties, the Bank has been proactive in addressing problem and non-performing assets which, in turn, has helped to build the strength of the Bank's financial condition. Such strategies, as well as the Bank's concentration on one- to four-family and commercial mortgage lending (which includes multifamily and non-residential real estate loans), the maintenance of sound credit standards for new loan originations and a strong real estate market, have resulted in the Bank maintaining a low level of non-performing assets. The underlying credit quality of the Bank's loan portfolio is dependent primarily on each borrower's ability to continue to make required loan payments and, in the event a borrower is unable to continue to do so, the value of the collateral should be adequate to secure the loan. A borrower's ability to pay typically is dependent primarily on employment and other sources of income, which, in turn, is impacted by general economic conditions, although other factors, such as unanticipated expenditures or changes in the financial markets, may also impact the borrower's ability to pay. Collateral values, particularly real estate values, are also impacted by a variety of factors, including general economic conditions, demographics, maintenance and collection or foreclosure delays. NON-PERFORMING ASSETS. When a borrower fails to make a payment on a mortgage loan, immediate steps are taken by Carver Federal's sub-servicers to have the delinquency cured and the loan restored to current status. With respect to mortgage loans, once the payment grace period has expired (in most instances 15 days after the due date), a late notice is mailed to the borrower within two business days and a late charge is imposed if applicable. If payment is not promptly received, the borrower is contacted by telephone and efforts are made to formulate an affirmative plan to cure the delinquency. Additional calls are made by the 20th and 25th day of the delinquency. If a mortgage loan becomes 30 days delinquent, a letter is mailed to the borrower requesting payment by a specified date. If a mortgage loan becomes 60 days delinquent, Carver Federal seeks to make personal contact with the borrower and also has the property inspected. If a mortgage becomes 90 days delinquent, a letter is sent to the borrower demanding payment by a certain date and indicating that a foreclosure suit will be filed if the deadline is not met. If payment is still not made, the Bank may pursue foreclosure or other appropriate action. When a borrower fails to make a payment on a consumer loan, steps are taken by Carver Federal's loan servicing department to have the delinquency cured and the loan restored to current status. Once the payment grace period has expired (15 days after the due date), a late notice is mailed to the borrower immediately and a late charge is imposed if applicable. If payment is not promptly received, the borrower is contacted by telephone, and efforts are made to formulate an affirmative plan to cure the delinquency. If a consumer loan becomes 30 days delinquent, a letter is mailed to the borrower requesting payment by a specified date. If the loan becomes 60 days delinquent, the account is given to an independent collection agency to follow up with the collection of the account. If the loan becomes 90 days delinquent, a final warning letter is sent to the borrower and any co-borrower. If the loan remains delinquent, it is reviewed for charge-off. The Bank's collection efforts generally continue after the loan is charged off. 10 The following table sets forth information with respect to Carver Federal's non-performing assets at the dates indicated.
AT MARCH 31, ---------------------------------------------------------------- 2004 2003 2002 2001 2000 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Loans accounted for on a non-accrual basis (1): Real estate: One- to four-family $ 558 $ 1,113 $ 756 $ 947 $ 966 Multifamily 1,532 - 253 978 870 Non-residential - 639 1,754 565 - Construction 23 23 23 23 122 Consumer and business 10 27 37 6 168 ----------- ----------- ----------- ----------- ----------- Total non-accrual loans 2,123 1,802 2,823 2,519 2,126 ----------- ----------- ----------- ----------- ----------- Accruing loans contractually past due 90 days or more - - - - - ----------- ----------- ----------- ----------- ----------- Total of non-accrual and accruing 90-day past due loans $ 2,123 $ 1,802 $ 2,823 $ 2,519 $ 2,126 ----------- ----------- ----------- ----------- ----------- Other non-performing assets (2): Real estate: One- to four-family - - - - 127 Multifamily - - - 27 27 Non-residential - - - 449 768 Consumer and business - - - - 16 ----------- ----------- ----------- ----------- ----------- Total other non-performing assets - - - 476 938 ----------- ----------- ----------- ----------- ----------- Total non-performing assets (3) $ 2,123 $ 1,802 $ 2,823 $ 2,995 $ 3,064 =========== =========== =========== =========== =========== Non-performing loans to total loans 0.60% 0.61% 0.96% 1.04% 1.12% Non-performing assets to total assets 0.39% 0.36% 0.63% 0.71% 0.73%
(1) Non-accrual status denotes any loan where the delinquency exceeds 90 days past due and in the opinion of management the collection of additional interest is doubtful. Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on assessment of the ability to collect on the loan. During the year ended March 31, 2004, gross interest income of $185,000 would have been recorded on non-accrual loans had they been current throughout the year (2) Other non-performing assets represent property acquired by the Bank in settlement of loans (i.e., through foreclosure or repossession or as an in-substance foreclosure). These assets are recorded at the lower of their fair value or the unpaid principal balance plus unpaid accrued interest of the related loans. (3) Total non-performing assets consist of non-accrual loans, accruing loans 90 days or more past due and property acquired in settlement of loans. At March 31, 2004, total non-performing assets increased by $321,000, or 17.8%, to $2.1 million compared to $1.8 million at March 31, 2003. All non-performing assets at March 31, 2004 and 2003 relate to loans accounted for on a non-accrual basis. The increase primarily reflects an increase in non-accruing multifamily real estate loans partially offset by a decrease in non-accruing one- to four-family real estate loans and non-residential loans. There were no accruing loans contractually past due 90 days or more at March 31, 2004 and March 31, 2003, reflecting the continued practice adopted by the Bank during the fiscal year ended March 31, 2000 to either write off or place on non-accrual status all loans contractually past due 90 days or more. ASSET CLASSIFICATION AND ALLOWANCES FOR LOSSES. Federal regulations and the Bank's policies require the classification of assets on the basis of quality on a quarterly basis. An asset is classified as "substandard" if it is determined to be inadequately protected by the current net worth and paying capacity of the obligor or the current value of the collateral pledged, if any. An asset is classified as "doubtful" if full collection is highly questionable or improbable. An asset is classified as "loss" if it is considered un-collectible, even if a partial recovery could be expected in the future. The regulations also provide for a "special mention" designation, described as assets that do not currently expose a savings institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. Assets classified as substandard or doubtful require a savings institution to establish general allowances for loan losses. If an asset or portion thereof is classified as a loss, a savings institution must either establish specific allowances for loan losses in the amount of the portion of the asset classified loss or charge off such amount. Federal examiners may disagree with a savings institution's classifications. If a savings institution does not agree with an examiner's classification of an asset, it may appeal this determination to the OTS Regional Director. 11 At March 31, 2004, Carver Federal had $2.7 million of loans classified as substandard which represented 0.5% of the Bank's total assets and 4.8% of the Bank's tangible regulatory capital at March 31, 2004. There were no loans classified as doubtful or loss at March 31, 2004. The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan losses and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems, that management analyze all significant factors that affect the ability to collect the portfolio in a reasonable manner and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary. Federal examiners may disagree with the savings institution as to the appropriate level of the institution's allowance for loan losses. While management believes Carver Federal has established its existing loss allowances in accordance with generally accepted accounting principles, there can be no assurance that regulators, in reviewing Carver Federal's assets, will not require Carver Federal to increase its loss allowance, thereby negatively affecting Carver Federal's reported financial condition and results of operations. Carver Federal's methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific loans as well as losses that have not been identified but can be expected to occur. Further, management reviews the ratio of allowances to total loans (including projected growth) and recommends adjustments to the level of allowances accordingly. The Internal Asset Review Committee conducts quarterly reviews of the Bank's loans and evaluates the need to establish general and specific allowances on the basis of this review. In addition, management actively monitors Carver Federal's asset quality and charges off loans and properties acquired in settlement of loans against the allowances for losses on loans and such properties when appropriate and provides specific loss reserves when necessary. Although management believes it uses the best information available to make determinations with respect to the allowances for losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations. Carver Federal's Internal Asset Review Committee reviews its assets on a quarterly basis to determine whether any assets require classification or re-classification. The Bank has a centralized loan servicing structure that relies upon outside servicers, each of which generates a monthly report of delinquent loans. The Board has designated the Internal Asset Review Committee to perform quarterly reviews of the Bank's asset quality, and their report is submitted to the Board for review. The Asset Liability and Interest Rate Risk Committee establishes policy relating to internal classification of loans and also provides input to the Internal Asset Review Committee in its review of classified assets. In originating loans, Carver Federal recognizes that credit losses will occur and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. It is management's policy to maintain a general allowance for loan losses based on, among other things, regular reviews of delinquencies and loan portfolio quality, character and size, the Bank's and the industry's historical and projected loss experience and current and forecasted economic conditions. In addition, considerable uncertainty exists as to the future improvement or deterioration of the real estate markets in various states, or of their ultimate impact on Carver Federal as a result of its purchased loans in such states. See "--Lending Activities--Loan Purchases and Originations." Carver Federal increases its allowance for loan losses by charging provisions for possible losses against the Bank's income. General allowances are established by the Board on at least a quarterly basis based on an assessment of risk in the Bank's loans, taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, the state of the real estate market and economic conditions generally. Specific allowances are provided for individual loans, or portions of loans, when ultimate collection is considered improbable by management based on the current payment status of the loan and the fair value or net realizable value of the security for the loan. At the date of foreclosure or other repossession or at the date the Bank determines a property is an impaired property, the Bank transfers the property to real estate acquired in settlement of loans at the lower of cost or fair value, less estimated selling costs. Fair value is defined as the amount in cash or cash-equivalent value of other consideration that a real estate parcel would yield in a current sale between a willing buyer and a willing seller. Any amount of cost in excess of fair value is charged-off against the allowance for loan losses. Carver Federal records an allowance for estimated selling costs of the property immediately after foreclosure. Subsequent to acquisition, the property is periodically evaluated by management and an allowance is established if the estimated fair value of the property, less estimated costs to sell, declines. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of real estate is recorded. At March 31, 2004, the Bank had no real estate acquired in settlement of loans. See Note 1 of Notes to Consolidated Financial Statements. 12 The following table sets forth an analysis of Carver Federal's allowance for loan losses for the periods indicated.
YEAR ENDED MARCH 31, ------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ------------- ------------ -------------- ------------ ------------ (DOLLARS IN THOUSANDS) Balance at beginning of period $ 4,158 $ 4,128 $ 3,551 $ 2,935 $ 4,020 Loans charged-off: Real Estate: One- to four-family 6 2 - 252 138 Non-residential 55 - - 194 171 Consumer and business 264 226 500 931 2,260 ------------- ------------ -------------- ------------ ------------ Total Charge-offs 325 228 500 1,377 2,569 ------------- ------------ -------------- ------------ ------------ Recoveries: One- to four-family 107 - 3 - 31 Multifamily - - - - 40 Non-residential 10 - - - 22 Consumer and business 175 258 174 200 292 ------------- ------------ -------------- ------------ ------------ Total Recoveries 292 258 177 200 385 ------------- ------------ -------------- ------------ ------------ ------------- ------------ -------------- ------------ ------------ Net loans charged-off (recovered) 33 (30) 323 1,177 2,184 ------------- ------------ -------------- ------------ ------------ Provision for losses - - 900 1,793 1,099 ------------- ------------ -------------- ------------ ------------ Balance at end of period $ 4,125 $ 4,158 $ 4,128 $ 3,551 $ 2,935 ============= ============ ============== ============ ============ Ratio of net charge-offs to loans outstanding 0.01% -0.01% 0.11% 0.42% 0.84% Ratio of allowance to total loans 1.16% 1.40% 1.41% 1.24% 1.07% Ratio of allowance to non-performing assets (1) 194.30% 230.74% 146.23% 118.56% 95.79%
(1) Non-performing assets consist of non-accrual loans, accruing loans 90 days or more past due and property acquired in settlement of loans. The following table allocates the allowance for loan losses by asset category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
AT MARCH 31, --------------------------------------------------------------------- 2004 2003 2002 ---------------------- ---------------------- ---------------------- % OF LOANS % OF LOANS % OF LOANS IN EACH IN EACH IN EACH CATEGORY CATEGORY CATEGORY TO TOTAL TO TOTAL TO TOTAL AMOUNT GROSS LOANS AMOUNT GROSS LOANS AMOUNT GROSS LOANS --------- ------------ --------- ------------ --------- ------------ Loans: Real Estate One- to four-family $ 355 27.80% $ 298 24.20% $ 429 41.84% Multifamily 1,240 33.88% 656 44.45% 1,468 40.39% Non-residential 853 28.92% 1,967 26.74% 729 13.66% Construction 158 7.71% 170 3.89% 76 3.32% Consumer and business 487 1.69% 344 0.72% 377 0.79% Unallocated 1,032 N/A 723 N/A 1,049 N/A --------- ------------ --------- ------------ --------- ------------ Total Allowance for loan losses $ 4,125 100.00% $ 4,158 100.00% $ 4,128 100.00% ========= ============ ========= ============ ========= ============
AT MARCH 31, --------------------------------------------- 2001 2000 ---------------------- ---------------------- % OF LOANS % OF LOANS IN EACH IN EACH CATEGORY CATEGORY TO TOTAL TO TOTAL AMOUNT GROSS LOANS AMOUNT GROSS LOANS --------- ------------ --------- ------------ Loans: Real Estate One- to four-family $ 1,198 54.94% $ 1,050 55.76% Multifamily 748 29.13% 764 31.52% Non-residential 353 12.58% 202 8.31% Construction 290 2.03% 272 1.95% Consumer and business 962 1.32% 647 2.46% Unallocated - N/A - N/A --------- ------------ --------- ------------ Total Allowance for loan losses $ 3,551 100.00% $ 2,935 100.00% ========= ============ ========= ============ 13 INVESTMENT ACTIVITIES GENERAL. The Bank utilizes mortgage-backed and other investment securities in virtually all aspects of its asset/liability management strategy. In making investment decisions, the Bank considers, among other things, its yield and interest rate objectives, its interest rate and credit risk position and its liquidity and cash flow. The Bank must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. The Bank's liquidity policy requires that cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. Generally, the investment policy of the Bank is to invest funds among categories of investments and maturities based upon the Bank's asset/liability management policies, investment quality, loan and deposit volume, liquidity needs and performance objectives. SFAS No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES", requires that securities be classified into three categories: trading, held-to-maturity, and available-for-sale. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value with unrealized gains and losses included in earnings. Debt securities for which the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. All other securities not classified as trading or held-to-maturity are classified as available-for-sale and reported at fair value with unrealized gains and losses included, on an after-tax basis, in a separate component of stockholders' equity. At March 31, 2004, the Bank had no securities classified as trading. At March 31, 2004, $96.4 million, or 68.9% of the Bank's mortgage-backed and other investment securities, was classified as available-for-sale. The remaining $43.5 million, or 31.1%, was classified as held-to-maturity. MORTGAGE-BACKED SECURITIES. The Bank has invested in mortgage-backed securities in order to achieve its asset/liability management goals. Although mortgage-backed securities generally yield from 60 to 100 basis points less than whole loans, they present substantially lower credit risk, are more liquid than individual mortgage loans and may be used to collateralize obligations of the Bank. Because Carver Federal receives regular payments of principal and interest from its mortgage-backed securities, these investments provide more consistent cash flows than investments in other debt securities, which generally only pay principal at maturity. Mortgage-backed securities also help the Bank meet certain definitional tests for favorable treatment under federal banking and tax laws. See "--Regulation and Supervision--Federal Banking Regulation--QTL Test" and "Federal and State Taxation." At March 31, 2004, mortgage-backed securities constituted 22.0% of total assets, as compared to 24.9% of total assets at March 31, 2003. Carver Federal maintains a significant portfolio of mortgage-backed securities in the form of Government National Mortgage Association ("GNMA") pass-through certificates, Fannie Mae and FHLMC participation certificates and at times collateralized mortgage obligations ("CMOs"). GNMA pass-through certificates are guaranteed as to the payment of principal and interest by the full faith and credit of the United States Government while Fannie Mae and FHLMC certificates are each guaranteed by their respective agencies as to principal and interest. Mortgage-backed securities generally entitle Carver Federal to receive a pro rata portion of the cash flows from an identified pool of mortgages. CMOs are securities issued by special purpose entities generally collateralized by pools of mortgage-backed securities. The cash flows from such pools are segmented and paid in accordance with a predetermined priority to various classes of securities issued by the entity. Carver Federal has also invested in pools of loans guaranteed as to principal and interest by the Small Business Administration ("SBA"). The Bank seeks to manage interest rate risk by investing in adjustable-rate mortgage-backed securities, which at March 31, 2004 constituted $113.2 million, or 95.8% of the mortgage-backed securities portfolio. Mortgage-backed securities, however, expose Carver Federal to certain unique risks. In a declining rate environment, accelerated prepayments of loans underlying these securities expose Carver Federal to the risk that it will be unable to obtain comparable yields upon reinvestment of the proceeds. In the event the mortgage-backed security has been funded with an interest-bearing liability with a maturity comparable to the original estimated life of the mortgage-backed security, the Bank's interest rate spread could be adversely affected. Conversely, in a rising interest rate environment, the Bank may experience a lower than estimated rate of repayment on the underlying mortgages, effectively extending the estimated life of the mortgage-backed security and exposing the Bank to the risk that it may be required to fund the asset with a liability bearing a higher rate of interest. 14 The following table sets forth the carrying value of Carver Federal's mortgage-backed securities at the dates indicated. In November 2002 the Bank transferred $22.8 million of mortgage-backed securities from available-for-sale to held-to-maturity.
AT MARCH 31, ------------------------------------------------------ 2004 2003 2002 ----------------- ---------------- --------------- (IN THOUSANDS) Available-for-Sale: GNMA $ 55,512 $ 47,120 $ 10,584 Fannie Mae 12,626 23,470 11,451 FHLMC 6,712 19,693 28,249 CMO - - 136 ----------------- ---------------- --------------- Total available-for-sale 74,850 90,283 50,420 ----------------- ---------------- --------------- HELD-TO-MATURITY: GNMA $ 1,465 $ 2,473 $ 3,448 Fannie Mae 20,386 6,203 5,607 FHLMC 21,305 27,482 6,149 SBA 318 372 439 ----------------- ---------------- --------------- Total held-to-maturity 43,474 36,530 15,643 ----------------- ---------------- --------------- Total mortgage-backed securities $ 118,324 $ 126,813 $ 66,063 ================= ================ ===============
The following table sets forth the scheduled final maturities, carrying values and fair values for Carver Federal's mortgage-backed securities at March 31, 2004. Expected maturities will differ from contractual maturities due to scheduled repayments and because borrowers may have the right to call or prepay obligations with or without prepayment penalties. The following table does not take into consideration the effects of scheduled repayments or the effects of possible prepayments. CARRYING FAIR VALUE VALUE -------- -------- (IN THOUSANDS) AVAILABLE-FOR-SALE: Less than one year $ 9 $ 9 One through five years 902 957 Five through ten years - - After ten years 74,202 73,884 -------- -------- $ 75,113 $ 74,850 ======== ======== HELD-TO-MATURITY: Less than one year 12 12 One through five years 174 183 Five through ten years - - After ten years 43,288 43,599 -------- -------- $ 43,474 $ 43,794 ======== ======== OTHER INVESTMENT SECURITIES. In addition to mortgage-backed securities, the Bank also invests in high-quality assets (primarily government and agency obligations) with short and intermediate terms (typically seven years or less) to maturity. Carver Federal is permitted under federal law to make certain investments, including investments in securities issued by various federal agencies and state and municipal governments, deposits at the FHLB, certificates of deposit in federally insured institutions, certain bankers' acceptances and federal funds. The Bank may also invest, subject to certain limitations, in commercial paper having one of the two highest investment ratings of a nationally recognized credit rating agency, and certain other types of corporate debt securities and mutual funds. 15 The following table sets forth the carrying value of Carver Federal's other securities available-for-sale and held-to-maturity at the date indicated.
AT MARCH 31, ------------------------------------------ 2004 2003 2002 ------------- ------------ ------------ (IN THOUSANDS) U.S. Government and Equity securities: Available-for-sale $ 21,553 $ 38,772 $ 39,401 Held-to-maturity - - - ------------- ------------ ------------ Total other securities $ 21,553 $ 38,772 $ 39,401 ============= ============ ============
The following table sets forth the scheduled maturities, carrying values and fair values for Carver Federal's other investments at March 31, 2004. CARRYING FAIR VALUE VALUE ------------- ------------ (IN THOUSANDS) Available-for-sale: One year or less $ 6,443 $ 6,452 One through five years 14,805 15,101 ------------- ------------ $ 21,248 $ 21,553 ============= ============ OTHER EARNING ASSETS. Federal regulations require the Bank to maintain an investment in FHLB stock and a sufficient amount of liquid assets which may be invested in cash and specified securities. For additional information, see "--Regulation and Supervision--Federal Banking Regulation--Liquidity." The following table sets forth the carrying value of Carver Federal's investment in FHLB stock and liquid assets at the dates indicated. AT MARCH 31, --------------------------------- 2004 2003 2002 ------- ------- ------- (IN THOUSANDS) FHLB stock $ 4,576 $ 5,440 $ 3,763 Federal funds sold 8,200 5,500 21,100 DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS GENERAL. Deposits are the primary source of Carver Federal's funds for lending and other investment purposes. In addition to deposits, Carver Federal derives funds from loan principal repayments, interest payments and maturing investments. Loan and mortgage-backed securities repayments and interest payments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by prevailing market interest rates and money market conditions. Borrowed money may be used to supplement the Bank's available funds, and from time to time the Bank has borrowed funds from the FHLB and through repurchase agreements. DEPOSITS. Carver Federal attracts deposits principally from within its market area by offering a variety of deposit instruments, including passbook and statement accounts and certificates of deposit, which range in term from 91 days to seven years. Deposit terms vary, principally on the basis of the minimum balance required, the length of time the funds must remain on deposit and the interest rate. Carver Federal also offers Individual Retirement Accounts. Carver Federal's policies are designed primarily to attract deposits from local residents through the Bank's branch network rather than from outside the Bank's market area. Carver Federal also holds deposits from various governmental agencies or authorities and corporations. At March 31, 2004 the Bank did not hold any brokered deposits. Deposit interest rates, maturities, service fees and withdrawal penalties on deposits are established based on the Bank's funds acquisition and liquidity requirements, the rates paid by the Bank's competitors, the Bank's growth goals and applicable regulatory restrictions and requirements. 16 The following table sets forth the change in dollar amount of deposits in the various types of accounts offered by Carver Federal between the dates indicated. During fiscal 2004 the Bank opened two stand-alone ATM centers in Harlem and a new branch in Jamaica, Queens. During fiscal 2002, the Bank sold its branch located in East New York. As a result of this sale, the Bank transferred approximately $16.4 million of deposits to the purchaser. Additionally, during fiscal 2002, the Bank opened a new Branch in Harlem. Both of the new branches operate in New York State designated Banking Development Districts ("BDD"), which allow Carver Federal to participate in BDD-related activities, including receipt of low cost New York City and New York State deposits. As of March 31, 2004, Carver Federal held $50.0 million in BDD deposits.
YEAR ENDED MARCH 31, ----------------------------------------- 2004 2003 2002 ----------------------------------------- (DOLLARS IN THOUSANDS) Deposits at beginning of period $347,164 $324,954 $279,424 Net increase before interest credited 21,852 16,450 37,403 Interest credited 4,649 5,760 8,127 ------------ ------------ ------------ Deposits at end of period $373,665 $347,164 $324,954 ============ ============ ============ Net increase during the year: Amount $26,501 $22,210 $45,530 ============ ============ ============ Percent 7.6% 6.8% 16.3% ============ ============ ============
The following table sets forth the distribution of the Bank's deposit accounts and the related weighted average interest rates paid at the dates indicated.
AT MARCH 31, ------------------------------------------------------------------------ 2004 2003 --------------------------------- ---------------------------------- PERCENT OF WEIGHTED PERCENT OF WEIGHTED TOTAL AVERAGE TOTAL AVERAGE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE ---------- ---------- ---------- ---------- ---------- ----------- Non-interest-bearing demand $ 20,966 5.6 % - % $ 16,539 4.8 % - % NOW demand 22,671 6.0 0.30 18,190 5.2 0.53 Savings and clubs 131,120 35.1 0.60 128,935 37.1 1.06 Money Market savings 30,842 8.3 0.74 20,735 6.0 0.92 Certificates of deposit 168,066 45.0 1.97 162,765 46.9 2.20 ---------- ---------- ---------- ---------- Total $373,665 100.0 % 1.18 % $ 347,164 100.0 % 1.51 % ========== ========== ========== ==========
AT MARCH 31, ------------------------------------ 2002 ------------------------------------ PERCENT OF WEIGHTED TOTAL AVERAGE AMOUNT DEPOSITS RATE ---------- --------- ------------- Non-interest-bearing demand $ 13,463 4.1 % - % NOW demand 18,095 5.6 1.24 Savings and clubs 126,779 39.0 1.71 Money Market savings 15,232 4.7 1.78 Certificates of deposit 151,385 46.6 2.73 ---------- --------- Total $324,954 100.0 % 2.09 % ========== ========= 17 The following table sets forth the amount and maturities of certificates of deposit in specified weighted average interest rate categories at March 31, 2004.
PERIOD TO MATURITY MARCH 31, ----------------------------------------------------------------------------- --------------------------- LESS THAN AFTER PERCENT Rate ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL OF TOTAL 2003 2002 - --------------- ------------- ------------- ----------- ----------- ------------- ---------- --------------------------- (DOLLARS IN THOUSANDS) 0% - 0.99% $ 29,641 $ 33 $ 3 $ 171 $ 29,848 17.76 % $ - $ - 1% - 1.99% 65,023 4,045 161 205 69,434 41.31 87,811 22,138 2% - 3.99% 29,453 8,352 5,538 9,951 53,294 31.71 40,926 95,523 4% and over 3,622 3,387 871 7,610 15,490 9.22 34,028 33,724 ------------- ------------- ----------- ----------- ------------- ---------- ------------- ------------- Total $ 127,739 $ 15,817 $ 6,573 $17,937 $ 168,066 100.00 % $ 162,765 $ 151,385 ============= ============= =========== =========== ============= ========== ============= =============
Carver Federal's certificates of deposit of $100,000 or more were $104.3 million as of March 31, 2004 compared to $100.1 million at March 31, 2003. BORROWED MONEY. Deposits are the primary source of funds for Carver Federal's lending, investment and general operating activities. Carver Federal is authorized, however, to use advances and securities sold under agreement to repurchase ("Repos") from the FHLB and approved primary dealers to supplement its supply of funds and to meet deposit withdrawal requirements. The FHLB functions as a central bank providing credit for savings institutions and certain other member financial institutions. As a member of the FHLB system, Carver Federal is required to own stock in the FHLB and is authorized to apply for advances. Advances are made pursuant to several different programs, each of which has its own interest rate and range of maturities. Advances from the FHLB are secured by Carver Federal's stock in the FHLB and a blanket pledge of Carver Federal's mortgage loan and mortgage-backed securities portfolios. One of the elements of Carver Federal's investment strategy is to leverage the balance sheet by increasing liabilities with FHLB advances and Repos and investing borrowed funds primarily in adjustable-rate mortgage loan and mortgage-backed securities products. The Bank takes into consideration the term of borrowed money with the repricing cycle of the mortgage loans on the balance sheet. At March 31, 2004, Carver Federal had outstanding $104.3 million in total borrowed money. 18 The following table sets forth certain information regarding Carver Federal's borrowed money at the dates and for the periods indicated:
AT OR FOR THE YEAR ENDED MARCH 31, -------------------------------- 2004 2003 ------------- ------------- (DOLLARS IN THOUSANDS) Amounts outstanding at the end of period: FHLB advances $ 91,516 $ 108,789 Guaranteed preferred beneficial interest in junior subordinated debentures 12,741 - Loan for employee stock ownership plan 25 207 Weighted average rate paid at period end: FHLB advances 3.92% 3.59% Guaranteed preferred beneficial interest in junior subordinated debentures 4.20% - Loan for employee stock ownership plan 4.00% 4.00% Maximum amount of borrowing outstanding at any month end: FHLB advances $ 112,030 $ 108,789 Guaranteed preferred beneficial interest in junior subordinated debentures 12,742 - Loan for employee stock ownership plan 207 389 Approximate average amounts outstanding for period: FHLB advances $ 99,359 $ 80,541 Guaranteed preferred beneficial interest in junior subordinated debentures 6,854 - Loan for employee stock ownership plan 137 320 Approximate weighted average rate paid during period (1): FHLB advances 3.74% 3.99% Guaranteed preferred beneficial interest in junior subordinated debentures 4.78% - Loan for employee stock ownership plan 4.07% 4.24%
(1) The approximate weighted average rate paid during the period was computed by dividing the average amounts outstanding into the related interest expense for the period. On September 17, 2003, the Trust issued 13,000 shares, liquidation amount $1,000 per share, of floating rate capital securities. Gross proceeds from the sale of these trust preferred securities were $13.0 million and, together with the proceeds from the sale of the trust's common securities, were used to purchase approximately $13.4 million aggregate principal amount of the Holding Company's floating rate junior subordinated debt securities due 2033. The trust preferred securities are redeemable quarterly at the option of the Company beginning on or after July 7, 2007 and have a mandatory redemption date of September 17, 2033. Cash distributions on the trust preferred securities are cumulative and payable at a floating rate per annum (reset quarterly) equal to 3.05% over 3-month LIBOR, with a current rate of 4.16%. The subordinated debt securities amounted to $12.7 million at March 31, 2004 and are included in other borrowed money on the consolidated statement of financial condition. REGULATION AND SUPERVISION GENERAL The Bank is subject to extensive regulation, examination and supervision by its primary regulator, the OTS. The Bank's deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"), and it is a member of the FHLB. The Bank must file reports with the OTS concerning its activities and financial condition, and it must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The Holding Company, as a unitary savings and loan holding company, is subject to regulation, examination and supervision by the OTS and is required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and of the Securities and Exchange Commission (the "SEC") under the federal securities laws. The OTS and the FDIC periodically perform safety and soundness examinations of the Bank and the Holding Company and test our compliance with various regulatory requirements. The OTS has primary enforcement responsibility over federally chartered savings 19 banks and has substantial discretion to impose enforcement action on an institution that fails to comply with applicable regulatory requirements, particularly with respect to its capital requirements. In addition, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular federally chartered savings bank and, if action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. This regulation and supervision establishes a comprehensive framework to regulate and control the activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. This structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such laws and regulations whether by the OTS, the FDIC or through legislation could have a material adverse impact on the Bank and the Holding Company and their operations and stockholders. The description of statutory provisions and regulations applicable to federally chartered savings banks and their holding companies and of tax matters set forth in this document does not purport to be a complete description of all such statutes and regulations and their effects on the Bank and the Holding Company. FEDERAL BANKING REGULATION ACTIVITY POWERS. The Bank derives its lending and investment powers from the Home Owners' Loan Act, as amended ("HOLA"), and the regulations of the OTS. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. The Bank's authority to invest in certain types of loans or other investments is limited by federal law. LOANS TO ONE BORROWER LIMITATIONS. The Bank is generally subject to the same limits on loans to one borrower as a national bank. With specified exceptions, the Bank's total loans or extension of credit to a single borrower or group of related borrowers may not exceed 15% of the Bank's unimpaired capital and surplus, which does not include accumulated other comprehensive income. The Bank may lend additional amounts up to 10% of its unimpaired capital and surplus if the loans or extensions of credit are fully secured by readily marketable collateral. The Bank currently complies with applicable loans to one borrower limitations. At March 31, 2004, the Bank's limit on loans to one borrower based on its unimpaired capital and surplus was $8.6 million. QTL TEST. Under HOLA, the Bank must comply with a qualified thrift lender ("QTL") test. Under this test, the Bank is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" in at least nine months of the most recent twelve-month period. "Portfolio assets" means, in general, an association's total assets less the sum of (a) specified liquid assets up to 20% of total assets, (b) goodwill and other intangible assets and (c) the value of property used to conduct the Bank's business. "Qualified thrift investments" include various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities and consumer loans. If the Bank fails the QTL test, it must either operate under certain restrictions on its activities or convert to a bank charter. At March 31, 2004, the Bank maintained approximately 70.9% of its portfolio assets in qualified thrift investments. The Bank had also met the QTL test in each of the prior 12 months and was, therefore, a qualified thrift lender. CAPITAL REQUIREMENTS. OTS regulations require the Bank to meet three minimum capital ratios: (1) a tangible capital ratio requirement of 2% of total assets, as adjusted under OTS regulations; (2) a leverage ratio requirement of 4% of core capital to such adjusted total assets; and (3) a risk-based capital ratio requirement of 8% of core and supplementary capital to total risk-weighted assets. In determining compliance with the risk-based capital requirement, the Bank must compute its risk-weighted assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the U.S. government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulations based on the risks that the OTS believes are inherent in the type of asset. Generally, tangible capital is defined as common stockholders' equity (including retained earnings), certain non-cumulative perpetual preferred stock and related earnings and minority interests in equity accounts of fully consolidated subsidiaries, less intangibles (other than certain mortgage servicing rights) and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital is defined similarly to tangible capital, but also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital includes cumulative and other perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. In addition, up to 45% of unrealized gains on available-for-sale equity securities with a readily determinable fair value may be included in 20 supplementary capital. The allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital. In assessing an institution's capital adequacy, the OTS takes into consideration not only these numeric factors but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where necessary. The Bank, as a matter of prudent management, targets as its goal the maintenance of capital ratios which exceed these minimum requirements and are consistent with the Bank's risk profile. At March 31, 2004, the Bank exceeded each of its capital requirements with a tangible capital ratio of 10.6%, leverage capital ratio of 10.6% and total risk-based capital ratio of 17.7%. The Federal Deposit Insurance Corporation Improvement Act, as amended ("FDICIA"), requires that the OTS and other federal banking agencies revise their risk-based capital standards, with appropriate transition rules, to ensure that they take into account interest rate risk, concentration of risk and the risks of non-traditional activities. The OTS adopted regulations, effective January 1, 1994, that set forth the methodology for calculating an IRR component to be incorporated into the OTS risk-based capital regulations. On May 10, 2002, the OTS adopted an amendment to its capital regulations which eliminated the IRR component of the risk-based capital requirement. Pursuant to the amendment, the OTS will continue to monitor the IRR of individual institutions through the OTS requirements for IRR management, the ability of the OTS to impose individual minimum capital requirements on institutions that exhibit a high degree of IRR, and the requirements of Thrift Bulletin 13a, which provides guidance on the management of IRR and the responsibility of boards of directors in that area. LIMITATION ON CAPITAL DISTRIBUTIONS. The OTS imposes various restrictions on the Bank's ability to make capital distributions, including cash dividends, payments to repurchase or otherwise acquire its shares and other distributions charged against capital. A savings institution that is the subsidiary of a savings and loan holding company, such as the Bank, must file an application or a notice with the OTS at least 30 days before making a capital distribution. The Bank must file an application for prior approval if the total amount of its capital distributions (including each proposed distribution), for the applicable calendar year would exceed the Bank's net income for that year plus the Bank's retained net income for the previous two years. In other cases, the Bank will have to file a notice as a savings bank subsidiary of a savings and loan holding company. The OTS may disapprove of a notice or application if: (1) the Bank would be undercapitalized following the distribution; (2) the proposed capital distribution raises safety and soundness concerns; or (3) the capital distribution would violate a prohibition contained in any statute, regulation or agreement. LIQUIDITY. The Bank maintains liquidity levels to meet operational needs. In the normal course of business, the levels of liquid assets during any given period are dependent on operating, investing and financing activities. Cash and due from banks, federal funds sold and repurchase agreements with maturities of three months or less are the Bank's most liquid assets. The Bank maintains a liquidity policy to maintain sufficient liquidity to ensure its safe and sound operations. BRANCHING. Subject to certain limitations, federal law permits the Bank to establish branches in any state of the United States. The authority for the Bank to establish an interstate branch network would facilitate a geographic diversification of the Bank's activities. This authority under federal law and OTS regulations preempts any state law purporting to regulate branching by federal savings associations. COMMUNITY REINVESTMENT. Under the Community Reinvestment Act, as amended ("CRA"), as implemented by OTS regulations, the Bank has a continuing and affirmative obligation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for the Bank nor does it limit the Bank's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA does however require the OTS, in connection with its examination of the Bank, to assess the Bank's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the Bank. In particular, the system focuses on three tests: (1) a lending test, to evaluate the institution's record of making loans in its assessment areas; (2) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing and programs benefiting low or moderate income individuals and businesses; and (3) a service test, to evaluate the institution's delivery of banking services through its branches, ATMs and other offices. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating in its most recent examination conducted in 2001. 21 Regulations require that we publicly disclose certain agreements that are in fulfillment of CRA. The Holding Company has no such agreements in place at this time. TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in transactions with its "affiliates" is limited by OTS regulations and by Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, these transactions must be on terms which are as favorable to the Bank as comparable transactions with non-affiliates. Additionally, certain types of these transactions are restricted to an aggregate percentage of the Bank's capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from the Bank. In addition, OTS regulations prohibit a savings bank from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate other than a subsidiary. The Bank's authority to extend credit to its directors, executive officers, and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board ("FRB"). Among other things, these provisions require that extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank's capital. In addition, extensions of credit in excess of certain limits must be approved by the Bank's board of directors. The FRB rescinded its interpretations of Sections 23A and 23B of the FRA and replaced these interpretations with Regulation W. The OTS has also conformed its regulations to coincide with Regulation W. Regulation W makes various changes to existing law regarding Sections 23A and 23B, including expanding the definition of what constitutes an "affiliate" subject to Sections 23A and 23B and exempting certain subsidiaries of state-chartered banks from the restrictions of Sections 23A and 23B. The OTS issued a final rule, effective as of October 6, 2003, which conforms the OTS's regulations on transactions with affiliates to Regulation W. In addition, the rule implements additional restrictions imposed on savings associations under Section 11 of HOLA, including provisions prohibiting a savings association from making a loan to an affiliate that is engaged in non-bank holding company activities and provisions prohibiting a savings association from purchasing or investing in securities issued by an affiliate that is not a subsidiary. The final rule also includes certain specific exemptions from these prohibitions. The FRB and the OTS expect each depository institution that is subject to Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W and the final OTS rule. We do not expect that the changes made by Regulation W and the final OTS rule will have a material adverse effect on our business. Section 402 of the Sarbanes-Oxley Act prohibits the extension of personal loans to directors and executive officers of issuers (as defined in the Sarbanes-Oxley Act). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as the Bank, that is subject to the insider lending restrictions of Section 22(h) of the FRA. ENFORCEMENT. The OTS has primary enforcement responsibility over the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices. STANDARDS FOR SAFETY AND SOUNDNESS. The OTS has adopted guidelines prescribing safety and soundness standards. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. In addition, OTS regulations authorize, but do not require, the OTS to order an institution that has been given notice that it is not satisfying these safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action" provisions of federal law. If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. PROMPT CORRECTIVE ACTION REGULATIONS. Under the prompt corrective action regulations, the OTS is authorized and, in some cases, required to take supervisory actions against undercapitalized savings banks. For this purpose, a savings bank would be placed in one of the following five categories based on the bank's regulatory capital: well-capitalized; adequately capitalized; undercapitalized; significantly undercapitalized; or critically undercapitalized. Generally, a capital restoration plan must be filed with the OTS within 45 days of the date a bank receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." In addition, various mandatory supervisory actions become immediately applicable to the institution, including restrictions on growth of assets and other forms of expansion. Under the OTS regulations, generally, a federally chartered savings bank is treated as well capitalized if its total risk-based capital 22 ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, and its leverage ratio is 5% or greater, and it is not subject to any order or directive by the OTS to meet a specific capital level. When appropriate, the OTS can require corrective action by a savings association holding company under the "prompt corrective action" provisions of federal law. At March 31, 2003, the Bank was considered well-capitalized by the OTS. INSURANCE OF DEPOSIT ACCOUNTS. The Bank is a member of the SAIF and pays its deposit insurance assessments to the SAIF. The FDIC also maintains another insurance fund, BIF, which primarily insures the deposits of banks and state chartered savings banks. Under federal law, the FDIC established a risk-based assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. Under the assessment system, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of the quarter ending three months before the beginning of the assessment period. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates currently range from 0.0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.27% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern). The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of the deposit insurance fund to 1.25%. In addition, all FDIC insured institutions are required to pay assessments to the FDIC at an annual rate of approximately .0212% of insured deposits to fund interest payments on the bonds issued by the Financing Corporation ("FICO"), an agency of the federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the FICO bonds mature in 2017. FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of New York ("FHLB-NY"), which is one of the twelve regional FHLBs composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank, as an FHLB member, is required to acquire and hold shares of capital stock in the FHLB-NY in an amount equal to the greater of (i) 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, and (ii) 5% (or such greater fraction as established by the FHLB) of its outstanding advances from the FHLB. The Bank was in compliance with this requirement with an investment in the capital stock of the FHLB at March 31, 2004 of $4.6 million. Any advances from a FHLB must be secured by specified types of collateral, and all long term advances may be obtained only for the purpose of providing funds for residential housing finance. FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, the Bank's net interest income would be adversely affected. Under the Gramm-Leach-Bliley Act, as amended ("Gramm-Leach"), which repeals historical restrictions and eliminates many federal and state law barriers to affiliations among banks and securities firms, insurance companies and other financial service providers, membership in the FHLB system is now voluntary for all federally-chartered savings banks such as the Bank. Gramm-Leach also replaces the existing redeemable stock structure of the FHLB system with a capital structure that requires each FHLB to meet a leverage limit and a risk-based permanent capital requirement. Two classes of stock are authorized: Class A (redeemable on six months notice) and Class B (redeemable on five years notice). Pursuant to regulations promulgated by the Federal Housing Finance Board, as required by Gramm-Leach, the FHLB-NY has adopted a capital plan that will change the foregoing minimum stock ownership requirements for FHLB-NY stock. Under the new capital plan, each member of the FHLB-NY will have to maintain a minimum investment in FHLB-NY capital stock in an amount equal to the sum of (1) the greater of $1,000 or 0.20% of the member's mortgage-related assets and (2) 4.50% of the dollar amount of any outstanding advances under such member's Advances, Collateral Pledge and Security Agreement with the FHLB-NY. The FHLB-NY, however, has postponed the implementation of the new capital plan, and the new implementation date has not yet been determined. FEDERAL RESERVE SYSTEM. Under the FRB's regulations, the Bank is required to maintain non-interest-earning reserves against its transaction accounts. FRB regulations generally require that (a) reserves of 3% must be maintained against aggregate transaction accounts between $6.6 million and $45.4 million (subject to adjustment by the FRB), and (b) a reserve of 10% (subject to adjustment by the FRB between 8% and 14%) must be maintained against that portion of total transaction accounts in excess of $45.4 million. The first $6.6 million of otherwise reservable balances are exempted from the reserve requirements. The Bank is in compliance with these reserve requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank, or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the Bank's interest-earning assets to the extent that the requirement exceeds vault cash. PRIVACY PROTECTION. Carver Federal is subject to OTS regulations implementing the privacy protection provisions of Gramm-Leach. These regulations require the Bank to disclose its privacy policy, including identifying with whom it shares "nonpublic personal information," to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require the Bank to provide its customers with initial and annual notices that accurately reflect its privacy policies and 23 practices. In addition, to the extent its sharing of such information is not exempted, the Bank is required to provide its customers with the ability to "opt-out" of having the Bank share their nonpublic personal information with unaffiliated third parties. The Bank is subject to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of Gramm-Leach. The guidelines describe the agencies' expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to insure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. The Bank has a policy to comply with the foregoing guidelines. HOLDING COMPANY REGULATION. The Holding Company is a savings and loan holding company regulated by the OTS. As such, the Holding Company is registered with and is subject to OTS examination and supervision, as well as certain reporting requirements. In addition, the OTS has enforcement authority over the Holding Company and its subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings institution. Unlike bank holding companies, federal savings and loan holding companies are not subject to any regulatory capital requirements or to supervision by the Federal Reserve Board. Gramm-Leach restricts the powers of new unitary savings and loan holding companies. Unitary savings and loan holding companies that are "grandfathered," i.e., unitary savings and loan holding companies in existence or with applications filed with the OTS on or before May 4, 1999, such as Carver, retain their authority under the prior law. All other unitary savings and loan holding companies are limited to financially related activities permissible for bank holding companies, as defined under Gramm-Leach. Gramm-Leach also prohibits non-financial companies from acquiring grandfathered unitary savings and loan holding companies. RESTRICTIONS APPLICABLE TO ALL SAVINGS AND LOAN HOLDING COMPANIES. Federal law prohibits a savings and loan holding company, including the Holding Company, directly or indirectly, from acquiring: (1) control (as defined under HOLA) of another savings institution (or a holding company parent) without prior OTS approval; (2) through merger, consolidation, or purchase of assets, another savings institution or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company), without prior OTS approval; or (3) control of any depository institution not insured by the FDIC (except through a merger with and into the holding company's savings institution subsidiary that is approved by the OTS). A savings and loan holding company may not acquire as a separate subsidiary an insured institution that has a principal office outside of the state where the principal office of its subsidiary institution is located, except: (1) in the case of certain emergency acquisitions approved by the FDIC; (2) if such holding company controls a savings institution subsidiary that operated a home or branch office in such additional state as of March 5, 1987; or (3) if the laws of the state in which the savings institution to be acquired is located specifically authorize a savings institution chartered by that state to be acquired by a savings institution chartered by the state where the acquiring savings institution or savings and loan holding company is located or by a holding company that controls such a state chartered association. FEDERAL SECURITIES LAWS. The Holding Company is subject to the periodic reporting, proxy solicitation, tender offer, insider trading restrictions and other requirements under the Securities Exchange Act of 1934, as amended ("Exchange Act"). DELAWARE CORPORATION LAW. The Holding Company is incorporated under the laws of the State of Delaware. Thus, it is subject to regulation by the State of Delaware and the rights of its shareholders are governed by the General Corporation Law of the State of Delaware. NEW YORK STATE BANKING REGULATIONS. The New York State Banking Department has adopted a new Section 6-1 to the banking law and regulations which impose restrictions and limitations on certain high cost home loans made by any individual or entity, including a federally-chartered savings bank, that originates more than one high cost home loan in New York State in a 12-month period. Among other things, the regulations and statute prohibit certain mortgage loan provisions and certain acts and practices by originators and impose certain disclosure and reporting requirements. It is unclear whether these provisions would be preempted by Section 5(a) of HOLA, as implemented by the lending and investment regulations of the OTS. The OTS has not yet adopted regulations regarding high-cost mortgage loans and is currently considering whether it will do so. Although the Bank does 24 not originate loans that meet the definition of "high-cost mortgage loan" under the proposed regulations, in the event the Bank determines to originate such loans in the future, the Bank may be subject to such regulation, if adopted as proposed. OTHER FEDERAL REGULATION. The Bank is subject to OTS regulations implementing the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Title III of the USA PATRIOT Act and the related OTS regulations impose the following requirements with respect to financial institutions: o Establishment of anti-money laundering programs. o Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time. o Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering. o Prohibition on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect to correspondent accounts of foreign banks. The OTS adopted interim final rules implementing the USA PATRIOT Act in 2002 and adopted final rules implementing the customer identification requirements on May 9, 2003. The final rule became effective June 9, 2003, however, financial institutions had until October 1, 2003 to come into compliance with such final rule. Compliance with the regulations adopted under the USA PATRIOT Act did not have a material adverse impact on our financial condition or results of operations. FEDERAL AND STATE TAXATION FEDERAL TAXATION GENERAL. The Holding Company and the Bank currently file consolidated federal income tax returns, report their income for tax return purposes on the basis of a taxable-year ending March 31st, using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including in particular the Bank's tax reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Holding Company. BAD DEBT RESERVES. The Bank, as a "small bank" (one with assets having an adjusted tax basis of $500 million or less) in fiscal 2003 and fiscal 2002, was permitted to maintain a reserve for bad debts with respect to "qualifying loans," which, in general, are loans secured by certain interests in real property, and to make, within specified formula limits, annual additions to the reserve which are deductible for purposes of computing the Bank's taxable income. In fiscal 2004 the Bank was no longer considered a small bank as assets exceeded $500 million. DISTRIBUTIONS. To the extent that the Bank makes "non-dividend distributions" to shareholders, such distributions will be considered to result in distributions from the Bank's "base year reserve," i.e., its reserve as of March 31, 1988, to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the Bank's taxable income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute non-dividend distributions and, therefore, will not be included in the Bank's income. The amount of additional taxable income created from a non-dividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the non-dividend distribution would be includable in gross income for federal income tax purposes, assuming a 34% federal corporate income tax rate. ELIMINATION OF DIVIDENDS; DIVIDENDS-RECEIVED DEDUCTION. The Holding Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received 25 deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Holding Company and the Bank will not file a consolidated tax return, except that if the Holding Company or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted. STATE AND LOCAL TAXATION STATE OF NEW YORK. The Bank and the Holding Company are subject to New York State franchise tax on entire net income or one of several alternative bases, whichever results in the highest tax. "Entire net income" means federal taxable income with adjustments. The Bank and the Holding Company file combined returns and are subject to taxation in the same manner as other corporations with some exceptions, including the Bank's deductions for additions to its reserve for bad debts. The New York State franchise tax rates for fiscal years 2004 and 2003 are 9.03% and 9.53%, respectively, (including the Metropolitan Commuter Transportation District Surcharge) of net income. In general, the Holding Company is not required to pay New York State tax on dividends and interest received from the Bank or on gains realized on the sale of Bank stock. 60% of dividend income, and gains and losses from subsidiary capital are excluded from New York State entire net income. Distributions to Carver Federal received from Carver Asset Corporation are eligible for the New York State dividends received deduction. New York State has enacted legislation that enabled the Bank to avoid the recapture of the New York State tax bad debt reserves that otherwise would have occurred as a result of the changes in federal law and to continue to utilize either the federal method or a method based on a percentage of its taxable income for computing additions to its bad debt reserve. NEW YORK CITY. The Bank and the Holding Company are also subject to a similarly calculated New York City banking corporation tax of 9% on income allocated to New York City. In this connection, legislation was recently enacted regarding the use and treatment of tax bad debt reserves that is substantially similar to the New York State legislation described above. DELAWARE TAXATION. As a Delaware holding company not earning income in Delaware, the Holding Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. EXECUTIVE OFFICERS OF THE HOLDING COMPANY The name, position, term of office as officer and period during which he or she has served as an officer is provided below for each executive officer of the Holding Company as of May 31, 2004. Each of the persons listed below is an executive officer of the Holding Company and the Bank, holding the same office in each. DEBORAH C. WRIGHT, age 46, has served as President and Chief Executive Officer and a Director of the Holding Company and Carver Federal since June 1, 1999. Prior to joining Carver, Ms. Wright was President & Chief Executive Officer of the Upper Manhattan Empowerment Zone Development Corporation, a position she held since May 1996. CATHERINE A. PAPAYIANNIS, age 44, has served as Executive Vice President and Chief Operating Officer since June 2002. Ms. Papayiannis was previously Senior Vice President/Director of Community Banking at Atlantic Bank of New York, where she oversaw the regional retail distribution network, the offsite ATM network, wealth and cash management services, residential and consumer lending and small business banking. JAMES H. BASON, age 49, has served as Senior Vice President and Chief Lending Officer since March 2003. Previously Mr. Bason was Vice President and Real Estate Loan Officer at The Bank of New York where he had been employed since 1991. At the Bank of New York, Mr. Bason was responsible for developing and maintaining relationships with developers, builders, real estate investors and brokers to provide construction and permanent real estate financing. FRANK DEATON, age 35, has served as Senior Vice President and Chief Auditor since May 2001. Mr. Deaton was previously Vice President and Risk Review Manager with Key Bank in Cleveland, Ohio where he was responsible for developing the scope and overseeing completion of credit, operational and regulatory compliance audits for a variety of business units. LINDA J. DUNN, age 48, has served as Senior Vice President, General Counsel and Corporate Secretary since June 2001. Ms. Dunn had been a corporate associate at the law firm Paul, Weiss, Rifkind, Wharton & Garrison since 1994. WILLIAM GRAY, age 49, has served as Senior Vice President and Chief Financial Officer since February 2002. Mr. Gray had been employed at the Dime Savings Bank of New York since 1992, most recently serving as Vice President/Director of Business Unit Planning and Support in the Controller's Department where he was responsible for identifying and evaluating strategic initiatives for several businesses. BRIAN J. MAHER, age 62, has served as Senior Vice President and Chief Credit Officer with over 30 years of experience in financial services. Mr. Maher joined Carver in September 2002 and was appointed to the newly created Chief Credit Officer position in January 2003. 26 MARGARET D. PETERSON, age 53, has served as Senior Vice President and Chief Human Resources Officer since June 2002. She joined Carver in October 1999 as Senior Vice President and Chief Administrative Officer. Ms. Peterson came to Carver from Deutsche Bank where she had served as a Compensation Planning Consultant in Corporate Human Resources. DEVON W. WOOLCOCK, age 38, has served as Senior Vice President and Chief of Retail Banking since 2000. He joined Carver from Citibank where he was a Division Executive Vice President and where, most recently, he had managed six branches in Brooklyn and Queens. ITEM 2. PROPERTIES. The Bank currently conducts its business through one administrative office and six branch offices (including the main office) and two stand-alone ATM centers. Carver does not share its owned or leased spaces with any other businesses. The following table sets forth certain information regarding Carver Federal's offices and other material properties at March 31, 2004. The Bank believes that such facilities are suitable and adequate for its operational needs.
LEASE YEAR OWNED OR EXPIRATION NET BOOK OPENED LEASED DATE VALUE --------------------------------------------------- (In thousands) Main Office & BRANCH -------------------- 75 West 125th Street 1996 Owned $ 5,548 New York, NY Branch Offices -------------- 1281 Fulton Street Brooklyn, NY 1989 Owned 1,453 (Bedford-Stuyvesant Office) 1009-1015 Nostrand Avenue Brooklyn, NY 1975 Owned 333 (Crown Heights Office) 115-02 Merrick Boulevard Jamaica, NY 1996 Leased 2/28/2011 278 (St Albans Office) 130 Malcolm X Boulevard New York, NY 2001 Leased 5/31/2006 579 (Malcolm X Blvd. Office) 158-45 Archer Avenue Jamaica, New York 2003 Leased 7/31/2018 677 (Jamaica Center Office) ATM CENTERS 503 West 125th Street New York, NY 2003 Leased 3/1/2013 156 601 West 137th Street New York, NY 2003 Leased 10/31/2003 146 ----------- Total $ 9,170 ===========
The net book value of Carver Federal's investment in premises and equipment totaled approximately $11.8 million at March 31, 2004. ITEM 3. LEGAL PROCEEDINGS. From time to time, Carver Federal is a party to various legal proceedings incident to its business. Certain claims, suits, complaints and investigations involving Carver Federal, arising in the ordinary course of business, have been filed or are pending. The Company is of the opinion, after discussion with legal counsel representing Carver Federal in these proceedings, that the 27 aggregate liability or loss, if any, arising from the ultimate disposition of these matters would not have a material adverse effect on the Company's consolidated financial position or results of operations. At March 31, 2004, except as set forth below, there were no material legal proceedings to which the Company or its subsidiaries was a party or to which any of their property was subject. On or about April 29, 1999, plaintiff Reginald St. Rose ("St. Rose"), a former Carver Federal employee, filed suit against Carver Federal in the Supreme Court of the State of New York, County of New York (the "St. Rose Action"). On or about January 12, 1999, Carver Federal and St. Rose entered into an agreement (the "Agreement") providing that St. Rose would resign from Carver Federal on the terms and conditions set forth in the Agreement. In the St. Rose Action, St. Rose alleged breach of contract, promissory estoppel, and fraudulent misrepresentation related to the Agreement and St. Rose's separation from Carver Federal. St. Rose sought damages in an amount not less than $50,000 with respect to the breach of contract cause of action and sought undisclosed damages with respect to the promissory estoppel claim. Carver Federal had unasserted counterclaims against St. Rose for, among other claims, payment of certain financial obligations to Carver Federal. The parties reached a final settlement during the fourth quarter of fiscal 2004, which settlement will not have a material impact on the Bank's financial condition or results of operations. Carver Federal was a defendant in two actions brought by Ralph Williams ( "Williams Action I" and "Williams Action II") and an action brought by Janice Pressley (the "Pressley Action") both of which arose out of events concerning the Northeastern Conference Federal Credit Union ("Northeastern"). Plaintiff Williams is a former member of the Board of Directors of Northeastern and plaintiff Pressley is former treasurer of Northeastern. Northeastern was a federal credit union, and it maintained accounts with Carver Federal and other banks in the New York metropolitan area (collectively, the "Bank Defendants"). Plaintiffs alleged that the National Credit Union Administration ("NCUA") acted improperly when it placed Northeastern into conservatorship and subsequent liquidation. In or about July 1998, Williams commenced Williams Action I in the United States District Court, District of Columbia, seeking to restrain the NCUA from executing on the conservatorship order and an order directing the Bank Defendants to "restore [their] accounts to their original status." The Bank Defendants were not served with the pleadings in Williams Action I, and the court entered judgment against them on default. After the Bank Defendants learned of this case, they made a motion in September 2001 to vacate the default judgment. In January 2004, Williams Action I was dismissed without prejudice. On or about November 22, 2000, Williams filed Williams Action II in the United States District Court, District of Columbia, against the NCUA and the Bank Defendants seeking damages in the amount of $1 million plus certain additional unspecified amounts for the allegedly "unauthorized" or "invalid" actions of the NCUA Board of Directors in taking control of Northeastern as well as damages for discrimination and civil rights violations. Plaintiff Pressley filed the Pressley Action in the same court against the same defendants seeking unspecified compensatory and punitive damages based on identical allegations as Williams, except that she also alleged certain claims of employment discrimination. The Bank Defendants filed a joint motion to dismiss Williams Action II, which motion was granted by the District Court and appealed by Williams. The Bank Defendants collectively filed a motion for summary affirmance of the District Court's decision on October 9, 2003, which motion was granted on April 1, 2004, resolving Williams Action I and Williams Action II in the Bank Defendants' favor. The Bank Defendants also made a joint motion to dismiss the Pressley Action. After grant of the motion and appeal by Pressley, the Court of Appeals dismissed the appeal in August 2003 and, in October 2003 with the consent of Pressley's counsel, the District Court ordered the dismissal of Pressley's case against the Bank Defendants, resolving the Pressley Action in its entirety. In or about January 2004, Michael Lee & Company, former accountants for Hale House Center, Inc. ("Michael Lee"), filed an action against Carver Federal in New York County Supreme Court, asserting a single claim for contribution against Carver Federal. The complaint alleges that Carver Federal should be liable to Michael Lee in the event that Michael Lee is found liable to non-parties Hale House Center, Inc. and its affiliated corporations ("Hale House plaintiffs") in a separate action that the Hale House plaintiffs have filed against Michael Lee. The Hale House plaintiffs have asserted claims of professional malpractice and breach of contract against Michael Lee for providing deficient accounting services to Hale House. The basis of Michael Lee's contribution claim against Carver Federal is that Carver Federal allegedly breached a legal duty it owed Hale House by improperly opening and maintaining a checking account on behalf of one of the Hale House affiliates. Michael Lee seeks contribution from Carver Federal in the amount of at least $8.5 million or the amount of any money judgment entered against Michael Lee in favor of the Hale House plaintiffs. On February 4, 2004 Carver Federal filed a motion to dismiss the complaint in its entirety and, on February 11, 2004, Michael Lee served a cross-motion for summary judgment against Carver Federal. In May 2004, the court ruled in favor of Carver Federal and judgment was entered in Carver Federal's favor on June 14, 2004. Michael Lee's time to appeal will run until July 20, 2004. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. During the quarter ended March 31, 2004, no matter was submitted to a vote of our security holders through the solicitation of proxies or otherwise. 28 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. The Holding Company's common stock is listed on the American Stock Exchange under the symbol "CNY." As of May 31, 2004, there were 2,286,380 shares of the common stock outstanding, held by approximately 1,135 stockholders of record. The following table shows the high and low per share sales prices of the common stock and the dividends declared for the quarters indicated.
HIGH LOW DIVIDEND HIGH LOW DIVIDEND ---- --- -------- ---- --- -------- FISCAL YEAR 2004 FISCAL YEAR 2003 June 30, 2003 $16.59 $13.70 $0.05 June 30, 2002 $13.10 $11.31 $ - September 30, 2003 $18.15 $16.25 $0.05 September 30, 2002 $12.15 $ 9.83 $ - December 31, 2003 $26.50 $17.60 $0.05 December 31, 2002 $11.27 $ 9.08 $0.05 March 31, 2004 $25.99 $23.02 $0.05 March 31, 2002 $14.54 $11.13 $0.05
On January 9, 2003, the Holding Company's Board of Directors announced the establishment of a quarterly cash dividend in an amount to be determined each quarter dependent upon its earnings, financial condition and other factors. In each of the four fiscal years prior to fiscal 2003, the Company paid an annual $0.05 per common share cash dividend. The Bank will not be permitted to pay dividends to the Holding Company on its capital stock if its regulatory capital would be reduced below applicable regulatory capital requirements or if its stockholders' equity would be reduced below the amount required to be maintained for the liquidation account, which was established in connection with the Bank's conversion to stock form. The OTS capital distribution regulations applicable to savings institutions (such as the Bank) that meet their regulatory capital requirements permit, after not less than 30 days prior notice to the OTS, capital distributions during a calendar year that do not exceed the Bank's net income for that year plus its retained net income for the prior two years. For information concerning the Bank's liquidation account, see Note 11 of the Notes to the Consolidated Financial Statements. Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the payment of dividends to its stockholders, although the source of such dividends will be dependent, in part, upon capital distributions from the Bank. The Holding Company is subject to the requirements of Delaware law, which generally limit dividends to an amount equal to the excess of the net assets of the Company (the amount by which total assets exceed total liabilities) over its statutory capital, or if there is no such excess, to its net profits for the current and/or immediately preceding fiscal year. On August 6, 2002 the Holding Company announced a stock repurchase program. To date, 29,100 shares of its common stock have been repurchased in open market transactions at an average price of $13.84 per share as part of this program. The Holding Company intends to use repurchased shares to fund its stock-based benefit and compensation plans and for any other purpose the Board deems advisable in compliance with applicable law. The Holding Company did not make any purchases of its equity securities during the fourth quarter of fiscal 2004. 29 ITEM 6. SELECTED FINANCIAL DATA
AT OR FOR THE FISCAL YEAR ENDED MARCH 31, ------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ------------ ------------ ------------ ----------- ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Selected Financial Condition Data: Assets $ 538,830 $ 509,845 $ 450,306 $424,500 $ 420,119 Loans, net 351,900 292,738 289,710 283,437 270,148 Securities 139,877 165,585 105,464 87,788 104,177 Cash and cash equivalents 22,774 23,160 34,851 31,758 22,202 Deposits 373,665 347,164 324,954 279,424 281,941 Borrowed funds 104,282 108,996 75,651 105,600 98,578 Stockholders' equity $ 44,645 $ 41,073 $ 36,742 $ 32,096 $ 32,641 Number of deposit accounts 38,578 41,220 41,200 44,751 54,597 Number of offices 6 5 5 5 7 OPERATING DATA: Interest income $ 26,234 $ 27,390 $ 28,395 $ 28,336 $ 27,371 Interest expense 8,700 8,983 12,047 14,278 14,009 ------------ ------------ ------------ ----------- ------------ Net interest income 17,534 18,407 16,348 14,058 13,362 Provision for loan losses - - 900 1,793 1,099 ------------ ------------ ------------ ----------- ------------ Net interest income after provision for loan losses 17,534 18,407 15,448 12,265 12,263 Non-interest income 5,278 3,161 4,485 2,934 2,539 Non-interest expenses 15,480 14,704 14,339 15,490 15,827 ------------ ------------ ------------ ----------- ------------ Income (loss) before income taxes 7,332 6,864 5,594 (291) (1,025) Income tax 2,493 3,033 881 98 110 ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- ------------ Net income (loss) $ 4,839 $ 3,831 $ 4,713 $ (389) $ (1,135) ============ ============ ============ =========== ============ ============ ============ ============ =========== ============ Diluted earnings (loss) per common share $ 1.87 $ 1.52 $ 1.89 $ (0.26) $ (0.53) ============ ============ ============ =========== ============ SELECTED STATISTICAL DATA: Return on average assets (1) 0.93 % 0.83 % 1.11 % (0.07)% (0.27) Return on average equity (2) 11.40 9.77 13.78 (0.89) (3.29) Net interest margin (3) 3.56 4.26 4.09 3.61 3.47 Average interest rate spread (4) 3.40 4.08 3.89 3.48 3.38 Efficiency ratio (5) 67.86 68.18 77.89 96.93 104.31 Operating expense to average assets (6) 2.97 3.18 3.37 3.72 3.82 Equity to total assets at end of period 8.29 8.06 8.16 7.56 7.77 Average equity to average assets 8.13 8.48 8.03 7.85 8.33 Dividend payout ratio (7) 9.86 3.19 2.55 (17.24) (5.17) ASSET QUALITY RATIOS: Non-performing assets to total assets (8) 0.39 % 0.36 % 0.63 % 0.71 % 0.73 Non-performing assets to total loans receivable (8) 0.60 0.61 0.96 1.04 1.12 Allowance for loan losses to total loans receivable 1.16 1.40 1.41 1.24 1.07
(1) Net income divided by average total assets (2) Net income divided by average total equity (3) Net interest income divided by average interest-earning assets. (4) The difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (5) Non-interest expense (other than real estate owned expenses) divided by the sum of net interest income and non-interest income (other than net security gains and losses and other non-recurring income). (6) Non-interest expense less real estate owned expenses, divided by average total assets. (7) Dividends paid to common stockholders as a percentage of net income (loss) available to common stockholders. (8) Non performing assets consist of non-accrual loans, loans accruing 90 days or more past due, and property acquired in settlement of loans. 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. EXECUTIVE SUMMARY The Company's results of operations are significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies, changes in accounting standards and actions of regulatory agencies. Success in Carver the Company's Federal's fiscal 2004 performance reflects multiple factors: o A strong net interest margin o Strong credit quality o Continued loan and deposit growth o Prudent investment portfolio management o Active capital management During fiscal 2004, net interest margin was strong. However, net interest margin compression impacted earnings growth due to the historically low interest rate environment. Net interest margin declined to 3.56% for fiscal 2004 from 4.26% for fiscal 2003. Prepayments continued at an accelerated rate over the last two fiscal years due to the sustained low interest rate environment. Prepayments on mortgage-backed securities and mortgage loans contributed to net interest margin compression as these cash flows were reinvested at lower market yields. Partially offsetting the decline in net interest margin was the increase in average interest-earning assets of $61.2 million to $493.0 million for fiscal 2004 from $431.8 million for fiscal 2003. Structurally, the Bank's balance sheet exhibits an asset sensitive bias over the long term. As a result, the Bank's greatest exposure is to a sustained lower rate environment as asset yields would be expected to decline further while deposit costs would be expected to stabilize. Should rates begin to rise, additional margin compression would be expected in the near term; however, management anticipates that the Bank's balance sheet would benefit over time from a prolonged rising rate environment. In the fiscal year ending March 31, 2005 ("fiscal 2005"), it is anticipated that the Bank will be operating with a lower net interest margin relative to fiscal 2004. Asset quality of the Bank's loan portfolio remained strong. To accomplish this objective the Company seeks to follow its loan policies and underwriting practices, which include (1) granting loans on a sound and collectible basis; (2) understanding the needs of borrowers and the economic conditions in the Company's target market, while maintaining a balance between yield and risk; (3) ensuring that primary, secondary and tertiary sources of repayment are adequate in relation to the amount of the loan; (4) developing and maintaining adequate diversification of the Bank's loan portfolio as a whole and within loan categories; (5) ensuring that each loan is properly documented; and (6) developing and applying adequate collection procedures. The Bank experienced strong growth in its core business with increases in net loans receivable and deposits of 20.2% and 7.6%, respectively, compared to March 31, 2003. While the average balance of interest earning assets increased, the higher volume was more than offset by a decrease in yields. Management is mindful of growth levels and the long-term effects of adding assets to the balance sheet in this low interest rate environment. Management believes that its loans are priced sensibly, and as the rate environment shifts management is cognizant of potentially repositioning assets. Management continues its strategy not to take undue risks by extending asset maturities or to compromise credit quality to record higher yielding assets. Lowering the Bank's efficiency ratio remains a priority while continuing to expand Carver's franchise value, through delivery channel expansion and new product offerings. Financial results were achieved while maintaining an efficiency ratio of 67.86% for fiscal 2004. For fiscal 2004, net gains from sales of securities available-for-sale totaled $31,000. The Bank sold investment securities that were susceptible to increased prepayment risk in a continued low interest rate environment. Additional securities were sold as part of ongoing investment portfolio strategies. Mortgage-backed securities are sometimes sold when they pay down to a certain level to mitigate increased price risk. Government securities are sometimes sold to take advantage of changes in the yield curve. Cash flows from the investment and loan portfolios, as well as deposit growth, were deployed into loans and investment securities. Earnings growth outpaced asset growth for the fiscal year, adding to the importance of active capital management. During fiscal 2003, the Company approved a stock repurchase plan, allowing the repurchase of up to 10% of its then current outstanding common shares. Since inception of the stock repurchase program, the Company has purchased 29,100 shares of its common stock in open market transactions at an average price of $13.84 per share, representing 1.3% of its outstanding shares. In addition, in fiscal 2003 the Company established a regular quarterly dividend. Despite the change from an annual to a quarterly dividend, Carver's capital levels remain high and at a level that should be sufficient to support our intended acquisition of Independence and our planned branch expansion and organic growth. In April 2004, the Bank successfully opened a full service state-of-the-art branch in Jamaica, Queens and has plans to open an additional branch in fiscal 2005 in Fort Greene, Brooklyn. Additionally, in the last 12 months the Bank opened two 24/7 ATM banking centers in Harlem. Each of these elements is discussed in the analysis of our financial results and the accompanying financial statements and 31 footnotes. PENDING MERGER WITH INDEPENDENCE FEDERAL SAVINGS BANK On March 15, 2004, the Company entered into a definitive merger agreement to acquire Independence in a cash transaction valued at approximately $33 million. Under the terms of the merger agreement, Independence's stockholders will receive $21.00 in cash for each share of their common stock. The merger agreement has been approved by the directors of Independence, the Company and the Bank. The transaction, which is expected to close before the end of 2004, is subject to customary closing conditions, including regulatory approvals and the approval of Independence's shareholders. The merger agreement requires Independence to pay the Company a termination fee of $1.6 million if the merger agreement is terminated under certain circumstances following Independence's receipt of a superior acquisition proposal or $325,000 if the merger is not approved by Independence's shareholders. The Holding Company has made an Amended Share Voting Stipulation and Undertaking in favor of the OTS and entered into a Trust Agreement with American Stock Transfer & Trust Company pursuant to which it has placed 72,400 of the common shares of Independence owned by the Holding Company, representing approximately 4.7% of the outstanding common shares of Independence, in a non-voting trust. The shares held in the trust are shares of Independence owned by the Holding Company in excess of the 5% limit set forth in Section 10(e)(1)(A)(iii) of HOLA prior to the OTS approving the Holding Company's H-(e)3 Application to acquire Independence. Section 10(e)(1)(A)(iii) provides that a savings and loan holding company may not acquire or retain more than 5% of the outstanding voting shares of a savings association that is not a subsidiary without the prior approval of the OTS. The Trust Agreement will terminate, and the Independence common shares held in the trust will be transferred back to the Holding Company, upon the receipt by the Holding Company of the approval of the OTS to retain more than 5% of Independence's outstanding voting stock. GENERAL Carver Federal'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. In addition, net income is affected by the level of provision for loan losses, as well as non-interest income and operating expenses. 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 interest rates, primarily on competing investments, account maturities, and the levels of personal income and savings. CRITICAL ACCOUNTING POLICIES Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Our policy with respect to the methodologies used to determine the allowance for loan losses is our most critical accounting policy. This policy is important to the presentation of our financial condition and results of operations, and it involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in our results of operations or financial condition. See Note 1 of Notes to Consolidated Financial Statements for a description of our critical accounting policy related to allowance for loan losses and an explanation of the methods and assumptions underlying its application. ASSET/LIABILITY MANAGEMENT Net interest income, the primary component of Carver Federal's net income, is determined by the difference or "spread" between the yield earned on interest-earning assets and the rates paid on its interest-bearing liabilities and the relative amounts of such assets and liabilities. Because Carver Federal's interest-bearing liabilities consist primarily of shorter term deposit accounts, Carver Federal's interest rate spread can be adversely affected by changes in general interest rates if its interest-earning assets are not sufficiently sensitive to changes in interest rates. The Bank has sought to reduce its exposure to changes in interest rates by more closely matching the effective maturities and repricing periods of its interest-earning assets and interest-bearing liabilities through a variety of strategies, including the origination and purchase of adjustable-rate mortgage loans for its portfolio, investment in adjustable-rate mortgage-backed securities and shorter-term investment securities and the sale of all long-term fixed-rate mortgage loans originated into the secondary market. DISCUSSION OF MARKET RISK--INTEREST RATE SENSITIVITY ANALYSIS As a financial institution, the Bank's primary component of market risk is interest rate volatility. Fluctuations in interest 32 rates will ultimately impact both the level of income and expense recorded on a large portion of the Bank's assets and liabilities, and the market value of all interest-earning assets, other than those which 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, most of the Company's interest rate risk ("IRR") exposure lies at the Bank level. As a result, all significant IRR 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. Carver Federal seeks to manage its IRR by monitoring and controlling the variation in repricing intervals between its assets and liabilities. To a lesser extent, Carver Federal also monitors its interest rate sensitivity by analyzing the estimated changes in market value of its assets and liabilities assuming various interest rate scenarios. As discussed more fully below, there are a variety of factors which influence the repricing characteristics of any given asset or liability. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific period of time and the amount of interest-bearing liabilities repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Generally, during a period of falling interest rates, a negative gap could result in an increase in net interest income, while a positive gap could adversely affect net interest income. Conversely, during a period of rising interest rates a negative gap could adversely affect net interest income, while a positive gap could result in an increase in net interest income. As illustrated below, Carver Federal had a negative one-year gap equal to 8.46% of total rate sensitive assets at March 31, 2004. As a result, Carver Federal's net interest income could be negatively affected by rising interest rates and positively affected by falling interest rates. The following table sets forth information regarding the projected maturities, prepayments and repricing of the major rate-sensitive asset and liability categories of Carver Federal as of March 31, 2004. Maturity repricing dates have been projected by applying estimated prepayment rates based on the current rate environment. The information presented in the following table is derived in part from data incorporated in "Schedule CMR: Consolidated Maturity and Rate," which is part of the Bank's quarterly reports filed with the OTS. The repricing and other assumptions are not necessarily representative of the Bank's actual results. Classifications of items in the table below are different from those presented in other tables and the financial statements and accompanying notes included herein and do not reflect non-performing loans.
THREE OVER ONE OR FOUR TO THROUGH OVER THREE OVER FIVE OVER LESS TWELVE THREE THROUGH THROUGH TEN MONTHS MONTHS YEARS FIVE YEARS TEN YEARS YEARS ------ ------ ----- ---------- --------- ----- (DOLLARS IN THOUSANDS) RATE SENSITIVE ASSETS: Loans and Mortgage Backed Securities $ 23,023 $ 103,025 $ 169,308 $ 112,222 $ 33,097 $ 32,574 Federal Funds Sold 8,200 - - - - - Investment Securities 6,394 - 10,461 4,640 - 4,635 ------------ ------------ ------------ ------------ ------------ ------------ Total interest-earning assets 37,617 103,025 179,769 116,862 33,097 37,209 RATE SENSITIVE LIABILITIES: NOW demand 149 4,014 4,251 1,551 7,329 5,806 Savings and clubs 3,152 7,696 15,501 13,000 32,918 58,855 Money market savings 2,924 10,314 8,416 1,960 3,394 3,834 Certificates of Deposit 28,700 100,619 21,102 17,644 - - Borrowings 2,025 24,000 60,974 4,300 242 - ------------ ------------ ------------ ------------ ------------ ------------ Total interest-bearing liabilities $ 36,950 $ 146,643 $ 110,244 $ 38,455 $ 43,883 $ 68,495 Interest Sensitivity Gap $ 667 $(43,618) $ 69,525 $ 78,407 $(10,786) $(31,286) Cumulative Interest Sensitivity Gap $ 667 $(42,951) $ 26,574 $ 104,981 $ 94,195 $ 62,908 Ratio of Cumulative Gap to Total Rate Sensitive assets 0.13% -8.46% 5.24% 20.68% 18.56% 12.39%
TOTAL ----- (DOLLARS IN THOUSANDS) RATE SENSITIVE ASSETS: Loans and Mortgage Backed Securities $ 473,248 Federal Funds Sold 8,200 Investment Securities 26,130 ------------ Total interest-earning assets 507,578 RATE SENSITIVE LIABILITIES: NOW demand 23,100 Savings and clubs 131,122 Money market savings 30,842 Certificates of Deposit 168,065 Borrowings 91,541 ------------ Total interest-bearing liabilities $ 444,670 Interest Sensitivity Gap $ 62,908 Cumulative Interest Sensitivity Gap - Ratio of Cumulative Gap to Total Rate Sensitive assets 33 The table above assumes that fixed maturity deposits are not withdrawn prior to maturity and that transaction accounts will decay as disclosed in the table above. Certain shortcomings are inherent in the method of analysis presented in the table above. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in the market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, generally have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Additionally, 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 Federal's portfolio contain conditions that restrict the periodic change in interest rate. NET PORTFOLIO VALUE ("NPV") ANALYSIS. As part of its efforts to maximize net interest income while managing the risks associated with changing interest rates, management uses the NPV methodology. Under this methodology, IRR exposure is assessed by reviewing the estimated changes in net interest income ("NII") and NPV that would hypothetically occur if interest rates rapidly rise or fall 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, 2004, is an analysis of the Bank's IRR as measured by changes in NPV and NII for instantaneous and sustained parallel shifts of 100 basis points in market interest rates. Such limits have been established with consideration of the impact of various rate changes and the Bank's current capital position. The Bank's level of IRR, as measured by changes in NPV, for fiscal 2004 is substantially unchanged from fiscal 2003. The information set forth below relates solely to the Bank; however, because virtually all of the Company's IRR exposure lies at the Bank level, management believes the table below also accurately reflects an analysis of the Company's IRR.
NET PORTFOLIO VALUE NPV AS A % OF PV OF ASSETS -------------------------------------------- -------------------------- CHANGE IN RATE $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE -------------- -------- -------- -------- --------- ------ (DOLLARS IN THOUSANDS) +300 bp 73,093 -14,877 -17% 13.39% -208 bp +200 bp 79,383 -8,586 -10% 14.31% -116 bp +100 bp 84,450 -3,519 -4% 15.02% -45 bp 0 bp 87,970 - - 15.47% - (100)bp 90,175 2,205 3% 15.71% +24 bp
MARCH 31, 2004 -------------- RISK MEASURES: +200 BP RATE SHOCK Pre-Shock NPV Ratio: NPV as % of PV of Assets 15.47% Post-Shock NPV Ratio 14.31% Sensitivity Measure; Decline in NPV Ratio 116 bp Certain shortcomings are inherent in the methodology used in the above IRR measurements. Modeling changes in NPV require the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV table presented assumes that the composition of Carver Federal's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV table provides an indication of Carver Federal's IRR exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on Carver Federal's net interest income and will differ from actual results. AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES The following table sets forth certain information relating to Carver Federal's average interest-earning assets and average interest-bearing liabilities and reflects the average yield on assets and the average cost of liabilities for the years indicated. Such yields and costs are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods 34 shown. Average balances are derived from average month-end balances, except for federal funds which are derived from daily balances. The use of average monthly balances instead of average daily balances on all other accounts should not result in 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 profitability is its "net interest margin," which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.
MONTH ENDED MARCH 31, 2004 YEAR ENDED MARCH 31, 2004 ------------------------------ -------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE YIELD/COST BALANCE INTEREST YIELD/COST -------------- -------------- ----------- ---------- ------------ (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Loans (1) $ 348,418 6.25% $ 314,297 $20,117 6.40% Investment securities (2) 25,844 3.71% 29,708 1,161 3.91% Mortgage-backed securities 120,666 3.93% 126,764 4,789 3.78% Federal funds 6,626 0.89% 22,194 167 0.75% -------------- -------------- ----------- ---------- ------------ Total interest-earning assets 501,554 5.49% 492,963 26,234 5.32% Non-interest-earning assets 25,264 28,423 -------------- ----------- Total assets $ 526,818 $ 521,386 ============== =========== INTEREST-BEARING LIABILITIES: Deposits: NOW demand $ 22,568 0.31% $ 23,286 $ 85 0.37% Savings and clubs 130,771 0.59% 130,509 1,001 0.77% Money market savings 29,383 0.80% 27,662 235 0.85% Certificates of deposit 168,223 1.95% 163,382 3,304 2.02% -------------- -------------- ----------- ---------- ------------ Total deposits 350,945 1.24% 344,839 4,625 1.34% Mortgagors deposits 1,753 1.34% 1,643 24 1.46% Borrowed money 104,375 4.03% 106,350 4,051 3.81% -------------- -------------- ----------- ---------- ------------ Total deposits and interest-bearing liabilities 457,073 1.88% 452,832 8,700 1.92% ---------- Non-interest-bearing liabilities: Demand 19,508 19,408 Other liabilities 6,308 6,746 -------------- ----------- Total liabilities 482,889 478,986 Stockholders' equity 43,929 42,400 -------------- ----------- Total liabilities and stockholders' equity $ 526,818 $ 521,386 ============== =========== Net interest income $17,534 ========== Average interest rate spread 3.61% 3.40% ============== ============ Net interest margin 3.67% 3.56% ============== ============ Ratio of average interest-earning assets to interest-bearing liabilities 109.73% 108.86% ============== ============
(1) Includes non-accrual loans. (2) Includes FHLB stock. 35
YEAR ENDED MARCH 31, -------------------------------------------------------------------------------------- 2003 2002 ----------------------------------------- ------------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE INTEREST EARNING ASSETS: BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST ---------------- ---------- ------------ --------------- ------------- ------------ (DOLLARS IN THOUSANDS) Loans (1) $ 282,439 $21,194 7.50% $ 297,130 $ 22,727 7.65% Investment securities (2) 36,660 1,614 4.40% 38,505 2,324 6.04% Mortgage-backed securities 93,002 4,282 4.60% 50,450 2,918 5.78% Fed funds sold 19,744 300 1.52% 13,662 426 3.12% ---------------- ---------- ------------ --------------- ------------- ------------ Total interest earning assets 431,845 27,390 6.34% 399,747 28,395 7.10% Non-interest earning assets 30,414 26,177 ---------------- --------------- Total assets $ 462,259 $ 425,924 ================ =============== INTEREST BEARING LIABILITIES: Deposits NOW demand $ 18,138 $ 130 0.72% $ 21,114 $ 237 1.12% Savings and clubs 127,004 1,477 1.16% 126,065 2,342 1.86% Money market savings 16,747 189 1.13% 16,181 302 1.87% Certificates of deposit 155,187 3,964 2.55% 133,624 5,246 3.93% ---------------- ---------- ------------ --------------- ------------- ------------ Total deposits 317,076 5,760 1.82% 296,984 8,127 2.74% Borrowed money 80,861 3,223 3.99% 78,153 3,920 5.02% ---------------- ---------- ------------ --------------- ------------- ------------ Total interest-bearing liabilities 397,937 8,983 2.26% 375,137 12,047 3.21% ---------- ------------- Non-interest-bearing liabilities: Demand 15,234 7,781 Other liabilities 9,880 8,809 ---------------- --------------- Total liabilities 423,051 391,727 Stockholders' equity 39,208 34,197 ---------------- --------------- Total liabilities and stockholders' equity $ 462,259 $ 425,924 ================ =============== Net interest income $18,407 $ 16,348 ========== ============= Average interest rate spread 4.08% 3.89% ============ ============ Net interest margin 4.26% 4.09% ============ ============ Ratio of avg interest-earning assets to interest-bearing liabilities 108.52% 106.56% ============ ============
(1) Includes non-accrual loans. (2) Includes FHLB stock. RATE/VOLUME ANALYSIS The following table sets forth information regarding the extent to which changes in interest rates and changes in volume of interest related assets and liabilities have affected Carver Federal's interest income and expense during the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided for changes attributable to (1) changes in volume (changes in volume multiplied by new rate), (2) changes in rates (change in rate multiplied by old volume) and (3) changes in rate/volume. Changes in rate/volume variance are allocated proportionately between changes in rate and changes in volume. 36
YEAR ENDED MARCH 31, ----------------------------------------------------------------------- 2004 VS. 2003 2003 VS. 2002 INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO ----------------------------------- ----------------------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL ----------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) INTEREST EARNING ASSETS: Loans $ 2,039 $(3,116) $(1,077) $(1,124) $ (409) $(1,533) Investment securities (273) (180) (453) (81) (629) (710) Mortgage-backed securities 1,270 (763) 507 1,959 (595) 1,364 Fed funds 18 (151) (133) 92 (218) (126) ----------- ----------- ----------- ----------- ----------- ----------- Total interest earning assets 3,054 (4,210) (1,156) 846 (1,851) (1,005) INTEREST BEARING LIABILITIES: Deposits NOW demand 19 (64) (45) (21) (85) (106) Savings and clubs 27 (503) (476) 11 (876) (865) Money market savings 93 (47) 46 6 (119) (113) Certificates of deposit 165 (801) (636) 551 (1,834) (1,283) ----------- ----------- ----------- ----------- ----------- ----------- Total deposits 304 (1,415) (1,111) 547 (2,914) (2,367) Borrowed money 1,024 (196) 828 109 (806) (697) ----------- ----------- ----------- ----------- ----------- ----------- Total deposits and interest bearing liabilities 1,328 (1,611) (283) 656 (3,720) (3,064) Net change in interest income $ 1,726 $(2,599) $ (873) $ 190 $ 1,869 $ 2,059 =========== =========== =========== =========== =========== ===========
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 AND 2003 At March 31, 2004, total assets increased by $29.0 million, or 5.7%, to $538.8 million compared to $509.8 million at March 31, 2003. The increase in total assets was primarily attributable to an increase in loans receivable, partially offset by decreases in securities. The increase in loans receivable and the decrease in securities reflects the decision to reinvest funds received from the maturities and repayments of securities into higher yielding real estate loans. Loans receivable, net, increased by $59.2 million, or 20.2%, to $351.9 million as of March 31, 2004 compared to $292.7 million one year ago. The loan growth during fiscal 2004 represented loan originations of $87.1 million and loan purchases of $93.7 million, offset by principal repayments of $111.9 million and loans sold to Fannie Mae of $9.4 million. The increase in mortgage loan principal repayments, originations and purchases in fiscal 2004 and fiscal 2003 is primarily a result of the lower interest rate environment during both fiscal years, which has significantly increased the level of mortgage refinance activity. One- to four-family mortgage loans increased by $26.9 million, or 37.5%, to $98.6 million at March 31, 2004 compared to $71.7 million at March 31, 2003. The increase in one- to four-family loans is primarily due to increased loan purchases as well as $8.3 million in increased loan originations. Multifamily real estate loans decreased by $11.4 million, or 8.7%, to $120.3 million at March 31, 2004 compared to $131.7 million at March 31, 2003. Non-residential real estate loans (including church loans) increased by $23.4 million, or 29.5%, to $102.6 million at March 31, 2004 compared to $79.2 million at March 31, 2003. Construction loans increased by $15.9 million, or 138.3%, to $27.4 million at March 31, 2004 compared to $11.5 million at March 31, 2003 primarily due to purchases. The Bank continues to focus on the origination of multifamily, non-residential and construction real estate loans in the markets it serves and will augment these originations with loan purchases. Consumer and business loans increased by $3.9 million, or 182.8%, to $6.0 million at March 31, 2004 compared to $2.1 million at March 31, 2003. The increase in consumer and business loans comprises four separate secured business loans in the amount of $1.0 million each originated during fiscal 2004. Total securities at March 31, 2004 decreased $25.7 million to $139.9 million from $165.6 million at March 31, 2003, reflecting a $32.7 million decrease in available-for-sale securities and a $6.9 million increase in held-to-maturity securities. The decrease in available-for-sale securities primarily reflects $65.1 million in principal repayments, maturities and calls, $23.9 million in proceeds from sales of securities, and an $860,000 decrease in the market value of the portfolio, substantially offset by purchases of $58.5 million. The increase in held-to-maturity securities reflects securities purchases of $19.9 million offset by principal payments and maturities of $12.7 million. Available-for-sale securities represented 68.9% of the total securities portfolio at March 31, 2004 compared to 77.9% at March 31, 2003. The Bank invests in securities to help diversify its asset portfolios and satisfy collateral requirements for certain deposits and borrowings. At March 31, 2004, total liabilities increased $25.4 million, or 5.4%, to $494.2 million compared to $468.8 million at March 31, 2003. Deposits increased $26.5 million, or 7.6%, to $373.7 million at March 31, 2004 from $347.2 million at March 31, 2003. 37 The increase in deposits was primarily attributable to increases of $10.1 million in money market accounts, $8.9 million in demand accounts, $5.3 million in certificates of deposit and $2.2 million in regular savings and club accounts. Funds from deposit growth were used to pay down higher cost advances from the FHLB-NY, resulting in a net decrease in total borrowed money of $4.7 million, or 4.3%, to $104.3 million at March 31, 2004, from $109.0 million one year ago. Advances from the FHLB-NY declined by $17.5 million which were partially offset by new borrowings from the issuance of $12.7 million of trust preferred securities. At March 31, 2004, stockholders' equity increased $3.6 million, or 8.7%, to $44.6 million compared to $41.1 million at March 31, 2003. The increase in stockholders' equity was primarily attributable to net income of $4.8 million partially offset by other comprehensive losses, net of taxes, of $492,000, a net increase in treasury stock holdings of $200,000 and dividends declared of $659,000. The Bank's capital levels meet regulatory requirements of a well capitalized financial institution. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2004 AND 2003 NET INCOME The Bank reported net income for fiscal 2004 of $4.8 million compared to $3.8 million for the prior fiscal year. Net income available to common stockholders for fiscal 2004 was $4.6 million, or $1.87 per diluted common share compared to $3.6 million, or $1.52 per diluted common share, for fiscal 2003. The increase in net income was primarily due to a $2.1 million increase in non-interest income and a $540,000 reduction in income tax expense partially offset by an $873,000 decrease in net interest income and a $776,000 increase in non-interest expense. INTEREST INCOME Interest income for fiscal 2004 was $26.2 million, a decrease of $1.2 million, or 4.2%, from the prior fiscal year. The average balance of interest-earning assets increased to $493.0 million for fiscal 2004 from $431.8 million for the prior fiscal year. This increase was more than offset by a decline in the average yield on interest-earning assets to 5.32% for fiscal 2004 compared to 6.34% for fiscal 2003. Interest income on loans decreased by $1.1 million, or 5.1%, to $20.1 million for fiscal 2004 compared to $21.2 million for the prior fiscal year. The decrease in interest income from loans reflects a 110 basis point decrease in the average rate earned on loans to 6.40% for fiscal 2004 from 7.50% for the prior fiscal year, the effects of which were partially offset by an increase of $31.9 million, or 11.3%, in the average balance of loans to $314.3 million for fiscal 2004 compared to $282.4 million for fiscal 2003. The increase in the average balance of loans reflects originations and purchases in excess of principal collections. The decline in the average rate earned on loans was principally due to the downward pricing on loan products during the low interest rate environment experienced during fiscal 2004, see "Item 7. Management Discussion and Analysis--Liquidity and Capital Resources." Interest income on mortgage-backed securities increased by $507,000, or 11.8%, to $4.8 million for fiscal 2004 compared to $4.3 million for the prior fiscal year, reflecting an increase of $33.8 million in the average balance of mortgage-backed securities to $126.8 million for fiscal 2004 compared to $93.0 million for fiscal 2003. The increase in the average balance of such securities was due to the utilization of part of the proceeds received from increased borrowings and deposits, coupled with the redeployment of mortgage loan principal repayments, to purchase mortgage-backed securities. This increase was partially offset by an 82 basis point decrease in the average rate earned on mortgage-backed securities to 3.78% for fiscal 2004 from 4.60% for the prior fiscal year. Interest income on investment securities decreased by approximately $453,000, or 28.1%, to $1.2 million for fiscal 2004 compared to $1.6 million for the prior fiscal year. The decrease in interest income on investment securities reflects a 49 basis point decrease in the average rate earned on investment securities to 3.91% for fiscal 2004 from 4.40% for the prior fiscal year and a decrease of $7.0 million in the average balance of investment securities to $29.7 million for fiscal 2004 compared to $36.7 million for fiscal 2003. Interest income on federal funds decreased $133,000, or 44.3%, to $167,000 for fiscal 2004 compared to $300,000 for the prior fiscal year. The decrease is attributable to a 77 basis point decrease in the average rate earned on federal funds, partially offset by a $2.5 million increase in the average balance of federal funds. INTEREST EXPENSE Interest expense decreased by $283,000, or 3.2%, to $8.7 million for fiscal 2004 compared to $9.0 million for the prior fiscal year. The decrease in interest expense reflects a decline of 34 basis points in the average cost of interest-bearing liabilities. This decline in average rate paid was partially offset by a $54.9 million increase in the average balance of interest-bearing liabilities to $452.8 million in fiscal 2004 from $397.9 million in fiscal 2003. The increase in the average balance of interest-bearing liabilities in fiscal 2004 compared to fiscal 2003 was due to increases in the average balance of interest-bearing deposits, as well as increases in 38 the average balance of borrowed money. Interest expense on deposits decreased $1.1 million, or 19.3%, to $4.6 million for fiscal 2004 compared to $5.8 million for the prior fiscal year. This decrease is attributable to a 48 basis point decrease in the cost of average deposits partially offset by a $27.7 million, or 8.8%, increase in the average balance of interest-bearing deposits to $344.8 million for fiscal 2004 compared to $317.1 million for fiscal 2003. The increase in the average balance of interest-bearing deposits was primarily due to an increase in the average balance of money market accounts of $10.9 million, or 65.2%, and an increase in the average balance of certificates of deposit of $8.2 million, or 5.3%. The increase in average interest-bearing deposits was achieved in part through deposits generated by a new branch and two new ATM centers in fiscal 2004. The decrease in the average rate paid on deposits was principally due to the declining interest rate environment experienced in fiscal 2004. Interest expense on borrowed money increased by $828,000, or 25.7%, to $4.1 million for fiscal 2004 compared to $3.2 million for the prior fiscal year. The increase in interest expense on borrowed money for fiscal 2004 reflects a $25.5 million increase in the average balance of borrowed money, of which $6.9 million resulted from the issuance of trust preferred securities, partially offset by a decrease of 18 basis points in the average cost of borrowed money. The decrease in average cost of borrowings was due to the continued declining interest rate environment experienced during fiscal 2004. NET INTEREST INCOME Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned and paid. Our net interest income is significantly impacted by changes in interest rate and market yield curves. See "--Discussion of Market Risk--Interest Rate Sensitivity Analysis" for further discussion on the potential impact of changes in interest rates on our results of operations. Net interest income before the provision for loan losses decreased $873,000, or 4.7%, to $17.5 million for fiscal 2004 compared to $18.4 million for the prior fiscal year. The 102 basis point decrease in the return on average interest-earning assets, coupled with a 34 basis point decrease in the cost of interest-bearing liabilities used to fund interest-earning assets, contributed to a 68 basis point decrease in the interest rate spread to 3.40% for fiscal 2004 compared to 4.08% for the prior fiscal year. The net interest margin decreased to 3.56% for fiscal 2004 compared to 4.26% for fiscal 2003. PROVISION FOR LOAN LOSSES During fiscal 2004 no provision was recorded for loan losses. The Bank records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level that is considered appropriate to absorb probable losses inherent in the existing loan portfolio. Factors considered when evaluating the adequacy of the allowance for loan losses include the volume and type of lending conducted, the Bank's previous loan loss experience, the known and inherent risks in the loan portfolio, adverse situations that may affect the borrowers' ability to repay, the estimated value of any underlying collateral and trends in the local and national economy and trends in the real estate market. During fiscal 2004, the Bank had net charge-offs of $33,000 compared to net recoveries of $30,000 for fiscal 2003. At March 31, 2004, non-performing loans totaled $2.1 million, or 0.6% of total loans compared to $1.8 million, or 0.6% of total loans, at March 31, 2003. At March 31, 2004, the Bank's allowance for loan losses was $4.1 million, substantially unchanged from that of March 31, 2003, resulting in a ratio of the allowance to non-performing loans of 194.3% at March 31, 2004 compared to 230.7% at March 31, 2003, and a ratio of allowance for possible loan losses to total loans of 1.16% and 1.40% at March 31, 2004 and March 31, 2003, respectively. The Bank believes its reported allowance for loan loss at March 31, 2004 is both appropriate in the circumstances and adequate to provide for estimated probable losses in the loan portfolio. For further discussion of non-performing loans and allowance for loan losses, see "Item 1--Business--General Description of Business--Asset Quality" and Note 1 of Notes to the Consolidated Financial Statements. NON-INTEREST INCOME Non-interest income is comprised of loan fees and service charges, gains or losses from the sale of securities and certain other items, fee income for banking services and miscellaneous non-interest income. Non-interest income increased $2.1 million, or 67.0%, to $5.3 million for fiscal 2004 compared to $3.2 million for fiscal 2003. The increase is primarily due to a $1.3 million increase in loan fees and service charges and a $590,000 increase in other, or miscellaneous, non-interest income. Loan fees and service charges amounted to $2.6 million for fiscal 2004, a 94.4% increase from the prior fiscal year, primarily resulting from higher mortgage prepayment penalties relating to increased refinancing activity including several loans whose prepayment penalties were based on the yield maintenance method compared to a flat declining rate method usually used by the Bank. The yield maintenance method is calculated by using a stated contractual interest rate for the remaining term of the loan multiplied by the current outstanding balance. Current loan production does not incorporate the yield maintenance method. Additionally, a decline in the refinance market could result in lower prepayment penalty fee income. Other non-interest income amounted to $597,000 for fiscal 2004 compared to 39 $7,000 for the prior fiscal year. The increase in other non-interest income was primarily a result of a recovery of $558,000 of which $411,000 was related to the recognition of previously unrecognized mortgage loan income from one problem loan that had been held in escrow pending the resolution of certain mechanics' liens. The remaining recovery of $147,000 was from previously unrecognized prepaid mortgage loan income. NON-INTEREST EXPENSE Non-interest expense increased by $776,000, or 5.3%, to $15.5 million for fiscal 2004 compared to $14.7 million for the prior fiscal year. The increase in non-interest expense was primarily attributable to increases of $813,000 in salaries and employee benefits and $58,000 in net occupancy and equipment expenses, slightly offset by a decrease of $95,000 in other non-interest expense. The increase in salaries and employee benefits was primarily attributable to annual salary increases, new hires and the increased costs of benefit plans. Net occupancy expenses increased primarily from new and upgraded 24/7 ATM centers and the Bank's recently opened Jamaica Center branch. INCOME TAX EXPENSE Income tax expense was approximately $2.5 million for fiscal 2004, a $540,000, or 17.8%, decrease from $3.0 million for fiscal 2003 due to a reduction in the Company's tax rate following the establishment of a REIT. The effective tax rate in fiscal 2004 was 34.0% compared to 44.2% in fiscal 2003. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2003 AND 2002 NET INCOME The Bank reported net income for fiscal 2003 of $3.8 million compared to $4.7 million for the prior fiscal year. Net income available to common stockholders for fiscal 2003 was $3.6 million, or $1.52 per diluted common share compared to $4.5 million, or $1.89 per diluted common share, for fiscal 2002. The decrease in net income was primarily due to a $2.2 million increase in income tax expense, a $1.3 million decrease in non-interest income and a $366,000 increase in non-interest expense partially offset by a $2.1 million improvement in net interest income and a $900,000 decrease in the provision for loan losses. INTEREST INCOME Interest income for fiscal 2003 was $27.4 million, a decrease of $1.0 million, or 3.5%, from the prior fiscal year. The average balance of interest-earning assets increased to $431.8 million for fiscal 2003 from $399.7 million for the prior fiscal year. This increase was more than offset by a decline in the average yield on interest-earning assets to 6.34% for fiscal 2003 compared to 7.10% for fiscal 2002. Interest income on loans decreased by $1.5 million, or 6.8%, to $21.2 million for fiscal 2003 compared to $22.7 million for fiscal 2002. The decrease in interest income from loans reflects a decrease of $14.7 million, or 4.9%, in the average balance of loans to $282.4 million for fiscal 2003 compared to $297.1 million for fiscal 2002, coupled with a 10 basis point decrease in the average rate earned on loans to 7.50% for fiscal 2003 from 7.65% for the prior fiscal year. The decrease in the average balance of loans reflects amortization of prepayments in excess of originations and purchases. The decline in the average rate earned on loans was principally due to the downward pricing on loan products during the continuing declining interest rate environment of fiscal 2003. Interest income on mortgage-backed securities increased by $1.4 million, or 46.7%, to $4.3 million for fiscal 2003 compared to $2.9 million for the prior fiscal year, reflecting an increase of $42.6 million in the average balance of mortgage-backed securities to $93.0 million for fiscal 2003 compared to $50.5 million for fiscal 2002. The increase in the average balance of such securities was due to the utilization of part of the proceeds received from increased borrowings and deposits, coupled with the redeployment of mortgage loan principal repayments, to purchase mortgage-backed securities. This increase was partially offset by a 118 basis point decrease in the average rate earned on mortgage-backed securities to 4.60% from 5.78%. Interest income on investment securities decreased by approximately $710,000, or 30.6%, to $1.6 million for fiscal 2003 compared to $2.3 million for the prior fiscal year. The increase in interest income on investment securities reflects a 164 basis point decrease in the average rate earned on investment securities to 4.40% from 6.04% and a decrease of $1.8 million in the average balance of investment securities to $36.7 million for fiscal 2003 compared to $38.5 million for fiscal 2002. Interest income on federal funds decreased $126,000, to $300,000 for fiscal 2003 compared to $426,000 for the prior fiscal year. The decrease is attributable to a 160 basis point decrease in the average rate earned on federal funds, partially offset by a $6.1 million increase in the average balance of federal funds. 40 INTEREST EXPENSE Interest expense decreased by $3.1 million, or 25.4%, to $9.0 million for fiscal 2003 compared to $12.0 million for the prior fiscal year. The decrease in interest expense reflects a decline of 95 basis points in the average cost of interest-bearing liabilities. This decline in average rate paid was partially offset by a $22.8 million increase in the average balance of interest-bearing liabilities to $397.9 million in fiscal 2003 from $375.1 million in fiscal 2002. The increase in the average balance of interest-bearing liabilities in fiscal 2003 compared to fiscal 2002 was due to increases in the average balance of interest-bearing deposits and, to a lesser extent, increases in the average balance of borrowed money. Interest expense on deposits decreased $2.4 million, or 29.1%, to $5.8 million for fiscal 2003 compared to $8.1 million for the prior fiscal year. This decrease is attributable to a 92 basis point decrease in the cost of average deposits partially offset by a $20.1 million, or 6.8%, increase in the average balance of interest-bearing deposits to $317.1 million for fiscal 2003 compared to $297.0 million for fiscal 2002. The increase in the average balance of interest-bearing deposits was primarily due to an increase in the average balance of certificates of deposit of $21.6 million, or 16.1%. The increase in average interest-bearing deposits was achieved through increased retail production brought about by enhanced marketing efforts. The decrease in the average rate paid on deposits was principally due to the declining interest rate environment experienced in fiscal 2003. Interest expense on borrowed money decreased by $697,000, or 17.8%, to $3.2 million for fiscal 2003 compared to $3.9 million for the prior fiscal year. The decrease in interest expense on borrowed money for fiscal 2003 reflects a decrease of 103 basis points in the average cost of borrowed money partially offset by a $2.7 million increase in the average balance of borrowed money. The decrease in average cost of borrowings was due to the continued declining interest rate environment experienced during fiscal 2003. NET INTEREST INCOME Net interest income before the provision for loan losses increased $2.1 million, or 12.6%, to $18.4 million for fiscal 2003 compared to $16.3 million for the prior fiscal year. Net interest income benefited from a general interest rate decline, as well as an increase in deposits. This benefit was partially offset by an increase in borrowed money, a decrease in loan originations and average loan balances and accelerated prepayments of mortgage-backed securities. The 95 basis point decrease in the cost of interest-bearing liabilities used to fund interest-earning assets, coupled with a 76 basis point decrease in the return on average interest-earning assets, contributed to a 19 basis point increase in the interest rate spread to 4.08% for fiscal 2003 compared to 3.89% for the prior fiscal year. The net interest margin increased to 4.26% for fiscal 2003 compared to 4.09% for fiscal 2002. PROVISION FOR LOAN LOSSES For fiscal 2003 there were no provisions recorded for loan losses compared to $900,000 for fiscal 2002. Management believes that the decrease in provisions for loan losses compared to fiscal 2002 was warranted by the decreases in charge-offs and non-performing assets. During fiscal 2003, the Bank had net recoveries of approximately $30,000 compared to net charge-offs of $323,000 for fiscal 2002. At March 31, 2003, non-performing loans totaled $1.8 million, or 0.6% of total loans, compared to $2.8 million, or 1.0% of total loans, at March 31, 2002. At March 31, 2003, the Bank's allowance for loan losses was $4.2 million, substantially unchanged from that at March 31, 2002, resulting in a ratio of the allowance to non-performing loans of 230.7% at March 31, 2003 compared to 146.2% at March 31, 2002, and a ratio of allowance for possible loan losses to total loans of 1.40% and 1.41% at March 31, 2003 and March 31, 2002, respectively. Management believes the Company's reported allowance for loan loss at March 31, 2003 is both appropriate in the circumstances and adequate to provide for estimated probable losses in the loan portfolio. For further discussion of non-performing loans and allowance for loan losses, see "Item 1--Business--General Description of Business--Asset Quality" and Note 1 of Notes to the Consolidated Financial Statements. NON-INTEREST INCOME Non-interest income is composed of loan fees and service charges, gains or losses from the sale of securities and certain other items, fee income for banking services and miscellaneous non-interest income. Non-interest income decreased $1.3 million, or 29.5%, to $3.2 million for fiscal 2003 compared to $4.5 million for fiscal 2002. Despite increases in fees and charges for deposits and loans, non-interest income decreased due to the inclusion in fiscal 2002 of $1.4 million relating to the sale of securities, $987,000 relating to the sale of the Bank's East New York branch and the loss of $101,000 from the sale of the Bank's automobile loan portfolio. Excluding the income and loss from sales of securities, loans and deposits, total non-interest income increased by $961,000, or 43.7% compared to fiscal 2002. Loan fees and service charges amounted to $1.3 million for fiscal 2003, a $655,000, or a 95.5%, increase from the prior fiscal year. The increase in loan fees and service charges is primarily attributable to substantially higher mortgage prepayment penalties, primarily resulting from multifamily borrowers prepaying due to the lower interest rate environment, and a restructuring of the Bank's loan fees in the second quarter of fiscal 2003. Depository fees and charges increased $316,000, or 41 21.1%, to $1.8 million for fiscal 2003 from $1.5 million for fiscal 2002. The increase in depository fees primarily relates to increased ATM fees and the restructuring of the Bank's service charges in the second quarter of fiscal 2003. NON-INTEREST EXPENSE Non-interest expense increased by $366,000, or 2.6%, to $14.7 million for fiscal 2003 compared to $14.3 million for the prior fiscal year. The increase in non-interest expense was primarily attributable to increases of $307,000 in net occupancy and equipment expenses and $269,000 in salaries and employee benefits, partially offset by a decrease of $210,000 in other non-interest expense. The increase in net occupancy and equipment expenses are related to the opening of the Malcolm X Blvd. branch in September 2001 and the renovation of an existing branch facility which resulted in increases in maintenance contracts, building taxes and water and sewer expense. The increase in salaries and employee benefits was primarily attributable to increased compensation resulting from the Bank being able to successfully fill key management positions, including the Chief Operating Officer, Chief Financial Officer, Chief Lending Officer and Chief Credit Officer positions. INCOME TAX EXPENSE Income tax expense was approximately $2.5 million for fiscal 2004, a $540,000, or 17.8%, decrease from $3.0 million for fiscal 2003, reflecting the benefit of the Bank's REIT. The effective tax rate in fiscal 2004 was 34.0% compared to 44.2% in fiscal 2003. LIQUIDITY AND CAPITAL RESOURCES Liquidity is a measure of the Bank's ability to generate adequate cash to meet financial obligations. The principal cash requirements of a financial institution are to cover potential deposit outflows, fund increases in its loan and investment portfolios and cover its ongoing operating expenses. The Company's primary sources of funds are deposits, borrowed funds 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. Management believes the Bank's short-term assets have sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash requirements. In addition, as previously discussed, the Bank has the ability to borrow funds from the FHLB-NY to further meet any liquidity needs. The Bank monitors its liquidity utilizing guidelines that are contained in a policy developed by management of the Bank and approved by the Bank's Board of Directors. The Bank's several liquidity measurements are evaluated on a frequent basis. The Bank was in compliance with this policy as of March 31, 2004. Congress eliminated the statutory liquidity requirement which required federal savings banks to maintain a minimum amount of liquid assets of between 4% and 10%, as determined by the Director of the OTS, the Bank's primary federal regulator. The Bank is required to maintain sufficient liquidity to ensure its safe and sound operation. As a result of the elimination of the liquidity requirement, the Bank manages its liquidity through a Board-approved liquidity policy. The Bank's most liquid assets are cash and short-term investments. The level of these assets is dependent on the Bank's operating, investing and financing activities during any given period. At March 31, 2004 and 2003, assets qualifying for short-term liquidity, including cash and short-term investments, totaled $28.7 million and $45.3 million, respectively. The levels of the Bank's short-term liquid assets are dependent on the Bank's operating, financing and investing activities during any given period. The most significant liquidity challenge the Bank currently faces is the variability in its cash flows as a result of mortgage refinance activity, which has resulted in a lag in redeploying lower yielding federal funds into higher yielding mortgage loans, which has had a negative impact on the Company's net interest margin and net interest income. As mortgage interest rates decline, customers' refinance activities tend to accelerate, causing the cash flow from both the mortgage loan portfolio and the mortgage-backed securities portfolio to accelerate. In addition, as mortgage interest rates decrease, customers generally tend to prefer fixed rate mortgage loan products over variable rate products. Since the Bank generally sells its 15-year and 30-year fixed rate loan production into the secondary mortgage market, the origination of such products for sale does not significantly reduce the Bank's liquidity. During fiscal 2002, the Federal Open Market Committee reduced the federal funds rate on eight separate occasions by a total of 325 basis points, resulting in a lower interest rate environment in fiscal 2002 compared to the fiscal year ended March 31, 2001. During fiscal 2003, the federal funds rate was again lowered on three separate occasions a total of 125 basis points. During fiscal 2004 the federal funds rate has remained unchanged. The increase in loan and securities repayments experienced by the Bank over the past two fiscal years was primarily the result of the increase in mortgage loan refinancing activity caused by this lower interest rate environment. The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During fiscal 2004, cash and cash equivalents decreased by $386,000. Net cash provided by operating activities was $17.0 million, representing primarily the results of operations adjusted for depreciation and amortization and the provision for loan losses. Net cash 42 used in investing activities was $38.2 million, which was primarily the result of purchases of loans and securities and originations of loans partially offset by repayments and maturities of loans and securities. Net cash provided by financing activities was $20.8 million, reflecting primarily net increases in deposits and borrowed money. CONTRACTUAL OBLIGATIONS The following table presents the Bank's contractual obligations at March 31, 2004.
PAYMENTS DUE BY PERIOD ---------------------------------------------------------------------- Contractual Less than 1 - 3 3 - 5 More than Obligations Total 1 year years years 5 years - ------------------------------------------------ ---------------------------- ------------ ------------ ------------ (IN THOUSANDS) Long term debt obligations: FHLB advances $ 91,516 $ 26,000 $64,274 $ 1,000 $ 242 Guaranteed preferred beneficial interest in junior subordinated debentures 12,741 12,741 ------------- ------------- ------------ ------------ ------------ Total long term debt obligations 104,257 26,000 64,274 13,741 242 Operating lease obligations: Lease obligations for rental properties 2,619 370 946 606 697 ------------- ------------- ------------ ------------ ------------ Total contractual obligations $106,876 $ 26,370 $65,220 $ 14,347 $ 939 ============= ============= ============ ============ ============
REGULATORY CAPITAL POSITION The Bank must satisfy three minimum capital standards established by the OTS. For a description of the OTS capital regulation, see "Item 1--Regulation and Supervision--Federal Banking Regulation--Capital Requirements." The Bank presently exceeds all capital requirements as currently promulgated. At March 31, 2004, the Bank had tangible, core, and total risk-based capital ratios of 10.6%, 10.6% and 17.7%, respectively. The following table reconciles the Bank's stockholders' equity at March 31, 2004 under accounting principles generally accepted in the United States of America ("GAAP") to regulatory capital requirements.
REGULATORY CAPITAL REQUIREMENTS -------------------------------------------------------------- GAAP TANGIBLE LEVERAGE RISK-BASED CAPITAL CAPITAL CAPITAL CAPITAL ------------------------------ -------------- -------------- (IN THOUSANDS) Stockholders' Equity at March 31, 2004 (1) $ 57,442 $ 57,442 $ 57,442 $ 57,442 Add: General valuation allowances - - 4,125 Deduct: Unrealized loss on securities available-for-sale, net (251) (251) (251) Goodwill and qualifying intangible assets - - - -------------- -------------- -------------- Regulatory Capital 57,191 57,191 61,316 Minimum Capital requirement 10,776 21,553 27,726 -------------- -------------- -------------- Regulatory Capital Excess $ 46,415 $ 35,638 $ 33,590 ============== ============== ==============
(1) Reflects Bank only. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and accompanying notes appearing elsewhere herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of Carver Federal's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact on Carver Federal's performance than do the effects of the general level of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. 43 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required by this item appears under the caption "Discussion of Market Risk--Interest Rate Sensitivity Analysis" in Item 7, incorporated herein by reference. 44 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. LETTERHEAD OF KPMG LLP INDEPENDENT AUDITOR'S REPORT 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, 2004 and 2003 and the related consolidated statements of income, changes in stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with standards established by the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2004 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2004, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP New York, New York June 24, 2004 45 MANAGEMENT'S REPORT Management of Carver Bancorp is responsible for the preparation and integrity and fair presentation of the consolidated financial statements and other information presented in this annual report. The consolidated financial statements have been prepared in conformity with GAAP and, where necessary, are based on management's best estimates and judgment. Other financial information contained elsewhere in this annual report is consistent with that contained in the consolidated financial statements. Management maintains accounting systems and internal controls to meet its responsibilities for reliable consolidated financial statements. There are inherent limitations in the effectiveness of internal controls, including the possibility of circumvention of overriding of controls. Furthermore, because of changes in conditions, the effectiveness of internal controls may vary over time. These systems and controls are designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with management's authorization. An internal audit function is maintained to continually evaluate the adequacy and effectiveness of such internal controls, policies and procedures. KPMG LLP, independent auditors, are engaged to audit the Company's consolidated financial statements in accordance with auditing standards generally accepted in the United States of America and the independent auditor's report expresses their opinion as to the fair representation, in all material respects, of the consolidated financial statements in conformity with GAAP. The audit provides an objective assessment of the degree to which management meet its responsibility for financial reporting. The Board fulfills its oversight role for the financial statements through the Finance and Audit Committee, which is composed entirely of outside directors. The Finance and Audit Committee meet regularly with management, the internal auditors, and the independent auditors, to discuss internal controls and accounting, auditing and financial reporting matters. The Finance and Audit Committee reviews and approves the scope of internal and external audits, as well as recommendations made with respect to internal controls by the independent and internal auditors and the various regulatory agencies. KPMG LLP and the internal auditors meet with the Finance and Audit Committee with and with and without management present. Management assessed the Company's system of internal control over financial reporting as of March 31, 2004 based on criteria for effective internal control over financial reporting described in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that as of March 31, 2004, the Company's system of internal controls over financial reporting met those criteria. /s/ Deborah C. Wright /s/ William C. Gray - --------------------- ------------------- Deborah C. Wright William C. Gray President and Chief Executive Officer Senior Vice President and Chief Financial Officer 46 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except share data)
MARCH 31, ----------------------------- 2004 2003 ------------- ------------ ASSETS Cash and cash equivalents: Cash and due from banks $ 11,574 $ 15,160 Federal funds sold 8,200 5,500 Interest earning deposits 3,000 2,500 ------------- ------------ Total cash and cash equivalents 22,774 23,160 ------------- ------------ Securities: Available-for-sale, at fair value (including pledged as collateral of $82,325 at March 31, 2004, $124,954 at March 31, 2003) 96,403 129,055 Held-to-maturity, at amortized cost (including pledged as collateral of $42,189 at March 31, 2004 and $35,138 at March 31, 2003; fair value of $43,794 at March 31, 2004 and $37,543 at March 31, 2003) 43,474 36,530 ------------- ------------ Total securities 139,877 165,585 ------------- ------------ Loans receivable: Real estate mortgage loans 350,015 294,771 Consumer and business loans 6,010 2,125 Allowance for loan losses (4,125) (4,158) ------------- ------------ Total loans receivable, net 351,900 292,738 ------------- ------------ Premises and equipment, net 11,826 10,193 Federal Home Loan Bank of New York stock, at cost 4,576 5,440 Accrued interest receivable 2,489 3,346 Identifiable intangible asset, net -- 178 Other assets 5,388 9,205 ------------- ------------ Total assets $ 538,830 $ 509,845 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 373,665 $ 347,164 Advances from the Federal Home Loan Bank of New York and other borrowed money 104,282 108,996 Other liabilities 16,238 12,612 ------------- ------------ Total liabilities 494,185 468,772 ------------- ------------ Stockholders' equity: Preferred stock (par value $0.01 per share; 1,000,000 shares authorized; 100,000 issued and outstanding) 1 1 Common stock (par value $0.01 per share: 5,000,000 shares authorized; 2,316,358 shares issued; 2,285,267 and 2,296,960 outstanding at March 31, 2004 and March 31, 2003, respectively) 23 23 Additional paid-in capital 23,882 23,781 Retained earnings 20,892 16,712 Unamortized awards of common stock under management recognition plan ("MRP") (21) (4) Treasury stock, at cost (31,091 shares at March 31, 2004 and 19,398 shares at March 31, 2003) (390) (190) Accumulated other comprehensive income 258 750 ------------- ------------ Total stockholders' equity 44,645 41,073 ------------- ------------ Total liabilities and stockholders' equity $ 538,830 $ 509,845 ============= ============
See accompanying notes to consolidated financial statements. 47 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share data)
FOR THE YEAR ENDED MARCH 31, -------------------------------- 2004 2003 2002 ---------- ---------- --------- Interest income: Loans $ 20,117 $ 21,194 $ 22,727 Mortgage-backed securities 4,789 4,282 2,918 Investment securities 1,161 1,614 2,324 Federal funds sold 167 300 426 ---------- ---------- --------- Total interest income 26,234 27,390 28,395 ---------- ---------- --------- Interest expense: Deposits 4,649 5,760 8,127 Advances and other borrowed money 4,051 3,223 3,920 ---------- ---------- --------- Total interest expense 8,700 8,983 12,047 ---------- ---------- --------- Net interest income 17,534 18,407 16,348 Provision for loan losses - - 900 ---------- ---------- --------- Net interest income after provision for loan losses 17,534 18,407 15,448 ---------- ---------- --------- Non-interest income: Depository fees and charges 1,925 1,813 1,497 Loan fees and service charges 2,607 1,341 686 Gain on sale of investment securities 31 - 1,399 Income from sale of branches - - 987 Gain (loss) from sale of loans 118 - (101) Other 597 7 17 ---------- ---------- --------- Total non-interest income 5,278 3,161 4,485 ---------- ---------- --------- Non-interest expense: Compensation and benefits 7,587 6,774 6,505 Net occupancy expense 1,443 1,261 1,144 Equipment 1,486 1,610 1,420 Other 4,964 5,059 5,269 ---------- ---------- --------- Total non-interest expense 15,480 14,704 14,338 ---------- ---------- --------- Income before income taxes 7,332 6,864 5,595 Income taxes 2,493 3,033 881 ---------- ---------- --------- Net income $ 4,839 $ 3,831 $ 4,714 ========== ========== ========= Dividends applicable to preferred stock $ 197 $ 197 $ 197 Net income available to common stockholders $ 4,642 $ 3,634 $ 4,517 ========== ========== ========= Earnings per common share: Basic $ 2.03 $ 1.59 $ 1.98 ========== ========== ========= Diluted $ 1.87 $ 1.52 $ 1.89 ========== ========== =========
See accompanying notes to consolidated financial statements. 48 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (In thousands)
ADDITIONAL RETAINED PREFERRED STOCK COMMON STOCK PAID-IN CAPITAL EARNINGS TREASURY STOCK --------------- ------------- ---------------- ---------------- -------------- Balance - March 31, 2001 $ 1 $ 23 $ 23,769 $ 8,793 $ (61) Comprehensive income: Net income - - - 4,714 - Change in net unrealized gain on available-for-sale securities, net of taxes - - - - - --------------- ------------- ---------------- ---------------- -------------- Comprehensive income, net of taxes: Dividends paid - - - (313) - Purchase of treasury stock - - (5) - (77) Allocation of ESOP Stock - - (8) - - Purchase of shares for MRP - - - - - --------------- ------------- ---------------- ---------------- -------------- BALANCE - MARCH 31, 2002 1 23 23,756 13,194 (138) Comprehensive income : Net income - - - 3,831 - Change in net unrealized gain on available-for-sale securities, net of taxes - - - - - --------------- ------------- ---------------- ---------------- -------------- Comprehensive income, net of taxes: Dividends paid - - - (313) - Treasury stock activity - - 5 - (52) Allocation of ESOP Stock - - 20 - - Purchase of shares for MRP - - - - - --------------- ------------- ---------------- ------------------------------- BALANCE--MARCH 31, 2003 1 23 23,781 16,712 (190) Comprehensive income : Net income - - - 4,839 - Change in net unrealized gain on available-for-sale securities, net of taxes - - - - - --------------- ------------- ---------------- ---------------- -------------- Comprehensive income, net of taxes: Dividends paid - - (659) - Treasury stock activity - - 82 - (200) Allocation of ESOP Stock - - - - - Issuance (Purchase) of shares for MRP - - 19 - - --------------- ------------- ---------------- ---------------- -------------- BALANCE--MARCH 31, 2004 $ 1 $ 23 $ 23,882 $ 20,892 $ (390) =============== ============= ================ ===============================
COMMON STOCK COMMON STOCK TOTAL ACCUMULATED OTHER ACQUIRED BY ACQUIRED BY STOCKHOLDERS' COMPREHENSIVE INCOME ESOP MRP EQUITY --------------------- -------------- -------------- ----------------- Balance - March 31, 2001 $ - $ (334) $ (95) 32,096 Comprehensive income: Net income - - - 4,714 Change in net unrealized gain on available-for-sale securities, net of taxes 116 - - 116 --------------------- -------------- -------------- ----------------- Comprehensive income, net of taxes: 4,830 Dividends paid - - - (313) Purchase of treasury stock - - - (82) Allocation of ESOP Stock - 182 - 174 Purchase of shares for MRP - - 37 37 --------------------- -------------- -------------- ----------------- BALANCE - MARCH 31, 2002 116 (152) (58) 36,742 Comprehensive income : Net income - - - 3,831 Change in net unrealized gain on available-for-sale securities, net of taxes 634 - - 634 --------------------- -------------- -------------- ----------------- Comprehensive income, net of taxes: 4,465 Dividends paid - - - (313) Treasury stock activity - - - (47) Allocation of ESOP Stock - 152 - 172 Purchase of shares for MRP - - 54 54 --------------------- -------------- -------------- ----------------- BALANCE--MARCH 31, 2003 750 - (4) 41,073 Comprehensive income : Net income - - - 4,839 Change in net unrealized gain on available-for-sale securities, net of taxes (492) - - (492) --------------------- -------------- -------------- ----------------- Comprehensive income, net of taxes: 4,347 Dividends paid - - - (659) Treasury stock activity - - - (118) Allocation of ESOP Stock - - - - Issuance (Purchase) of shares for MRP - - (17) 2 --------------------- -------------- -------------- ----------------- BALANCE--MARCH 31, 2004 $ 258 $ - $ (21) $ 44,645 ===================== ============== ============== =================
See accompanying notes to consolidated financial statements. 49 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED MARCH 31, ------------------------------------------------------------ 2004 2003 2002 ---- ---- ---- Cash flows from operating activities: Net income $ 4,839 $ 3,831 $ 4,713 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses - - 900 ESOP and MRP expense 33 206 206 Depreciation and amortization expense 1,146 1,224 1,155 Amortization of intangibles 178 213 213 Other amortization 1,848 481 625 Loss from sale of loans - - 101 Gain on sale of branches - - (987) Gain on sale of foreclosed real estate - - (77) Charge-off of branch improvements and related items, net - - (1,399) Changes in assets and liabilities: Decrease (increase) in accrued interest receivable 857 (542) (77) Decrease (increase) in other assets 4,478 (6,112) (1,451) Increase (decrease) in other liabilities 3,615 (481) 6,185 (Decrease) increase in accrued interest payable (39) 134 (606) ------------------- ------------------- ------------------- Net cash provided by (used in) operating activities 16,955 (1,046) 9,501 ------------------- ------------------- ------------------- Cash flows from investing activities: Purchases of securities: Available-for-sale (58,477) (91,112) (134,721) Held-to-maturity (19,859) (4,145) - Proceeds from principal payments, maturities and calls of securities: Available-for-sale 65,060 28,705 79,233 Held-to-maturity 12,693 6,578 6,357 Proceeds from sales of available-for-sale securities 23,871 - 32,676 Disbursements for loan originations (87,140) (59,595) (63,190) Loans purchased from third parties (93,694) (42,260) (45,881) Principal collections on loans 111,937 96,432 100,306 Redemption (Purchase) of FHLB-NY stock 864 (1,677) 1,992 Proceeds from loans sold 9,358 2,453 1,260 Proceeds from sale of other real estate owned - - 553 Additions to premises and equipment (2,779) (1,166) (1,172) ------------------- ------------------- ------------------- Net cash used in investing activities (38,166) (65,787) (22,587) ------------------- ------------------- ------------------- Cash flows from financing activities: Net increase in deposits 26,501 22,210 61,900 Repayment of securities repurchase agreements - - (4,930) Net (repayment of) proceeds from FHLB advances and - - - other borrowed money (17,455) 33,345 (25,019) Issuance of trust preferred securities, net 12,741 - - Cash paid for sale of deposits - - (15,383) Common stock repurchased (303) (100) (77) Dividends paid (659) (313) (312) ------------------- ------------------- ------------------- Net cash provided by financing activities 20,825 55,142 16,179 ------------------- ------------------- ------------------- Net (decrease) increase in cash and cash equivalents (386) (11,691) 3,093 Cash and cash equivalents at beginning of the period 23,160 34,851 31,758 ------------------- ------------------- ------------------- Cash and cash equivalents at end of the period $ 22,774 $ 23,160 $ 34,851 =================== =================== =================== Supplemental information: Noncash Transfers- Securities transferred from available-for-sale to held-to-maturity $ - $ 22,811 $ - Securities transferred from held-to-maturity to available-for-sale - - 45,700 Change in unrealized gain on valuation of available-for-sale investments, net (492) 634 116 Cash paid for- Interest 8,739 9,616 12,685 Income taxes 2,825 3,106 473
See accompanying notes to consolidated financial statements 50 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Carver Bancorp, Inc. (on a stand-alone basis, the "Holding Company" or "Registrant"), was incorporated in May 1996 and its principal wholly owned subsidiary is Carver Federal Savings Bank (the "Bank" or "Carver Federal"). Carver Statutory Trust I (the "Trust") is another wholly owned subsidiary of the Holding Company. The Trust, which was formed in September 2003, exists for the sole purpose of issuing trust preferred securities and investing the proceeds in an equivalent amount of subordinated debentures of the Holding Company. CFSB Realty Corp. and CFSB Credit Corp. are wholly owned subsidiaries of the Bank. CFSB Credit Corp. is currently inactive. The Bank owns a majority interest in Carver Asset Corporation, a real estate investment trust formed in the fourth quarter of fiscal 2003. The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally chartered mutual savings and loan association. The Bank converted to a federal savings bank in 1986 and changed its name at that time. On October 24, 1994, the Bank converted from mutual to stock form and issued 2,314,275 shares of its common stock, par value $0.01 per share. On October 17, 1996, the Bank completed its reorganization into a holding company structure (the "Reorganization") and became a wholly owned subsidiary of the Holding Company. In connection with the Reorganization, each share of the Bank's outstanding common stock was exchanged for one share of the Holding Company's common stock, par value $0.01 per share. See Note 11 of Notes to the Consolidated Financial Statements. Collectively, the Holding Company, the Bank and the Holding Company's other direct and indirect subsidiaries are referred to herein as the "Company" or "Carver." Carver Federal's principal business consists of attracting deposit accounts through its branch offices and investing those funds in mortgage loans and other investments permitted by federal savings banks. The Bank has six branches located throughout the City of New York that primarily serve the communities in which they operate. BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION The consolidated financial statements include the accounts of the Holding Company, the Bank, the Bank's wholly owned or majority owned subsidiaries, Carver Asset Corporation, CFSB Realty Corp. and CFSB Credit Corp., and Carver Statutory Trust I, a subsidiary of the Holding Company. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the period then ended. Estimates that are particularly susceptible to significant changes in the near-term relate to prepayment assumptions on mortgage-backed securities, the determination of the allowance for loan losses and the valuation of real estate owned. Actual results could differ significantly from those estimates. 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 Federal had extended mortgages and other credit instruments. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Carver Federal's allowance for loan losses and real estate owned valuations. Such agencies may require Carver Federal to recognize additions to the allowance for loan losses or additional write downs of real estate owned based on their judgments about information available to them at the time of their examination. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and amounts due from depository institutions and federal funds sold. Generally, federal funds sold are sold for one-day periods. SECURITIES The Bank does not have trading securities, but does differentiate between held-to-maturity securities and available-for-sale securities. When purchased, securities are classified in either the securities held-to-maturity portfolio or the securities available-for-sale portfolio. Securities can be classified as held-to-maturity and carried at amortized cost only if the Bank has a positive intent and 51 ability to hold those securities to maturity. If not classified as held-to-maturity, such securities are classified as securities available-for-sale. Available-for-sale securities are reported at fair value. Unrealized holding gains or losses for securities available-for-sale are to be excluded from earnings and reported net of deferred income taxes as a separate component of accumulated other comprehensive income, a component of Stockholders' Equity. Securities held-to-maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity. Gains or losses on sales of securities of all classifications are recognized based on the specific identification method. LOANS RECEIVABLE Loans receivable are carried at unpaid principal balances plus unamortized premiums, less the allowance for loan losses and deferred loan fees and discounts. The Bank defers loan origination fees and certain direct loan origination costs and accretes such amounts as an adjustment of yield over the contractual lives of the related loans using methodologies which approximate the interest method. Premiums and discounts on loans purchased are amortized or accreted as an adjustment of yield over the contractual lives of the related loans using methodologies which approximate the interest method. Loans are generally placed on non-accrual status when they are past due 90 days or more as to contractual obligations or when other circumstances indicate that collection is questionable. When a loan is placed on non-accrual status, any interest accrued but not received is reversed against interest income. Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on an assessment of the ability to collect the loan. A non-accrual loan is restored to accrual status when principal and interest payments become less than 90 days past due and its future collectibility is reasonably assured. ALLOWANCE FOR LOAN LOSSES An allowance for loan losses is maintained at a level considered adequate to provide for potential loan losses. Management is responsible for determining the adequacy of the allowance for loan losses and the periodic provisioning for estimated losses included in the consolidated financial statements. The evaluation process is undertaken on a quarterly basis, but may increase in frequency should conditions arise that would require management's prompt attention, such as business combinations and opportunities to dispose of non-performing and marginally performing loans by bulk sale or any development which may indicate an adverse trend. The methodology employed for assessing the appropriateness of the allowance consists of the following criteria: o Establishment of reserve amounts for all specifically identified criticized loans that have been designated as requiring attention by management's internal loan review program, bank regulatory examinations or the external auditors. o An average loss factor is applied to smaller balance homogenous types of loans not subject to specific review. These loans include residential one- to four-family, multifamily, nonresidential and construction properties, which also includes consumer and business loans. o An allocation to the remaining loans giving effect to historical loss experience over several years and linked to cyclical trends. Recognition is also given to the changed risk profile brought about by business combinations, customer knowledge, the results of ongoing credit quality monitoring processes and the cyclical nature of economic and business conditions. An important consideration in applying these methodologies is the concentration of real estate related loans located in the New York City metropolitan area. The initial allocation or specific-allowance methodology commences with loan officers and underwriters grading the quality of their loans on an eight-category risk classification scale. Loans identified from this process as below investment grade are referred to the Internal Asset Review Committee for further analysis and identification of those factors that may ultimately affect the full recovery or collectibility of principal and/or interest. These loans are subject to continuous review and monitoring while they remain in the criticized category. Additionally, the Internal Asset Review Committee is responsible for performing periodic reviews of the loan portfolio that are independent from the identification process employed by loan officers and underwriters. Gradings that fall into criticized categories are further evaluated and reserve amounts are established for each loan. The second allocation or loss factor approach to common or homogeneous loans is made by applying the average loss factor to the outstanding balances in each loan category. 52 The final allocation of the allowance is made by applying several years of loss experience to categories of loans. It gives recognition to the loss experience of acquired businesses, business cycle changes and the real estate components of loans. Since many loans depend upon the sufficiency of collateral, any adverse trend in the real estate markets could seriously affect underlying values available to protect against loss. Other evidence used to support the amount of the allowance and its components are as follows: o Regulatory examinations o Amount and trend of criticized loans o Actual losses o Peer comparisons with other financial institutions o Economic data associated with the real estate market in the Company's market area o Opportunities to dispose of marginally performing loans for cash consideration Carver Federal maintains a loan review system, which allows for a periodic review of its loan portfolio and the early identification of potential problem loans. Such system takes into consideration, among other things, delinquency status, size of loans, type of collateral and financial condition of the borrowers. Loan loss allowances are established for problem loans based on a review of such information and/or appraisals of the underlying collateral. On the remainder of its loan portfolio, loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of loan portfolio, current economic conditions and management's judgment. Although management believes that adequate loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of the loan loss allowance may be necessary in the future. A loan is considered to be impaired, as defined by Statement of Financial Accounting Standards ("SFAS") No. 114, "ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN" ("SFAS 114"), when it is probable that Carver Federal will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. Carver Federal tests loans covered under SFAS 114 for impairment if they are on non-accrual status or have been restructured. Consumer credit non-accrual loans are not tested for impairment because they are included in large groups of smaller-balance homogeneous loans that, by definition along with leases, are excluded from the scope of SFAS 114. Impaired loans are required to be measured based upon the present value of expected future cash flows, discounted at the loan's initial effective interest rate, or at the loan's market price or fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, an impairment reserve must be established for the difference. The impairment reserve is established by either an allocation of the reserve for credit losses or by a provision for credit losses, depending on various circumstances. Impairment reserves are not needed when credit losses have been recorded so that the recorded investment in an impaired loan is less than the loan valuation. CONCENTRATION OF RISK The Bank's principal lending activities are concentrated in loans secured by real estate, a substantial portion of which is located in the State of New York. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio is susceptible to changes in New York's market conditions. PREMISES AND EQUIPMENT Premises and equipment are comprised of land, at cost, and buildings, building improvements, furnishings and equipment and leasehold improvements, at cost, less accumulated depreciation and amortization. Depreciation and amortization charges are computed using the straight-line method over the following estimated useful lives: Buildings and improvements 10 to 40 years Furnishings and equipment 3 to 10 years Leasehold improvements 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 fair value at the date of acquisition and thereafter carried at the lower of cost or fair value less estimated selling costs. The fair value of such assets is determined based primarily upon independent appraisals and other relevant factors. The amounts ultimately recoverable from real estate owned could differ from the net carrying value of these properties because of economic conditions. 53 Costs incurred to improve properties or prepare them for sale are capitalized. Revenues and expenses related to the holding and operating of properties are recognized in operations as earned or incurred. Gains or losses on sale of properties are recognized as incurred. The Bank had no real estate owned as of March 31, 2004. IDENTIFIABLE INTANGIBLE ASSETS Carver Federal adopted Statement of Financial Accounting Standards No.142 ("SFAS No. 142"), "GOODWILL AND OTHER INTANGIBLE ASSETS" on January 1, 2002. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. Identifiable intangible assets relate primarily to core deposit premiums, resulting from the valuation of core deposit intangibles acquired in the purchase of two branch offices. These identifiable intangible assets are amortized using the straight line method over periods not exceeding the estimated average remaining life of the existing customer deposits acquired. Amortization periods range from 5 to 15 years. Amortization periods for intangible assets are monitored to determine if events and circumstances require such periods to be reduced. INCOME TAXES Carver Federal accounts for income taxes using the asset and liability method. Temporary differences between the basis of assets and liabilities for financial reporting and tax purposes are measured as of the balance sheet date. Deferred tax liabilities or recognizable deferred tax assets are calculated on such differences, using current statutory rates, which result in future taxable or deductible amounts. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. IMPAIRMENT The Company annually evaluates long-lived assets, certain identifiable intangibles, deferred cost and goodwill for indication of impairment in value. There has been no impairment for the past three years. When required, asset impairment will be recorded as an expense in the current period. EARNINGS (LOSS) PER COMMON SHARE Basic earnings per share ("EPS") is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS includes any additional common shares as if all potentially dilutive common shares were issued (e.g. convertible preferred stock). For the purpose of these calculations, unreleased shares of the Carver Federal Savings Bank Employee Stock Ownership Plan ("ESOP") are not considered to be outstanding. TREASURY STOCK Treasury stock is recorded at cost and is presented as a reduction of stockholders' equity. PENSION PLANS In February 1998, the FASB issued SFAS No. 132, "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS" ("SFAS 132"). SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. Carver Federal has made the required disclosures in the accompanying Notes to the Consolidated Financial Statements. STOCK-BASED COMPENSATION PLANS Compensation expense is recognized for the Bank's ESOP equal to the fair value of shares committed to be released for allocation to participant accounts. Any difference between the fair value at that time and the ESOP's original acquisition cost is charged or credited to stockholders' equity (additional paid-in capital). The cost of unallocated ESOP shares (shares not yet committed to be released) is reflected as a reduction of stockholders' equity. The Holding Company accounts for its stock option plan ("Stock Option Plan") in accordance with Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly, compensation expense is recognized only if the exercise price of the option is less than the fair value of the underlying stock at the grant date. SFAS 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS 123"), encourages entities to recognize the fair value of all stock-based awards (measured on the grant date) as compensation expense over the vesting period. Alternatively, SFAS 123 allows entities to apply the provisions of APB 54 Opinion No. 25 and provide pro forma disclosures of net income and earnings per share as if the fair-value-based method defined in SFAS 123 had been applied. The Holding Company has elected to apply the provisions of APB Opinion No. 25 and provide these pro forma disclosures. Carver Federal applies Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related interpretations in accounting for our stock-based Plan under which there is no charge to earnings for stock option awards and the dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share. Alternatively, Carver Federal could have accounted for its Stock Option Plan under SFAS 123, under which compensation cost for stock option awards would be calculated and recognized over the service period (generally equal to the vesting period). Had Carver Federal applied SFAS 123 for its Stock Option Plan, net income and earnings per common share would have been to the pro forma amounts indicated below for the years ended March 31:
2004 2003 2002 -------------- --------------- --------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income (loss) available to common shareholders: As reported $4,642 $3,634 $4,517 Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects (158) (88) (102) -------------- --------------- --------------- Pro forma $ 4,484 $ 3,546 $ 4,415 ============== =============== =============== Basic earnings (loss) per share: As reported $2.03 $1.59 $1.98 Pro forma 1.96 1.55 1.94 Diluted earnings (loss) per share: As reported $1.87 $1.52 $1.89 Pro forma 1.81 1.48 1.85 Weighted average number of shares outstanding 2,283,802 2,290,934 2,276,920
The fair value of the option grants was estimated on the date of the grant using the Black-Scholes option pricing model applying the following weighted average assumptions: risk-free interest rates of 2.50%, 2.50% and 4.50%, for the relevant fiscal years ended March 31, 2004, 2003 and 2002 ("fiscal 2004", "fiscal 2003" and "fiscal 2002"), respectively; volatility of 45% for fiscal 2004 and 30% fiscal 2003 and fiscal 2002; expected dividend yield was calculated using annual dividends of $0.20 per share for fiscal 2004 and fiscal 2003 and $0.05 for fiscal 2002; and an expected life of five years for employee option grants and seven years for directors option grants. The Holding Company's management recognition and retention plan ("MRP") is also accounted for in accordance with Accounting Principles Board Opinion No. 25. The fair value of the shares awarded, measured at the grant date, is recognized as unearned compensation (a deduction from stockholders' equity) and amortized to compensation expense as the shares become vested. When MRP shares become vested, the Company records a credit to additional paid-in capital for tax benefits attributable to any MRP deductions in excess of the grant-date fair value charged to expense, for financial reporting purposes. RECLASSIFICATIONS Certain amounts in the consolidated financial statements presented for prior periods have been reclassified to conform with the current year presentation. 55 NOTE 2. SECURITIES The following is a summary of securities at March 31, 2004:
GROSS UNREALIZED ---------------- CARRYING ESTIMATED VALUE GAINS LOSSES FAIR-VALUE ------------- ------------ ------------ ----------- (DOLARS IN THOUSANDS) Available-for-Sale: Mortgage-backed securities: Pass-through certificates: Government National Mortgage Association $ 55,703 $ 169 $ (360) $ 55,512 Federal Home Loan Mortgage Corporation 6,753 52 (93) 6,712 Federal National Mortgage Association 12,657 47 (78) 12,626 ------------- ------------ ------------ ----------- Total mortgage-backed securities 75,113 268 (531) 74,850 Equity Securities 48 10 - 58 U.S. Government Agency Securities 21,200 296 (1) 21,495 ------------- ------------ ------------ ----------- Total available-for-sale 96,361 574 (532) 96,403 ------------- ------------ ------------ ----------- HELD-TO-MATURITY: Mortgage-backed securities: Pass-through certificates: Government National Mortgage Association 1,465 96 - 1,561 Federal Home Loan Mortgage Corporation 21,305 362 (1) 21,666 Federal National Mortgage Association 20,386 94 (234) 20,246 Small Business Administration 318 3 - 321 ------------- ------------ ------------ ----------- Total mortgage-backed securities 43,474 555 (235) 43,794 U.S. Government Agency Securities - - - - Total held-to-maturity 43,474 555 (235) 43,794 ------------- ------------ ------------ ----------- Total securities $ 139,835 $ 1,129 $ (767) $166,598 ============= ============ ============ ===========
The following is a summary of securities at March 31, 2003:
GROSS UNREALIZED ---------------- CARRYING ESTIMATED VALUE GAINS LOSSES FAIR VALUE ------------ ----------- ------------ ------------ (DOLLARS IN THOUSANDS) AVAILABLE-FOR-SALE: Mortgage-backed securities: Pass-through certificates: Government National Mortgage Association $ 47,066 $ 184 $ (130) $ 47,120 Federal Home Loan Mortgage Corporation 19,614 90 (11) 19,693 Federal National Mortgage Association 23,286 216 (32) 23,470 ------------ ----------- ------------ ------------ Total mortgage-backed securities 89,966 490 (173) 90,283 U.S. Government Agency Securities 38,187 585 - 38,772 ------------ ----------- ------------ ------------ Total available-for-sale 128,153 1,075 (173) 129,055 ------------ ----------- ------------ ------------ HELD-TO-MATURITY: Mortgage-backed securities: Pass-through certificates: Government National Mortgage Association 2,473 157 - 2,630 Federal Home Loan Mortgage Corporation 27,482 682 - 28,164 Federal National Mortgage Association 6,203 177 - 6,380 Small Business Administration 372 - (3) 369 ------------ ----------- ------------ ------------ Total mortgage-backed securities 36,530 1,016 (3) 37,543 ------------ ----------- ------------ ------------ Total held-to-maturity 36,530 1,016 (3) 37,543 ------------ ----------- ------------ ------------ Total securities $164,683 $ 2,091 $ (176) $166,598 ============ =========== ============ ============
56 The net unrealized gain on available-for-sale securities was $42,000 ($26,000 after taxes) at March 31, 2004 as compared to $902,000 ($750,000 after taxes) at March 31, 2003. On November 30, 2002 the Bank transferred $22.8 million of mortgage-backed securities from available-for-sale to held-to-maturity as a result of management's intention to hold these securities in portfolio until maturity. A related unrealized gain of $468,000 was recorded as a separate component of stockholders' equity and is being amortized over the remaining lives of the securities as an adjustment to yield. As of March 31, 2004 the carrying value of these securities is $18.1 million and a related unrealized gain of $232,000 (net of amortization) continues to be reported. Changes in unrealized holding gains and losses between fiscal 2004 and fiscal 2003 resulted in an after-tax decrease in stockholders' equity of $492,000. These gains and losses will continue to fluctuate based on changes in the portfolio and market conditions. Sales of available-for-sale securities resulted in gross realized gains during fiscal 2004 and the fiscal year ended March 31, 2002 of $31,000 and $1.4 million, respectively. There were no sales of securities in fiscal 2003. The following is a summary of the carrying value (amortized cost) and fair value of securities at March 31, 2004, by remaining period to contractual maturity (ignoring earlier call dates, if any). Actual maturities may differ from contractual maturities because certain security issuers have the right to call or prepay their obligations. CARRYING FAIR VALUE VALUE ------------ ------------ (IN THOUSANDS) AVAILABLE-FOR-SALE : Less than one year $ 6,452 $ 6,461 One through five years 15,707 16,058 Five through ten years - - After ten years 74,202 73,884 ------------ ------------ $96,361 $96,403 ============ ============ HELD-TO-MATURITY: Less than one year 12 12 One through five years 174 183 Five through ten years - - After ten years 43,288 43,599 ------------ ------------ $43,474 $43,794 ============ ============ The unrealized losses and fair value of securities that have been in a continuous unrealized loss position for less than 12 months and 12 months or longer were as follows:
MARCH 31, 2004 -------------------------------------------------------------- Less than 12 months 12 months or longer Total ------------------- ------------------- -------------------- Unrealized Fair Unrealized Fair Unrealized Fair Losses Value Losses Value Losses Value ---------- --------- -------- ---------- --------- ---------- (IN THOUSANDS) AVAILABLE-FOR-SALE: Mortgage-backed securities $ (342) $ 32,035 $ (189) $ 15,220 $ (531) $ 47,255 U.S. Government Agency Securities (1) 6,394 - - (1) 6,394 ---------- --------- -------- ---------- --------- ---------- Total available-for-sale (343) 38,429 (189) 15,220 (532) 53,649 ---------- --------- -------- ---------- --------- ---------- HELD-TO-MATURITY: Mortgage-backed securities (226) 17,951 (9) 1,379 (235) 19,330 ---------- --------- -------- ---------- --------- ---------- Total securities $ (569) $ 56,380 $ (198) $ 16,599 $ (767) $ 72,979 ========== ========= ======== ========== ========= ==========
57 NOTE 3. LOANS RECEIVABLE, NET A summary of loans receivable, net follows:
MARCH 31, --------------------------------------------------------- 2004 2003 --------------------------- -------------------------- AMOUNT PERCENT AMOUNT PERCENT ------------- ------------- -------------------------- (DOLLARS IN THOUSANDS) REAL ESTATE LOANS: One- to four-family $ 98,645 27.80 % $ 71,735 24.20 % Multifamily 120,252 33.88 131,749 44.45 Nonresidential 102,641 28.92 79,244 26.74 Construction 27,376 7.71 11,539 3.89 Construction loans in process - - - - Consumer and business 6,010 1.69 2,125 0.72 ------------- ------------- -------------------------- Total gross loans 354,924 100.00 % 296,392 100.00 % ============= ============= ADD: Premium on loans 1,264 867 LESS: Deferred fees and loan discounts (163) (363) Allowance for loan Losses (4,125) (4,158) ------------- ------------- Total $ 351,900 $ 292,738 ============= =============
At March 31, 2004, 91.0% of the Company's real estate loans receivable were principally secured by properties located in the State of New York. The mortgage loan portfolios serviced for Fannie Mae are not included in the accompanying consolidated financial statements. The unpaid principal balances of these loans aggregated $11.7 million, $4.1 million and $2.9 million at March 31, 2004, 2003 and 2002, respectively. Custodial escrow balances, maintained in connection with the foregoing loan servicing, were approximately $40,000, $16,000 and $28,000 at March 31, 2004, 2003 and 2002, respectively. During the year ended March 31, 2004 the Bank sold $9.4 million in loans with a gain of $118,000 recognized, as compared to $2.5 million in loans sold during fiscal 2003 and a minimal gain recognized. The following is an analysis of the allowance for loan losses:
YEAR ENDED MARCH 31, -------------------------------------- 2004 2003 2002 ------ ------ ------ (DOLLARS IN THOUSANDS) Balance at beginning of the year $4,158 $4,128 $3,551 Provision charged to operations - - 900 Recoveries of amounts previously charged off 292 258 177 Loans charged-off (325) (228) (500) ------ ------ ------ Balance at ending of the year $4,125 $4,158 $4,128 ====== ====== ======
Non-accrual loans consist of loans for which the accrual of interest has been discounted as a result of such loans becoming 90 days or more delinquent as to principal and/or interest payments. Interest income on non-accrual loans is recorded when received. Restructured loans consist of loans where borrowers have been granted concessions in regards to the terms of their loans due to financial or other difficulties, which rendered them unable to repay their loans under the original contractual terms. At March 31, 2004, 2003 and 2002 the recorded investment in impaired loans was $2.1 million, $1.8 million and $2.8 million, respectively all of which represented non-accrual loans. The related allowance for credit losses was approximately $317,000 and $195,000 at March 31, 2004 and 2003, respectively. The impaired loan portfolio is primarily collateral dependent. The average recorded investment in impaired loans during the fiscal years ended March 31, 2004, 2003 and 2002 was approximately $2.0 million, $1.8 million and $2.3 million, respectively. For the fiscal years ended March 31, 2004, 2003 and 2002, the Company did not recognize any interest income on these impaired loans. Interest income of $185,000, $173,000 and $288,000, respectively, for the fiscal years ended March 31, 2004, 2003 and 2002 would have been recorded on impaired loans had they performed in accordance with the original contract. At March 31, 2004 and 2003, there were no loans to officers or directors. 58 NOTE 4. PREMISES AND EQUIPMENT, NET The detail of premises and equipment is as follows:
MARCH 31, ------------------------------ 2004 2003 -------------- ------------- (DOLLARS IN THOUSANDS) Land $ 415 $ 415 Building and improvements 8,838 8,477 Leasehold improvements 1,976 975 Furniture and Equipment 6,799 5,383 -------------- ------------- 18,028 15,250 Less accumulated depreciation and amortization 6,202 5,057 -------------- ------------- $ 11,826 $ 10,193 ============== =============
Depreciation and amortization charged to operations for the fiscal years ended March 31, 2004, 2003 and 2002 amounted to $1.1 million, $1.2 million and $1.2 million, respectively. NOTE 5. ACCRUED INTEREST RECEIVABLE The detail of accrued interest receivable is as follows:
MARCH 31, ------------------------------- 2004 2003 -------------- -------------- (DOLLARS IN THOUSANDS) Loans receivable $ 1,683 $ 1,984 Mortgage-backed securities 580 716 Investments and other interest bearing assets 226 646 -------------- -------------- Total accrued interest receivable $ 2,489 $ 3,346 ============== ==============
NOTE 6. IDENTIFIABLE INTANGIBLE ASSETS The identifiable intangible assets relate to the acquisition of the Bedford-Stuyvesant branch office. Details follow:
MARCH 31, ------------------------------------------------------------------------ 2004 2003 ----------------------------------- ---------------------------------- (DOLLARS IN THOUSANDS) Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Value Amortization Value Value Amortization Value ---------- ------------ ---------- --------- ------------- ---------- Core deposit premiums $ 582 $ 582 $ - $ 582 $ 410 $ 172 Other 22 22 - 22 16 6 ---------- ------------ ---------- --------- ------------- ---------- $ 604 $ 604 $ - $ 604 $ 426 $ 178 ========== ============ ========== ========= ============= ==========
59 NOTE 7. DEPOSITS Deposit balances and weighted average stated interest rates at March 31 follow:
------------------------------------------ ----------------------------------------- 2004 2003 ------------------------------------------ ----------------------------------------- PERCENT OF PERCENT OF TOTAL WEIGHTED TOTAL WEIGHTED AMOUNT DEPOSITS AVERAGE RATE AMOUNT DEPOSITS AVERAGE RATE ------------- ------------- ------------ ------------- ------------ ------------ (DOLLARS IN THOUSANDS) Non-interest -bearing demand $ 20,966 5.6 % % $ 16,539 4.8 % % - NOW demand 22,671 6.0 0.30 18,190 5.2 0.53 Savings and clubs 131,120 35.1 0.60 128,935 37.1 1.06 Money Market savings 30,842 8.3 0.74 20,735 6.0 0.92 Certificates of deposit 168,066 45.0 1.97 162,765 46.9 2.20 ------------- ------------- ------------ ------------- ------------ ------------ Total $ 373,665 100.0 % 1.18 % $ 347,164 100.0 % 1.51 % ============= ============= ============= ============
Scheduled maturities of certificates of deposit follow: MARCH 31, ----------------------------- 2004 2003 ------------- ------------- (IN THOUSANDS) Certificates of deposit by remaining term to contractual maturity: Within one year $ 127,739 $ 127,668 After one but within two years 15,817 12,492 After two but within three years 6,573 10,387 After three years 17,937 12,218 ------------- ------------- Total $ 168,066 $ 162,765 ============= ============= The aggregate amount of certificates of deposit with minimum denominations of $100,000 or more was approximately $104.3 million at March 31, 2004 compared to $100.1 million at March 31, 2003. Interest expense on deposits for the years ended March 31 follows:
2004 2003 2002 ------------- ------------- ------------- (IN THOUSANDS) NOW demand $ 85 $ 131 $ 237 Savings and clubs 1,000 1,477 2,342 Money market savings 235 189 302 Certificates of deposit 3,316 3,975 5,263 ------------- ------------- ------------- 4,636 5,772 8,144 Mortgagors deposits 24 - - Penalty for early withdrawal of certificates of deposit (11) (12) (17) ------------- ------------- ------------- Total interest expense $ 4,649 $ 5,760 $ 8,127 ============= ============= =============
60 NOTE 8. BORROWED MONEY FEDERAL HOME LOAN BANK ADVANCES ("FHLB"). FHLB advances and weighted average interest rates at March 31 follow, by remaining period to maturity:
--------------------------- --------------------------- 2004 2003 --------------------------- --------------------------- (DOLLARS IN THOUSANDS) Maturing YEAR ENDED WEIGHTED WEIGHTED March 31, AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT -------------- ------------- ----------- ------------- ----------- 2004 - % $ - - 1.93 % $ 18,250 2005 4.05 26,000 4.05 26,000 2006 3.46 32,840 3.46 32,840 2007 4.42 28,134 4.42 28,134 2008 3.49 3,300 3.49 3,300 2009 2.86 1,000 - - 2012 3.50 242 3.50 265 ------------- ----------- ------------- ----------- 3.92 % $91,516 3.59 % $108,789 ============= =========== ============= ===========
As a member of the FHLB, the Bank may have outstanding FHLB borrowings in a combination of term advances and overnight funds of up to 25% of its total assets, or approximately $134.7 million at March 31, 2004. Borrowings are secured by the Bank's investment in FHLB stock and by a blanket security agreement. This agreement requires the Bank to maintain as collateral certain qualifying assets (principally residential mortgage loans and securities) not otherwise pledged. At March 31, 2004 and 2003, advances were secured by pledges of the Bank's investment in the capital stock of the FHLB of New York totaling $4.6 million and $5.4 million, respectively and a blanket assignment of the Bank's unpledged qualifying mortgage, mortgage-backed securities and investment portfolios. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. In securities sold under agreements to repurchase, the Bank borrows funds through the transfer of debt securities to the FHLB, as counterparty, and concurrently agrees to repurchase the identical securities at a fixed price on a specified date. Repurchase agreements are collateralized by the securities sold and, in certain cases, by additional margin securities. At March 31, 2004 and 2003 there were no securities sold under agreements to repurchase outstanding. SUBORDINATED DEBT SECURITIES. On September 17, 2003, Carver Statutory Trust I, issued 13,000 shares, liquidation amount $1,000 per share, of floating rate capital securities. Gross proceeds from the sale of these trust preferred securities were $13.0 million, and, together with the proceeds from the sale of the trust's common securities, were used to purchase approximately $13.4 million aggregate principal amount of the Holding Company's floating rate junior subordinated debt securities due 2033. The trust preferred securities are redeemable quarterly at the option of the Company beginning on or after July 7, 2007 and have a mandatory redemption date of September 17, 2033. Cash distributions on the trust preferred securities are cumulative and payable at a floating rate per annum (reset quarterly) equal to 3.05% over three-month LIBOR, with a current rate of 4.16%. 61 The following table sets forth certain information regarding Carver Federal's borrowings at the dates and for the periods
AT OR FOR THE YEAR ENDED MARCH 31, -------------------------------- 2004 2003 -------------- ------------- (DOLLARS IN THOUSANDS) Amounts outstanding at the end of period: FHLB advances $ 91,516 $ 108,789 Guaranteed preferred beneficial interest in junior subordinated debentures 12,741 - Loan for employee stock ownership plan 25 207 Weighted average rate paid at period end: FHLB advances 3.92% 3.59% Guaranteed preferred beneficial interest in junior subordinated debentures 4.20% - Loan for employee stock ownership plan 4.00% 4.00% Maximum amount of borrowing outstanding at any month end: FHLB advances $112,030 $ 108,789 Guaranteed preferred beneficial interest in junior subordinated debentures 12,742 - Loan for employee stock ownership plan 207 389 Approximate average amounts outstanding for period: FHLB advances $ 99,359 $ 80,541 Guaranteed preferred beneficial interest in junior subordinated debentures 6,854 - Loan for employee stock ownership plan 137 320 Approximate weighted average rate paid during period (1): FHLB advances 3.74% 3.99% Guaranteed preferred beneficial interest in junior subordinated debentures 4.78% - Loan for employee stock ownership plan 4.07% 4.24%
(1) The approximate weighted average rate paid during the period was computed by dividing the average amounts outstanding into the related interest expense for the period. NOTE 9. INCOME TAXES The components of income tax expense for the years ended March 31 are as follows:
2004 2003 2002 ------------- ------------- ------------- (IN THOUSANDS) Federal income tax expense (benefit): Current $ 1,634 $ 4,200 $ 569 Deferred 427 (1,626) 1,792 ------------- ------------- ------------- 2,061 2,574 2,361 ------------- ------------- ------------- State and local income tax expense (benefit): Current 342 1,104 913 Deferred 90 (645) 46 ------------- ------------- ------------- 432 459 959 ------------- ------------- ------------- Valuation allowance - - (2,439) Total provision for income tax $ 2,493 $ 3,033 $ 881 ============= ============= =============
62 The reconciliation of the expected federal income tax rate to the consolidated effective tax rate for fiscal years ended March 31 follows:
2004 2003 2002 ---------------------- ---------------------- ----------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ----------- --------- ------------ --------- ------------- --------- (DOLLARS IN THOUSANDS) Statutory Federal income tax $ 2,493 34.0 % $ 2,334 34.0 % $ 1,902 34.0 % State and local income taxes, net of Federal tax benefit 285 3.9 303 4.4 632 11.3 Change in valuation allowance - - - - (2,439) (43.6) Other (285) (3.9) 396 5.8 786 14.0 ----------- --------- ------------ --------- ------------- --------- Total income tax expense $ 2,493 34.0 % $ 3,033 44.2 % $ 881 15.7 % =========== ========= ============ ========= ============= =========
Carver Federal's stockholders' equity includes approximately $2.8 million at each of March 31, 2004, 2003 and 2002 which has been segregated for federal income tax purposes as a bad debt reserve. The use of this amount for purposes other than to absorb losses on loans may result in taxable income for federal income taxes at the then current tax rate. Tax effects of existing temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at March 31 of the years indicated follow:
2004 2003 ----------- ----------- (IN THOUSANDS) Deferred tax assets Income from affiliate $ 1,943 $ 2,050 Allowance for loan losses 1,414 1,414 Deferred loan fees 52 287 Compensation and benefit plans 100 281 Reserves for losses on other assets 20 22 Non-accrual loan interest 242 194 Contributions carryforward - 1 ----------- ----------- Total deferred tax assets before valuation allowance 3,771 4,249 Valuation allowance - - ----------- ----------- Total deferred tax assets 3,771 4,249 ----------- ----------- Deferred tax liabilities Unrealized gain on available-for-sale securities 159 616 Identifiable Intangibles - 71 Depreciation 393 283 ----------- ----------- Total deferred tax liabilities 552 970 ----------- ----------- Net deferred tax assets $ 3,219 $ 3,279 =========== ===========
A valuation allowance against the deferred tax assets at March 31, 2004 and 2003 was not established since it is more likely than not that the results of future operations will generate sufficient future taxable income to realize the deferred tax asset. 63 NOTE 10. EARNINGS PER COMMON SHARE The following table reconciles the earnings (loss) available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted earnings per share for the periods presented:
YEAR ENDED MARCH 31, -------------------------------------------- 2004 2003 2002 ------------- ------------- ------------- (IN THOUSANDS) Net income $ 4,839 $ 3,831 $ 4,713 Preferred stock dividends (197) (197) (197) ------------- ------------- ------------- Net income - basic 4,642 3,634 4,516 Impact of potential conversion of convertible preferred stock to common stock 197 197 197 ------------- ------------- ------------- Net income - diluted $ 4,839 $ 3,831 $ 4,713 ============= ============= ============= Weighted average common shares outstanding - basic 2,284 2,291 2,277 Effect of dilutive securities convertible preferred stock and options 305 235 218 ------------- ------------- ------------- Weighted average common shares outstanding - diluted 2,589 2,526 2,495 ============= ============= =============
NOTE 11. STOCKHOLDERS' EQUITY CONVERSION AND STOCK OFFERING. On October 24, 1994, the Bank issued in an initial public offering 2,314,375 shares of common stock (par value $0.01) at a price of $10 per share resulting in net proceeds of $21.5 million. As part of the initial public offering, the Bank established a liquidation account at the time of conversion, in an amount equal to the surplus and reserves of the Bank at September 30, 1994. In the unlikely event of a complete liquidation of the Bank (and only in such event), eligible depositors who continue to maintain accounts shall be entitled to receive a distribution from the liquidation account. The total amount of the liquidation account may be decreased if the balances of eligible deposits decreased as measured on the annual determination dates. The balance of the liquidation account was approximately $2.1 million (unaudited), and $2.1 million (unaudited) at March 31, 2004 and 2003, respectively, based on an assumed decrease of 15.25% of eligible deposits per annum. On October 17, 1996, the Bank completed the Reorganization and became the wholly owned subsidiary of the Holding Company. Pursuant to an Agreement and Plan of Reorganization, dated May 21, 1996, each share of the Bank's outstanding common stock was exchanged for one share of the Holding Company's common stock. In connection with the Reorganization, a shareholder of the Bank exercised appraisal rights and 100 shares of the Bank's common stock were purchased from such shareholder in the fourth fiscal quarter of 1997. Accordingly, 2,314,275 shares of the Holding Company's common stock were outstanding. The Bank is not permitted to pay dividends to the Holding Company on its capital stock if the effect thereof would cause its net worth to be reduced below either: (i) the amount required for the liquidation account, or (ii) the amount required for the Bank to comply with applicable minimum regulatory capital requirements. CONVERTIBLE PREFERRED STOCK. On January 11, 2000, the Holding Company sold, pursuant to a Securities Purchase Agreement, dated January 11, 2000, in a private placement 40,000 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock") to Morgan Stanley & Co. Incorporated ("MSDW") and 60,000 Shares of Series B Convertible Preferred Stock (the "Series B Preferred Stock") to Provender Opportunities Fund L.P. ("Provender"). In addition, Carver Federal entered into a Registration Rights Agreement, dated January 11, 2000, with MSDW and Provender. The gross proceeds from the private placement were $2.5 million. On June 1, 2004, Provender sold all 60,000 of its Series B Preferred Stock to Keefe Bruyette & Woods, Inc. The Series A Preferred Stock and Series B Preferred Stock (collectively the "Preferred Stock") accrue annual dividends at $1.97 per share. Dividends are payable semi-annually on June 15 and December 15 of each year. Each share of Preferred Stock is convertible at the option of the holder, at any time, into 2.08333 shares of Carver Federal's Common Stock, subject to certain antidilution adjustments. The Holding Company may redeem the Preferred Stock beginning January 15, 2004. In the event of any liquidation, dissolution or winding up of Carver Federal, whether voluntary or involuntary, the holders of the shares of Preferred Stock shall be entitled to receive $25 per share of Preferred Stock plus all dividends accrued and unpaid thereon. Each share of Preferred Stock is entitled to one vote for each share of Common Stock into which the Preferred Stock can be converted. At March 31, 2004 unpaid accrued dividends related to the Preferred Stock amounted to $58,000. REGULATORY CAPITAL. The operations and profitability of the Bank are significantly affected by legislation and the policies of the various regulatory agencies. The Office of Thrift Supervision ("OTS") has promulgated capital requirements for financial institutions consisting of minimum tangible and core capital ratios of 2.0% and 3.0%, respectively, of the institution's adjusted total 64 assets and a minimum risk-based capital ratio of 8.0% of the institution's risk weighted assets. Although the minimum core capital ratio is 3.0%, the Federal Deposit Insurance Corporation Improvement Act, as amended ("FDICIA"), stipulates that an institution with less than 4.0% core capital is deemed undercapitalized. At March 31, 2004 and 2003, the Bank exceeded all of its regulatory capital requirements. The following is a summary of the Bank's actual capital amounts and ratios as of March 31, 2004 and 2003 compared to the OTS requirements for minimum capital adequacy and for classification as a well-capitalized institution:
MINIMUM CAPITAL CLASSIFICATION AS BANK ACTUAL ADEQUACY WELL CAPITALIZED ------------------ -------------------- ------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ---------- ------- ----------- -------- --------- -------- (DOLLARS IN THOUSANDS) March 31, 2004 - -------------- Tangible capital $ 57,191 10.6 % $ 10,776 2.0 % N/A N/A % Leverage capital 57,191 10.6 21,553 4.0 26,941 5.0 Risk-based capital: Tier 1 $ 57,191 16.5 $ 13,863 4.0 $ 20,794 6.0 Total 61,316 17.7 27,726 8.0 34,657 10.0 March 31, 2003 - -------------- Tangible capital $ 39,725 7.8 % $ 10,170 2.0 % N/A N/A % Leverage capital 39,725 7.8 20,341 4.0 25,426 5.0 Risk-based capital: Tier 1 $ 39,725 12.8 $ 12,422 4.0 $ 18,633 6.0 Total 43,610 14.0 24,844 8.0 31,055 10.0
The following table reconciles the Bank's stockholders' equity at March 31, 2004, in accordance with accounting principles generally accepted in the U.S. to regulatory capital requirements:
REGULATORY CAPITAL REQUIREMENTS -------------------------------------------------------------- GAAP TANGIBLE LEVERAGE RISK-BASED CAPITAL CAPITAL CAPITAL CAPITAL -------------- -------------- -------------- -------------- (IN THOUSANDS) Stockholders' Equity at March 31, 2004 (1) $ 57,442 $ 57,442 $ 57,442 $ 57,442 Add: General valuation allowances - - 4,125 Deduct: Unrealized loss on securities available-for-sale, net (251) (251) (251) Goodwill and qualifying intangible assets - - - -------------- -------------- -------------- Regulatory Capital 57,191 57,191 61,316 Minimum Capital requirement 10,776 21,553 27,726 -------------- -------------- -------------- Regulatory Capital Excess $ 46,415 $ 35,638 $ 33,590 ============== ============== ==============
COMPREHENSIVE INCOME. Comprehensive income represents net income and certain amounts reported directly in stockholders' equity, such as the net unrealized gain or loss on securities available for sale. The Holding Company has reported its comprehensive income for fiscal 2004 and 2003 in the consolidated statements of changes in stockholders' equity and comprehensive income. Carver Federal's other comprehensive income or loss (other than net income), which is attributable to unrealized gains and losses on securities, for the year ended March 31, 2004 and 2003 were $258,000 and $750,000, respectively. Included in the amounts at March 31, 2004 and 2003 was $232,000 and $255,000, respectively, relating to an unrealized gain on available-for-sale securities that were transferred during fiscal 2003 to held-to-maturity. This unrealized gain is an unrealized gain reported as a separate component of stockholders' equity and is amortized over the remaining lives of the securities as an adjustment to yield. 65 NOTE 12. EMPLOYEE BENEFIT AND STOCK COMPENSATION PLANS PENSION PLAN. Carver Federal has a non-contributory defined benefit pension plan covering all eligible employees. The benefits are based on each employee's term of service. Carver Federal's policy is to fund the plan with contributions which equal the maximum amount deductible for federal income tax purposes. The plan was curtailed during the fiscal year ended March 31, 2001. The following table sets forth the plan's changes in benefit obligation, changes in plan assets and funded status and amounts recognized in Carver Federal's consolidated financial statements at March 31:
2004 2003 ------------- --------------- (IN THOUSANDS) Change in projected benefit obligation during the year Projected benefit obligation at the beginning of year $ 2,752 $ 2,623 Interest cost 172 178 Actuarial loss 43 182 Benefits paid (231) (231) ------------- --------------- Projected benefit obligation at end of year $ 2,736 $ 2,752 ============= =============== Change in fair value of plan assets during the year Fair value of plan assets at beginning of year $ 2,907 $ 3,369 Actual return on plan assets 392 (231) Benefits paid (231) (231) ------------- --------------- Fair value of plan assets at end of year $ 3,068 $ 2,907 ============= =============== Funded status $ 332 $ 155 Unrecognized (gain) / loss (33) 93 ------------- --------------- Accrued pension cost $ 299 $ 248 ============= ===============
Net periodic pension benefit included the following components for the years ended March 31 are:
2004 2003 2002 ------------- -------------- ------------ (IN THOUSANDS) Interest cost $ 172 $ 178 $ 182 Expected return on plan assets (223) (260) (279) Amortization of: Unrecognized (gain) - (19) (56) ------------- -------------- ------------ Net periodic pension (benefit) $ (51) $ (101) $ (153) ============= ============== ============
Significant actuarial assumptions used in determining plan benefits for the years ended March 31 are:
2004 2003 2002 ------------ --------------- ------------ Annual salary increase (1) N/A N/A N/A Expected Long-term return on assets 8.00% 8.00% 8.00% Discount rate used in measurement of benefit obligations 6.50% 6.50% 7.00%
(1) The annual salary increase rate is not applicable as the plan is frozen. SAVINGS INCENTIVE PLAN. Carver has a savings incentive plan, pursuant to Section 401(k) of the Code, for all eligible employees of the Bank. Pursuant to the plan, Carver may make an annual non-elective contribution to the 401(k) plan on behalf of each eligible employee up to 2% of the employee's annual pay, subject to IRS limitations. This non-elective Carver contribution may be made regardless of whether or not the employee makes a contribution to the 401(k) plan. To be eligible for the non-elective Carver contribution, the employee must have completed at least one year of service and be employed as of the last day of the plan year, December 31. In addition, Carver matches contributions to the plan equal to 100% of pre-tax contributions made by each employee up to a maximum of 4% of their pay, subject to IRS limitations. All such matching contributions to the plan will be fully vested and non-forfeitable at all times regardless of the years of service. However, the non-elective Carver contribution, if awarded, 66 vests over a five-year period. Total savings incentive plan expenses for the years ended March 31, 2004, 2003 and 2002 were $95,000, $127,000 and $60,000, respectively. DIRECTORS' RETIREMENT PLAN. Concurrent with the conversion to the stock form of ownership, Carver Federal adopted a retirement plan for non-employee directors. The plan was curtailed during the fiscal year ended March 31, 2001. The benefits are payable based on the term of service as a director. The following table sets forth the plan's changes in benefit obligation, changes in plan assets and funded status and amounts recognized in Carver Federal's consolidated financial statements at March 31:
2004 2003 ------------ ------------ (IN THOUSANDS) Change in projected benefit obligation during the year Projected benefit obligation at beginning of year $ 200 $ 264 Interest cost 12 17 Actuarial (gain) - (38) Benefits paid (43) (43) ------------ ------------ Projected benefit obligation at end of year $ 169 $ 200 ============ ============ Change in fair value of plan assets during the year Fair value of plan assets at beginning of year $ - $ - Employer contributions 43 43 Benefits paid (43) (43) ------------ ------------ Fair value of plan assets at end of year $ - $ - ============ ============ Funded Status $ (169) $(200) Unrecognized (gain) (17) (17) ------------ ------------ Accrued pension cost $ (186) $ (217) ============ ============
Net periodic pension cost for the years ended March 31, 2004, 2003 and 2002 included the following:
2004 2003 2002 ------------- ------------ ------------ (IN THOUSANDS) Interest cost $ 12 $ 17 $ 19 ------------- ------------ ------------ Net periodic pension cost $ 12 $ 17 $ 19 ============= ============ ============
The actuarial assumptions used in determining plan benefits include a discount rate of 6.5%, 6.5% and 7.25% for the years ended March 31, 2004, 2003 and 2002, respectively. MANAGEMENT RECOGNITION PLAN ("MRP"). The MRP provides for automatic grants of restricted stock to certain employees as of the September 12, 1995 adoption of the MRP. In addition, the MRP provides for additional discretionary grants of restricted stock to those employees selected by the committee established to administer the MRP. Awards generally vest in three to five equal annual installments commencing on the first anniversary date of the award, provided the recipient is still an employee of the Holding Company or the Bank on such date. Awards will become 100% vested upon termination of service due to death or disability. When shares become vested and are distributed, the recipients will receive an amount equal to any accrued dividends with respect thereto. On September 23, 2003, the MRP was amended to increase the number of shares available to 119,431. Pursuant to the MRP, the Bank recognized $128,000, $79,000 and $119,000 as expense for the years ended March 31, 2004, 2003 and 2002, respectively. EMPLOYEE STOCK OWNERSHIP PLAN. Effective upon conversion, an ESOP was established for all eligible employees. The ESOP used $1,821,320 in proceeds from a term loan obtained from a third-party institution to purchase 182,132 shares of Bank common stock in the initial public offering. The term loan principal is payable over forty equal quarterly installments through September 2004. Interest on the term loan is payable quarterly, initially at a rate of 3.00% over the average federal funds rate. On May 20, 2002, the term loan was modified to provide for interest at a fixed rate of 4% per annum. Each year, the Bank intends to make discretionary contributions to the ESOP, which will be equal to principal and interest payments required on the term loan less any dividends received by the ESOP on unallocated shares. Shares purchased with the loan proceeds were initially pledged as collateral for the term loan and are held in a suspense account for future allocation among the participants on the basis of compensation, as described by the Plan, in the year of allocation. Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP shares in the consolidated statements of financial 67 condition. As shares are committed to be released from collateral, the Bank reports compensation expense equal to the current market price of the shares, and the shares become outstanding for net income per common share computations. ESOP compensation expense was $0, $172,000 and $174,000 for the years ended March 31, 2004, 2003 and 2002, respectively. The ESOP shares at March 31 follow: 2004 2003 ------------ ------------ (IN THOUSANDS) Allocated shares 177 163 Unreleased shares 5 19 ------------ ------------ Total ESOP shares 182 182 ============ ============ Fair value of unreleased shares $ 117 $ 261 ============ ============ STOCK OPTION PLAN. During 1995, the Holding Company adopted the 1995 Stock Option Plan (the "Plan") to advance the interests of the Bank through providing stock options to select key employees and directors of the Bank and its affiliates. The number of shares reserved for issuance under the plan is 338,862. At March 31, 2004, there were 229,636 options outstanding and 108,925 were exercisable. Options are granted at the fair market value of Carver Federal common stock at the time of the grant for a period not to exceed ten years. Under the Plan, as amended, option grants generally vest on an annual basis ratably over either three or five years, commencing after one year of service. In some instances, portions of option grants vest at the time of the grant. All options are exercisable immediately upon a participant's disability, death or a change in control, as defined in the Plan. Information regarding stock options as of and for the years ended March 31 follows:
2004 2003 2004 -------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- --------- ------- --------- ------- --------- Outstanding, beginning of year 192,176 $ 10.07 134,767 $ 9.10 112,963 $ 9.17 Granted 43,638 16.35 65,142 12.05 59,767 9.86 Exercised (77) 12.06 (333) 9.93 (2,500) 6.75 Forfeited (6,101) 10.39 (7,400) 10.14 (35,463) 10.61 ------- ------- ------- Outstanding, end of year 229,636 11.25 192,176 10.07 134,767 9.10 ======= ======= ======= Exercisable at year end 108,636 - 106,020 - 65,600 -
Information regarding stock options at March 31, 2004 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------- --------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE Range of REMAINING EXERCISE EXERCISE Exercise Prices SHARES LIFE PRICE SHARES PRICE - ---------------------- ------------- ------------- ----------- ------------- ------------ $ 8.00 $ 8.99 68,000 6 years $ 8.24 50,000 $ 8.26 9.00 9.99 46,560 7 years 9.86 32,369 9.83 10.00 10.99 7,000 7 years 10.53 4,600 10.54 11.00 11.99 2,500 9 years 11.28 833 11.28 12.00 12.99 61,176 8 years 12.08 20,123 12.08 13.00 13.99 1,000 4 years 13.81 1,000 13.81 15.00 15.99 10,000 9 years 15.96 - - 16.00 16.99 33,019 9 years 16.41 - - 21.00 21.99 381 10 years 21.76 - - ------------- ------------- Total 229,636 108,925 ============= =============
68 NOTE 13. 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 needs of its customers. These financial instruments primarily include commitments to extend credit and to sell loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements of financial condition. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies making commitments as it does for on-balance-sheet instruments. The Bank has outstanding various commitments as follows:
MARCH 31, ------------------------------- 2004 2003 --------------- ------------- (IN THOUSANDS) Commitments to originate mortgage loans $ 71,114 $ 10,643 Commitments to originate consumer loans 2,844 2,464 Letters of Credit 1,908 1,908 --------------- ------------- Total $ 75,866 $ 15,015 =============== =============
At March 31, 2004, of the $71.1 million in outstanding commitments to originate mortgage loans, $58.8 million represented commitments to originate non-residential mortgage loans at variable rates within a range of 5.45% to 7.25%, $5.9 million represented the balance of all other real estate loans at fixed rates between 4.50% to 6.50% and $6.4 million represented construction loans at an average rate of 4.79%. At March 31, 2004, undisbursed funds from approved consumer lines of credit, primarily credit cards, totaled $2.4 million. Such lines consist of unsecured and secured lines of credit of $2.1 million and $281,000 respectively. All such lines carry adjustable rates. At March 31, 2004, undisbursed funds from approved unsecured commercial lines of credit totaled $45,000. At March 31, 2004, the Bank maintains one letter of credit in the amount of $1.9 million. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management's credit evaluation of the counter-party. 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 $245,000, $186,000, and $142,000 for the years ended March 31, 2004, 2003 and 2002, respectively. As of March 31, 2004, minimum rental commitments under all noncancellable leases with initial or remaining terms of more than one year and expiring through 2012 follow: YEAR ENDING MINIMUM March 31, RENTAL --------- ------ (In Thousands) 2005 $ 370 2006 374 2007 291 2008 281 2009 299 Thereafter 1,004 ------------- $ 2,619 ============= 69 The Bank also has, in the normal course of business, commitments for services and supplies. Management does not anticipate losses on any of these transactions. LEGAL PROCEEDINGS. From time to time, Carver Federal is a party to various legal proceedings incident to its business. Certain claims, suits, complaints and investigations involving Carver Federal, arising in the ordinary course of business, have been filed or are pending. The Company is of the opinion, after discussion with legal counsel representing Carver Federal in these proceedings, that the aggregate liability or loss, if any, arising from the ultimate disposition of these matters would not have a material adverse effect on the Company's consolidated financial position or results of operations. At March 31, 2004, except as set forth below, there were no material legal proceedings to which the Company or its subsidiaries was a party or to which any of their property was subject. On or about April 29, 1999, plaintiff Reginald St. Rose ("St. Rose"), a former Carver Federal employee, filed suit against Carver Federal in the Supreme Court of the State of New York, County of New York (the "St. Rose Action"). On or about January 12, 1999, Carver Federal and St. Rose entered into an agreement (the "Agreement") providing that St. Rose would resign from Carver Federal on the terms and conditions set forth in the Agreement. In the St. Rose Action, St. Rose alleged breach of contract, promissory estoppel, and fraudulent misrepresentation related to the Agreement and St. Rose's separation from Carver Federal. St. Rose sought damages in an amount not less than $50,000 with respect to the breach of contract cause of action and sought undisclosed damages with respect to the promissory estoppel claim. Carver Federal had unasserted counterclaims against St. Rose for, among other claims, payment of certain financial obligations to Carver Federal. The parties reached a final settlement during the fourth quarter of fiscal 2004, which settlement will not have a material impact on the Bank's financial condition or results of operations. Carver Federal was a defendant in two actions brought by Ralph Williams ("Williams Action I" and "Williams Action II") and an action brought by Janice Pressley (the "Pressley Action") both of which arose out of events concerning the Northeastern Conference Federal Credit Union ("Northeastern"). Plaintiff Williams is a former member of the Board of Directors of Northeastern and plaintiff Pressley is former treasurer of Northeastern. Northeastern was a federal credit union, and it maintained accounts with Carver Federal and other banks in the New York metropolitan area (collectively, the "Bank Defendants"). Plaintiffs alleged that the National Credit Union Administration ("NCUA") acted improperly when it placed Northeastern into conservatorship and subsequent liquidation. In or about July 1998, Williams commenced Williams Action I in the United States District Court, District of Columbia, seeking to restrain the NCUA from executing on the conservatorship order and an order directing the Bank Defendants to "restore [their] accounts to their original status." The Bank Defendants were not served with the pleadings in Williams Action I, and the court entered judgment against them on default. After the Bank Defendants learned of this case, they made a motion in September 2001 to vacate the default judgment. In January 2004, Williams Action I was dismissed without prejudice. On or about November 22, 2000, Williams filed Williams Action II in the United States District Court, District of Columbia, against the NCUA and the Bank Defendants seeking damages in the amount of $1 million plus certain additional unspecified amounts for the allegedly "unauthorized" or "invalid" actions of the NCUA Board of Directors in taking control of Northeastern as well as damages for discrimination and civil rights violations. Plaintiff Pressley filed the Pressley Action in the same court against the same defendants seeking unspecified compensatory and punitive damages based on identical allegations as Williams, except that she also alleged certain claims of employment discrimination. The Bank Defendants filed a joint motion to dismiss Williams Action II, which motion was granted by the District Court and appealed by Williams. The Bank Defendants collectively filed a motion for summary affirmance of the District Court's decision on October 9, 2003, which motion was granted on April 1, 2004, resolving Williams Action I and Williams Action II in the Bank Defendants' favor. The Bank Defendants also made a joint motion to dismiss the Pressley Action. After grant of the motion and appeal by Pressley, the Court of Appeals dismissed the appeal in August 2003 and, in October 2003 with the consent of Pressley's counsel, the District Court ordered the dismissal of Pressley's case against the Bank Defendants, resolving the Pressley Action in its entirety. In or about January 2004, Michael Lee & Company, former accountants for Hale House Center, Inc. ("Michael Lee"), filed an action against Carver Federal in New York County Supreme Court, asserting a single claim for contribution against Carver Federal. The complaint alleges that Carver Federal should be liable to Michael Lee in the event that Michael Lee is found liable to non-parties Hale House Center, Inc. and its affiliated corporations ("Hale House plaintiffs") in a separate action that the Hale House plaintiffs have filed against Michael Lee. The Hale House plaintiffs have asserted claims of professional malpractice and breach of contract against Michael Lee for providing deficient accounting services to Hale House. The basis of Michael Lee's contribution claim against Carver Federal is that Carver Federal allegedly breached a legal duty it owed Hale House by improperly opening and maintaining a checking account on behalf of one of the Hale House affiliates. Michael Lee seeks contribution from Carver Federal in the amount of at least $8.5 million or the amount of any money judgment entered against Michael Lee in favor of the Hale House plaintiffs. On February 4, 2004 Carver Federal filed a motion to dismiss the complaint in its entirety and, on February 11, 2004, Michael Lee served a cross-motion for summary judgment against Carver Federal. In May 2004, the court ruled in favor of Carver Federal and judgment was entered in Carver Federal's favor on June 14, 2004. Michael Lee's time to appeal will run until July 20, 2004. 70 NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than a forced or liquidation sale. Significant estimations were used by the Bank for the purpose of this disclosure. Estimated fair values have been determined by the Bank using the best available data and estimation methodology suitable for each category of financial instrument. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate their recorded book balances. The estimation methodologies used and the estimated fair values and carrying values of the Bank's financial instruments are set forth below: CASH AND CASH EQUIVALENTS AND ACCRUED INTEREST RECEIVABLE The carrying amounts for cash and cash equivalents and accrued interest receivable approximate fair value because they mature in three months or less. SECURITIES The fair values for securities available-for-sale, mortgage-backed securities held-to-maturity and investment securities held-to-maturity are based on quoted market or dealer prices, if available. If quoted market or dealer prices are not available, fair value is estimated using quoted market or dealer prices for similar securities. LOANS RECEIVABLE The fair value of loans receivable is estimated by discounting future cash flows, using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities of such loans. DEPOSITS The fair value of demand, savings and club accounts is equal to the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. BORROWINGS The fair values of advances from the Federal Home Loan Bank of New York, securities sold under agreement to repurchase and other borrowed money are estimated using the rates currently available to the Bank for debt with similar terms and remaining maturities. COMMITMENTS The fair market value of unearned fees associated with financial instruments with off-balance sheet risk at March 31, 2004 approximates the fees received. The fair value is not considered material. The carrying amounts and estimated fair values of the Bank's financial instruments at March 31, 2004 and 2003 follow:
------------------------------------------------------ 2004 2003 -------------------------- -------------------------- Carrying Estimated CARRYING ESTIMATED Amount Fair Value AMOUNT FAIR VALUE ------------- ------------ ------------ ------------ (IN THOUSANDS) Financial Assets: Cash and cash equivalents $ 22,774 $ 22,774 $ 23,160 $ 23,160 Investment securities available-for-sale 21,248 21,553 38,187 38,772 Mortgage backed securities held-to-maturity 43,474 43,794 36,530 37,543 Mortgage backed securities available-for-sale 75,113 74,850 89,966 90,283 Loans receivable 351,900 362,684 292,738 316,073 Accrued interest receivable 2,489 2,489 3,346 3,346 Financial Liabilities: Deposits $ 373,665 $ 375,294 $ 347,164 $ 349,317 Advances from FHLB of New York 91,516 94,469 108,789 112,443 Other borrowed money 12,766 13,027 207 215
71 LIMITATIONS The fair value estimates are made at a discrete point in time based on relevant market information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no quoted market value exists for a significant portion of the Bank's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates are based on existing off balance sheet financial instruments without attempting to value anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment and advances from borrowers for taxes and insurance. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values. NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of unaudited quarterly financial data for fiscal years ended March 31, 2004 and 2003:
THREE MONTHS ENDED ----------------------------------------------------------------- JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 -------------- -------------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) FISCAL 2004 Interest income $6,516 $6,602 $6,483 $6,633 Interest expense (2,230) (2,109) (2,217) (2,144) -------------- -------------- -------------- -------------- Net interest income 4,286 4,493 4,266 4,489 Provision for loan losses - - - - Non-interest income 1,140 1,574 1,577 984 Non-interest expense (3,780) (3,890) (3,971) (3,836) Income tax expense (559) (751) (636) (547) -------------- -------------- -------------- -------------- Net income $1,087 $1,426 $1,236 $1,090 ============== ============== ============== ============== Earnings per common share Basic $0.45 $0.60 $0.52 $0.46 Diluted $0.42 $0.55 $0.47 $0.42 FISCAL 2003 Interest income $6,768 $6,759 $6,761 $7,101 Interest expense (2,338) (2,210) (2,218) (2,216) -------------- -------------- -------------- -------------- Net interest income 4,430 4,549 4,543 4,885 Provision for loan losses - - - - Non-interest income 953 716 750 741 Non-interest expense (3,795) (3,533) (3,539) (3,837) Income taxes (expense) benefit (714) (797) (807) (715) -------------- -------------- -------------- -------------- Net income (loss) $874 $935 $947 $1,074 ============== ============== ============== ============== Earnings (loss) per common share Basic $0.36 $0.39 $0.39 $0.45 Diluted $0.35 $0.37 $0.38 $0.42
72 NOTE 16. CARVER BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL STATEMENTS CONDENSED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, --------------------------- 2004 2003 ------------- ------------ (IN THOUSANDS) ASSETS Cash on deposit with the Bank $ 93 $ 87 Investment Securities 59 - Investment in the Subsidiaries 57,846 41,055 Other Assets 12 - ------------- ------------ Total assets $58,010 $ 41,142 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Borrowings $13,144 $ - Accounts payable to Subsidiaries 22 1 Other liabilities 199 68 ------------- ------------ Total liabilities $13,365 $ 69 ============= ============ Stockholders' equity 44,645 41,073 ------------- ------------ Total liabilities and stockholders' equity $58,010 $ 41,142 ============= ============
CONDENSED STATEMENTS OF INCOME
YEAR ENDED MARCH 31, ---------------------------------------------- 2004 2003 2002 ------------- ------------ ------------ (IN THOUSANDS) INCOME Equity in net income from Subsidiaries $ 8,328 $ 7,320 $ 6,247 Interest income from deposit with the Bank 9 6 33 Other income 9 - - ------------- ------------ ------------ Total income 8,346 7,326 6,280 EXPENSES Interest Expense on Borrowings 337 - - Salaries and employee benefits 169 52 82 Legal expense - 102 236 Shareholder expense 458 248 296 Other 50 60 72 ------------- ------------ ------------ Total expense 1,014 462 686 Income before income taxes 7,332 6,864 5,594 Income tax expense 2,493 3,033 881 ------------- ------------ ------------ Net income $ 4,839 $ 3,831 $ 4,713 ============= ============ ============
73 CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, ---------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,839 $ 3,831 $ 4,713 Adjustments to reconcile net loss to net cash provided by operating activities: Equity in net income of Subsidiaries (8,328) (7,320) (6,247) Income Taxes from the Bank 2,493 3,033 - Increase (decrease) in accounts payable to Bank 21 (13) (104) Increase (decrease) in other liabilities 131 (1,182) 976 Allocation of ESOP Stock - - 206 Other, net 1,772 1,664 (844) ------------ ------------ ------------ Net cash provided by (used in) operating activities 928 13 (1,300) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Additional Investment in Bank (13,153) - - Purchase of Investment Securities (59) - - ------------ ------------ ------------ Net cash (used in) provided by investing activities (13,212) - - CASH FLOWS FROM FINANCING ACTIVITIES Issuance of Sub Debt 13,144 - - Purchase of treasury stock, net (200) (52) (77) Dividends paid (654) (313) (312) ------------ ------------ ------------ Net cash (used in) provided by financing activities 12,290 (365) (389) ------------ ------------ ------------ Net increase in cash 6 (352) (1,689) Cash and cash equivalents - beginning 87 439 2,128 ------------ ------------ ------------ Cash and cash equivalents - ending $ 93 $ 87 $ 439 ============ ============ ============
NOTE 17. RECENT ACCOUNTING PRONOUNCEMENTS ACCOUNTING AND DISCLOSURE REQUIREMENT RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003 In January 2004, the Financial Accounting Standards Board ("FASB") issued Staff position No. 106-1 "ACCOUNTING AND DISCLOSURE REQUIREMENTS RELATED TO MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003" ("Medicare Act") for annual financial statements of fiscal years ending after December 7, 2003. The Medicare Act introduced both a Medicare prescription-drug benefit and federal subsidy to sponsors of retiree health-care plans that provide a benefit at least "actuarially equivalent" to the Medicare benefit. Carver Federal is not affected by the Medicare Act since it does not provide retiree health-care benefits. EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFIT In December 2003, the FASB issued a revised SFAS No. 132, "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS - AN AMENDMENT OF FASB STATEMENTS NOS. 87, 88 AND 106" (SFAS No. 132(R)). SFAS No. 132 (R) requires additional disclosures to those in the original statement about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined postretirement plans. SFAS No. 132 (R) also amends Accounting Principles Board ("APB") Opinion No. 28, "INTERIM FINANCIAL REPORTING," to require interim disclosure of the components of net periodic benefit cost and, if significantly different from previously disclosed amounts, the amounts of contributions and projected contributions to fund pension plans and other postretirement benefit plans. SFAS No. 132 (R) is effective for financial statements for fiscal years ending after December 15, 2003, except for disclosure of estimated future benefit payments, which is effective for fiscal years ending after June 15, 2004. As the provisions of SFAS No. 132 (R) are disclosure related, the adoption of SFAS No. 132 (R) had no impact on Carver Federal's financial condition or results of operations. 74 CONSOLIDATION OF VARIABLE INTEREST ENTITIES In December 2003, the FASB issued Interpretation No. 46 (revised), "CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51," ("FIN 46R"). Fin 46R addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the variable interest entity ("VIE"). FIN 46R replaces FIN46 that was issued in January 2003. All public companies, such as Carver Federal, are required to fully implement FIN 46R no later than the end of the first reporting period ending after March 15, 2004. The adoption of FIN 46R resulted in the deconsolidation of the Trust, which did not have a material impact on Carver Federal's financial condition or results of operations. ACCOUNTING FOR CERTAIN LOANS OR DEBT SECURITIES ACQUIRED IN A TRANSFER In December 2003, the American Institute of Certified Public Accountants issued Statement of Position No. 03-3, "ACCOUNTING FOR CERTAIN LOANS OR DEBT SECURITIES ACQUIRED IN A TRANSFER" (SOP No. 03-3). SOP No. 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP No. 03-3 prohibits "carry over" or creation of valuation allowances in the initial accounting of all loans acquired in transfers within the scope of SOP No. 03-3, which includes loans acquired in a business combination. SOP No. 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP No. 03-3 is not expected to have an impact on Carver Federal's financial condition or results of operations. ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY In May 2003, the FASB issued Statement No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY"("SFAS No. 150"). The SFAS No. 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, the statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company's earnings or financial position. AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," which amends and clarifies financial accounting and reporting of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003, and should generally be applied prospectively. The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, the provisions of SFAS No. 149 which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on Carver Federal's financial condition or results of operations. GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS In November 2002, FASB issued Interpretation No. 45, "GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS" ("FIN 45"), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees. FIN 45 requires the guarantor to recognize a liability for the non-contingent component of the guarantee; this is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. The Company will adopt the disclosure requirements of FIN 45 and will apply the recognition and measurement provisions for all guarantees entered into or modified after March 31, 2004. As of March 31, 2004 the Company maintains one letter of credit in the amount of $1.9 million and therefore management does not anticipate that the adoption of this interpretation will have a significant effect on the Company's earnings or financial position. 75 NOTE 18. PENDING ACQUISITION On March 15, 2004, the Company entered into a definitive merger agreement to acquire Independence in a cash transaction valued at approximately $33 million. Under the terms of the merger agreement, Independence's stockholders will receive $21.00 in cash for each share of their common stock. The merger agreement has been approved by the directors of Independence, the Company and the Bank. The transaction, which is expected to close before the end of 2004, is subject to customary closing conditions, including regulatory approvals and the approval of Independence's shareholders. The merger agreement requires Independence to pay the Company a termination fee of $1.6 million if the merger agreement is terminated under certain circumstances following Independence's receipt of a superior acquisition proposal or $325,000 if the merger is not approved by Independence's shareholders. The Holding Company has made an Amended Share Voting Stipulation and Undertaking in favor of the OTS and entered into a Trust Agreement with American Stock Transfer & Trust Company pursuant to which it has placed 72,400 of the common shares of Independence owned by the Holding Company, representing approximately 4.7% of the outstanding common shares of Independence, in a non-voting trust. The shares held in the trust are shares of Independence owned by the Holding Company in excess of the 5% limit set forth in Section 10(e)(1)(A)(iii) of HOLA prior to the OTS approving the Holding Company's H-(e)3 Application to acquire Independence. Section 10(e)(1)(A)(iii) provides that a savings and loan holding company may not acquire or retain more than 5% of the outstanding voting shares of a savings association that is not a subsidiary without the prior approval of the OTS. The Trust Agreement will terminate, and the Independence common shares held in the trust will be transferred back to the Holding Company, upon the receipt by the Holding Company of the approval of the OTS to retain more than 5% of Independence's outstanding voting stock. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the "SEC"). As of March 31, 2004, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective and timely in alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting and we did not identify any significant deficiencies or material weaknesses requiring corrective action with respect to those controls. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information concerning Executive Officers of the Company which responds to this Item is incorporated by reference from the section entitled "Executive Officers and Key Managers of Carver and Carver Federal" in the Holding Company's definitive proxy statement for the Annual Meeting of Stockholders for the fiscal year ended March 31, 2004 (the "Proxy Statement"). The information that responds to this Item with respect to Directors is incorporated by reference from the section entitled "Election of Directors" in the Proxy Statement. Information with respect to compliance by the Company's Directors and Executive Officers with Section 16(a) of the Exchange Act is incorporated by reference from the subsection entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement. AUDIT COMMITTEE FINANCIAL EXPERT Information regarding the audit committee of the Company's Board of Directors, including information regarding audit committee financial experts serving on the audit committee, is presented under the heading "Corporate Governance" in the Company's Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information required in response to this Item is incorporated by reference from the section entitled "Compensation of Directors and Executive Officers" in the Proxy Statement. 76 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information required in response to this Item is incorporated by reference from the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required in response to this Item is incorporated by reference from the section entitled "Transactions with Certain Related Persons" in the Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required in response to this Item is incorporated by reference from the section entitled "Auditor Fee Information" in the Proxy Statement. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) List of Documents Filed as Part of this Report (1) Financial Statement Schedules. All financial statement schedules have been omitted, as the required information is either inapplicable or included under Item 8, "Financial Statement and Supplementary Data". (b) Reports on Form 8-K Filed during the Last Quarter of the Registrant's Fiscal Year Ended March 31, 2004. (1) Report on Form 8-K, dated January 30, 2004, which includes information being filed pursuant to Item 12 but was not filed under Item 9, an announcement of our financial results for the third quarter ended December 31, 2003. (2) Report on Form 8-K, dated March 16, 2004, an announcement of the execution of an Agreement and Plan of Merger between Carver Bancorp, Inc., Carver Federal Savings Bank and Independence Federal Savings Bank. (c) Exhibits required by Item 601 of Regulation S-K: See Index of Exhibits on page E-1. 77 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CARVER BANCORP, INC. June 22, 2004 By /s/ Deborah C. Wright ---------------------------------------- Deborah C. Wright President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below on June 22, 2003 by the following persons on behalf of the Registrant and in the capacities indicated. /s/ Deborah C. Wright President, Chief Executive Officer and Director - --------------------------- (Principal Executive Officer) Deborah C. Wright /s/ William Gray Senior Vice President and Chief Financial Officer - --------------------------- (Principal Financial and Accounting Officer) William Gray /s/ Frederick O. Terrell - --------------------------- Frederick O. Terrell Chairman /s/ Carol Baldwin Moody - --------------------------- Carol Baldwin Moody Director /s/ David L. Hinds - --------------------------- David L. Hinds Director /s/ Robert Holland, Jr. - --------------------------- Robert Holland, Jr. Director /s/ Pazel G. Jackson - --------------------------- Pazel G. Jackson, Jr. Director /s/ Edward B. Ruggiero - --------------------------- Edward B. Ruggiero Director - --------------------------- Strauss Zelnick Director 78 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 2.1 Agreement and Plan of Merger dated as of March 15, 2004 by and between Carver Bancorp, Inc., Carver Federal Savings Bank and Independence Federal Savings Bank (10) 3.1 Certificate of Incorporation of Carver Bancorp, Inc. (1) 3.2 Amended and Restated Bylaws of Carver Bancorp, Inc. (9) 4.1 Stock Certificate of Carver Bancorp, Inc. (1) 4.2 Federal Stock Charter of Carver Federal Savings Bank (1) 4.3 Bylaws of Carver Federal Savings Bank (1) 4.4 Amendments to Bylaws of Carver Federal Savings Bank (2) 4.5 Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock (4) 4.6 Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock (4) 10.1 Carver Bancorp, Inc. 1995 Stock Option Plan, effective as of September 12, 1995 (1) 10.2 Carver Federal Savings Bank Retirement Income Plan, as amended and restated effective as of January 1, 1997 and as further amended through January 1, 2001 (9) 10.3 Carver Federal Savings Bank 401(k) Savings Plan in RSI Retirement Trust, as amended and restated effective as of January 1, 1997 and including provisions effective through January 1, 2002 (9) 10.4 Carver Bancorp, Inc. Employee Stock Ownership Plan, effective as of January 1, 1994, incorporating Amendment No. 1, incorporating Second Amendment, incorporating Amendment No. 2, incorporating Amendment No. 2A, incorporating Amendment No. 3 and incorporating Amendment No. 4 (9) 10.5 Carver Federal Savings Bank Deferred Compensation Plan, effective as of August 10, 1993 (1) 10.6 Carver Federal Savings Bank Retirement Plan for Nonemployee Directors, effective as of October 24, 1994 (1) 10.7 Carver Bancorp, Inc. Management Recognition Plan, effective as of September 12, 1995 (1) 10.8 Carver Bancorp, Inc. Incentive Compensative Plan, effective as of September 12, 1995 (1) 10.9 Employment Agreement by and between Carver Federal Savings Bank and Deborah C. Wright, entered into as of June 1, 1999 (3) 10.10 Employment Agreement by and between Carver Bancorp, Inc. and Deborah C. Wright, entered into as of June 1, 1999 (3) E-1 Exhibit Number Description - -------------- ----------- 10.11 Securities Purchase Agreement by and among Carver Bancorp, Inc., Morgan Stanley & Co. Incorporated and Provender Opportunities Fund L.P. (5) 10.12 Registration Rights Agreement by and among Carver Bancorp, Inc., Morgan Stanley & Co. Incorporated and Provender Opportunities Fund L.P. (5) 10.13 Settlement Agreement and Mutual Release by and among BBC Capital Market, Inc., The Boston Bank of Commerce, Kevin Cohee and Teri Williams; Carver Bancorp, Inc., Deborah C. Wright, David N. Dinkins, Linda H. Dunham, Robert J. Franz, Pazel G. Jackson, Jr., Herman Johnson and David R. Jones; Morgan Stanley & Co., Incorporated; and Provender Opportunities Fund, L.P. and Frederick O. Terrell (5) 10.14 Amendment to the Carver Bancorp, Inc. 1995 Stock Option Plan (6) 10.15 Amended and Restated Employment Agreement by and between Carver Federal Savings Bank and Deborah C. Wright, entered into as of June 1, 1999 (7) 10.16 Amended and Restated Employment Agreement by and between Carver Bancorp, Inc. and Deborah C. Wright, entered into as of June 1, 1999 (7) 10.17 Form of Letter Employment Agreement between Executive Officers and Carver Bancorp, Inc. (7) 10.18 Employment Agreement by and between Carver Federal Savings Bank and Catherine A. Papayiannis, entered into as of April 22, 2002 (7) 10.19 Carver Bancorp, Inc. Compensation Plan for Non-Employee Directors (9) 10.20 Amendment Number One to Carver Federal Savings Bank Retirement Income Plan, as amended and restated effective as of January 1, 1997 and as further amended through January 1, 2001 (9) 10.21 First Amendment to the Restatement of the Carver Federal Savings Bank 401(k) Savings Plan (9) 10.22 Second Amendment to the Restatement of the Carver Federal Savings Bank 401(k) Savings Plan for EGTRRA (9) 10.23 Guarantee Agreement by and between Carver Bancorp, Inc. and U.S. Bank National Association, dated as of September 17, 2003 (8) 10.24 Amended and Restated Declaration of Trust by and among, U.S. Bank National Association, as Institutional Trustee, Carver Bancorp, Inc., as Sponsor, and Linda Dunn, William Gray and Deborah Wright, as Administrators, dated as of September 17, 2003 (8) 10.25 Indenture, dated as of September 17, 2003, between Carver Bancorp, Inc., as Issuer, and U.S. Bank National Association, as Trustee (8) 10.26 Second Amendment to the Carver Bancorp, Inc. Management Recognition Plan, effective as of September 23, 2003 (*) 10.27 Amended Share Voting Stipulation and Undertaking made by Carver Bancorp, Inc. in favor of the OTS, made as of April 22, 2004 (*) 10.28 Trust Agreement between Carver Bancorp, Inc. and American Stock & Transfer Trust Company, dated May 3, 2004 (*) 10.29 First Amendment to Employment Agreement by and between Carver Federal Savings Bank and Catherine A. Papayiannis, entered into as of May 27, 2004 (*) 21.1 Subsidiaries of the Registrant (*) E-2 Exhibit Number Description - -------------- ----------- 23.2 Consent of KPMG LLP (*) 31.1 Certifications of Chief Executive Officer (*) 31.2 Certifications of Chief Financial Officer (*) 32.1 Written Statement of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (*) 32.2 Written Statement of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350(*) (*) Filed herewith. Copies of these exhibits are available at no charge through the SEC website at http://www.sec.gov. (1) Incorporated herein by reference to Registration Statement No. 333-5559 on Form S-4 of the Registrant filed with the Securities and Exchange Commission on June 7, 1996. (2) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1998. (3) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. (4) Incorporated herein by reference to the Exhibits to the Registrant's Report on Form 8-K, dated January 14, 2000. (5) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2000. (6) Incorporated herein by reference to the Registrant's Proxy Statement dated January 25, 2001. (7) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2002. (8) Incorporated herein by reference to the Exhibits to the Registrant's Quarterly Report on Form 10-Q for the three months ended September 30, 2003. (9) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2003 (10) Incorporated herein by reference to the Exhibits to the Registrant's Report on Form 8-K, dated March 16, 2004. E-3 EX-10.26 2 d241048.txt SECOND AMEND TO THE MANAGEMENT RECOGNITION PLAN EXHIBIT 10.26 SECOND AMENDMENT TO THE CARVER BANCORP, INC. MANAGEMENT RECOGNITION PLAN Pursuant to the powers reserved to the Board of Directors of Carver Bancorp, Inc. under Section 8.02 of the Carver Bancorp, Inc. Management Recognition Plan (the "Plan") the Plan is hereby amended as of September 23, 2003 as follows: Subject to stockholder approval, Section 5.02 is deleted in its entirety and the following new Section 5.02 is substituted in its place: "5.02 INVESTMENT OF TRUST ASSETS. The Trustee shall invest assets only in accordance with the Trust Agreement. The aggregate number of shares of Common Stock deliverable pursuant to Plan Share Awards shall not exceed 119,431 Shares. If any Plan Share Awards should be forfeited for any reason, the Plan Shares shall, unless the Plan shall have been terminated, be available for the grant of additional Plan Share Awards under the Plan." The Plan as previously adopted is hereby ratified and confirmed in all other respects. EX-10.27 3 d241035.txt AMEND SHARE VOTING STIP AND UNDERTAKING AGREEMENT EXHIBIT 10.27 AMENDED SHARE VOTING STIPULATION AND UNDERTAKING This AMENDED SHARE VOTING STIPULATION AND UNDERTAKING ("Amended Undertaking") amends the SHARE VOTING STIPULATION AND UNDERTAKING made as of April 22, 2004 by Carver Bancorp, Inc. ("Carver"), the savings and loan holding company parent of Carver Federal Savings Bank, to the U.S. Office of Thrift Supervision ("OTS"). RECITALS WHEREAS, Carver is the owner of 150,000 shares of common stock of Independence Federal Savings Bank, a federal savings association ("Independence"), representing approximately 9.7% of Independence's outstanding voting stock. WHEREAS, the rules and regulations of the OTS prohibit savings and loan holding companies, such as Carver, from acquiring or retaining more than 5% of the voting stock of a savings association not a subsidiary, such as Independence, except with the prior written approval of the OTS, and Carver is in the process of seeking such approval. WHEREAS, until such OTS approval is received, Carver agrees that it will transfer the shares of Independence held by it in excess of the 5% limit set forth above to a separate trust administered by an independent trustee, and that it will instruct the independent trustee to not vote any of such excess shares on any matter submitted to a vote of Independence's shareholders. NOW, THEREFORE, intending to be legally bound, Carver agrees as follows: 1. AGREEMENT TO PUT SHARES IN TRUST. Carver agrees that it will hereby place 72,375 of the 150,000 shares of Independence common stock held by it, representing approximately 4.7% of Independence's outstanding shares of common stock, in a separate trust (the "Trust"), which will be administered by an independent trustee. 2. VOTING OF SHARES HELD IN TRUST. Carver agrees that it will instruct the independent trustee to not vote any of the shares held in the Trust on any matter to be considered by the shareholders of Independence. 3. INSTRUCTIONS FOR CORPORATE SECRETARY OF INDEPENDENCE. Carver agrees that it will provide a copy of this Amended Undertaking to the Corporate Secretary of Independence upon the execution hereof. 4. TERMINATION. This Agreement shall terminate and shall have no further force or effect upon the earlier of (i) the date on which Carver is no longer the beneficial or record owner of more than 5% of Independence's outstanding voting stock and (ii) the date on which Carver receives the approval of the OTS to acquire or retain more than 5% of Independence's outstanding voting stock. IN WITNESS WHEREOF, Carver has caused this Amended Undertaking to be duly executed on April 27, 2004. CARVER BANCORP, INC. By: /s/ Deborah C. Wright ------------------------------------- Deborah C. Wright President and Chief Executive Officer EX-10.28 4 d241033.txt TRUST AGREEMENT EXHIBIT 10.28 TRUST AGREEMENT THIS TRUST AGREEMENT (as amended, restated, supplemented or otherwise modified from time to time, the "Agreement") dated as of May 3, 2004, between CARVER BANCORP, INC. (the "Grantor") and AMERICAN STOCK TRANSFER & TRUST COMPANY, and any successor Trustee appointed as provided in this Agreement (the "Trustee"). RECITALS WHEREAS, the Grantor desires to create a trust (the "Trust"), and transfer the assets listed on SCHEDULE A to the Trust, on the terms which are detailed below, and the Trustee has consented to accept and perform said Trust in accordance with such terms. NOW, THEREFORE, in consideration of the mutual covenants and promises of the parties hereto, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: I. TRUST ASSETS. A. TRANSFER OF ASSETS TO THE TRUST. The Grantor assigns and transfers to the Trustee, and the Trustee, by the execution of this Agreement, acknowledges receipt from the Grantor of the assets described on SCHEDULE A, consisting entirely of common stock of Independence Federal Savings Bank (the "Assets"). The Assets, together with any additions thereto, shall constitute the "Trust Estate." The term Trust Estate shall also include any other property which the Grantor or any other persons transfer to the Trustee, as well as the proceeds from the sale or investment of such Assets, and the securities or other assets in which such proceeds may be invested and reinvested, in accordance with the terms of this Agreement. B. ADDITIONAL ASSETS CONTRIBUTED TO THE TRUST. The Grantor, or any other person, may assign or transfer after the date of this Agreement, to the Trustee, securities or other property, whether real or personal, tangible or intangible, reasonably acceptable to the Trustee as an addition to the Trust Estate (an "Addition"). All Additions shall be added to the Trust Estate. C. TRUSTEE DEALING WITH ADDITIONS. The Trustee shall accept and hold any Addition, if such property is reasonably acceptable to the Trustee, as part of the Trust Estate subject to the terms and provisions of this Agreement. The Trustee shall then deal with, manage, operate, invest, reinvest and dispose of any Additions as part of the Trust Estate, as provided in this Agreement. The Trustee shall not be under any duty to accept any Addition not acceptable in the Trustee's discretion. II. GRANTOR'S POWERS AND RIGHTS UNDER THE TRUST. The Grantor has been advised with respect to the difference between revocable and irrevocable trusts and hereby declares that any trust formed under this Agreement, and the Trust Estate created hereby, are to be revocable, so that Grantor may change, amend or modify, in any manner and to any extent, the provisions of this Agreement; PROVIDED, HOWEVER, that any such amendment or modification shall not be effective unless or until it is approved in writing by the Regional Director of the Northeast Regional Office of the Office of Thrift Supervision ("OTS"). Subject to the foregoing, the Grantor has retained every right and power to alter, amend, revoke or terminate any Trust provision or interest, whether under this Agreement or any rule of law. III. OPERATIVE TRUST PROVISIONS. A. ASSET MAINTENANCE DURING THE TERM OF THE TRUST. During the term of this Trust, the Trustee shall hold the Trust Estate in trust without distributing, paying out or otherwise disposing of all or any portion of the Trust Estate, to the Grantor or otherwise. B. ADDITIONS DURING THE TERM OF THE TRUST. The Trustee shall immediately transfer to the Grantor, and shall not add to the Trust Estate, any cash dividends or other cash amounts or cash payments attributable to the Assets. C. TERMINATION OF THE TRUST. In addition to termination pursuant to section V(H) of this Agreement, the Trust shall immediately terminate and cease to exist upon the earlier of (i) the date on which the Grantor is no longer the beneficial or record owner of more than 5% of the outstanding voting stock of Independence Federal Savings Bank or (ii) the date on which the Grantor receives the approval of the OTS to retain more than 5% of the outstanding voting stock of Independence Federal Savings Bank. IV. TRUSTEE SELECTION, REMOVAL AND RESIGNATION. A. SUCCESSOR TRUSTEE. If the company named above to serve as Trustee is unable or unwilling to serve, then: 1. The Grantor may appoint a successor Trustee (where the successor Trustee is independent of the Grantor). 2. If the Grantor is unable or unwilling to appoint a successor trustee or fails to do so within a reasonable period of time after being advised that the Trustee is unable or unwilling to serve, then the Trustee may appoint a successor Trustee (where the successor Trustee is independent of the Grantor). B. EXCLUSION. The foregoing authorizations specifically exclude the right to designate the Grantor as a Trustee. C. DESIGNATION AND REVOCATION PROCESS. Any permissible designation shall be made by written instrument signed and acknowledged by the party making the appointment and shall become effective upon the successor Trustee qualifying as required under applicable law. Any designation of a successor Trustee, or any revocation of such designation, pursuant to the authority granted in this provision, shall be in a written instrument, duly executed and acknowledged by the party exercising such authority and filed in the Court which has jurisdiction over this Trust. 2 D. REMOVAL OF TRUSTEE. The Grantor may remove the Trustee and appoint a successor Trustee (where the successor Trustee is independent of the Grantor) if such removal is for "cause," as defined by the following factors: 1. The willful or negligent mismanagement by the Trustee of the Trust Estate. 2. The abuse or abandonment of, or inattention to, the Trust Estate by the Trustee. 3. A federal or state charge against the Trustee involving the commission of a felony. 4. An act of stealing, dishonesty, fraud, embezzlement, moral turpitude or moral degeneration by the Trustee. 5. The continued failure by the Trustee to comply with a material provision of this Agreement, after notice of non-compliance. 6. Any other reason for which a court of competent jurisdiction, in the State of New York, would remove a trustee. E. TRUSTEE ACCEPTANCE. The acceptance of trusteeship by any Trustee not a party to this Agreement shall be evidenced by an execution of a counterpart to this Agreement. F. TRUSTEE RESIGNATION. 1. Any Trustee hereunder may resign at any time without obtaining prior judicial approval. Such resignation shall be deemed complete upon the delivery of an instrument in writing declaring such resignation to the Grantor and to the successor Trustee hereunder. Such resigning Trustee shall promptly deliver the Assets of the Trust Estate to the successor Trustee. 2. The resigning Trustee shall, at the request of the successor Trustee, promptly deliver such assignments, transfers and other instruments as may be reasonably required for fully vesting in such successor Trustee all right, title and interest in the Trust Estate. V. TRUSTEE RIGHTS AND OBLIGATIONS. A. TRUSTEE COMPENSATION. 1. In exchange for the services provided for in this Agreement, the Grantor shall deliver to the Trustee, upon the execution of this Agreement, a non-refundable fee of $10,000 , which amount shall be compensation for all services contemplated herein. 2. In the event the Trustee incurs significant unexpected or unusual fees or expenses, such as legal fees, attorneys' fees or similar fees and expenses, in the administration of the Trust, the Trustee shall deliver to the Grantor a written invoice detailing such fees or expenses, and the Grantor shall pay such fees or expenses within 30 days of receipt of such invoice. If the Grantor fails to deliver payment within 60 days of receipt of such invoice, the Trustee shall be entitled to withdraw from the Trust Estate, without obtaining 3 court or other approval, the compensation which is allowed to a trustee under the laws of the State of New York. B. NO BOND OR SECURITY. No bond or security of any kind shall be required of any Trustee acting hereunder or appointed pursuant to the provisions hereof. C. ACCOUNTING. 1. No Trustee acting under this Agreement is under any duty to render a judicial accounting upon resignation or otherwise. However, the Trustee may submit any account to a court for approval and settlement. 2. The Trustee may render an accounting upon the termination of this Trust, and at any other times which the Trustee may deem necessary or advisable. The written approval of all persons who are entitled to receive the net income and principal of this Trust, as to all matters and transactions shown in the account, shall be final, binding and conclusive upon all such persons, and upon all persons who may then be, or thereafter become, entitled to any income or principal of the Trust. The written approval or assent of the persons mentioned in this provision shall have the same force and effect in discharging the Trustee as a decree by a court of competent jurisdiction. D. TRUSTEE RESPONSIBLE FOR CARE OF ASSETS COMPRISING TRUST ESTATE. The Trustee shall have the entire care and custody of the Assets comprising the Trust Estate and shall keep the Assets with the same care as given to other property held by it in a fiduciary capacity. The Trustee shall become responsible for the Trust Estate only when, as and if the same shall have been received by such Trustee. No Trustee shall be responsible for any act or omission of any prior Trustee, nor shall any Trustee be under a duty to take any proceedings against any prior Trustee, but shall be entitled to rely on the propriety of the actions of the prior Trustee as such actions appear from the records and accounts of the prior Trustee. E. DISCRETION AND LACK OF DIVERSIFICATION. The Grantor hereby acknowledges and agrees that the Trustee has no investment discretion with respect to the Assets comprising the Trust Estate. Accordingly, the Trustee shall hold, as custodian, the Assets comprising the Trust Estate, without regard to diversification or investment decisions that may otherwise be imposed under applicable prudent investor standards or otherwise. F. LIMITATION ON TRUSTEE LIABILITY. 1. No Trustee shall be individually liable for any loss to, or depreciation in, the value of the Trust Estate occurring for any reason, so long as the Trustee shall have been acting in good faith. 2. Every act done, power exercised or obligation assumed by the Trustee, pursuant to the provisions of this Agreement, shall be held to be done, exercised or assumed, as the case may be, by the Trustee acting in the Trustee's fiduciary capacity and not otherwise, and every person, firm or corporation contracting or otherwise dealing with the Trustee shall look only to the Assets of the Trust Estate for payment under such contract or payment of any money that may become due or payable under any obligation arising under this 4 Agreement, in whole or in part, and no Trustee shall be individually liable for such matter even though the Trustee did not exempt itself from individual liability when entering into any contract, obligation or transaction in connection with or growing out of the Trust Estate. 3. The Trustee shall be liable for gross negligence and for such acts, neglect and defaults which constitute a breach of trust or which are committed in bad faith. G. TRUSTEE CONSULTATION WITH COUNSEL. The Trustee may consult with legal counsel (who may, but is not required to, be counsel to the Grantor) concerning any question which may arise with reference to the Trustee's duties or obligations under this Agreement, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered by the Trustee in good faith and in accordance with the opinion of such counsel. H. RECEIPT BY GRANTOR BENEFICIARY DISCHARGES TRUSTEE. The receipt of the Grantor upon distribution hereunder shall discharge the Trustee from any further obligation with respect to the property so distributed. Upon final distribution, the Trustee shall be fully discharged, and this entire Trust shall terminate. VI. TRUSTEE ADMINISTRATIVE POWERS. A. TRUSTEE POWERS. Except as specifically provided to the contrary in this Agreement, the Trustee shall have in addition to, and not in limitation of, the powers granted elsewhere in this Agreement, or the powers allowed by law, the following powers: 1. To employ or retain accountants, custodians, agents, legal counsel and other experts as the Trustee shall deem advisable, and to (i) rely on the information and advice furnished by such persons; (ii) fix the compensation of such persons; and (iii) make payments on account of services provided by such person. 3. To the extent permitted by the laws of the State of New York, the Trustee may hold securities in the name of a nominee without indicating the trust character of such holdings, and may hold unregistered securities, or securities in a form that will pass by delivery. 4. To retain and continue for any period any Asset included in the Trust Estate. 5. To sell at public or private sale and to exchange or otherwise dispose of any stocks or other Asset constituting the Trust Estate at the time, price, and terms as the Trustee deems advisable. 6. To grant options for the sale or exchange of any Asset comprising the Trust Estate, at times, prices and terms which the Trustee deems advisable, without applying to or procuring the authority of any court. 5 7. To compromise, adjust, settle or submit to arbitration upon terms the Trustee deems advisable, in absolute discretion, any claim in favor of or against the Trust Estate. To release with or without consideration any claim in favor of the Trust Estate. 8. To participate in any refunding, reorganization, repurchase, splitting or readjustment of stocks or other securities or obligations comprising the Trust Estate, in connection with any merger, consolidation, dissolution or otherwise. 9. To borrow money for the purpose of raising funds to pay taxes or for any other purpose deemed by the Trustee beneficial to the Trust Estate, and upon such terms as the Trustee may determine. To pledge as security for the repayment of any loan any Assets included in the Trust Estate. 10. To exercise for the benefit of the Trust Estate, and for any Assets included in the Trust Estate, all rights, powers and privileges of every nature, which might or could be exercised by any person owning similar property absolutely and in his or her own right. To exercise any or all of such rights, powers and privileges, even where such right, power or privilege may not have been specifically mentioned in this Agreement. Notwithstanding the foregoing, the Trustee does not have the power to, and shall not, vote any of the shares of common stock of Independence Federal Savings Bank held in the Trust Estate. 11. To negotiate, draft, enter into, re-negotiate or otherwise modify any contracts or other written instruments which the Trustee deems advisable, and to include in them the covenants, terms and conditions as the Trustee deems proper. B. MODIFICATION OF THE AGREEMENT BY THE TRUSTEE. 1. The Trustee may modify or amend the Trust formed under this Trust Agreement to facilitate the administration of the Trust Estate or to conform such Trust to laws or regulations affecting trusts. 2. No such modification or amendment, however, shall affect the possession or enjoyment of the Trust Estate, nor shall any action under this provision be undertaken in a manner that frustrates the general purposes of this Agreement. 3. Such modification or amendment shall be affected by an instrument executed by the Trustee and delivered to the Grantor. C. THIRD PARTY RELIANCE. No bank or trust company, corporation, partnership, association, firm or other person dealing with the Trustee, or keeping any Assets of the Trust Estate, shall be required to investigate the authority of the Trustee for entering into any transaction involving Assets of the Trust Estate. Nor shall such person be required to see to the application of the proceeds of any transaction with the Trustee, or to inquire into the appropriateness, validity, expediency or propriety thereof, or be under any obligation or liability whatsoever, except to the Trustee; and any such person, bank or trust company, corporation, partnership, association or firm shall be fully protected in making disposition of any Assets of the Trust Estate in accordance with the directions of the Trustee. 6 D. FURTHER ASSURANCES. The Grantor agrees to execute any documents reasonably necessary for the Trustee to implement the Trustee's duties under this Agreement. E. RULE AGAINST PERPETUITIES. Notwithstanding any provision to the contrary: 1. If the Trust created under this Agreement shall violate any applicable rule against perpetuities, accumulations or any similar rule or law, the Trustee is hereby directed to terminate such Trust on the date limited by such rule or law, and thereupon the Assets held in any Trust under this Agreement affected by this provision shall be distributed to the Grantor or the persons then entitled to share the Trust Estate in the proportions in which they are then entitled to share. 2. No power of appointment granted under this Agreement shall be so exercised so as to violate any such rule or law, and any attempted exercise of any such power which violates such rule or law shall be void. F. CONSTRUCTION. 1. The validity, construction and effect of the provisions of this Trust shall be governed by the laws of the State of New York. 2. This Agreement may be executed in more than one counterpart, each of which is an original, but all taken together shall be deemed one and the same instrument. 3. Captions, provision numbers and headings have been inserted for convenience only and such shall not be construed to affect the interpretation of any provision of this Agreement or to limit or broaden the terms of any provision. 4. This Trust Agreement shall extend to and be binding upon the successors and assigns of the Grantor and the Trustee. 5. Any provision of this Agreement prohibited by law shall be ineffective to the extent of such prohibition without invalidating the rest of this Agreement which shall be interpreted to conform, to the extent permitted by law, with the original intent hereof. IN WITNESS WHEREOF, the undersigned Grantor and Trustee have executed this Agreement as of the date first-above written. AMERICAN STOCK TRANSFER & CARVER BANCORP, INC. TRUST COMPANY /s/ Deborah C. Wright /s/ Herbert J. Lemmer - --------------------- --------------------- By: Deborah C. Wright By: Herbert J. Lemmer Its: President and Chief Executive Officer Its: Vice President 7 SCHEDULE A ASSETS TRANSFERRED TO THE TRUST 72,400 shares of common stock, par value $0.01 per share, of Independence Federal Savings Bank 8 EX-10.29 5 d245212.txt FIRST AMENDMENT TO EMPLOYMENT AGREEMENT EXHIBIT 10.29 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This First Amendment to the Employment Agreement ("Agreement") made and entered into as of April 22, 2002, between Carver Federal Savings Bank ("Bank") and Catherine A. Papayiannis, an individual residing at 204 Battery Avenue, Brooklyn, New York 11209 ("Executive") is made and entered into as of May 27, 2004. WITNESSETH WHEREAS, the Bank and Executive have entered into the Agreement for purposes of setting forth the terms and conditions of Executive's employment; and WHEREAS, the Bank and Carver Bancorp, Inc. ("Company") feel that it is in the best interests of the Bank, the Company and their shareholders to establish a working environment for Executive which minimizes the personal distractions that might result from possible business combinations in which the Company or the Bank might be involved. NOW, THEREFORE, the Bank and Executive hereby agree to amend the Agreement, effective as of the date hereof, as follows: 1. Subsections (c), (d) and (e) of Section 11 of the Agreement shall be amended in their entirety to read as follows: (c) continued group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance benefits and after taking into account the coverage provided by any subsequent employer, if and to the extent necessary to provide coverage for Executive and her family for a period of one year (two years if the termination of employment occurs following a Change in Control); and (d) within thirty (30) days following her termination of employment with the Bank, a lump sum payment in an amount equal to one year's (two years if the termination of employment occurs following a Change in Control) base salary as in effect at that time; (e) an amount equal to the Incentive Compensation Award during any full fiscal year remaining in the term of the Agreement; PROVIDED, HOWEVER, that if the termination occurs following a Change of Control, an amount equal to two times the highest Incentive Compensation Award during any full fiscal year during the term of the Agreement; in either event, such payment to be made within thirty (30) days following Executive's termination of employment; 2. Subsection 11(h) of the Agreement shall be amended by deleting the last sentence thereof and substituting the following: The Bank and the Executive agree that the payments provided for in this Agreement are in lieu of any severance payments on a change of control which may be provided to employees of the Bank or Carver Bancorp, Inc. under the Carver Severance Plan or any other severance plan or through any other arrangement or plan of the Bank or Carver Bancorp, Inc. and the Executive hereby waives any and all rights to benefits, payments or amounts under any such plan or arrangement. If the aggregate amount payable to Executive in the nature of compensation that constitute parachute payments within the meaning of Section 280G of the Code is such that an excise tax under Section 4999 of the Code (the "Excise Tax") would be due and if the amount by which such parachute payments would have to be reduced to avoid the imposition of the Excise Tax is less than or equal to the amount of the Excise Tax due in the absence of such reduction, then the aggregate amount payable to Executive will be reduced by the amount necessary to avoid the imposition of the Excise Tax. The determination of whether any of the payments and benefits will trigger the Excise Tax, the amount of the Excise Tax and the reduction necessary to avoid the Excise Tax shall be made as of the Closing Date by the Bank's regular tax advisors. If such determination results in a requirement that Executive's payments be limited, Executive shall have the right, by written notice to the Bank, to specify which payments and benefits shall be reduced. 3. GUARANTEE. Carver Bancorp, Inc. hereby agrees to guarantee the payment by the Bank of any benefits and compensation to which the Executive is or may be entitled to and which may not be paid by the Bank under section 27(a) of the Agreement. 4. CONTINUED FORCE AND EFFECT. Except as set forth in this First Amendment, all other terms, covenants and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Bank has caused this First Amendment to be executed and the Executive has hereunto set her hand, all as of the day and year first above written. /s/ Catherine A. Papayiannis CATHERINE A. PAPAYIANNIS ATTEST: CARVER FEDERAL SAVINGS BANK By /s/ Linda J. Dunn By /s/ Deborah C. Wright ----------------- --------------------- Secretary NAME: Deborah C. Wright TITLE: President & CEO 2 [Seal] ATTEST: CARVER BANCORP, INC. By /s/ Linda J. Dunn By /s/ Deborah C. Wright ----------------- --------------------- Secretary NAME: Deborah C. Wright TITLE: President & CEO [Seal] EX-21.1 6 d245226.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Carver Bancorp, Inc. (the "Company") is the holding company for Carver Federal Savings Bank (the "Bank"), a federally chartered stock savings bank. The Bank, in turn, wholly owns two subsidiaries: CSFB Credit Corp. and CSFB Realty Corp., both incorporated in the State of New York. In addition, the Bank owns a majority interest in Carver Asset Corp., which is incorporated in the State of Delaware. The Company is the sole stockholder of Alhambra Holding Corp. ("Alhambra") and Carver Statutory Trust I (the "Trust"), both incorporated in the state of Delaware. Alhambra owns 80% of the common stock and 100% of the preferred stock of Alhambra Realty Corp., a Delaware corporation. EX-23.2 7 d245879.txt CONSENT OF KPMG LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND STOCKHOLDERS CARVER BANCORP, INC.: We consent to incorporation by reference in the annual report on Form 10-K of Carver Bancorp, Inc. and subsidiaries of our report dated June 22, 2004 relating to the consolidated statements of financial condition of Carver Bancorp, Inc. and subsidiaries as of March 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2004, which report appears in the March 31, 2004 annual report on Form 10-K of Carver Bancorp, Inc. and subsidiaries. KPMG LLP New York, New York June 28, 2004 EX-31.1 8 d241057.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION ------------- I, Deborah C. Wright, President and Chief Executive Officer of Carver Bancorp, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Carver Bancorp, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 27, 2004 /s/ Deborah C. Wright --------------------- Deborah C. Wright President and Chief Executive Officer EX-31.2 9 d241059.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION ------------- I, William C. Gray, Senior Vice President and Chief Financial Officer of Carver Bancorp, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Carver Bancorp, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 27, 2004 /s/ William C. Gray ------------------------- William C. Gray Senior Vice President and Chief Financial Officer EX-32.1 10 d241053.txt WRITTEN STATEMENT OF CHIEF EXECUTIVE OFFICER EXHIBIT 32.1 WRITTEN STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, Deborah C. Wright, is the President and Chief Executive Officer of Carver Bancorp (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2004 (the "Report"). By execution of this statement, I certify that: A) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and B) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended. June 27, 2004 /s/ Deborah C. Wright ------------- --------------------- Dated Deborah C. Wright * A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 11 d241054.txt WRITTEN STATEMENT OF CHIEF FINANCIAL OFFICER EXHIBIT 32.2 WRITTEN STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, William C. Gray, is the Senior Vice President and Chief Financial Officer of Carver Bancorp (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2004 (the "Report"). By execution of this statement, I certify that: A) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and B) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended. June 27, 2004 /s/ William C. Gray ------------- ------------------- Dated William C. Gray * A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----