<PAGE> 1
REGISTRATION NO. 333-05559
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CARVER BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 6035 APPLICATION PENDING
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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C/O CARVER FEDERAL SAVINGS BANK
75 WEST 125TH STREET
NEW YORK, NEW YORK 10027-4512
(212) 876-4747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
THOMAS L. CLARK, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
C/O CARVER FEDERAL SAVINGS BANK
75 WEST 125TH STREET
NEW YORK, NEW YORK 10027-4512
(212) 876-4747
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
ROBERT C. AZAROW, ESQ.
KOFI APPENTENG, ESQ.
THACHER PROFFITT & WOOD
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 912-7400
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. /X/
------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM OFFERING PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE PER MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) OFFERING PRICE(2) FEE(3)
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Common Stock, $.01 par
value....................... 2,314,375 $8.00 $18,515,000 $6,384
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(1) Based on the number of shares of common stock of Carver Bancorp, Inc. to be
issued in exchange for the same number of shares of common stock of Carver
Federal Savings Bank in connection with the reorganization of Carver Federal
Savings Bank as described in the Proxy Statement-Prospectus.
(2) The proposed maximum offering price per share reflects the market price of
the common stock of Carver Federal Savings Bank to be converted and
exchanged in connection with the reorganization described in the Proxy
Statement-Prospectus, computed in accordance with Rule 457(f)(1) under the
Securities Act of 1933. It is based on the average of the high and low
prices of the common stock on June 4, 1996, as reported on the Nasdaq
National Market System. The proposed maximum aggregate offering price is
estimated solely for the purpose of calculating the registration fee.
(3)Fee previously paid with filing of Registration Statement on June 7, 1996.
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<PAGE> 2
CARVER BANCORP, INC.
CROSS REFERENCE SHEET REQUIRED BY
ITEM 501(b) OF REGULATION S-K
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CAPTION CAPTION IN PROXY STATEMENT-PROSPECTUS
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A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus... Facing Page; Cross-Reference Sheet;
Notice of Annual Meeting of Stockholders;
Outside Front Cover Page of Proxy
Statement-Prospectus.
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Available Information; Table of Contents.
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............ Summary of the Proxy
Statement-Prospectus; General
Information; Proposal 3 -- Formation of
Holding Company -- Terms and Conditions
to the Reorganization.
4. Terms of the Transaction................... Summary of the Proxy
Statement-Prospectus; General
Information; Proposal 3 -- Formation of
Holding Company -- Conditions to the
Reorganization, Description of Bancorp
Capital Stock, Certain Differences in
Stockholder Rights, Tax Consequences of
the Reorganization, Accounting
Treatment of the Reorganization, Market
for the Common Stock; Appendix
A -- Agreement and Plan of
Reorganization.
5. Pro Forma Financial Information............ Pro Forma Consolidated Capitalization.
6. Material Contracts with the Company Being
Acquired................................. Proposal 1 -- Election of Directors --
Employee Benefit Plans, Employment
Agreements; Proposal 3 -- Formation of
Holding Company -- Management of
Carver; Appendix A -- Agreement and
Plan of Reorganization.
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters....................... Not Applicable.
8. Interests of Named Experts and Counsel..... Not Applicable.
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Proposal 3 -- Formation of Holding
Company -- Certain Differences in
Stockholder Rights -- Limitation of
Liability and Indemnification of
Directors, Officers and Employees.
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CAPTION CAPTION IN PROXY STATEMENT-PROSPECTUS
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B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants.............................. Not Applicable.
11. Incorporation of Certain Information by
Reference................................ Not Applicable.
12. Information with Respect to S-2 or S-3
Registrants.............................. Not Applicable.
13. Incorporation of Certain Information by
Reference................................ Not Applicable.
14. Information With Respect to Registrants
Other Than S-3 or S-2 Registrants........ Proposal 3 -- Formation of Holding
Company -- Parties to the
Reorganization, Business of Bancorp,
Description of Bancorp Capital Stock,
Market for the Common Stock, Dividend
Policy, Regulation and Supervision,
Management of Bancorp.
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information With Respect to S-3
Companies................................ Not Applicable.
16. Information With Respect to S-2 or S-3
Companies................................ Not Applicable.
17. Information With Respect to Companies Other
Than S-3 or S-2 Companies................ Proposal 3 -- Formation of Holding
Company -- Parties to the
Reorganization, Business of the Bank,
Market for the Common Stock, Dividend
Policy, Regulation and Supervision,
Management's Discussion and Analysis of
Financial Condition and Results of
Operations, Management of Carver.
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorization are to be Solicited........ Notice of Annual Meeting of Stockholders;
Summary of the Proxy Statement-
Prospectus; General Information;
Proposal 1 -- Election of Directors;
Proposal 2 -- Ratification of
Appointment of Independent Auditors;
Proposal 3 -- Formation of Holding
Company -- Conditions to the
Reorganization, Management of Bancorp,
Management of Carver; Form of Proxy;
Appendix B -- Dissenter and Appraisal
Rights.
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer..................... Not Applicable.
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[CARVER FEDERAL SAVINGS BANK LOGO]
June 27, 1996
Dear Stockholder:
You are invited to attend the 1996 annual meeting of stockholders of Carver
Federal Savings Bank ("Carver" or the "Bank"), which will be held on July 29,
1996 at 9:00 a.m., New York time, at the Adam Clayton Powell State Office
Building, 163 West 125th Street, Third Floor, New York, New York (the "Annual
Meeting").
At the Annual Meeting, you will be asked to consider and vote upon: (1) the
election of two directors to serve for a three-year term expiring in 1999 and
one director to serve for a one-year term expiring in 1997; (2) the ratification
of the appointment of Mitchell & Titus, LLP as independent auditors for the Bank
for the year ending March 31, 1997; and (3) a proposal to form a holding company
for the Bank by the adoption and approval of an Agreement and Plan of
Reorganization dated as of May 21, 1996 among the Bank, Carver Bancorp, Inc., a
newly-formed Delaware business corporation organized at the direction of the
Bank to be a savings and loan holding company, and Carver Interim Federal
Savings Bank, which is being organized as a wholly owned subsidiary of Carver
Bancorp, Inc. to facilitate the reorganization of the Bank. In addition,
management will report on the operations and activities of the Bank and there
will be an opportunity for you to ask questions about the Bank's business.
It is very important that your shares be represented at the Annual Meeting,
regardless of whether or not you plan to attend in person. The adoption of the
Agreement and Plan of Reorganization requires the approval of a majority of the
outstanding shares of Carver Common Stock. Consequently, a failure to vote will
have the same effect as a vote against these proposals. I urge you to execute,
date and return the enclosed proxy card in the enclosed postage-paid envelope as
soon as possible to ensure that your shares will be voted at the Annual Meeting.
YOUR VOTE IS IMPORTANT WHETHER OR NOT YOU PLAN
TO ATTEND THE ANNUAL MEETING IN PERSON.
The Board of Directors of Carver has determined that the matters to be
considered at the Annual Meeting are in the best interests of the Bank and its
stockholders. For the reasons set forth in the Proxy Statement-Prospectus, the
Board unanimously recommends a vote FOR each matter to be considered.
On behalf of the Board of Directors, I urge you to vote FOR the persons
nominated to serve as directors, FOR approval of the ratification of appointment
of the independent auditors and FOR approval of the Agreement and Plan of
Reorganization.
Sincerely yours,
/s/ Thomas L. Clark, Jr.
THOMAS L. CLARK, JR.
President and Chief Executive Officer
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CARVER FEDERAL SAVINGS BANK
75 WEST 125TH STREET
NEW YORK, NEW YORK 10027-4512
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 29, 1996
NOTICE IS HEREBY GIVEN that the 1996 annual meeting of stockholders of
Carver Federal Savings Bank ("Carver" or the "Bank") will be held on July 29,
1996 at 9:00 a.m., New York time, at the Adam Clayton Powell State Office
Building, 163 West 125th Street, Third Floor, New York, New York (the "Annual
Meeting"). The Annual Meeting has been called for the following purposes:
1. To elect two directors to serve for a three-year term expiring at
the 1999 annual meeting and until their respective successors have been
duly elected and qualified and to elect one director to serve for a
one-year term expiring at the 1997 annual meeting and until her successor
has been duly elected and qualified;
2. To ratify the appointment of Mitchell & Titus, LLP as independent
auditors for the Bank for the year ending March 31, 1997;
3. To consider and vote upon the formation of a savings and loan
holding company for Carver by the adoption and approval of the Agreement
and Plan of Reorganization dated as of May 21, 1996 (the "Plan of
Reorganization" or "Plan") among the Bank, Carver Bancorp, Inc. ("Bancorp"
or the "Company"), and Carver Interim Federal Savings Bank ("Interim"),
pursuant to which Carver will become a wholly owned subsidiary of Bancorp
and all of the outstanding shares of common stock of Carver (other than
shares held by stockholders exercising dissenters' rights, if any) will be
converted into and exchanged for, on a one-for-one basis, shares of common
stock of Bancorp (a copy of the Plan is attached as Appendix A to the Proxy
Statement-Prospectus accompanying this Notice); and
4. To transact such other business as may properly come before the
Annual Meeting or any adjournment or postponement thereof.
Pursuant to the Bylaws of Carver, the Board of Directors has fixed June 10,
1996 as the record date for the determination of stockholders entitled to notice
of and to vote at the Annual Meeting and at any adjournment or postponement
thereof. Only holders of Carver Common Stock as of the close of business on the
record date will be entitled to vote at the Annual Meeting or any adjournment or
postponement thereof.
Each Carver stockholder has the right to demand from Carver payment for the
fair value of such stockholder's shares; provided, that such stockholder (1)
files with Carver, before the vote on the approval of the Plan, a writing which
demands payment for the shares at fair value if the Plan is approved, and (2)
does not vote such shares in favor of the Plan. Carver and any such stockholder
shall in such case have the rights and duties and shall follow the procedures
set forth in Section 552.14 of the Rules and Regulations of the Office of Thrift
Supervision, a copy of which is attached as Appendix B to the Proxy
Statement-Prospectus accompanying this Notice.
THE CARVER BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
CARVER COMMON STOCK VOTE FOR APPROVAL OF EACH OF THE PROPOSALS.
<PAGE> 6
WE URGE YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS
POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON. THE
PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE IN THE MANNER DESCRIBED
IN THE ACCOMPANYING PROXY STATEMENT-PROSPECTUS. ANY STOCKHOLDER PRESENT AT THE
ANNUAL MEETING, INCLUDING ANY ADJOURNMENT OR POSTPONEMENT THEREOF, MAY REVOKE
SUCH HOLDER'S PROXY AND VOTE PERSONALLY ON EACH MATTER BROUGHT BEFORE THE ANNUAL
MEETING.
By Order of the Board of Directors
/s/ Margaret R. Lewis
MARGARET R. LEWIS
Corporate Secretary
New York, New York
June 27, 1996
2
<PAGE> 7
PROXY STATEMENT
CARVER FEDERAL SAVINGS BANK
75 WEST 125TH STREET
NEW YORK, NEW YORK 10027-4512
(212) 876-4747
ANNUAL MEETING OF STOCKHOLDERS
JULY 29, 1996
------------------------
PROSPECTUS
CARVER BANCORP, INC.
COMMON STOCK, PAR VALUE $0.01 PER SHARE
This document serves as a Proxy Statement for the 1996 annual meeting of
stockholders of Carver Federal Savings Bank ("Carver" or the "Bank"), to be held
on July 29, 1996 at 9:00 a.m., New York time, at the Adam Clayton Powell State
Office Building, 163 West 125th Street, Third Floor, New York, New York, and at
any adjournment or postponement thereof (the "Annual Meeting"), and is being
used by the Board of Directors of the Bank to solicit the proxies of the Bank's
stockholders in connection therewith. This Proxy Statement-Prospectus, with the
accompanying proxy card, is first being sent or given to Carver's stockholders
on or about June 27, 1996.
As more fully described in this Proxy Statement-Prospectus, the purpose of
the Annual Meeting is (1) to elect two directors to serve for a three-year term
and one director to serve for a one-year term; (2) to ratify the appointment of
Mitchell & Titus, LLP as independent auditors for the Bank for the fiscal year
ending March 31, 1996; (3) to consider and vote upon the formation of a savings
and loan holding company by the adoption and approval of the Agreement and Plan
of Reorganization dated as of May 21, 1996 (the "Plan of Reorganization" or
"Plan") among Carver, Carver Bancorp, Inc. ("Bancorp"), a newly-formed Delaware
business corporation organized at the direction of the Bank, and Carver Interim
Federal Savings Bank ("Interim"), which will be, upon formation, a wholly owned
subsidiary of Bancorp, pursuant to which Interim will be merged with and into
Carver and Bancorp will become the holding company for Carver (the
"Reorganization"); and (4) to transact such other business as may properly come
before the Annual Meeting or any adjournment or postponement thereof.
This document also serves as a Prospectus in connection with the issuance
by Bancorp of up to 2,314,375 shares of Bancorp common stock, par value $0.01
per share ("Bancorp Common Stock"). Upon the effective date of the
Reorganization (the "Effective Date"), all outstanding shares of Carver common
stock, par value $0.01 per share ("Carver Common Stock") (other than shares held
by stockholders exercising dissenters' rights, if any), will be converted into
and exchanged for an equal number of shares of Bancorp Common Stock, on a
one-for-one basis.
Under the Securities Act of 1933, as amended (the "Securities Act"), and
the rules and regulations of the Securities and Exchange Commission (the "SEC"),
the solicitation of stockholders of Carver to approve the proposed Plan of
Reorganization constitutes an offering of Bancorp Common Stock. Bancorp has
filed with the SEC a registration statement on Form S-4 under the Securities Act
(the "Registration Statement") with respect to such offering, and this Proxy
Statement-Prospectus constitutes the prospectus of Bancorp filed as part of the
Registration Statement. This Proxy Statement-Prospectus does not contain all of
the information set forth in the Registration Statement and the related
exhibits, certain parts of which are omitted in accordance with the rules and
regulations of the SEC.
This Proxy Statement-Prospectus shall not constitute a prospectus for a
public reoffering of Bancorp Common Stock issuable pursuant to the Plan of
Reorganization.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROXY STATEMENT-PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT-PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH IT WOULD BE UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT-PROSPECTUS, NOR ANY OFFER OR SOLICITATION MADE HEREUNDER, SHALL, UNDER
ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION SET FORTH OR INCORPORATED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION OR ANY OTHER FEDERAL
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION,
OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THESE SECURITIES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
The date of this Proxy Statement-Prospectus is June 27, 1996.
<PAGE> 8
AVAILABLE INFORMATION
Carver is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files periodic reports and other information with the
Office of Thrift Supervision (the "OTS"). Such reports and other information
when filed by the Bank can be inspected and copied at the public reference
facilities maintained by the OTS at 1776 G Street, N.W., Washington, D.C. 20552,
or at the OTS Regional Office located at 10 Exchange Place, 18th Floor, Jersey
City, New Jersey 07302.
Bancorp is not currently subject to the information reporting requirements
of the Exchange Act and, accordingly, has not filed reports, proxy statements or
other information with the SEC. All of the Bancorp Common Stock is currently
owned by Carver, and there is, therefore, no public trading market for Bancorp
Common Stock. If the Reorganization is consummated, Bancorp Common Stock will be
registered under the Exchange Act, and Bancorp will file periodic reports with
the SEC. In addition, in accordance with the rules and regulations of the SEC in
connection with annual meetings of the stockholders of Bancorp, proxy statements
accompanied or preceded by annual reports to stockholders will be furnished to
stockholders of Bancorp. Such reports will contain financial information that
has been examined and reported upon, with an opinion expressed, by an
independent public accounting firm.
This Proxy Statement-Prospectus does not contain all of the information set
forth in the Registration Statement and the related exhibits which Bancorp has
filed with the SEC, and to which reference is hereby made. The Registration
Statement, including exhibits, can be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, 7 World Trade Center, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies can be obtained at prescribed rates from the SEC Public
Reference Branch, 450 Fifth Street, N.W., Washington, D.C. 20549.
Bancorp will file a registration statement on Form H-(b)(10) under the Home
Owners' Loan Act, as amended ("HOLA"), with the OTS. In addition, Carver has
filed with the OTS an application on Form H-(e)1-S under HOLA. The
non-confidential portions of the applications and, when filed, registration
statement can be inspected at the OTS Regional Office located at 10 Exchange
Place, 18th Floor, Jersey City, New Jersey 07302.
A copy of the Bank's Annual Report to Stockholders for the fiscal year
ended March 31, 1996 (the "Annual Report") accompanies this Proxy
Statement-Prospectus. The Annual Report contains financial statements, prepared
in conformity with generally accepted accounting principles, for the years ended
March 31, 1995 and 1996 and certain other information and should be read in
connection with this Proxy Statement-Prospectus.
2
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TABLE OF CONTENTS
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AVAILABLE INFORMATION................................................................. 2
SUMMARY OF THE PROXY STATEMENT-PROSPECTUS............................................. 7
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK............................ 11
GENERAL INFORMATION................................................................... 13
General............................................................................. 13
Record Date and Voting.............................................................. 13
Votes Required...................................................................... 13
Rights of Dissenting Stockholders................................................... 14
Revocability of Proxies............................................................. 15
Solicitation of Proxies............................................................. 15
Security Ownership of Certain Beneficial Owners..................................... 15
Stock Ownership of Management....................................................... 16
PROPOSALS TO BE VOTED ON AT THE ANNUAL MEETING........................................ 18
PROPOSAL 1
ELECTION OF DIRECTORS................................................................. 18
General............................................................................. 18
Information with Respect to Nominees and Continuing Directors....................... 18
Nominees for Election as Directors.................................................. 19
Continuing Directors................................................................ 20
Board and Committee Meetings........................................................ 20
Directors' Compensation............................................................. 21
Executive Compensation.............................................................. 23
Compensation Committee Report....................................................... 23
Compensation Committee Interlocks and Insider Participation......................... 24
Performance Graph................................................................... 25
Summary Compensation Table.......................................................... 26
Certain Employee Benefit Plans and Employment Agreements............................ 26
Transactions with Certain Related Persons........................................... 29
Compliance with Section 16(a) of the Securities Exchange Act of 1934................ 29
PROPOSAL 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS................................... 29
PROPOSAL 3
FORMATION OF HOLDING COMPANY.......................................................... 30
PARTIES TO THE REORGANIZATION......................................................... 31
Carver Federal Savings Bank......................................................... 31
Carver Bancorp, Inc................................................................. 31
Carver Interim Federal Savings Bank................................................. 31
DESCRIPTION OF THE REORGANIZATION..................................................... 32
Reasons for the Reorganization...................................................... 32
Description of the Reorganization................................................... 32
Effective Date...................................................................... 33
Conditions to the Reorganization.................................................... 33
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3
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Amendment and Termination........................................................... 33
Exchange of Stock Certificates...................................................... 33
Effect of the Reorganization on Employee Benefit Plans.............................. 34
DESCRIPTION OF BANCORP CAPITAL STOCK.................................................. 35
General............................................................................. 35
Common Stock........................................................................ 35
Bancorp Preferred Stock............................................................. 36
Anti-Takeover Provisions............................................................ 36
DESCRIPTION OF CARVER CAPITAL STOCK................................................... 37
General............................................................................. 37
The Common Stock.................................................................... 37
Bank Preferred Stock................................................................ 37
CERTAIN DIFFERENCES IN STOCKHOLDER RIGHTS............................................. 38
General............................................................................. 38
Payment of Dividends................................................................ 38
Rights of Issuer to Repurchase Stock................................................ 38
Limitation of Liability and Indemnification of Directors, Officers and Employees.... 38
Appraisal Rights.................................................................... 39
Special Meetings of Stockholders.................................................... 39
Certain Anti-Takeover Provisions.................................................... 40
TAX CONSEQUENCES OF THE REORGANIZATION................................................ 44
ACCOUNTING TREATMENT OF THE REORGANIZATION............................................ 44
MARKET FOR THE COMMON STOCK........................................................... 44
DIVIDEND POLICY....................................................................... 45
PRO FORMA CONSOLIDATED CAPITALIZATION................................................. 47
BUSINESS OF BANCORP................................................................... 48
General............................................................................. 48
Property............................................................................ 48
Competition......................................................................... 48
Employees........................................................................... 48
BUSINESS OF THE BANK.................................................................. 49
General............................................................................. 49
Lending Activities.................................................................. 49
Asset Quality....................................................................... 57
Mortgage-Backed and Related Securities.............................................. 62
Investment Activities............................................................... 65
Deposit Activity and Other Sources of Funds......................................... 67
Subsidiary Activities............................................................... 70
Market Area and Competition......................................................... 70
Employees........................................................................... 71
Legal Proceedings................................................................... 72
FEDERAL AND STATE TAXATION............................................................ 74
Federal Taxation.................................................................... 74
State and Local Taxation............................................................ 76
REGULATION AND SUPERVISION............................................................ 77
General............................................................................. 77
Regulation of Federal Savings Associations.......................................... 77
Regulation of Holding Company....................................................... 85
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4
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Federal Securities Laws............................................................. 86
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 88
General............................................................................. 88
Asset/Liability Management.......................................................... 88
Interest Rate Sensitivity Analysis.................................................. 88
Average Balance, Interest and Average Yields and Rates.............................. 88
Rate/Volume Analysis................................................................ 88
Comparison of Financial Condition at March 31, 1996 and 1995........................ 92
Comparison of Financial Condition at March 31, 1995 and 1994........................ 93
Comparison of Operating Results for the Years Ended March 31, 1996 and 1995......... 93
Comparison of Operating Results for the Years Ended March 31, 1995 and 1994......... 95
Cumulative Effect of Change in Accounting for Income Taxes.......................... 98
Liquidity and Capital Resources..................................................... 98
Regulatory Capital Position......................................................... 98
Impact of Inflation and Changing Prices............................................. 99
Impact of New Accounting Standards.................................................. 99
Possible Impact of Proposed Legislation............................................. 100
MANAGEMENT OF BANCORP................................................................. 102
Directors........................................................................... 102
Executive Officers.................................................................. 102
Compensation........................................................................ 102
Employee Benefit Plans.............................................................. 102
MANAGEMENT OF CARVER.................................................................. 103
Directors........................................................................... 103
Executive Officers.................................................................. 103
Compensation and Employee Benefit Plans............................................. 104
OTHER MATTERS......................................................................... 104
PROPOSALS FOR 1997 ANNUAL MEETING..................................................... 104
FINANCIAL STATEMENTS.................................................................. 105
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................................ F-1
CONSOLIDATED FINANCIAL STATEMENTS..................................................... F-2
APPENDIX A -- PLAN OF REORGANIZATION............................................. A-1
APPENDIX B -- SECTION 552.14 OF RULES AND REGULATIONS OF OTS..................... B-1
APPENDIX C -- CERTIFICATE OF INCORPORATION OF BANCORP............................ C-1
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SUMMARY OF THE PROXY STATEMENT-PROSPECTUS
This Summary is qualified in its entirety by the detailed information
contained in this Proxy Statement-Prospectus, the Appendices hereto and the
documents referred to herein.
ANNUAL MEETING OF STOCKHOLDERS
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Time and Place of the Annual Meeting.... The Annual Meeting will be held on July 29, 1996 at
9:00 a.m., New York time, at the Adam Clayton
Powell State Office Building, 163 West 125th
Street, Third Floor, New York, New York. See
"General Information -- General."
Purpose of the Annual Meeting........... The purpose of the Annual Meeting is to (1) elect
two directors, each to serve for a three-year term
expiring in 1999 and one director to serve for a
one-year term expiring in 1997; (2) ratify the
appointment of Mitchell & Titus, LLP as independent
auditors for the Bank for the fiscal year ending
March 31, 1997; (3) consider and vote upon the Plan
of Reorganization pursuant to which Interim will be
merged with and into Carver and Carver will become
a wholly owned subsidiary of Bancorp, and all of
the outstanding shares of Carver Common Stock
(other than shares held by stockholders exercising
dissenters' rights, if any) will be converted into
and exchanged for, on a one-for-one basis, shares
of Bancorp Common Stock; and (4) transact such
other business as may properly come before the
Annual Meeting. See "General Information,"
"Proposal 1 -- Election of Directors," "Proposal
2 -- Ratification of Appointment of Independent
Auditors" and "Proposal 3 -- Formation of Holding
Company."
Record Date............................. The Board of Directors of Carver has fixed the
close of business on June 10, 1996 as the record
date (the "Record Date") for the determination of
stockholders entitled to notice of and to vote at
the Annual Meeting and at any adjournment or
postponement thereof. See "General
Information -- Record Date and Voting."
Beneficial Ownership by Directors and
Executive Officers.................... On April 30, 1996 the directors and executive
officers of Carver beneficially owned in the
aggregate 197,428 shares of Carver Common Stock.
See "General Information -- Stock Ownership of
Management."
Additional Information.................. For additional information, telephone Raymond L.
Bruce, Vice President and Corporate Counsel, Carver
Federal Savings Bank, at (212) 876-4747.
</TABLE>
6
<PAGE> 13
FORMATION OF HOLDING COMPANY
The Parties to the
Reorganization.................. Carver, Carver Bancorp, Inc. and Carver
Interim Federal Savings Bank.
Carver Federal Savings Bank..... Carver is a federally chartered stock savings
bank organized under the rules and
regulations of the OTS. Carver conducts its
business through 8 full service banking
offices located in the boroughs of Brooklyn,
Manhattan and Queens in the City of New York,
and Nassau County in the State of New York.
Carver's administrative offices are located
at 75 West 125th Street, New York, New York,
10027-4512, and its telephone number is (212)
876-4747.
On October 24, 1995, the Bank converted from
mutual to stock form and issued 2,314,375
shares of its common stock, par value $0.01
per share.
Carver Bancorp, Inc............. Bancorp is a business corporation
incorporated as a wholly owned subsidiary of
Carver under the General Corporation Law of
the State of Delaware. Bancorp was organized
at the direction of Carver for the purpose of
acquiring all of the issued and outstanding
shares of Carver Common Stock pursuant to the
Plan of Reorganization. Bancorp's telephone
number and address are the same as those
given for Carver above.
Carver Interim Federal Savings
Bank............................ Interim is a stock-form savings bank formed
under the Rules and Regulations of the OTS
(the "OTS Regulations"). Interim is being
organized as a wholly owned subsidiary of
Bancorp for the purpose of being merged with
and into Carver pursuant to the Plan of
Reorganization.
Reasons for the
Reorganization.................. The Board of Directors of Carver believes
that a holding company structure will provide
greater flexibility to meet the future
competitive and financial needs of the Bank.
The Reorganization will also increase
flexibility with respect to potential
expansion through mergers and acquisitions,
which may be funded by additional equity
offerings. A holding company structure will
also allow the Board of Directors of Bancorp
to repurchase shares of Bancorp Common Stock
and declare dividends in the future, although
there are no present plans to do so.
Description of the
Reorganization.................. Under the Plan of Reorganization, Interim
will merge with and into Carver, with Carver
as the surviving institution, and all of the
outstanding shares of Carver Common Stock
(other than shares held by stockholders
exercising dissenters' rights, if any) will
be converted into and exchanged for, on a
one-for-one basis, shares of Bancorp Common
Stock. Thereafter, Interim will cease to
exist as a separate entity and Carver will
become a wholly owned subsidiary of Bancorp
and will continue its current business and
operations as a federally chartered stock
savings bank using its current name. The Plan
of Reorganization is incorporated by
reference into this Proxy
Statement-Prospectus and attached hereto as
Appendix A.
7
<PAGE> 14
See "Proposal 3 -- Formation of Holding
Company -- Conditions to the Reorganization."
Management of Bancorp........... The Board of Directors of Bancorp is
comprised of the members of the Board of
Directors of Carver. The officers of Bancorp
are the senior officers of Carver. See
"Proposal 3 -- Formation of Holding
Company -- Management of Bancorp."
Conditions and Required
Regulatory Approvals............ The consummation of the Reorganization is
subject to the satisfaction of several
significant conditions, including: the
adoption and approval of the Plan of
Reorganization by the holders of at least a
majority of the outstanding shares of Carver
Common Stock; the approval of the
organization of Interim by the OTS, the
approval of the merger of Interim with and
into Carver by the OTS, the approval by the
OTS of the application of Bancorp to acquire
all of the capital stock of the Bank; and the
receipt by Carver of a favorable opinion of
counsel as to the federal income tax
consequences of the Reorganization. There is
no assurance that such conditions will be
satisfied. See "Tax Consequences of the
Reorganization" and "Conditions to the
Reorganization" under "Proposal
3 -- Formation of Holding Company."
Comparison of Stockholder
Rights.......................... While the Certificate of Incorporation of
Bancorp (the "Certificate of Incorporation"),
attached hereto as Appendix C, is similar in
many respects to the current Federal Stock
Charter of Carver (the "Federal Stock
Charter"), certain differences will exist
following the Reorganization between the
rights of the stockholders of Bancorp and
those of Carver. These differences will
include such matters as limitations on the
liability of directors, indemnification of
directors, officers and employees, appraisal
rights and antitakeover protections. See
"Proposal 3 -- Formation of Holding
Company -- Certain Differences in Stockholder
Rights."
Anti-Takeover Effects........... The Certificate of Incorporation and Bylaws
of Bancorp and the Federal Stock Charter and
Bylaws of Carver contain provisions that may
be relevant to potential changes in control.
See "Proposal 3 -- Formation of Holding
Company -- Certain Anti-takeover Provisions."
Federal Income Tax
Consequences.................... The Plan of Reorganization is conditioned, in
part, upon the receipt by Carver of an
opinion of counsel to the effect that for
federal income tax purposes: (1) no gain or
loss will be recognized by stockholders of
Carver on the transfer of their shares of
Carver Common Stock to Bancorp solely in
exchange for shares of Bancorp Common Stock;
(2) no gain or loss will be recognized by
Bancorp upon its receipt of shares of Carver
Common Stock in exchange for shares of
Bancorp Common Stock; (3) the basis of the
shares of Bancorp Common Stock to be received
by each Carver stockholder will be the same
as the basis of the shares of Carver Common
Stock exchanged therefor; and (4) the holding
period of the shares of Bancorp Common Stock
to be received by each Carver stockholder
will
8
<PAGE> 15
include the holding period of Carver Common
Stock exchanged therefor, provided that each
such stockholder held such shares of Carver
Common Stock as a capital asset on the
Effective Date. Each stockholder is urged to
consult his own tax advisor as to the
specific consequences of the Reorganization
to the stockholder under federal, state and
any other applicable tax laws. See "Proposal
3 -- Formation of Holding Company -- Tax
Consequences of the Reorganization."
Accounting Treatment of the
Reorganization................ It is expected that the Reorganization will
be characterized as, and treated similarly
to, a "pooling of interests" for financial
reporting and related purposes. See "Proposal
3 -- Formation of Holding
Company -- Accounting Treatment of the
Reorganization."
Regulation and Supervision...... After the Effective Date, Bancorp will be
subject to regulation by the OTS as a savings
and loan holding company under the HOLA.
Carver will continue to be subject to
regulation by the OTS and the FDIC. See
"Proposal 3 -- Formation of Holding
Company -- Regulation and Supervision."
Market for Stock................ The Bank's Common Stock is currently traded
on the Nasdaq National Market System under
the symbol "CARV". Following the
Reorganization, it is expected that Bancorp
Common Stock will be traded on the Nasdaq
National Market System under the same symbol.
See "Market For The Common Stock" and
"Dividend Policy" under "Proposal
3 -- Formation of Holding Company."
Effective Date.................. The Effective Date will be the later of the
date of the (a) consummation of the Plan or
(b) date specified on the endorsement by the
Secretary of the OTS of the articles of
combination with respect to the Plan of
Reorganization in accordance with the Rules
and Regulations of the OTS. See "Proposal
3 -- Formation of Holding
Company -- Conditions to the
Reorganization, -- Effective Date."
Rights of Dissenting
Stockholders.................... Holders of shares of Carver Common Stock are
entitled to dissent from the Plan of
Reorganization and to receive the fair value
of their shares if they follow certain
statutory procedures. See "General
Information -- Appraisal Rights, "Proposal
3 -- Formation of Holding Company -- Rights
of Dissenting Stockholders" and Appendix B.
Stockholder Vote Required for
Approval........................ Approval of the Plan of Reorganization will
require the vote of the holders of a majority
of the outstanding shares of Carver Common
Stock entitled to vote thereon.
Recommendation of Management.... THE BOARD OF DIRECTORS OF CARVER UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
ADOPTION OF THE PLAN OF REORGANIZATION.
9
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
The selected consolidated financial and other data of the Bank set forth
below is derived in part from and should be read in conjunction with the
Consolidated Financial Statements of the Bank and Notes thereto presented
elsewhere in this Proxy Statement-Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
TOTAL AMOUNT OF:
Assets................................................... $367,657 $367,962 $308,507 $330,725 $323,998
Loans.................................................... 82,608 48,460 51,020 56,533 51,710
Mortgage-backed securities............................... 131,105 181,134 153,843 235,676 243,590
Investment securities.................................... 8,937 18,035 12,018 14,779 10,892
Securities available-for-sale............................ 114,328 93,328 71,572 -- --
Excess of cost over assets acquired...................... 1,669 1,899 2,141 2,676 3,206
Cash and cash equivalents................................ 10,026 11,818 9,053 10,435 4,603
Deposits................................................. 256,952 248,446 252,474 256,068 246,930
Borrowed funds........................................... 73,948 82,318 39,930 59,000 61,345
Stockholders' equity..................................... 34,765 34,801 14,170 13,418 13,223
NUMBERS OF:
Deposit accounts......................................... 45,815 44,324 44,593 44,744 45,668
Offices.................................................. 8 8 8 8 8
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income.......................................... $ 23,529 $ 19,750 $ 17,464 $ 21,081 $ 21,937
Interest expense......................................... 13,594 10,532 10,167 13,063 14,989
--------- --------- -------- -------- --------
Net interest income...................................... 9,935 9,218 7,297 8,018 6,948
Provision for loan losses................................ 131 334 19 812 192
--------- --------- -------- -------- --------
Net interest income after provision for loan losses...... 9,804 8,884 7,278 7,206 6,756
--------- --------- -------- -------- --------
Non-interest income:
Gain on sales of assets................................ -- -- 1,127 -- 3,565
Other.................................................. 608 576 565 452 511
--------- --------- -------- -------- --------
Total non-interest income....................... 608 576 1,692 452 4,076
--------- --------- -------- -------- --------
Non-interest expenses:
Loss on sale of foreclosed real estate................. 77 34 159 475 2
Other.................................................. 8,976 7,907 7,690 6,758 6,733
--------- --------- -------- -------- --------
Total non-interest expense...................... 9,053 7,941 7,849 7,233 6,735
--------- --------- -------- -------- --------
Income before income taxes, extraordinary income and
cumulative effect of change in accounting principal.... 1,359 1,519 1,121 425 4,097
Income taxes............................................. 606 674 613 230 1,682
--------- --------- -------- -------- --------
Income before extraordinary income and cumulative effect
of change in accounting principle...................... 753 845 508 195 2,415
Extraordinary income, net of income taxes................ -- -- 323 -- --
--------- --------- -------- -------- --------
Income before cumulative effect of change in accounting
principles............................................. 753 845 831 195 2,415
Cumulative effect of change in accounting principles..... -- -- 252 -- --
--------- --------- -------- -------- --------
Net income............................................... $ 753 $ 845 $ 1,083 $ 195 $ 2,415
========= ========= ======== ======== ========
Net income per common share(1)........................... $ 0.35 $ 0.40 -- -- --
Weighted average number of common shares outstanding..... 2,156,346 2,136,615 -- -- --
</TABLE>
- ---------------
(1) Historical net income per common shares from October 24, 1994 (date of
Conversion) to March 31, 1995 was $0.17.
10
<PAGE> 17
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED MARCH 31,
---------------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets(1).................................. 0.21% 0.25% 0.35% 0.06% 0.86%
Return on average equity(2).................................. 2.16 3.61 7.88 1.48 20.54
Interest rate spread(3)...................................... 2.57 2.74 2.38 2.50 2.48
Net interest margin(4)....................................... 2.85 2.91 2.43 2.56 2.57
Operating expenses to average assets(5)...................... 2.48 2.38 2.46 2.07 2.40
Equity-to-assets(6).......................................... 9.45 9.46 4.59 4.06 4.08
Net interest income to operating expenses(7)................. 1.10x 1.17x 0.95x 1.19x 1.03x
Average interest-earning assets to average interest-bearing
liabilities................................................ 1.07x 1.05x 1.02x 1.01x 1.01x
ASSET QUALITY RATIOS:
Non-performing assets to total assets(8)..................... 0.97% 0.56% 1.24% 1.53% 1.30%
Non-accrual loans and accruing loans 90 days or more past due
to
total loans................................................ 3.85 3.39 6.73 8.17 8.14
Allowance for loan losses to total loans..................... 1.42 2.10 2.35 2.74 1.58
Allowance for loan losses to non-accrual loans............... 37.05 61.79 34.95 33.53 20.38
Allowance for loan losses to non-performing loans............ 59.29 70.17 57.56 41.62 21.22
Net loan charge-offs to average loans........................ 0.00 1.06 0.65 1.63 0.43
</TABLE>
- ---------------
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Combined weighted average interest rate earned less combined weighted
average interest rate cost.
(4) Net interest income divided by average interest-earning assets.
(5) Non-interest expenses less loss on foreclosed real estate, divided by
average total assets.
(6) Total equity divided by assets at period end.
(7) Net interest income divided by non-interest expenses less loss on foreclosed
real estate.
(8) Non-performing assets consist of non-accrual loans, accruing loans 90 days
or more past due and property acquired in settlement of loans.
11
<PAGE> 18
GENERAL INFORMATION
GENERAL
This Proxy Statement-Prospectus is being furnished to stockholders of
Carver, in connection with the solicitation of proxies by the Board of Directors
of Carver to be used at the Annual Meeting to be held on July 29, 1996, at 9:00
a.m., at the Adam Clayton Powell State Office Building, 163 W. 125th Street,
Third Floor, New York, New York, and at any adjournment or postponement thereof.
HOLDERS OF CARVER COMMON STOCK ARE REQUESTED PROMPTLY TO SIGN, DATE AND
RETURN THE ACCOMPANYING PROXY CARD TO CARVER IN THE ENCLOSED POSTAGE-PAID,
ADDRESSED ENVELOPE. FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE
AT THE ANNUAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST PROPOSAL 3.
RECORD DATE AND VOTING
The Board of Directors of Carver has fixed the close of business on June
10, 1996 as the record date (the "Record Date") for the determination of the
holders of Carver Common Stock entitled to receive notice of and to vote at the
Annual Meeting. Only holders of record of Carver Common Stock at the close of
business on that date will be entitled to vote at the Annual Meeting and at any
adjournment or postponement thereof. At the close of business on the Record
Date, there were 2,314,375 shares of Carver Common Stock outstanding.
Each holder of shares of Carver Common Stock outstanding on the Record Date
will be entitled to one vote for each share held of record upon each matter
properly submitted at the Annual Meeting and at any adjournment or postponement
thereof. The presence, in person or by proxy, of the holders of at least a
majority of the total number of outstanding shares of Carver Common Stock
entitled to vote at the Annual Meeting is necessary to constitute a quorum at
the Annual Meeting. If a quorum is not obtained, or if fewer shares of Carver
Common Stock are voted in favor of either Proposal 2 or 3 than the number
required for approval, it is expected that the Annual Meeting will be postponed
or adjourned for the purpose of allowing additional time for obtaining
additional proxies or votes, and, at any subsequent reconvening of the Annual
Meeting, all proxies will be voted in the same manner as such proxies would have
been voted at the original convening of the Annual Meeting (except for any
proxies which have theretofore effectively been revoked or withdrawn).
If the enclosed proxy card is properly executed and received by Carver in
time to be voted at the Annual Meeting, the shares represented thereby will be
voted in accordance with the instructions marked thereon. EXECUTED PROXIES WITH
NO INSTRUCTIONS INDICATED THEREON WILL BE VOTED FOR EACH OF THE PROPOSALS SET
FORTH IN THE ACCOMPANYING NOTICE OF ANNUAL MEETING OF STOCKHOLDERS.
Management is not aware of any matters other than those set forth in the
Notice of Annual Meeting of Stockholders that may be brought before the Annual
Meeting. If any other matters properly come before the Annual Meeting,
including, among other things, a motion to adjourn or postpone the Annual
Meeting to another time or place or both for the purpose of soliciting
additional proxies or otherwise, the persons named in the accompanying proxy
will vote the shares represented by all properly executed proxies on such
matters in such manner as shall be determined by a majority of the Board of
Directors of Carver.
VOTES REQUIRED
A plurality of the votes cast is sufficient to elect directors. A majority
of the votes of the stockholders represented in person or by proxy and entitled
to vote at the Annual Meeting is sufficient to ratify the appointment of
Mitchell & Titus, LLP as independent auditors for the Bank. Approval of the Plan
of Reorganization requires the approval of a majority of the outstanding shares
of the Bank.
SHARES AS TO WHICH THE "ABSTAIN" BOX HAS BEEN SELECTED ON THE PROXY CARD
WITH RESPECT TO THE APPOINTMENT OF MITCHELL & TITUS, LLP AS INDEPENDENT AUDITORS
FOR THE BANK (PROPOSAL 2), WILL BE COUNTED AS PRESENT AND ENTITLED TO VOTE AND
WILL HAVE THE EFFECT OF A VOTE AGAINST THAT PROPOSAL. IN CONTRAST, SHARES
UNDERLYING BROKER NON-VOTES WILL NOT BE COUNTED AS PRESENT AND ENTITLED TO VOTE
AND WILL HAVE NO EFFECT ON THE VOTE WITH RESPECT TO PROPOSAL 2.
12
<PAGE> 19
THE REQUIRED VOTE OF CARVER STOCKHOLDERS ON THE PLAN OF REORGANIZATION
(PROPOSAL 3) IS BASED UPON THE NUMBER OF OUTSTANDING SHARES OF CARVER COMMON
STOCK, AND NOT THE NUMBER OF THOSE SHARES THAT ARE ACTUALLY VOTED. ACCORDINGLY,
THE FAILURE TO SUBMIT A PROXY CARD OR TO VOTE IN PERSON AT THE ANNUAL MEETING OR
THE ABSTENTION FROM VOTING BY A CARVER STOCKHOLDER WILL HAVE THE SAME EFFECT AS
A "NO" VOTE WITH RESPECT TO THIS PROPOSAL. BROKER NON-VOTES WILL NOT BE COUNTED
AS HAVING BEEN VOTED IN PERSON OR BY PROXY AT THE ANNUAL MEETING AND WILL HAVE
THE SAME EFFECT AS A "NO" VOTE WITH RESPECT TO PROPOSAL 3.
RIGHTS OF DISSENTING STOCKHOLDERS
Any stockholder of Carver has the right to demand payment from Carver of
the fair or appraised value of his shares of Carver Common Stock upon compliance
with Section 552.14 of the OTS Regulations. (See Appendix A for the full text of
the Plan of Reorganization and Appendix B for the full text of Section 552.14).
Any stockholder intending to enforce this right may not vote in favor of the
Plan of Reorganization and must file with Carver, before or at the Annual
Meeting (but before the stockholders' vote), written demand of payment for his
shares of Carver Common Stock if the Plan of Reorganization is approved. If the
Plan of Reorganization is approved by Carver's stockholders at the Annual
Meeting, each stockholder who has filed a written demand and has not voted in
favor of the Plan of Reorganization will be notified of the approval by Carver
within ten days of completion of the Reorganization. A stockholder may not
dissent as to less than all of the shares of Carver Common Stock beneficially
held of record by such stockholder. Upon filing such written demand, the
stockholder will cease to have the rights of a stockholder to receive dividends
or to vote, except for dividends or other distributions payable to, or a vote to
be taken by stockholders of record at a date on or prior to the effective date
of the Reorganization. Withdrawal of any written demand may be made at any time
within 60 days after the effective date of the Reorganization. Upon withdrawal
of such written demand, or if the Reorganization is not consummated, the
stockholder will have no right to receive payment for his shares of Carver
Common Stock but will instead be reinstated with all the rights of a
stockholder.
Within 60 days of the effective date of the Reorganization, a dissenting
stockholder must submit the certificates representing his shares of Carver
Common Stock to American Stock Transfer & Trust Co., the Bank's transfer agent,
which shall place a legend on such certificates indicating that a written demand
has been filed and shall thereafter return such certificates to the stockholder.
Within ten days after the effective date of the Reorganization, the Bank
shall give written notice of the effective date of the Reorganization and make a
written offer to all dissenting stockholders to pay a specified amount, which it
considers to be a fair amount, for the shares of Carver Common Stock. If within
60 days of the effective date of the Reorganization any dissenting stockholder
and Carver agree on the price to be paid for the stockholder's Carver Common
Stock, the agreed upon payment will be made within 90 days of the effective date
of the Reorganization upon the surrender of the certificates representing the
Carver Common Stock.
If Carver and any dissenting stockholder fail to agree on the price to be
paid within the specified period, then the dissenting stockholder may file a
petition with the OTS demanding a determination of the fair value of the shares.
If the required petition is not filed within the 60-day period, a dissenting
stockholder shall lose all dissenters' rights. It is possible that the exercise
by a stockholder of his or her rights under Section 552.14 may cause such person
to incur some personal expense.
In the event that stockholders, through the exercise of dissenters' rights,
would cause the Bank's total risk-based capital ratio to fall below 8.0%, or
would cause the Bank's tier 1 risk-based capital ratio to fall below 4.0% or
would cause the Bank's core capital ratio to fall below 3.0%, the Bank will not
complete the Reorganization without the further approval of the OTS.
REVOCABILITY OF PROXIES
The presence of a stockholder at the Annual Meeting will not automatically
revoke such stockholder's proxy. However, a stockholder may revoke a proxy at
any time prior to its exercise by (i) delivering to the Corporate Secretary of
Carver a written notice of revocation prior to the Annual Meeting, (ii)
delivering to the Corporate Secretary of Carver prior to the Annual Meeting a
duly executed proxy bearing a later date or
13
<PAGE> 20
(iii) attending the Annual Meeting, filing a written notice of revocation with
the secretary of the meeting, and voting in person.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
Carver and its subsidiaries may solicit proxies for the Annual Meeting from
Carver stockholders personally or by telephone or telegram without additional
remuneration therefor. Carver will also provide persons, firms, banks and
corporations holding shares in their names or in the names of nominees, which in
either case are beneficially owned by others, proxy material for transmittal to
such beneficial owners and will reimburse such record owners for their expenses
in doing so. Carver has retained Morrow & Co., Inc., a proxy soliciting firm, to
aid in the solicitation of proxies at a fee of $3,000 plus expenses. The cost of
solicitation of proxies for the Carver Annual Meeting, including the fees of
Morrow & Co., Inc., will be borne by Carver. A Carver stockholder may authorize
another person or persons to act for him as proxy by transmitting or authorizing
the transmission of a telegram, cablegram or other means of electronic
transmission to Morrow & Co., Inc., provided that any such telegram, cablegram
or other means of electronic transmission must either set forth or be submitted
with information (such as a prescribed identification code) from which it can be
determined that the telegram, cablegram or other electronic transmission was
authorized by the stockholder.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as to those persons
believed by management to be beneficial owners of more than 5% of the
outstanding shares of Carver Common Stock on April 30, 1996, except as otherwise
indicated. The beneficial owners of Carver Common Stock are not currently
subject to the stock ownership reporting requirements of the Exchange Act.
Accordingly, the most recent information available to the Bank regarding the
beneficial ownership of Carver Common Stock is set forth in the table below.
Other than those persons listed below, the Bank is not aware of any person or
group that beneficially owns more than 5% of the outstanding shares of Carver
Common Stock as of April 30, 1996.
<TABLE>
<CAPTION>
PERCENT OF
SHARES
NAME AND ADDRESS AMOUNT AND NATURE OF COMMON STOCK
TITLE OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OUTSTANDING(1)
- ------------------------- -------------------------------- ----------------------- ----------------
<S> <C> <C> <C>
Common Stock............. Carver Federal Savings Bank 182,132(2) 7.87%
Employee Stock Ownership Plan
Trust (the "ESOP Trust")
75 West 125th Street
New York, New York 10027
</TABLE>
- ---------------
(1) The total number of shares of Carver Common Stock outstanding on April 30,
1996 was 2,314,375 shares.
(2) The Administrative Committee established to administer the Carver Federal
Savings Bank Employee Stock Ownership Plan (the "ESOP") consists of the
members of the Board of Directors. The ESOP's assets are held in the ESOP
Trust, for which M. Moran Weston and David R. Jones serve as trustees (the
"ESOP Trustees"). The Administrative Committee instructs the ESOP Trustees
regarding the investment of funds contributed to the ESOP. Carver Common
Stock purchased by the ESOP Trust is held in a suspense account and
allocated to participants' accounts annually based on contributions made to
the ESOP by the Bank. Shares released from the suspense account are
allocated among participants in proportion to their compensation, as defined
in the ESOP, for the year the contributions are made up to the limits
permitted under the Internal Revenue Code of 1986 (the "Code"). The ESOP
Trustees must vote all allocated shares held in the ESOP Trust in accordance
with the instructions of participants. As of April 30, 1996, 31,389 shares
had been allocated, but not distributed, to participants. Under the ESOP,
unallocated shares or shares for which no voting instructions have been
received will be voted by the ESOP Trustees in the same proportion as
allocated shares with respect to which the ESOP Trustees receive
instructions. In the absence of any voting instructions with respect to
allocated shares, the Board
Notes continued on following page.
14
<PAGE> 21
of Directors, on behalf of the Bank, directs the voting of all shares of
unallocated stock, or in the absence of such directions from the Board of
Directors, the ESOP Trustees have sole discretion with respect to the voting
of such shares. Except as described above, Dr. Weston and Mr. Jones, as the
ESOP Trustees, have shared voting power and investment power over the shares
held in the ESOP Trust. Each member of the Board of Directors and each ESOP
Trustee disclaims beneficial ownership of the shares held in the ESOP.
STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth information as of April 30, 1996 as to
shares of Carver Common Stock beneficially owned by each director of the Bank,
each Named Executive Officer of the Bank identified in the Summary Compensation
Table appearing elsewhere herein and all directors and executive officers as a
group. Ownership information is based upon information furnished by the
respective individuals. For purposes of this table, an individual is considered
to "beneficially own" any securities (a) over which such individual exercises
sole or shared voting or investment power, or (b) of which such individual has
the right to acquire beneficial ownership, including the right to acquire
beneficial ownership by the exercise of stock options, within 60 days after
April 30, 1996. As used herein, "voting power" includes the power to vote, or
direct the voting of, such securities, and "investment power" includes the power
to dispose of, or direct the disposition of, such securities. Except as
otherwise indicated, each person and the group shown in the table has sole
voting and investment power with respect to the shares indicated.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT OF
BENEFICIAL COMMON STOCK
NAME TITLE OWNERSHIP OUTSTANDING(1)
- -------------------------------------- ------------------------------- ---------- --------------
<S> <C> <C> <C>
Thomas L. Clark, Jr.(2)............... President and Chief Executive 322 *
Officer, Director
David N. Dinkins...................... Director 2,700 *
Linda H. Dunham....................... Director 1,500 *
Richard T. Greene..................... Director 3,500 *
Herman Johnson(3)..................... Director 300 *
David R. Jones(4)..................... Chairman of the Board, Director 2,500 *
M. Moran Weston, Ph.D.(4)............. Vice Chairman of the Board, 1,500 *
Director
Biswarup Mukherjee(5)................. Executive Vice President and 3,512 *
Chief Financial Officer
All directors and executive officers
as a group (11 persons)(6)(7)....... 197,428 8.53%
</TABLE>
- ---------------
* Less than 1% of outstanding Carver Common Stock.
(1) Percentages with respect to each person or group of persons have been
calculated on the basis of 2,314,375 shares of Carver Common Stock, the
number of shares of Carver Common Stock outstanding as of April 30, 1996. No
officer or director has the right to acquire beneficial ownership of
additional shares of Carver Common Stock within 60 days after April 30,
1996.
(2) Includes 222 shares held by the trustee of the Carver Federal Savings Bank
401(k) Savings Plan in RSI Retirement Trust ("401(k) Plan") which are
allocable to the account of Mr. Clark.
(3) Includes 50 shares held jointly by spouse and son and 50 shares held
individually by spouse over which Mr. Johnson has shared voting power and
dispositive power.
(4) Does not include 182,132 shares held by the ESOP Trust for which Mr. Jones
and Dr. Weston serve as the ESOP Trustees. See Note 6.
(5) Includes 1,174 shares held by the trustee of the 401(k) Plan which are
allocable to the account of Mr. Mukherjee, and as to which he shares voting
and dispositive power, and 1,638 shares allocated to
Notes continued on following page.
15
<PAGE> 22
Mr. Mukherjee under the ESOP as to which he has sole voting power, but no
dispositive power, except in limited circumstances.
(6) Includes 3,081 shares held by the ESOP Trust that have been allocated as of
April 30, 1996 to the individual accounts of the executive officers under
the ESOP and as to which such executive officers have sole voting power, but
no dispositive power, except in limited circumstances. Also includes 28,308
shares held by the ESOP Trust and allocated to the individual accounts of
the other Bank employees, as to which Dr. Weston and Mr. Jones, as the ESOP
Trustees, have no voting and shared dispositive power, and 150,743
unallocated shares held by the ESOP Trust, as to which Dr. Weston and Mr.
Jones, as the ESOP Trustees, and the Board of Directors on behalf of the
Bank, share voting and dispositive power. Each member of the Board of
Directors and each ESOP Trustee disclaims beneficial ownership of the shares
held in the ESOP.
(7) Includes 100 shares over which the directors and executive officers share
voting and dispositive power, and 1,396 shares allocable to the individual
accounts of the executive officers under the 401(k) Plan and as to which
such executive officers have sole dispositive power and shared voting power
with Mr. Mukherjee and Margaret R. Lewis, as members of the Committee
established to administer the 401(k) Plan.
Notes continued on following page.
16
<PAGE> 23
PROPOSALS TO BE VOTED ON AT THE ANNUAL MEETING
------------------------
PROPOSAL 1
ELECTION OF DIRECTORS
------------------------
GENERAL
The Charter of the Bank provides that the Board of Directors shall be
divided into three classes, as nearly equal in number as possible. The directors
in each class serve for a term of three years, with one class elected each year.
In all cases, directors serve until their successors are elected and qualified.
The Carver Board currently consists of seven members. The Board of
Directors has nominated for election as directors David N. Dinkins and David R.
Jones to serve for three years and until their successors are elected and
qualified. On March 19, 1996, the Board of Directors of the Bank increased the
size of the Board of Directors from six to seven members and appointed Ms.
Dunham to fill the newly created vacancy. Ms. Dunham has been appointed to serve
as a director in the class with a term expiring in 1997. The Bylaws of the Bank
provide that if the Board of Directors expands its size by appointing an
additional director, such director must be put up for election at the next
annual meeting of stockholders. The Board of Directors appointed Ms. Dunham to
serve in the class of directors whose term expires in 1997. Therefore, she has
been nominated to serve for an initial one-year term as director, with a term
expiring in 1997.
Each nominee has consented to being named in the Proxy Statement-Prospectus
and to serve if elected. However, if any nominee is unable to serve, the shares
represented by all properly executed proxies which have not been revoked will be
voted for the election of such substitute as the Board of Directors may
recommend or the size of the Board of Directors may be reduced to eliminate the
vacancy. At this time, the Board knows of no reason why any nominee might be
unavailable to serve. Directors shall be elected by a plurality of the votes
cast at the Annual Meeting.
INFORMATION WITH RESPECT TO NOMINEES AND CONTINUING DIRECTORS
The following table sets forth certain information with respect to each
nominee for election as a director and each director whose term does not expire
at the Annual Meeting ("Continuing Director"). There are no arrangements or
understandings between the Bank and any director or nominee pursuant to which
such person was elected or nominated to be a director of the Bank. For
information with respect to security ownership of directors, see "General
Information -- Stock Ownership of Management."
<TABLE>
<CAPTION>
END OF DIRECTOR
NAME AGE(1) TERM POSITION HELD WITH THE BANK SINCE
- --------------------------------- ------ ------ --------------------------------- --------------
<S> <C> <C> <C> <C>
NOMINEES FOR A THREE-YEAR TERM
EXPIRING IN 1999
David N. Dinkins................. 69 1996 Director 1996
David R. Jones................... 48 1996 Chairman of the Board, Director 1989
NOMINEE FOR A ONE-YEAR TERM
EXPIRING IN 1997
Linda H. Dunham.................. 46 1996 Director 1996
CONTINUING DIRECTORS
Thomas L. Clark, Jr.............. 52 1998 President, Chief Executive
Officer
and Director 1995
Richard T. Greene................ 82 1997 Director 1968
Herman Johnson, CPA.............. 60 1998 Director 1981
M. Moran Weston, Ph.D............ 86 1997 Vice Chairman of the Board,
Director 1949
</TABLE>
- ---------------
(1) As of April 30, 1996.
17
<PAGE> 24
The principal occupation and business experience of each nominee for
election as director and each Continuing Director is set forth below.
NOMINEES FOR ELECTION AS DIRECTORS
DAVID N. DINKINS, the 106th Mayor of New York City, is Professor in the
Practice of Public Affairs at the Columbia University School of International
and Public Affairs and is a Senior Fellow at the Barnard-Columbia Center for
Urban Policy. He is a member of the Advisory Board of the Taubman Center for
State and Local Government at Harvard University's Kennedy School of Government
and of the Visiting Committee of the Robert J. Milano Graduate School of
Management and Urban Policy at the New School for Social Research. Mr. Dinkins
is also the host of "Dialogue with Dinkins," a twice-weekly public affairs radio
program on WLIB-AM. He serves on the boards of directors of the American Stock
Exchange, AMREP, New World Communications Group Inc., Transderm Laboratories
Corporation, Wertheim Schroder Investment Services and on the International
Advisory Board of Independent Newspaper Holdings. He is also on the board of
directors of the Aaron Diamond Foundation, the Andrew Goodman Foundation, the
Association to Benefit Children, the Federation of Protestant Welfare Agencies,
Friends of the Nelson Mandela Children's Fund, Goods for Guns, Hope for Infants,
the Howard Samuels Foundation, the Lenox Hill Neighborhood Association, the
March of Dimes, the New York State International Partnership Program and the New
York Junior Tennis League. He is a member of the Advisory Board of the
Children's Health Fund, Citizens for Service, Shared Interest, the South
African-American Organization, the Advisory Council of the Respect for Law
Alliance, the Board of Advisors of the Aristide Foundation for Democracy and the
Steering Committee of the Association for a Better New York. He is a member of
the Honorary Board of Directors of the Rowell Foster Children's Positive Plan,
an Honorary Life Trustee of the Community Service Society of New York and an
Honorary Trustee of the Friends of Harlem Hospital. He is a founding member of
the Black and Puerto Rican Legislative Caucus of New York State, the Council of
Black Elected Democrats of New York State, 100 Black Men and the Black Americans
in Support of Israel Committee. He is the first male member of the National
Women's Political Caucus and is the former Vice President of the United States
Conference of Mayors.
LINDA H. DUNHAM is Vice President of TCB Management Corporation, a
management company which oversees the McDonald's restaurants which she co-owns
and operates. Prior to joining TCB Management Corporation, Ms. Dunham was
employed by Chemical Bank for 16 years in various capacities. Ms. Dunham is also
Secretary of the Board of Directors of The Children's Oncology Society of New
York, the Vice Chair of the Board of Trustees of Community Service Society of
New York, a member of the Board of Directors of Aaron Davis Hall and a member of
the National Board of Directors of Ronald McDonald Children's Charities.
DAVID R. JONES is President and Chief Executive Officer of the Community
Service Society of New York ("CSS"). One of the nation's oldest and largest
nonprofit social welfare organizations, the 150-year-old agency uses direct
help, research, advocacy and litigation to alleviate the effects of poverty,
focusing on the areas of education, health delivery, income security and
affordable housing. Prior to joining CSS, Mr. Jones served for three years as
Executive Director of the New York City Youth Bureau and as Special Advisor to
Mayor Edward I. Koch. A member of the New York State and Federal Bars, he
previously worked for four years as a litigator at the law firm of Cravath,
Swaine & Moore. Earlier, he had been a clerk for federal Judge Constance Baker
Motley and one of the last interns for U.S. Senator Robert R. Kennedy. Mr. Jones
is currently on the boards of directors of the New York City Health and Hospital
Corporation, which runs 21 public hospitals and clinics, the Puerto Rican Legal
Defense and Education Fund, and the New York Foundation. A charter trustee of
Wesleyan University, he also serves on the advisory boards of the John F.
Kennedy School of Government and the Barnard-Columbia Center for Leadership on
Urban Public Policy, and as a trustee of the New York Historical Society. He is
the author of the "Urban Agenda" column which appears in the Amsterdam News and
ethnic papers throughout the nation and host of the CUNY-TV show of the same
name.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR
APPROVAL OF ALL OF THE NOMINEES FOR ELECTION AS DIRECTORS.
18
<PAGE> 25
CONTINUING DIRECTORS
THOMAS L. CLARK, JR., is currently President and Chief Executive Officer of
Carver, a position he assumed on February 1, 1995. Mr. Clark is also a member of
the Bank's Board of Directors. Prior to assuming his current position, Mr. Clark
was employed by the New York State Banking Department from 1976 until 1995 and,
from 1987 until 1995, served as Deputy Superintendent of Banks for New York
State and as secretary of the New York State Banking Board. From 1970 until
1976, Mr. Clark was employed by Buffalo Savings Bank in various capacities. Mr.
Clark is the founder and president of African-American Men of Westchester, Inc.
In addition, Mr. Clark was recently elected Vice Chairman of the American League
of Financial Institutions, the national trade association representing minority
savings institutions, serves as Vice Chairman of the Community Bankers
Association of New York State's Community Reinvestment Committee and is a member
of the Advisory Board of Small Business Development Centers of New York State.
HERMAN JOHNSON is currently self-employed as a certified public accountant
in Brooklyn, New York, and has been employed in such profession since 1962. Mr.
Johnson currently serves as Chairman of the Board of Trustees of Mt. Sinai
Baptist Church in Brooklyn and has been a Trustee since 1966. He formerly served
as a Trustee of the Interfaith Medical Center in Brooklyn from 1987 to 1991.
RICHARD T. GREENE is the immediate past President and Chief Executive
Officer of Carver, positions he had held since joining the Bank in 1960. Mr.
Greene currently serves on the boards of directors for the Harlem Urban
Development Corp., the New York City Housing Partnership and Thrift Association
Service Corporation. He also is a member of various community organizations,
including Harlem Business Alliance, President's Council, Museum of the City of
New York and One Hundred Black Men, Inc. Mr. Greene also served two terms as a
director of the Federal Home Loan Bank of New York from 1989 to 1990 and from
1991 to 1992.
M. MORAN WESTON, PH.D., is a founding Director of Carver and has served
continuously as a Director since 1948. He was President of Carver during 1968
and 1969, Chairman of the Board from 1980 to 1995 and has served as Vice
Chairman of the Board since 1995. He is Rector Emeritus of the St. Philip's
Episcopal Church and Canon-Emeritus of the Episcopal Cathedral of St. John the
Divine, both in New York City. In addition, Dr. Weston has served as a Trustee
of St. Augustine's College in Raleigh, North Carolina and of Mt. Sinai Medical
Center and Hospital since 1971. He is Trustee Emeritus of Columbia University
and Professor Emeritus of Social History of the State University of New York,
and has been awarded honorary doctorate degrees by Fordham University, Columbia
University and the Virginia Theological Seminary. He is also a member of various
community organizations, including Weston United Community Renewal, the National
Association of Affordable Housing, the NAACP Legal Defense Fund and six
nonprofit housing companies providing approximately 1,000 units of housing. He
was Trustee of the Foreign Policy Association for nine years, a Director of the
New York City Chapter of the American Red Cross for nine years, and a founding
President of the Greater Harlem Nursing Home, the Greater Harlem Community
Service Council, the Upper Manhattan Day Care Center and a residential service
facility for mentally handicapped persons.
BOARD AND COMMITTEE MEETINGS
The Board of Directors of the Bank holds regular monthly meetings and holds
special meetings as needed. During the year ended March 31, 1996, the Board met
17 times. No director attended fewer than 75% in the aggregate of the total
number of Board meetings held while he was a member during the year ended March
31, 1996 and the total number of meetings held by committees on which he served
during such fiscal year. The Board of Directors of the Bank has standing Audit,
Executive and Compensation Committees and an Investment, Asset, Liability and
Interest Rate Risk Committee, the nature and composition of which are described
below.
Audit Committee. The Audit Committee consists of Directors Herman Johnson
(Chairman), David R. Jones and Richard T. Greene. This committee meets at least
once annually to review and approve the independent audit report. This committee
met 12 times during fiscal year 1996.
Executive Committee. The Executive Committee is authorized to act as
appropriate between meetings of the Board of Directors. Members of this
committee are Directors Thomas L. Clark, Jr. (Chairman),
19
<PAGE> 26
Richard T. Greene, David R. Jones and Herman Johnson. This committee met 12
times during fiscal year 1996.
Compensation Committee. The Compensation Committee consists of Directors
M. Moran Weston (Chairman), David R. Jones and Richard T. Greene. This committee
meets at least annually to evaluate the performance of the executive officers
and to establish compensation for those individuals. This committee met 1 time
during fiscal year 1996.
Investment, Asset, Liability and Interest Rate Risk Committee. The
Investment, Asset, Liability and Interest Rate Risk Committee consists of
Directors Herman Johnson (Chairman), David R. Jones, Richard T. Greene, Thomas
L. Clark, Jr. and M. Moran Weston. This committee meets at least quarterly to
evaluate and approve asset classifications and reserves for losses.
Classifications recommended by this committee are reviewed and ratified by the
Board of Directors. This committee held 5 meetings during fiscal year 1996.
The Board of Directors, acting as nominating committee, met in March, 1996
to select the nominees for election as directors at the Annual Meeting. In
accordance with the Bylaws of the Bank, no nominations for election as
directors, except those made by the Board acting as nominating committee, shall
be voted upon at the Annual Meeting unless properly made by a stockholder. No
nominations for directors have been received from stockholders for the elections
to be held at the Annual Meeting as of the date of this Proxy Statement-
Prospectus. To be timely, notice of a stockholder's nomination for an annual
meeting must be delivered to the Secretary of the Bank no later than 5 days
prior to the Annual Meeting.
DIRECTORS' COMPENSATION
Directors' Fees. Effective as of October 1995, the Bank's directors, other
than Mr. Clark, receive fees ranging from $600 to $850 per Board meeting
attended; the Chairman and Vice Chairman receive a fee of $850 per meeting. In
addition, the Chairman and Vice Chairman of the Board each receive a quarterly
retainer fee of $1,000. Fees for executive committee meetings are $700 per
meeting and $475 for all other committee meetings. Mr. Clark does not receive
fees for his attendance at meetings of the Board or its committees. During
fiscal year 1996, the Bank's directors' fees totaled $115,025.
Director Retirement Plan. In connection with the mutual to stock
conversion of the Bank (the "Conversion"), the Bank's Board of Directors adopted
the Carver Federal Savings Bank Retirement Plan for Nonemployee Directors (the
"Directors' Plan"), for directors (i) who are members of the Bank's Board of
Directors, and (ii) who are not employees. A participant in the Directors' Plan
will receive, on each of the ten annual anniversary dates of his or her
retirement, an amount equal to the product of his or her "Vested Percentage" and
the fees he or she received for service on the Board during the calendar year
preceding his or her retirement. A participant's "Vested Percentage" is based on
his or her overall years of service on the Board of Directors of the Bank, and
increases from 0% for less than six years of service, to 33% for between six and
ten years of service, to 67% for between eleven and nineteen years of service
and to 100% for more than twenty years of service. However, in the event a
participant terminates service on the Board due to "disability" (as such term is
defined in the Directors' Plan), the participant's Vested Percentage becomes
100% regardless of his or her years of service. In the event of a director's
death, the director's Vested Percentage becomes 100%, and a survivor benefit
equal to 50% of the annual amount which would have been payable to the director
had he or she survived will be paid to his or her surviving spouse. The Bank
will pay such benefits from its general assets, and expects to establish a trust
in order to hold assets with which to pay benefits. Trust assets will be subject
to the claims of the Bank's general creditors.
Option Plan. The Bank maintains the Carver Federal Savings Bank 1995 Stock
Option Plan (the "Option Plan") for the benefit of its directors and certain key
employees. Under the Option Plan, each outside director who was a director on
the effective date of the Option Plan was granted options to purchase 6,943
shares of Carver Common Stock, except that Directors Richard T. Greene and M.
Moran Weston each were granted non-statutory stock options to purchase 10,415
shares of Carver Common Stock. Such options were granted on September 12, 1995
at an exercise price of $10.38 per share. Any individual who becomes an outside
director following the effective date of the Option Plan will be granted options
to purchase 1,000 shares of Carver Common Stock with an exercise price equal to
the fair market value of Carver Common Stock on the date of the grant. The
Option Plan also provides for automatic option grants to certain
20
<PAGE> 27
employees as of the effective date of the Option Plan, including Mr. Clark and
Mr. Mukherjee, who were granted 34,715 and 13,886 Shares of Carver Common Stock,
respectively, on September 12, 1995 at an exercise price of $10.38 per share. In
addition, the Option Plan provides for additional discretionary option grants to
those employees selected by the committee established to administer the Option
Plan with an exercise price equal to the fair market value of Carver Common
Stock on the date of the grant. Options granted under the Option Plan vest in
five equal annual installments commencing on the first anniversary of the
effective date of the grant, provided the recipient is still a director or
employee of the Bank on such date. Upon death or disability, all options
previously granted automatically become exercisable.
Management Recognition Plan. The Bank maintains the Carver Federal Savings
Bank Management Recognition Plan (the "MRP") for the benefit of its directors
and certain key employees. Under the MRP, each outside director who was a
director on the effective date of the MRP received an automatic grant of 3,471
shares of restricted stock, except that Directors Richard T. Greene and M. Moran
Weston each received 5,207 shares of restricted stock. Any individual who
becomes an outside director following the effective date of the MRP will be
granted 1,000 shares of restricted stock. The MRP also provides for automatic
grants of restricted stock to certain employees as of the effective date of the
MRP, including Mr. Clark and Mr. Mukherjee who received 17,357 and 10,415 shares
of restricted stock, respectively. 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 vest in five equal annual
installments commencing on the first anniversary date of the award, provided the
recipient is still a director or employee of the Bank on such date. Awards will
be 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.
Supplemental Executive Retirement Agreement. In order to secure and reward
the services of Richard T. Greene (the "SERA Participant"), the President and
Chief Executive Officer of the Bank at the time, the Board of Directors of the
Bank entered into a supplemental executive retirement agreement (the "SERA"),
effective January 30, 1995. The Bank expects to establish an irrevocable grantor
trust to hold assets to provide itself with a source of funds to assist the Bank
in the meeting of its liabilities under the SERA.
Pursuant to the terms of the SERA, upon the SERA Participant's termination
of employment with the Bank effective February 1, 1995, he became entitled to
receive annual payments from the Bank in an amount equal to (i) 50% of his
"Average Annual Compensation," less (ii) his "Annual Offset Amount." Under the
SERA, "Average Annual Compensation" means the average of the SERA Participant's
highest annual compensation for three of the five calendar years preceding his
termination of employment, and "Annual Offset Amount" means the sum of the SERA
Participant's primary social security benefits and the benefits which the SERA
Participant is entitled to receive in the form of an annuity under the Pension
Plan or the 401(k) Savings Plan (but only to the extent attributable to Bank
matching contributions) upon his termination of employment. Such annual payments
shall be made for 10 years, except that in the event of the SERA Participant's
death, a 50% death benefit will be payable to his surviving spouse, if any.
Deferred Compensation Plan. The Bank's Board of Directors has established
the Carver Federal Savings Bank Deferred Compensation Plan (the "Deferred
Compensation Plan"), effective August 10, 1993, for the exclusive benefit of
members of the Bank's Board of Directors, the Bank's President and Executive
Vice President and other employees as the Bank's Board of Directors may select,
in its discretion. Pursuant to the terms of the Deferred Compensation Plan,
directors may elect to defer the receipt of all or part of their future fees,
and eligible employees may elect to defer receipt of up to 25% of their future
compensation. Deferred amounts will be credited to a bookkeeping account in the
participant's name, which will also be credited quarterly with the investment
return which would have resulted if such deferred amounts had been invested,
based upon the participant's choice, in Carver Common Stock or at the Bank's
highest annual rate of interest on certificates of deposit, regardless of their
term. Changes in participant elections generally become effective only as of the
following January 1st, except that elections designating a beneficiary or
ceasing future contributions will be given immediate effect.
21
<PAGE> 28
A participant may elect to have the amounts deferred and any related
accumulated earnings thereon distributed beginning during the first 15 days of
January of either the calendar year immediately following termination of
employment, a specific date following employment not later than the year in
which the participant will attain 80 years of age or the year in which the
participant attains 80 years of age. At the election of the participants,
distributions will either be in a lump sum or monthly over a period of not more
than 10 years. Participants may change elections as to the timing or form of
distributions only with respect to subsequently deferred compensation. Effective
as of July 1, 1995, the deferral of fees and compensation by directors and
eligible employees under the Deferred Compensation Plan will be governed by the
Carver Federal Savings Bank Incentive Compensation Plan (the "Incentive
Compensation Plan").
Incentive Compensation Plan. Under the Incentive Compensation Plan,
effective as of September 12, 1995, directors and eligible employees may elect
to defer the receipt of all or part of their future fees and/or compensation.
Pursuant to the terms of the Incentive Compensation Plan, any deferred amounts
will be credited to a bookkeeping account in accordance with the terms of the
deferred compensation agreement ("Deferred Compensation Agreement") entered into
with the individual director or employee. Such accounts will be adjusted
annually to reflect the investment return which would have resulted if such
deferred amounts had been invested, based on the participant's choice, in one of
the following: (i) Carver Common Stock; (ii) the Bank's highest annual rate of
interest on 12-month certificates of deposit; or (iii) the "Multiplier," which
generally is the sum of certain indicators with respect to the Bank's
performance, times two percent. A participant will receive distributions of
deferred amounts in accordance with the terms of their respective Deferred
Compensation Agreements. A participant may change the investment selection
applicable to his or her account or elections as to the timing and form of
distributions from such account only with respect to subsequently deferred fees
or compensation.
In addition to providing for deferred compensation for directors and
eligible employees, the Incentive Compensation Plan provides incentive
compensation to certain eligible employees, including Mr. Clark and Mr.
Mukherjee, in the form of bonuses, stock options and restricted stock.
EXECUTIVE COMPENSATION
Compensation Committee Report
The Compensation Committee of the Bank (the "Compensation Committee") is
responsible for establishing the policies which govern employee annual
compensation and stock ownership programs. The Compensation Committee annually
reviews and makes recommendations to the Board of Directors regarding the
compensation of the Bank's executive officers, including the compensation of Mr.
Clark, the President and Chief Executive Officer ("CEO") of the Bank. The
overall compensation structure of the Bank is aimed at establishing a total
compensation package that both rewards strong individual and Bank performance
and remains competitive with compensation levels at similar institutions.
For the 1996 fiscal year, base salaries were set at levels determined, in
the subjective judgment of the Compensation Committee, to be commensurate with
the respective executive officers' customary duties and responsibilities.
Benefit plans, consisting of a pension plan, 401(k) Plan, ESOP and group
insurance coverages, are designed to provide for the health and welfare of all
employees, including the executives, and their families, as well as for their
long-term financial and retirement needs.
When determining salary levels, the Compensation Committee also took into
account the addition of the Option Plan, the MRP and the Incentive Compensation
Plan that were adopted in connection with the Bank's initial public offering.
The Compensation Committee concluded that, considering the then prevailing
salary levels and the addition of longer-term performance incentives using
options and restricted stock, the Bank's compensation program constituted a
total compensation package that was competitive with that of comparable
institutions. The Compensation Committee reviews and updates the Bank's
compensation program on an ongoing basis in order to continue to offer a total
compensation package that provides incentive for strong individual and Bank
performance and is competitive with comparable banking institutions.
Incentive Compensation. The Incentive Compensation Plan provides for
incentive compensation in the form of cash bonuses, stock options and restricted
stock based upon the annual performance of the Bank in
22
<PAGE> 29
comparison to its pre-established goals and, in the case of certain executive
officers, the individual performance of the executive officer. Discretionary
bonuses for fiscal 1996, when granted, will be determined in the subjective
judgment of the committee established to administer the Incentive Compensation
Plan, with the intention of rewarding effort, performance and results at levels
above and beyond those assumed in establishing base salary rates. The
Compensation Committee believes that incentive compensation should be an
integral component of the Bank's total compensation package.
Stock Ownership Programs. The Compensation Committee believes that
providing executive officers with significant stock ownership and stock options
aligns the interests of executive officers with the interests of stockholders.
In this regard, the Bank adopted the ESOP, the Option Plan and the MRP in
connection with its initial public offering in 1994. Mr. Clark will not be
eligible to participate in the ESOP until July 1, 1996. Each of the other
executive officers has an individual account under the ESOP which is invested
primarily, if not exclusively in employer securities, with the result that a
portion of each executive officer's long-term retirement savings is tied to the
performance of the Bank.
Following the adoption of the Option Plan, the Bank granted stock options
to provide employees, including the executive officers, with an incentive for
future performance through their equity interests in the Bank. The size of the
grants was based in part on practices of other similar institutions and in part
on the executive officer's performance and position in the organization. Since
these grants, no further stock options have been granted to the Bank's executive
officers under the Option Plan. The MRP is designed to encourage valued
executive officers to remain with the Bank by giving them the potential of
earning increased equity interests through additional service. Following the
adoption of the MRP, the Company made awards under the MRP to certain employees
including Messrs. Clark, Mukherjee, Dabney and Bruce and to Ms. Lewis. Since
these awards, no further shares under the MRP have been awarded to the Bank's
executive officers.
Chief Executive Officer. The Compensation Committee reviewed the
performance of Mr. Clark as CEO of the Bank over the past year. The Committee
concluded that his performance was outstanding, in terms of achieving the Bank's
goals and objectives as set forth in the Bank's strategic operating plan,
building a solid and talented management team and managing the Bank's growth
since the successful initial public offering of the Bank. Mr. Clark also
actively participated in a variety of outside organizations and causes which
served to benefit the Bank and the banking industry. These factors were used to
determine Mr. Clark's salary, options and MRP awards.
COMPENSATION COMMITTEE
M. Moran Weston, Chairman
David R. Jones
Richard T. Greene
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
One of the responsibilities of the Compensation Committee is to determine
the level of compensation for executive officers of the Bank. Mr. Greene, who
served as President and Chief Executive Officer of the Bank until January 31,
1995, is a member of the Compensation Committee. There are no other interlocks,
as defined under the SEC's rules, between the Compensation Committee and
corporate affiliates of members of the Compensation Committee or otherwise.
23
<PAGE> 30
PERFORMANCE GRAPH
In accordance with the regulations of the SEC, set forth below is a line
graph comparing the cumulative total return of Carver Common Stock with that of
the Nasdaq Stock Market and the SNL Thrift Index for the period from October 25,
1994, the date that the Bank became a public company, through March 29, 1996.
The graph is based on an investment of $100.00 on October 25, 1994 at the
initial public offering price of $10.00 and assumes the reinvestment of
dividends in additional shares of the same class of equity securities as those
below.
CARVER FEDERAL SAVINGS BANK
STOCK PRICE PERFORMANCE
<TABLE>
<CAPTION>
CARVER FED-
MEASUREMENT PERIOD ERAL SAVINGS NASDAQ TOTAL SNL THRIFT
(FISCAL YEAR COVERED) BANK RETURN INDEX
<S> <C> <C> <C>
10/25/94 100.00 100.00 100.00
12/30/94 62.50 97.27 94.24
06/30/95 78.13 121.29 120.91
12/29/95 90.00 137.57 147.01
03/29/96 87.50 143.98 149.32
</TABLE>
THERE CAN BE NO ASSURANCE THAT STOCK PERFORMANCE WILL CONTINUE INTO THE FUTURE
WITH THE SAME OR SIMILAR TRENDS DEPICTED IN THE GRAPH ABOVE.
24
<PAGE> 31
SUMMARY COMPENSATION TABLE
The following table sets forth cash and noncash compensation for the fiscal
years ended March 31, 1996, 1995 and 1994 awarded to or earned by the Bank's
Chief Executive Officer and by each other executive officer whose compensation
exceeded $100,000 for services rendered in all capacities to the Bank during the
fiscal year ended March 31, 1996 ("Named Executive Officers"). No officers,
other than Mr. Clark and Mr. Mukherjee, received total compensation in excess of
$100,000 in fiscal 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ----------------------- -------
-------------------------------------
(E) (F) (H) (I)
(A) (C) (D) OTHER ANNUAL RESTRICTED (G) LTIP ALL OTHER
NAME AND PRINCIPAL (B) SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS PAYOUTS COMPENSATION
POSITIONS YEAR ($) ($)(1) ($)(2) ($)(1) (#)(1) ($) ($)
- --------------------------------- ---- ------- ----- ------------ ------------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas L. Clark.................. 1996 165,000 -- -- 186,588 34,715 -- 1,103(4)
President and Chief 1995 27,288 -- -- -- -- -- --
Executive Officer(3) 1994 -- -- -- -- -- -- --
Biswarup Mukherjee............... 1996 115,000 -- -- 111,961 13,886 -- 5,417(5)
Executive Vice President and 1995 103,903 -- -- -- -- -- 4,784
Chief Financial Officer 1994 94,425 1,722 -- -- -- -- 4,620
</TABLE>
- ---------------
(1) As of April 30, 1996, the committee established to administer the Incentive
Compensation Plan has not determined the amount, if any, of cash bonuses,
stock options and restricted stock to be awarded to Mr. Clark and Mr.
Mukherjee under such plan.
(2) Does not include perquisites and other personal benefits the value of which
did not exceed the lesser of $50,000 or 10% of salary and bonus.
(3) The compensation earned by Mr. Clark for his services for fiscal year ended
March 31, 1995 reflects his appointment to the position of President and
Chief Executive Officer of the Bank on February 1, 1995.
(4) Includes $95.00 in matching contributions allocated to Mr. Clark's account
under the Bank's 401(k) Plan for the fiscal year ended March 31, 1996.
(5) Includes $2,897, $4,784 and $4,620 in matching contributions allocated to
Mr. Mukherjee's account under the Bank's 401(k) Plan for the fiscal years
ended March 31, 1996, 1995 and 1994, respectively.
CERTAIN EMPLOYEE BENEFIT PLANS AND EMPLOYMENT AGREEMENTS
Employment Agreements. The Bank has entered into employment agreements (the
"Employment Agreements") with Mr. Clark in his capacity as President and Chief
Executive Officer and Mr. Mukherjee in his capacity as Executive Vice President
and Chief Financial Officer (the "Executives").
The Employment Agreement with Mr. Clark became effective on January 3, 1995
and provides for a term of three years, with an annual base salary equal to
$165,000. The Employment Agreement with Mr. Mukherjee became effective on April
14, 1995 and also provides for a term of three years, with an annual base salary
of $100,000. On each anniversary date from the date of commencement of the
Employment Agreements, the term of employment will be extended for an additional
one-year period beyond the then effective expiration date so that the remaining
term shall be three years, upon a determination by the Board of Directors that
the performance of the Executive has met the required performance standards and
that such Employment Agreement should be extended. The Employment Agreements
provide the Executives with a salary review by the Board of Directors not less
often than annually, as well as with inclusion in any discretionary bonus plans,
retirement and medical plans, customary fringe benefits and vacation and sick
leave. The Employment Agreements will terminate upon each Executive's death or
disability (as defined in the Employment Agreements), and are terminable by the
Bank in each case for "just cause" (as defined in the Employment Agreements). In
the event of termination for just cause, no severance benefits are available. If
the Bank terminates one of the Executives without just cause, the Executive will
be entitled to severance
25
<PAGE> 32
benefits equal to his salary from the date of termination through the remaining
term of the Employment Agreement (but in no event less than a 12 month period in
the case of Mr. Mukherjee), and the cost to the Executive of obtaining all
health, life, disability and other benefits which the Executive would have been
eligible to participate in through the remaining term of the Employment
Agreement, based upon benefit levels substantially equal to those that the Bank
provided for the Executive at the date of termination of employment. If the
Employment Agreements are terminated due to an Executive's disability, the
Executive will be entitled to compensation and benefits for (i) any period
during the term of the Employment Agreement and prior to the establishment of
the Executive's disability during which the Executive is unable to work due to
the physical or mental infirmity, or (ii) any period of disability which is
prior to the Executive's termination of employment. In the event of an
Executive's death during the term of his Employment Agreement, his estate will
be entitled to receive his salary through the last day of the calendar month in
which his death occurred. Severance benefits payable to the Executive or to his
estate will be paid in a lump sum or in installments, as he (or his estate)
elects. The Executives are able to voluntarily terminate their Employment
Agreements by providing 60 days' written notice to the Board of Directors of the
Bank, in which case the Executives are entitled to receive only their
compensation, vested rights and benefits up to the date of termination.
Each of the Employment Agreements contains provisions stating that in the
event of the Executive's involuntary termination of employment in connection
with, or within one year after, any "change in control" of the Bank (as defined
in the Employment Agreements), other than for "just cause," the Executive will
be paid within 10 days of such termination an amount equal to the difference
between (i) 2.99 times his "base amount," as defined in Section 280G(b)(3) of
the Code, and (ii) the sum of any other parachute payments, as defined under
Section 280G(b)(2) of the Code, that the Executive receives on account of the
change in control. An Executive's "base amount" is generally the average of the
Executive's annual taxable compensation from the Bank for each of the most
recent five taxable years ending before the date on which a change of control
occurs. A "change in control" generally refers to the acquisition, by any person
or entity, of the ownership of or power to vote more than 25% of the Bank's
voting stock, the control of the election of a majority of the Bank's directors,
or the exercise of a controlling influence over the management or policies of
the Bank. In addition, under the Employment Agreements, a change in control
occurs when, during any consecutive two-year period, directors of the Bank at
the beginning of such period cease to constitute two-thirds of the Board of
Directors of the Bank unless the election of replacement directors was approved
by a two-thirds vote of the initial directors then in office. The Employment
Agreements provide that within five business days of a change in control, the
Bank shall fund, or cause to be funded, a trust in the amount of 2.99 times the
Executive's base amount, that will be used to pay the Executive amounts owed to
him upon termination other than for just cause within one year of the change in
control. The amount to be paid to the Executive from this trust upon his
termination is determined according to the procedures outlined in the Employment
Agreement with the Bank, and any money not paid to the Executive is returned to
the Bank.
The Employment Agreements also provide for a similar lump sum payment to be
made in the event of the Executive's voluntary termination of employment within
one year following a change in control, upon the occurrence, or within 90 days
thereafter, of certain specified events following the change in control which
have not been consented to in writing by the Executive, including (i) the
requirement that the Executive perform his principal executive functions more
than 35 miles from the Bank's current primary office, (ii) a material reduction
in the Executive's base compensation as then in effect, (iii) the failure of the
Bank to continue to provide the Executive with compensation and benefits
provided for under the Employment Agreement or with substantially similar
benefits, (iv) the assignment to the Executive of duties and responsibilities
that are materially different from those normally associated with his position
with the Bank, (v) a material reduction in the Executive's authority and
responsibility, and (vi), in the case of Mr. Clark, a failure to re-elect the
Executive to the Bank's Board of Directors. In the event that the Executives
prevail over the Bank in a legal dispute as to the Employment Agreements, they
will be reimbursed for their legal and other expenses.
Pension Plan. The Bank maintains a non-contributory, tax-qualified defined
benefit plan (the "Pension Plan"). As required, the Bank annually contributes an
amount to the Pension Plan necessary to satisfy the
26
<PAGE> 33
actuarially determined minimum funding requirements in accordance with the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Employees who are 18 years of age or older and who have completed one year
of service with the Bank are eligible to participate in the Pension Plan.
Participants become 100% vested after five years of service, death, or
termination of the Pension Plan, regardless of the participant's years of
service. The Pension Plan also provides for early retirement benefits, on an
actuarially reduced basis, at the election of a participant who terminates
employment after age 55.
Under the Pension Plan, each participant is entitled to a retirement
benefit equal to the greater of (a) the product of 50% of final earnings (as
defined in the Pension Plan) reduced by 50% of the social security amount (as
defined in the Pension Plan) times the ratio of number of years of credited
service (as defined in the Pension Plan) up to a maximum of 15, over 15 if the
participant's employment ceased at or after the normal retirement age (as
defined in the Pension Plan) or multiplied by the ratio of the number of years
of credited service divided by the greatest of (i) 15 and (ii) the number of
years of credited service he or she would have had on his or her normal
retirement date, if the participant's employment ceased prior to the normal
retirement age (as defined in the Pension Plan), or (b) $25 multiplied by the
number of the participants' months of credited service.
The following table sets forth the estimated annual benefits that would be
payable under the Pension Plan in the form of a single life annuity before
reduction for the social security amount upon retirement at the normal
retirement date. The amounts are expressed at various levels of compensation and
years of service.
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
------------------------------------------------------------
FINAL EARNINGS 15 20 25 30 35
---------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$100,000.................... $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
150,000.................... 75,000 75,000 75,000 75,000 75,000
200,000(1)................. 100,000 100,000 100,000 100,000 100,000
</TABLE>
- ---------------
(1) Under Section 401(a)(17) of the Code, a participant's compensation in excess
of $150,000 (as adjusted to reflect cost-of-living increases) is disregarded
for purposes of determining final earnings.
Final earnings equal the average of the participant's highest three
consecutive calendar years of taxable compensation during the last 10 full
calendar years of employment prior to termination, or the average of the
Participant's annual compensation over his or her total service, if less.
The following table sets forth the years of credited service and the final
earnings determined as of March 31, 1996 for each of the individuals named in
the Summary Compensation Table.
<TABLE>
<CAPTION>
YEARS OF CREDITED
SERVICE
------------------------
NAME YEARS MONTHS FINAL EARNINGS
-------------------------------------- ----- ------ --------------
<S> <C> <C> <C>
Thomas J. Clark, Jr. ................. 1 2 $165,039
Biswarup Mukherjee.................... 9 4 $ 92,837
</TABLE>
Option Plans. The following table discloses for the CEO and the Named
Executive Officers, the gain or "spread" that would be realized if the stock
options granted to such individuals were exercised when the
27
<PAGE> 34
Bank's stock price had appreciated by the percentage rates indicated from the
closing market price on the date of the grant.
OPTION/SAR GRANTS IN FISCAL YEAR 1993
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
----------------------------- REALIZABLE VALUE AT
PERCENT OF ASSUMED ANNUAL RATE
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS/SARS EMPLOYEES IN EXERCISE OR -------------------
GRANTED FISCAL YEAR BASE PRICE EXPIRATION 5% 10%
NAME (#) (%) ($ PER SHARE) DATE ($) ($)
- -------------------------- ------------ ------------ ------------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Thomas L. Clark, Jr. ..... 34,715 36% 10.38 9/11/05 226,689 574,186
Biswarup Mukherjee........ 13,886 14.4% 10.38 9/11/05 90,676 229,674
</TABLE>
The following table provides certain information with respect to the number
of shares of Carver Common Stock acquired through the exercise of, or
represented by, outstanding stock options held by the Named Executive Officers
on March 31, 1996. Also reported is the value for any "in-the-money" options,
which represent the positive spread between the exercise price of any such
existing stock options and the fiscal year-end price of Carver Common Stock,
which was $8.75 per share.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT FISCAL IN-THE-MONEY OPTIONS/SARS
YEAR-END AT FISCAL YEAR-END(2)
(#) ($)
NAME(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------------------- ------------------------- -------------------------
<S> <C> <C>
Thomas L. Clark, Jr. ............................ 0/34,715 --/--
Biswarup Mukherjee............................... 0/13,886 --/--
</TABLE>
- ---------------
(1) Neither of the Named Executive Officers exercised options during the fiscal
year ended March 31, 1996.
(2) None of the outstanding stock options held by the Named Executive Officers
are "in-the-money" options.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
Under current law, Carver offers loans to its directors, officers and
employees, which loans are made in the ordinary course of business, on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and do not
involve more than the normal risk of collectibility or present other unfavorable
features. Furthermore, loans above the greater of $25,000 or 5% of the Bank's
capital and surplus (up to $500,000) to the Bank's directors and executive
officers must be approved in advance by a disinterested majority of the Bank's
Board of Directors. Under prior law, however, Carver had a policy of offering
loans to directors, officers, employees and their immediate family members
residing at the same address on terms substantially equivalent to those offered
to the public, except the interest rates on loans were reduced so long as the
director, officer or employee remained at the Bank.
The following table sets forth information at March 31, 1996 relating to
loans made to directors and executive officers of the Bank whose terms included
reduced interest rates or other preferential terms and whose total aggregate
balances exceeded $60,000 at any time since April 1, 1995.
<TABLE>
<CAPTION>
HIGHEST
BALANCE
BALANCE AT SINCE
TYPE OF DATE ORIGINAL INTEREST MARCH 31, APRIL 1,
NAME AND RELATION TO BANK LOAN ORIGINATED AMOUNT RATE 1996 1995
- -------------------------- --------- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Biswarup Mukherjee........ Mortgage 9/13/88 $160,000 8.25% $ 127,485 $133,087
Executive Vice President
and Chief Financial
Officer
Herman Johnson............ Mortgage 10/18/89 $150,000 8.50 $ 126,831 $131,085
Director
</TABLE>
28
<PAGE> 35
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Under the federal securities laws, the Bank's directors, executive
officers, and any person holding more than ten percent of the Bank's Common
Stock are required to file initial reports of ownership of the Bank's Common
Stock and reports of changes in that ownership to the OTS and the National
Association of Securities Dealers, Inc. Specific due dates for these reports
have been established and the Bank is required to disclose in this Proxy
Statement any failure to file by these dates during the fiscal year ended March
31, 1996. All of these requirements were satisfied during the fiscal year ended
March 31, 1996, except that: (i) Mr. Clark, Mr. Greene, Mr. Johnson, Mr. Jones,
Dr. Weston, Mr. Mukherjee, Mr. Dabney and Ms. Lewis did not timely file reports
relating to grants of stock options under the Option Plan; (ii) Mr. Johnson did
not disclose purchases of Carver Common Stock by members of his immediate family
in his initial report following the public offering of Carver Common Stock, and
(iii) Ms. Dunham and Mr. Bruce did not timely file initial reports upon becoming
a director and executive officer, respectively. These situations were
subsequently corrected. In making these disclosures, the Company has relied on
written representations of its directors and executive officers and copies of
the reports that they have filed with the OTS.
------------------------
PROPOSAL 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
------------------------
The Board of Directors has appointed the firm of Mitchell & Titus, LLP as
independent auditors for the Bank for the fiscal year ending March 31, 1997,
subject to ratification of such appointment by the stockholders. Representatives
of Mitchell & Titus, LLP are expected to be present at the Annual Meeting. They
will have an opportunity to make a statement if they desire to do so, and will
be available to respond to questions.
On November 21, 1995, the Board of Directors determined to replace Radics &
Co., LLC (formerly Stephen P. Radics & Co.), the Bank's independent auditors for
the 1995 fiscal year with the firm of Mitchell & Titus, LLP, who were engaged on
November 21, 1995. The Bank's business relationship with Radics & Co., LLC had
always been good, and none of the reports of Radics & Co., LLC on the financial
statements of the Bank for either of the past two fiscal years contained an
adverse opinion or a disclaimer of opinion or was qualified or modified as to
uncertainty, audit scope or accounting principles. During the Bank's two most
recent fiscal years, there was no disagreement with Radics & Co., LLC on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Radics & Co., LLC, would have caused it to make reference to the
subject matter of the disagreement in connection with its reports.
During the Bank's two most recent fiscal years, neither the Bank nor anyone
on its behalf consulted Mitchell & Titus, LLP regarding the application of
accounting principles to a specific completed or contemplated transaction or the
type of audit opinion that might be rendered on the Bank's financial statements,
and no written or oral advice concerning the same was provided to the Bank that
was an important factor considered by the Bank in reaching a decision as to any
accounting, auditing or financial reporting issue.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF MITCHELL & TITUS, LLP AS INDEPENDENT
AUDITORS FOR THE BANK.
29
<PAGE> 36
------------------------
PROPOSAL 3
FORMATION OF HOLDING COMPANY
------------------------
GENERAL
Bancorp, Carver and Interim entered into the Plan of Reorganization as of
May 21, 1996, pursuant to which Interim will merge with and into Carver and
Bancorp will thereby become a savings and loan holding company with Carver as
its wholly owned subsidiary. In connection with the Reorganization, all of the
outstanding shares of Carver Common Stock (other than shares held by
stockholders exercising dissenters' rights, if any) will be converted into and
exchanged for, on a one-for-one basis, shares of Bancorp Common Stock. A copy of
the Plan of Reorganization is set forth as Appendix A to this Proxy
Statement-Prospectus and is incorporated herein by reference. The discussion
below is qualified in its entirety by such reference.
Bancorp is a newly-formed Delaware business corporation that was organized
by Carver for the purpose of effecting the Reorganization and, therefore, has no
operating history. As part of the Reorganization, Interim is being organized as
a wholly owned subsidiary of Bancorp. If the Reorganization is approved by the
holders of Carver Common Stock, and subject to the satisfaction of all other
conditions set forth in the Plan of Reorganization, including receipt of all
required regulatory approvals, Interim will be merged with and into Carver on
the Effective Date, with Carver as the surviving federal savings bank.
After the Effective Date, Carver will continue its existing business and
operations as a wholly owned subsidiary of Bancorp. The consolidated assets,
liabilities, stockholders' equity and income of Bancorp immediately following
the Effective Date will be the same as those of Carver immediately prior to the
Effective Date. The Board of Directors of Bancorp is, and upon the Effective
Date will continue to be, comprised of the members of the Board of Directors of
Carver. The officers of Bancorp are, and upon the Effective Date will continue
to be, certain officers of Carver. See "Management of Bancorp." Carver will
continue to operate under the name "Carver Federal Savings Bank" and its deposit
accounts will continue to be insured by the FDIC. The corporate existence of
Carver will continue unaffected and unimpaired by the Reorganization, except
that all of the outstanding shares of Carver Common Stock (other than shares
held by stockholders exercising dissenters' rights, if any) will be owned by
Bancorp. Carver's stockholders prior to the Effective Date will, in turn, own
all of the outstanding shares of Bancorp Common Stock, having received that
stock in exchange for their shares of Carver Common Stock as part of the
Reorganization.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL
OF THE FORMATION OF A SAVINGS AND LOAN HOLDING COMPANY.
30
<PAGE> 37
PARTIES TO THE REORGANIZATION
CARVER FEDERAL SAVINGS BANK
Carver 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 53 West 125th Street in New York City, at which time, the Bank
obtained federal deposit insurance and became a member of the Federal Home Loan
Bank ("FHLB") of New York. In 1961, Carver opened its first branch office in the
Bedford-Stuyvesant section of Brooklyn, New York and over the next 20 years
added three other branches in Brooklyn and Manhattan, New York. In 1982, the
Bank acquired Allied Federal Savings and Loan Association in a supervisory
transaction. The Bank opened its Roosevelt, Long Island office in 1984 and
acquired two additional branches in 1989 and 1990. The Bank converted to a
federal savings bank in 1986 and changed its name at that time to Carver Federal
Savings Bank. On October 24, 1994, the Bank converted from mutual to stock form
(the "Conversion") and issued 2,314,375 shares of its common stock, par value
$0.01 per share.
Carver was founded to provide an African-American operated institution
where residents of underserved communities could invest their savings and obtain
credit. The Bank's principal business consists of attracting passbook and other
savings accounts through its branch offices and investing those funds in
mortgage loans and other investments permitted to federal savings banks. Based
on asset size as of March 31, 1996, Carver is the largest minority-run financial
institution in the United States.
CARVER BANCORP, INC.
Bancorp was organized in May, 1996 at the direction of the Board of
Directors of the Bank to become a savings and loan holding company with Carver
as its wholly owned subsidiary. Bancorp, upon the approval of the OTS to become
a savings and loan holding company, will be subject to regulation by the OTS.
After completion of the Reorganization, Bancorp will conduct business initially
as a unitary savings and loan holding company. See "Regulation and Supervision
- -- Savings and Loan Holding Company Regulation." Upon consummation of the
Reorganization, Bancorp will have no significant assets other than the shares of
the Bank's capital stock acquired in the Reorganization, and will have no
significant liabilities. The management of Bancorp is set forth under
"Management of Bancorp." Initially, Bancorp will neither own nor lease any
property, but will instead use the premises, equipment and furniture of the
Bank. At the present time, Bancorp does not intend to employ any persons other
than certain executive officers, but will utilize the support staff of the Bank
from time to time. Additional employees will be hired as appropriate, to the
extent Bancorp expands its business in the future.
Bancorp's executive office is located at 75 West 125th Street, New York
10027-4512, and its telephone number is (212) 876-4747.
CARVER INTERIM FEDERAL SAVINGS BANK
Interim is a stock-form savings bank formed under the rules and regulations
of the OTS. Interim is being organized as a wholly owned subsidiary of Bancorp
for the purpose of being merged with and into Carver pursuant to the Plan of
Reorganization.
31
<PAGE> 38
DESCRIPTION OF THE REORGANIZATION
REASONS FOR THE REORGANIZATION
The Board of Directors of Carver believes that a holding company structure
will provide greater flexibility to meet the future competitive and financial
needs of the Bank. As a savings and loan holding company, Bancorp will not be
subject to the same regulatory restrictions as the Bank and will be able to
engage in a broader range of business activities than are currently permissible
for federal savings banks. See "Regulation and Supervision -- Savings and Loan
Holding Company Regulation." The Reorganization will also allow Bancorp greater
flexibility in the management of its corporate affairs than Carver currently
has, including the right to repurchase its stock in response to hostile takeover
attempts and in other circumstances as deemed appropriate by its Board of
Directors. Any such repurchases would be subject to applicable law, and there
are currently no agreements or understandings with respect to the repurchase of
the capital stock of the Bank prior to the Effective Date or the capital stock
of Bancorp after the Reorganization. The Board of Directors of Bancorp expects
that, after completion of the Reorganization, it will consider the possibility
of implementing a regular program of share repurchases. See "Certain Differences
in Stockholder Rights" and "Certain Anti-Takeover Provisions" for a comparison
of anti-takeover provisions and other stockholder rights contained in the
charter documents of Carver and Bancorp.
The Reorganization will also increase flexibility with respect to potential
expansion through mergers and acquisitions. As a holding company, Bancorp will
be able to acquire other banks through the issuance of its stock in exchange for
the stock of such other banks, or by a merger of its bank subsidiary with such
other bank. There are currently no agreements or understandings with respect to
any such mergers or acquisitions.
DESCRIPTION OF THE REORGANIZATION
The Reorganization will be accomplished through the following steps:
1. Bancorp has been incorporated as a wholly owned subsidiary of Carver.
The primary purpose of Bancorp is to become the holding company for
Carver.
2. Interim is being organized as a wholly owned subsidiary of Bancorp.
3. Interim will be merged with and into Carver, with Carver as the
surviving institution.
4. As part of the merger, the shares of Bancorp Common Stock held by
Carver will be cancelled, and all of the shares of Carver Common Stock
outstanding prior to the merger (other than shares held by stockholders
exercising dissenters' rights, if any) will be converted into and
exchanged for, on a one-for-one basis, shares of Bancorp Common Stock,
with the result that the stockholders of Carver will become the sole
stockholders of Bancorp.
5. The shares of common stock of Interim which are outstanding prior to
the merger will be converted into shares of Carver Common Stock (and
not further converted into shares of Bancorp Common Stock), with the
result that, after the merger, all of the issued and outstanding shares
of Carver Common Stock will be owned by Bancorp.
6. All shares acquired by Carver as a result of the exercise of
dissenters' rights will be cancelled upon receipt.
Bancorp will receive an initial cash infusion from Carver in the amount of
$100,000. Shortly after consummation of the Reorganization, management of the
Bank expects to make a capital distribution of $5.7 million to Bancorp, which
may be used by Bancorp after the Reorganization to conduct the activities
described in "Reasons for the Reorganization" as well as to fund any cash
dividends that may be declared. See "Dividend Policy."
32
<PAGE> 39
EFFECTIVE DATE
The Effective Date will be the later of the date of (a) the consummation of
the Plan or (b) the date specified on the endorsement by the Secretary of the
OTS of the articles of combination with respect to the Plan of Reorganization in
accordance with the OTS Regulations.
CONDITIONS TO THE REORGANIZATION
The Plan of Reorganization provides that the obligations of Carver, Bancorp
and Interim to consummate the Reorganization are subject to the satisfaction of
the following conditions: (1) the approval of the Plan of Reorganization by an
affirmative vote of the holders of a majority of the outstanding shares of
Carver Common Stock; (2) the approval by the OTS of the Plan of Reorganization
and the transactions contemplated therein, including the formation of Interim,
the merger of Interim with and into Carver, and the acquisition by Bancorp of
all of the issued and outstanding shares of Carver Common Stock (other than
shares held by stockholders exercising dissenters' rights, if any); (3) the
receipt of a favorable ruling from the Internal Revenue Service or a favorable
opinion of counsel as to the federal income tax consequences of the
Reorganization; (4) the registration with the SEC of Bancorp Common Stock under
the Securities Act; (5) compliance with all applicable state securities or "blue
sky" laws relating to the issuance and distribution of Bancorp Common Stock; and
(6) the receipt of all other consents and approvals and the satisfaction of all
other requirements necessary to the consummation of the Reorganization.
AMENDMENT AND TERMINATION
The Plan of Reorganization provides that it may be amended by the parties
thereto in whole or in part at any time prior to the Effective Date, whether
before or after approval by the stockholders, to the extent authorized by
applicable law. However, after approval by the stockholders of the Bank, the
Plan may not be amended in any way deemed by the Board of Directors to be
materially adverse to the stockholders.
The Plan of Reorganization further provides that it may be terminated at
any time prior to the Effective Date (whether before or after approval by the
stockholders of Carver): (1) at the option of the Board of Directors of Carver
or Bancorp or the incorporator of Interim if any one or more of the conditions
to the obligations of any of them under the Plan of Reorganization shall not
have been satisfied and shall not have been waived at or prior to the Effective
Date; (2) at the option of the Board of Directors of Carver for any reason; or
(3) by the mutual agreement of the Boards of Directors of Carver and Bancorp and
the incorporator of Interim. In addition, in the event that stockholders,
through the exercise of dissenters' rights, would cause the Bank's total
risk-based capital ratio to fall below 8.0%, or would cause the Bank's Tier 1
risk-based capital ratio to fall below 4.0% or would cause the Bank's core
capital ratio to fall below 3.0%, the Bank will not complete the Reorganization
without the further approval of the OTS.
EXCHANGE OF STOCK CERTIFICATES
In connection with the exchange of Carver Common Stock for Bancorp Common
Stock, it will not be necessary for stockholders of Carver to exchange their
certificates for certificates representing shares of Bancorp Common Stock. On
the Effective Date, non-dissenting stockholders of Carver will automatically
become stockholders of Bancorp and each outstanding certificate representing
shares of Carver Common Stock will automatically represent, and will be deemed
for all purposes to evidence ownership of, the same number of shares of Bancorp
Common Stock.
After the Effective Date, as currently outstanding certificates of Carver
Common Stock are presented for transfer, or, upon the request of any holder of
Carver Common Stock, the registrar and transfer agent for Carver Common Stock
and Bancorp Common Stock (the "Transfer Agent") will issue new stock
certificates representing the same number of shares of Bancorp Common Stock as
the number of shares of Carver Common Stock surrendered therefor. Upon
surrender, each certificate representing Carver Common Stock will be cancelled.
After the Effective Date, there will be no further registration of transfers of
shares of Carver Common Stock on the records of Carver.
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If any certificate representing shares of Bancorp Common Stock is to be
issued in a name other than that in which the certificate of Carver Common Stock
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the certificate surrendered in exchange be properly
endorsed and otherwise in proper form for transfer. The person requesting such
transfer will be required to pay to the Transfer Agent any transfer or other tax
required by reason of the issuance of a certificate for shares of Bancorp Common
Stock in a name other than that of the registered holder of the certificate
surrendered or establish to the satisfaction of the Transfer Agent that such tax
has been paid or is not payable.
EFFECT OF THE REORGANIZATION ON EMPLOYEE BENEFIT PLANS
On the Effective Date, the ESOP, the Option Plan, the MRP and the Incentive
Compensation Plan will be assumed by Bancorp. Stock options to purchase shares
of Carver Common Stock granted under the Option Plan and Incentive Compensation
Plan and outstanding prior to the Reorganization will automatically become
options to purchase the same number of shares of Bancorp Common Stock upon
identical terms and conditions and for an identical price. Similarly, stock
appreciation rights with respect to shares of Carver Common Stock granted under
the Option Plan, if any, will automatically become stock appreciation rights
with respect to shares of Bancorp Common Stock, and grants of restricted shares
of Carver Common Stock under the MRP and Incentive Compensation Plan will
automatically become grants of restricted shares of Bancorp Common Stock.
Bancorp will assume all of Carver's obligations with respect to such outstanding
options, stock appreciation rights and restricted stock. Any shares of Carver
Common Stock reserved for future issuance under the Option Plan, MRP or
Incentive Compensation Plan will automatically be converted into an equal number
of shares of Bancorp Common Stock and will be reserved for issuance under the
respective plans. Shares of Carver Common Stock held by the ESOP will
automatically become shares of Bancorp Common Stock.
The Reorganization will not trigger any change in control provisions
contained in any of the employment agreements with the Bank's officers. All
other employee benefit plans of Carver will be unchanged by the Reorganization.
See "Management of Carver -- Compensation and Employee Benefit Plans."
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DESCRIPTION OF BANCORP CAPITAL STOCK
GENERAL
The Certificate of Incorporation of Bancorp authorizes the issuance of
capital stock consisting of 10,000,000 shares of common stock, par value $0.01
per share, and 2,000,000 shares of preferred stock, par value $0.01 per share
(the "Bancorp Preferred Stock"). There are 100 shares of Bancorp Common Stock
currently issued and outstanding, all of which are owned by Carver. On the
Effective Date, such shares will be cancelled, and there will be, subject to the
exercise of dissenters' rights, if any, 2,314,375 shares outstanding as a result
of the exchange of shares of Bancorp Common Stock for shares of Carver Common
Stock. Because all of the issued and outstanding shares of Bancorp Common Stock
are owned by Carver, there is currently no established public trading market for
Bancorp Common Stock.
In the future, the authorized but unissued and unreserved shares of Bancorp
Common Stock and the authorized and unissued shares of Bancorp Preferred Stock
will be available for issuance for general corporate purposes, including, but
not limited to, possible issuance as stock dividends or stock splits, future
mergers or acquisitions, or future private placements or public offerings.
Bancorp's Board of Directors may (i) divide, and cause the issuance of, one or
more series of the authorized shares of Bancorp Preferred Stock, (ii) fix the
number of shares constituting any such new series, and (iii) fix the dividend
rate, terms, conditions, conversion and exchange rights, redemption rights
(including sinking fund provisions), liquidation preferences and voting rights,
if any, of any such new series. Such rights and preferences may be superior to
those of Bancorp Common Stock. Except as otherwise may be required to approve a
merger or other transaction in which the additional authorized shares of Bancorp
Common Stock or authorized shares of Bancorp Preferred Stock would be issued, no
stockholder approval will be required for the issuance of those shares. See
"Certain Differences in Stockholder Rights" for a discussion of the rights of
the holders of Bancorp Common Stock as compared to the holders of Carver Common
Stock. In addition, the Company may be restricted in its ability to register
additional shares of capital stock after completion of the Reorganization due to
certain requirements of the SEC related to financial statement disclosures and
related disclosures. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
COMMON STOCK
General. Each share of Bancorp Common Stock has the same relative rights
as, and is identical in all respects to, each other share of Bancorp Common
Stock. Until such time as voting Bancorp Preferred Stock is issued, if ever, the
holders of shares of Bancorp Common Stock will possess all rights, including
exclusive voting rights, pertaining to the capital stock of Bancorp. The
relative rights of shares of Bancorp Common Stock do not materially differ from
the relative rights of shares of Carver Common Stock.
Dividend Rights. The holders of Bancorp Common Stock will be entitled to
dividends when, as and if declared by Bancorp's Board of Directors out of funds
legally available therefor. The payment of dividends by Bancorp will depend on
Bancorp's net income, financial condition, regulatory requirements and other
factors, including the results of Carver's operations. See "Dividend Policy" for
restrictions on the payment of dividends on Bancorp Common Stock. Bancorp has no
present intention to pay dividends, but may consider doing so in the future.
Voting Rights. Each share of Bancorp Common Stock will entitle the holder
thereof to one vote on all matters upon which stockholders have the right to
vote. In addition, the Board of Directors of Bancorp is classified so that
approximately one-third of the directors will be elected each year. Stockholders
of Bancorp will not be entitled to cumulate their votes for the election of
directors. See "Certain Anti-Takeover Provisions."
Liquidation Rights. In the event of any liquidation, dissolution or
winding up of Bancorp, the holders of shares of Bancorp Common Stock will be
entitled to receive, after payment of all debts and liabilities of Bancorp and
subject to the prior rights, if any, of holders of shares of Bancorp Preferred
Stock, all remaining assets of Bancorp available for distribution in cash or in
kind. In the event of any liquidation, dissolution or winding up of Carver,
Bancorp, as the holder of all shares of Carver Common Stock, upon completion of
the
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Reorganization, would be entitled to receive payment of all debt, and
liabilities of Carver (including all deposits and accrued interest thereon) and
all remaining assets of Carver available for distribution in cash or in kind.
Preemptive Rights; Redemption. Holders of shares of Bancorp Common Stock
will not be entitled to preemptive rights with respect to any shares that may be
issued. Bancorp Common Stock is not subject to call or redemption.
BANCORP PREFERRED STOCK
No Bancorp Preferred Stock is being issued in connection with the
Reorganization and the Board of Directors of Bancorp has no present plan or
intention to issue any Bancorp Preferred Stock. The Board of Directors may,
without action of the stockholders of Bancorp, issue shares of Bancorp Preferred
Stock from time to time in one or more series with distinctive serial
designations, preferences, limitations and other rights.
The Board of Directors is authorized to determine, among other things, with
respect to each series which may be issued: (i) the dividend rate, conditions of
payment of dividends, dividend preferences, if any, and whether dividends would
be cumulative and, if so, the date from which dividends on such series would
accumulate; (ii) whether, and upon what terms, such series would be redeemable
and, if so, the redemption price and terms and conditions of redemption; (iii)
the preference, if any, to which such series would be entitled in the event of
voluntary or involuntary liquidation, dissolution or winding up of Bancorp; (iv)
whether or not a sinking fund would be provided for the redemption of such
series and, if so, the terms and conditions thereof; (v) whether, and upon what
terms, such series would be convertible into or exchangeable for shares of any
other class of capital stock or other series of Bancorp Preferred Stock; and
(vi) whether, and to what extent, the holders of such series would enjoy voting
rights, if any, in addition to those prescribed by law. With regard to
dividends, redemption and liquidation preference, any particular series of
Bancorp Preferred Stock may rank junior to, on a parity with or senior to any
other series of Bancorp Preferred Stock.
It is not possible to state the actual effect of the authorization of
Bancorp Preferred Stock upon the rights of holders of Bancorp Common Stock,
until the Board of Directors determines the specific rights of the holders of a
series of Bancorp Preferred Stock. However, such effects might include (a)
restrictions on dividends on Bancorp Common Stock if dividends on Bancorp
Preferred Stock have not been paid; (b) dilution of the voting power of Bancorp
Common Stock to the extent that Bancorp Preferred Stock has voting rights; (c)
dilution of the equity interest of Bancorp Common Stock to the extent that
Bancorp Preferred Stock is converted into Bancorp Common Stock; or (d) Bancorp
Common Stock not being entitled to share in Bancorp's assets upon liquidation
until satisfaction of any liquidation preference granted the holders of Bancorp
Preferred Stock. Issuance of Bancorp Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could make it more difficult for a third party to acquire a majority
of the outstanding voting stock. Accordingly, the issuance of Bancorp Preferred
Stock may be used as an "anti-takeover" device without further action on the
part of the stockholders of Bancorp.
ANTI-TAKEOVER PROVISIONS
See "Certain Differences in Stockholder Rights -- Certain Anti-Takeover
Provisions" for a description of certain provisions contained in the Certificate
of Incorporation and Bylaws of Bancorp that might have the effect of delaying,
deferring or preventing a change in control of Bancorp.
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DESCRIPTION OF CARVER CAPITAL STOCK
GENERAL
The Bank's Federal Stock Charter authorizes the issuance of up to 5,000,000
shares of common stock (the "Bank Common Stock") and 1,000,000 shares of serial
preferred stock (the "Bank Preferred Stock"). The Bank Preferred Stock may be
issued in classes and series having such rights, preferences, privileges and
restrictions as the Board of Directors of the Bank may determine from time to
time.
The Bank Preferred Stock may be issued by the Bank in one or more series
from time to time as determined by the Bank's board of directors by the adoption
of a supplementary provision in the Bank's Federal Stock Charter. No Bank
Preferred Stock has been authorized by the Board of Directors at this time.
THE COMMON STOCK
Under the Bank's Federal Stock Charter, each holder of shares of Bank
Common Stock is entitled to one vote per share on all matters requiring
stockholder action and to participate equally (subject to any preference which
may hereafter be established in favor of the Bank Preferred Stock) with the
other holders of Bank Common Stock in any dividends, when, as and if declared by
the Board of Directors of the Bank from funds legally available therefor. See
"Dividend Policy." Subject to any preferential rights established in favor of
any outstanding Bank Preferred Stock, each share of Bank Common Stock is
entitled to equal rights in the event of liquidation. Stockholders of Carver do
not have the right to cumulate their votes for the election of directors.
The holders of the Bank Common Stock have no preemptive or other rights to
subscribe for additional shares of any class of capital stock of the Bank.
Without preemptive rights, a stockholder's ownership position in the Bank is
subject to dilution if additional shares of capital stock are issued by the
Bank. The Bank Common Stock is not redeemable.
BANK PREFERRED STOCK
The Board of Directors may, without action of the stockholders of the Bank,
issue shares of Bank Preferred Stock from time to time in one or more series
with distinctive serial designations, preferences, limitations and other rights.
The Board of Directors is authorized to determine the same features with respect
to the Bank Preferred Stock as those of Bancorp Preferred Stock.
No Bank Preferred Stock is being issued in connection with the
Reorganization and there is currently no Bank Preferred Stock outstanding. The
Board of Directors of the Bank has no present plan or intention to issue any
Bank Preferred Stock.
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CERTAIN DIFFERENCES IN STOCKHOLDER RIGHTS
GENERAL
The rights of the holders of Carver Common Stock are currently governed by
the OTS Regulations and by Carver's Federal Stock Charter and the Bylaws adopted
thereunder. The rights of the holders of Bancorp Common Stock will be governed
by Delaware General Corporation Law ("DGCL"), by Bancorp's Certificate of
Incorporation and the Bylaws adopted thereunder and by the applicable
regulations of the SEC. Certain differences in stockholder rights arise from
this change of governing law. The following discussion summarizes the material
differences as reflected in Bancorp's Certificate of Incorporation and Bylaws
and is not intended to be a complete statement of all differences affecting the
rights of stockholders. This discussion is qualified in its entirety by
reference to Bancorp's Certificate of Incorporation, a copy of which is attached
hereto as Appendix C. If the Reorganization is not consummated, any action
affecting the rights of stockholders of Carver, including any change in control,
will continue to be subject to the relevant provisions of Carver's Federal Stock
Charter and Bylaws and the OTS Regulations. For a description of Bancorp Common
Stock, see "Description of Bancorp Capital Stock -- Common Stock." For a
description of provisions contained in the Certificate of Incorporation and
Bylaws of Bancorp that may be deemed to have an anti-takeover effect, see "--
Certain Anti-Takeover Provisions."
PAYMENT OF DIVIDENDS
The ability of Carver to pay dividends on its common stock is restricted by
OTS Regulations and by tax considerations related to federally chartered savings
banks. See "Regulation and Supervision -- Restrictions on Dividends and Other
Capital Distributions." Although Bancorp's ability to pay dividends will not be
subject to these restrictions, such restrictions will indirectly affect the
Company because dividends from the Bank will be a primary source of funds of the
Company for the payment of dividends to stockholders of the Company. Bancorp
will be limited by certain restrictions imposed generally on Delaware
corporations. Subject to certain limitations and exceptions, dividends may be
paid only out of a Delaware corporation's surplus (as defined by the DGCL) or
its net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. See "Dividend Policy" and "Regulation and
Supervision -- Savings and Loan Holding Company Regulation." Bancorp has no
present intention to pay dividends but may consider doing so in the future.
RIGHTS OF ISSUER TO REPURCHASE STOCK
Under the OTS Regulations, Carver may repurchase its stock under certain
specific conditions, but only with the prior approval of the OTS. See
"Regulation and Supervision -- Restrictions on Dividends and Other Capital
Distributions." Under the DGCL, no prior approval is required and, therefore,
Bancorp will be allowed to purchase its own stock in the open market subject to
applicable law and the availability of funds therefor. See "Regulation and
Supervision -- Savings and Loan Holding Company Regulation" for a description of
the restrictions on the repurchase by Bancorp of its stock. Bancorp may consider
repurchases of its stock in the future.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
The Certificate of Incorporation of Bancorp contains provisions that limit
the personal liability of directors to Bancorp or to its stockholders for
monetary damages for breach of fiduciary duty, except to the extent such
limitation is not permitted by the DGCL. Section 102(b)(7) of the DGCL provides
that such a provision shall not eliminate or limit the personal liability of a
director (1) for any breach of the director's duty of loyalty to the corporation
or its stockholders; (2) for acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law; (3) under Section 174 of
the DGCL, which imposes liability for the unlawful payment of dividends or
unlawful stock purchase or redemption; or (4) for any transaction from which the
director received an improper personal benefit. The provisions in Bancorp's
Certificate of Incorporation apply only to the liability of a director acting in
his capacity as such and not to actions brought other than by a stockholder or
Bancorp. Bancorp's Certificate of Incorporation contains provisions that require
indemnification of the directors and officers and permits indemnification of
employees
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of Bancorp and any of its direct or indirect subsidiaries. To be entitled to
indemnification, it must be determined that, in general terms, the person acted
in good faith and in a manner believed to be in, or not opposed to, the best
interests of Bancorp and, with respect to a criminal action, had no reasonable
cause to believe his or her conduct was unlawful.
Under present OTS regulations, the Bank must indemnify its directors,
officers and employees for any costs incurred in connection with any litigation
involving any such person's activities as a director, officer or employee if
such person obtains a final judgment on the merits in his or her favor. In
addition, indemnification is permitted in the case of a settlement, a final
judgment against such person or a final judgment in such person's favor, other
than on the merits, if a majority of disinterested directors determine that such
person was acting in good faith within the scope of his or her employment as he
or she could reasonably have believed under the circumstances was in the best
interest of the Bank or its stockholders. The Bank also is permitted to pay
ongoing expenses incurred by a director, officer or employee if a majority of
disinterested directors concludes that such person may ultimately be entitled to
indemnification.
Bancorp's Certificate of Incorporation defines in greater detail than the
OTS Regulations the circumstances under which a person may be entitled to
indemnification and the procedures for obtaining indemnification and for
resolving disputes over indemnification. Indemnification by Carver may be paid
only after prior notice to, and no objection by, the OTS, but Bancorp would not
be subject to such procedure. Under the Federal Deposit Insurance Act, as
amended ("FDIA"), both Carver and Bancorp would be prohibited from paying any
indemnification with respect to any liability or legal expense incurred by a
director, officer, or employee as result of an action or proceeding by a federal
banking agency resulting in a civil money penalty or certain other remedies
against such person.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Bancorp pursuant
to the forgoing provisions, Bancorp has been informed that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
APPRAISAL RIGHTS
Under the OTS Regulations, a stockholder of a federally chartered savings
bank which engages in a merger, consolidation or sale of all or substantially
all of its assets has the right to demand from such savings bank payment of the
fair or appraised value of his or her stock in the savings bank, subject to
specified procedural requirements. This regulation also provides, however, that
the stockholders of a federally chartered savings bank with stock which is
listed on a national securities exchange or quoted on the Nasdaq Stock Market
are not entitled to appraisal rights if the stockholder is required to accept
only "qualified consideration" for his or her stock, which is defined to include
cash, shares of stock of any association or corporation which at the effective
date of the merger will be listed on a national securities exchange or quoted on
the Nasdaq Stock Market or any combination of such shares of stock and cash. The
relevant OTS regulations governing a stockholder's appraisal rights are attached
hereto as Appendix B.
After the Reorganization, the rights of appraisal of dissenting
stockholders will be governed by the DGCL. The DGCL provides that dissenting
stockholders have appraisal rights in certain instances. However, the DGCL
generally does not confer appraisal rights if a corporation's stock is held of
record by more than 2,000 stockholders, or if it is listed on a national
securities exchange or listed on the Nasdaq National Market System, provided
that stockholders receive only certain forms of consideration in exchange for
their shares of stock.
SPECIAL MEETINGS OF STOCKHOLDERS
The Bank's Bylaws provide that special meetings of the stockholders of the
Bank may be called by the Chairman, President, a majority of the Board of
Directors or the holders of not less than one-tenth of the outstanding capital
stock of the Bank entitled to vote at the meeting. The Bylaws also provide that
any action required to be taken at a meeting of the stockholders may be taken
without a meeting if consent in writing is given by all of the stockholders
entitled to vote on the subject matter. The Company's Certificate of
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Incorporation and Bylaws contain a provision pursuant to which special meetings
of stockholders of the Company may only be called by the Chairman, the President
and Chief Executive Officer, or by resolution of at least three-fourths of the
Directors then in office.
CERTAIN ANTI-TAKEOVER PROVISIONS
General. The principal purpose of any anti-takeover provision is to
protect the interests of a corporation and its stockholders in the event of a
sudden takeover attempt. Such provisions are intended to require a hostile
purchaser to deal fairly with stockholders and to give a corporation's board of
directors a better opportunity to analyze prospective business combinations and
tender offers, evaluate alternatives, and make careful recommendations to
stockholders. Such provisions could have the effect of making more difficult, or
discourage, a merger, tender offer, proxy contest, or assumption of control and
change of incumbent management, even when a majority of stockholders considers
such a course to be in its best interests. However, the Board of Directors of
Bancorp believes that the disadvantages of discouraging such actions are
outweighed by the best interests of the stockholders as a whole and by the
benefits obtained by protecting the ability of the Board to negotiate with a
proponent of an unfriendly or unsolicited proposal to take over or restructure
Bancorp.
The following discussion focuses on certain provisions of Bancorp's
Certificate of Incorporation and Bylaws and, where applicable, the corresponding
provisions of Carver's Federal Stock Charter and Bylaws that could be relevant
to change in control situations and that may affect the rights of stockholders.
Capital Stock. Carver's Charter authorizes the issuance of up to 5,000,000
shares of common stock and 1,000,000 shares of serial preferred stock and
Bancorp's Certificate of Incorporation authorizes the issuance of up to
10,000,000 shares of common stock and 2,000,000 shares of preferred stock.
Although neither Carver nor Bancorp has any arrangements, understandings or
plans at the present time for the issuance or use of additional shares of common
stock or any of the shares of authorized preferred stock, the availability of
such shares will provide Carver or Bancorp with flexibility in structuring
financings and acquisitions and meeting other corporate needs that may arise.
As permitted by the DGCL, Bancorp's Board of Directors may, without
stockholder approval, issue additional shares of Bancorp Common Stock or
authorize the issuance of a series of preferred stock with rights and
preferences that could impede the completion of a transaction to which
management is opposed. Bancorp's ability to issue additional capital stock is
subject to applicable law, including the duty of directors to exercise their
business judgment in the best interests of Bancorp and its stockholders.
Board of Directors. Carver's Charter provides that the authorized number
of directors shall not be fewer than five nor more than fifteen, as fixed in
Carver's Bylaws. Bancorp's Certificate of Incorporation and Bylaws provide that
the authorized number of directors shall not be fewer than five nor more than
fifteen, with the exact number to be fixed by resolution of Bancorp's Board of
Directors. The Board of Bancorp will initially be composed of seven directors,
the same number of directors currently on Carver's Board of Directors. See
"Management of Bancorp." Carver's Bylaws and Bancorp's Certificate of
Incorporation provide for a board of directors that is to be divided into three
classes, which shall be as nearly equal in number as possible. The power to fill
vacancies for each of Carver and Bancorp is vested in their respective Boards of
Directors. The overall effect of such provisions may be to prevent a person or
entity from immediately acquiring control of Carver or Bancorp through an
increase in the number of directors and the election of such person or of such
person's or entity's nominees to fill such newly created vacancies.
The DGCL provides that a director serving on a classified board may be
removed by the holders of a majority of the shares entitled to vote thereon, but
only for cause, unless the certificate of incorporation provides otherwise. The
Bylaws of Carver provide that any director may be removed only for cause, at a
meeting of stockholders expressly called for that purpose by a vote of the
holders of a majority of the shares then entitled to vote at an election of
directors. Bancorp's Certificate of Incorporation provides that any director may
be removed only for cause by a vote of the holders of 80% of the shares then
entitled to vote at an election of directors. The classified Board of Directors,
the enhanced requirement for removal of directors of
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Bancorp and the related provisions discussed above could make it more difficult
for stockholders to force an immediate change in the composition of a majority
of the composition of a majority of the Board of Directors.
Action Without a Stockholder Meeting. Carver's Bylaws provide that the
stockholders may act without a meeting if consent in writing, describing the
action to be taken, is given by all stockholders entitled to vote on the action.
Bancorp's Certificate of Incorporation prohibits stockholder action by written
consent in lieu of an annual or special meeting of stockholders. Although
stockholders of Bancorp are not permitted to take action by written consent
while stockholders of Carver are permitted to do so, taking significant
corporate action through written consent is difficult to achieve due to the
requirement that all Carver stockholders entitled to vote on the action provide
written consent.
Notice of Director Nominations and Stockholder Proposals. The Bank's
Bylaws generally provide that stockholders may submit nominations for election
of directors at an annual meeting of stockholders and any new business to be
taken up at an annual meeting by filing a submission in writing with the Bank at
least five days before the date of any such meeting.
Bancorp's Bylaws provide that all nominations for election to the Board of
Directors and proposals for any new business, other than those made by the
Chairman of the Board, the President and Chief Executive Officer or by
resolution of at least three-fourths of the directors then in office, shall be
made by a stockholder who has complied with the written notice provisions in the
Bylaws. These written notice provisions provide for a longer period of notice to
the Company than the five days required by the Bank.
The Bylaw procedures regarding stockholder proposals and nominations are
intended to provide the Board of Directors of Bancorp with the information
deemed necessary to evaluate a stockholder proposal or nomination and other
relevant information, such as existing stockholder support, as well as the time
necessary to consider and evaluate such information in advance of a meeting. The
procedures will give incumbent directors advance notice of a business proposal
or nomination. This may make it easier for incumbent directors to defeat a
stockholder proposal or nomination, even when certain stockholders may view such
proposal or nomination as in the best interests of the Company or its
stockholders.
Stockholder Vote Required to Approve Certain Business Combinations. Under
the OTS Regulations, business combinations, such as mergers, consolidations,
purchases and sales of substantially all of the assets of an institution,
require the approval of the holders of two-thirds of the outstanding voting
stock entitled to vote thereon.
The Certificate of Incorporation requires the approval of the holders of at
least 80% of the Company's outstanding shares of voting stock, together with the
affirmative vote of the Company's outstanding shares not beneficially owned by
an Interested Stockholder (as defined below) to approve certain "Business
Combinations," as defined therein, and related transactions. Under Delaware law,
absent this provision, Business Combinations, including mergers, consolidations
and sales of all or substantially all of the assets of a corporation must,
subject to certain exceptions, be approved by the vote of the holders of only a
majority of the outstanding shares of Common Stock of the Company and any other
affected class of stock. Under the Certificate of Incorporation, at least 80%
approval of stockholders is required in connection with any transaction
involving an Interested Stockholder except (i) in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Company's Board of Directors who are unaffiliated with the Interested
Stockholder and were directors prior to the time when the Interested Stockholder
became an Interested Stockholder or (ii) if the proposed transaction meets
certain conditions set forth therein which are designed to afford the
stockholders a fair price in consideration for their shares in which case, if a
stockholder vote is required, approval of only a majority of the outstanding
shares of voting stock would be sufficient. The term "Interested Stockholder" is
defined to include any individual, corporation, partnership or other entity
(other than the Company or its subsidiary) which owns beneficially or controls,
directly or indirectly, 10% or more of the outstanding shares of voting stock of
the Company. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include (i) any merger or
consolidation of the Company or any of its subsidiaries with or into any
Interested Stockholder or Affiliate (as defined in the Certificate of
Incorporation) of an Interested Stockholder; (ii) any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition to or with any Interested
Stockholder or Affiliate of
41
<PAGE> 48
5% or more of the assets of the Company or combined assets of the Company and
its subsidiary; (iii) the issuance or transfer to any Interested Stockholder or
its Affiliate by the Company (or any subsidiary) of any securities of the
Company other than on a pro rata basis to all stockholders; (iv) the adoption of
any plan for the liquidation or dissolution of the Company proposed by or on
behalf of any Interested Stockholder or Affiliate thereof; and (v) any
reclassification of securities, recapitalization, merger or consolidation of the
Company which has the effect of increasing the proportionate share of Common
Stock or any class of equity or convertible securities of the Company owned
directly or indirectly by an Interested Stockholder or Affiliate thereof.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer to the Company from another party to (i) make a tender or exchange offer
for any equity security of the Company, (ii) merge or consolidate the Company
with another corporation or entity or (iii) purchase or otherwise acquire all or
substantially all of the properties and assets of the Company, may, in
connection with the exercise of its judgment in determining what is in the best
interest of the Company and the stockholders of the Company, give due
consideration to the extent permitted by law to all relevant factors, including,
without limitation, the financial and managerial resources and future prospects
of the other party, the possible effects on the business of the Company and its
subsidiaries and on the employees, customers, suppliers and creditors of the
Company and its subsidiaries, the effects on the communities in which the
Company's and its subsidiaries' facilities are located and the commitment and
ability of the other party to remain faithful to the special mission of the
Company and its subsidiaries in the communities in which the Company and its
subsidiaries are located in the tradition begun by the Bank. By having these
standards in the Certificate of Incorporation of the Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then market
price of any equity security of the Company.
Amendment of Certificate of Incorporation and Bylaws. Carver's Charter
provides that amendments of the Charter must be proposed by the Board of
Directors, approved by the OTS and thereafter approved by the holders of a
majority of the total votes of stockholders entitled to vote thereon. Carver's
Bylaws permit the amendment of the Bylaws by a vote of a majority of the Board
of Directors or by holders of a majority of the total votes of stockholders
present in person or by proxy at a meeting and entitled to vote thereon.
Amendments of Carver's Bylaws may also require approval of the OTS.
Bancorp's Certificate of Incorporation generally provides that, in addition
to any affirmative vote required by applicable law and any voting rights granted
to or held by holders of any series of Bancorp Preferred Stock, any alteration,
amendment, repeal or rescission (collectively, any "Change") of any provision of
the Certificate of Incorporation must be approved by a majority of the directors
of Bancorp then in office and by the affirmative vote of the holders of a
majority (or such greater proportion as may otherwise be required pursuant to
any specific provision of the Certificate of Incorporation) of the total votes
eligible to be cast by the holders of all outstanding shares of Bancorp Common
Stock entitled to vote. In addition to the above requirement, a Change to
certain provisions of the Certificate of Incorporation must also be approved
either (i) by not less than a majority of the authorized number of directors
and, if one or more Interested Stockholders exist, by not less than a majority
of the Disinterested Directors or (ii) by the affirmative vote of the holders of
not less than two-thirds of the total votes eligible to be cast by the holders
of all outstanding shares of the capital stock of Bancorp entitled to vote
thereon and, if the Change is proposed by or on behalf of an Interested
Stockholder or a director who is an Affiliate or Associate of an Interested
Stockholder, by the affirmative vote of the holders of not less than a majority
of the total votes eligible to be cast by holders of all outstanding shares
entitled to vote thereon not beneficially owned by an Interested Stockholder or
an Affiliate or Associate thereof. Amendment of the provision relating to
business combinations must also be approved by either (i) a majority of the
Disinterested Directors, or (ii) the affirmative vote of not less than eighty
percent (80%) of the total number of votes eligible to be cast by the holders of
all outstanding shares of the Voting Stock, voting together as a single class,
together with the affirmative vote of not less than fifty percent (50%) of the
total number of votes eligible to be cast by the holders of all outstanding
shares of the Voting Stock not beneficially owned by any Interested Stockholder
or Affiliate or Associate thereof, voting
42
<PAGE> 49
together as a single class. Capitalized terms are as defined in the Certificate
of Incorporation. Furthermore, the Company's Certificate of Incorporation
provides that provisions of the Certificate of Incorporation and Bylaws that
contain supermajority voting requirements may not be altered, amended, repealed
or rescinded without a vote of the Board or holders of capital stock entitled to
vote thereon that is not less than the supermajority specified in such
provision. Absent these provisions, the DGCL provides that a corporation's
certificate of incorporation and bylaws may be amended by the holders of a
majority of the corporation's outstanding capital stock. The Certificate of
Incorporation also provides that the Board of Directors is authorized to make,
alter, amend, rescind or repeal any of the Company's Bylaws in accordance with
the terms thereof, regardless of whether the Bylaw was initially adopted by the
stockholders. However, this authorization neither divests the stockholders of
their right, nor limits their power to adopt, amend, rescind or repeal any Bylaw
under the DGCL. These provisions could have the effect of discouraging a tender
offer or other takeover attempt where the ability to make fundamental changes
through Bylaw amendments is an important element of the takeover strategy of the
acquiror.
The provisions of Bancorp's Certificate of Incorporation limiting the
liability of directors, as described above, may not be repealed or amended
without the affirmative vote of the holders of 80 percent of the total votes
eligible to be cast by the holders of all of the outstanding shares of the
capital stock of Bancorp entitled to vote thereon.
Section 203 of Delaware General Corporate Law. The State of Delaware has a
statute designed to provide Delaware corporations with additional protection
against hostile takeovers. The takeover statute, which is codified in Section
203 of the DGCL ("Section 203"), is intended to discourage certain takeover
practices by impeding the ability of a hostile acquiror to engage in certain
transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, with the number of shares outstanding
calculated without regard to those shares owned by the corporation's directors
who are also officers and by certain employee stock plans; (iii) any business
combination with an Interested Stockholder that is approved by the Board of
Directors and by a two-thirds vote of the outstanding voting stock not owned by
the Interested Stockholder; and (iv) certain business combinations that are
proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the Board of Directors. A corporation may exempt itself from the requirement of
the statute by adopting an amendment to its Certificate of Incorporation or
Bylaws electing not to be governed by Section 203. At the present time, the
Board of Directors does not intend to propose any such amendment.
Additional Change in Control Regulation. Prior approval of the OTS under
the Change in Bank Control Act, as amended, is required for an acquisition of
control of a federal savings bank, such as Carver, by a company or by
individuals. Such prior approval would be required for a direct acquisition of
control of Carver or for an indirect acquisition of control of Carver through an
acquisition of control of Bancorp. For such purpose, an acquiror is deemed to
have acquired control by acquiring more than 25% of any class of voting stock,
and an acquisition of "control" is presumed if, among other things, a person
acquires more than 10% of any class of voting securities if the acquiror also
benefits from any of various "control factors" specified in the OTS Regulations.
Among the "control factors" are the acquiror being a holder of one of the two
largest holdings of the institution's voting stock; the acquiror, together with
the acquiror's representatives and
43
<PAGE> 50
nominees, constituting more than one member of the institution's board of
directors; or the acquiror having the power to dispose of, or the ability to
vote other than through revocable proxies, more than 25% of the institution's
voting stock.
The Exchange Act requires that a purchaser of any class of a corporation's
securities registered under the Exchange Act notify the SEC and such corporation
within ten days after its purchases exceed 5% of the outstanding shares of that
class of securities. This notice must disclose the background and identity of
the purchaser, the source and amount of funds used for the purchase, the number
of shares owned and, if the purpose of the transaction is to acquire control of
the corporation, any plans to materially alter the corporation's business or
corporate structure. In addition, any tender offer to acquire a corporation's
securities is subject to the limitations and disclosure requirements of the
Exchange Act.
TAX CONSEQUENCES OF THE REORGANIZATION
The consummation of the Reorganization is conditioned, in part, upon
receipt by Carver of an opinion of counsel to Carver to the effect that, for
federal income tax purposes: (1) no gain or loss will be recognized by
stockholders of Carver on the transfer of their shares of Carver Common Stock to
Bancorp solely in exchange for Bancorp Common Stock; (2) no gain or loss will be
recognized by Bancorp upon its receipt of shares of Carver Common Stock in
exchange for shares of Bancorp Common Stock; (3) the basis of the shares of
Bancorp Common Stock to be received by each Carver stockholder will be the same
as the basis of the shares of Carver Common Stock exchanged therefor; and (4)
the holding period of Bancorp Common Stock to be received by each Carver
stockholder will include the holding period of the shares of Carver Common Stock
exchanged therefor, provided that such stockholder held such shares of Carver
Common Stock as a capital asset on the Effective Date.
Thacher Proffitt & Wood, the Bank's special counsel for the Reorganization,
has opined, subject to the limitations and qualifications in its opinion, that
the Reorganization will not be a taxable transaction to Bancorp, Carver or
Carver's stockholders who do not elect to exercise dissenters' rights for New
York State or New York City income and corporate franchise tax purposes. Though
the matter is not free from doubt, it is likely that the Reorganization will not
cause the Bank to incur any New York State real estate transfer tax or real
property gains tax or any New York City real property transfer tax.
Thacher Proffitt & Wood, the Bank's special counsel for the Reorganization,
will not express an opinion as to whether or to what extent payments to
stockholders who exercise dissenters rights or payments by Carver to Bancorp of
an amount that exceeds the current and accumulated earnings and profits of
Carver will cause Carver to have income. In addition, Thacher Proffitt & Wood
will not express an opinion as to the tax consequences to stockholders of
exercising their dissenters rights with respect to any shares of Carver Common
Stock. Any stockholder of Carver considering exercising such dissenter's rights
should consult his tax advisor for specific advice with respect to the federal
income tax consequences thereof.
Each stockholder is urged to consult his own tax advisor as to the specific
consequences of the Reorganization to the stockholder under federal, state and
any other applicable laws.
ACCOUNTING TREATMENT OF THE REORGANIZATION
The Reorganization is expected to be characterized as, and treated
similarly to, a "pooling of interests" (rather than a "purchase") for financial
reporting and related purposes, with the result that the accounts of Carver and
Bancorp will be combined.
MARKET FOR THE COMMON STOCK
Although there is an established market for the Bank's common stock which
is currently quoted on the Nasdaq Stock Market under the Bank's current symbol,
"CARV," as a newly formed company, the Company has never issued capital stock
and consequently there is no established market for its Common Stock. It is
expected that Bancorp Common Stock will be at least as liquid as the Bank's
Common Stock since the
44
<PAGE> 51
number of outstanding shares of Company Common Stock following the
Reorganization will match the number of Shares of Bank Common Stock prior to the
Reorganization. However, there can be no assurance that an active and liquid
trading market for the Company Common Stock will develop, or if developed, will
be maintained.
The Company's Common Stock will be quoted on the Nasdaq Stock Market under
the symbol "CARV." The Company expects to retain the Bank's market makers for
the Common Stock, but there can be no assurance that the Company will be able to
retain these market-makers.
Making a market involves maintaining bid and ask quotations and being able,
as principal, to effect transactions in reasonable quantities at those quoted
prices, subject to various securities laws and other regulatory requirements.
Additionally, the development of a liquid public market depends on the existence
of willing buyers and sellers, the presence of which is not within the control
of the Company, the Bank or any market maker. Since there can be no assurance
that an active and liquid trading market for Bancorp Common Stock will develop
or that, if developed, it will continue, investors in Bancorp Common Stock could
have difficulty disposing of their shares and should not view Bancorp Common
Stock as a short-term investment. The absence of an active and liquid trading
market for Bancorp Common Stock could affect the price and liquidity of Bancorp
Common Stock.
At June 10, 1996, there were 2,314,375 shares of Bank Common Stock
outstanding which were held of record by 1,246 stockholders. Since October 24,
1994, the Bank Common Stock has traded on the Nasdaq Stock Market under the
symbol "CARV." The following table shows the high and low per share sales price
of the Bank Common Stock as reported on the Nasdaq Stock Market. No dividends
were declared during the periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE
-------------
QUARTER ENDED HIGH LOW
-------------------------------------------------------------- ---- ----
<S> <C> <C>
Fiscal year ended March 31, 1995:
Third Quarter............................................... 8 1/4 6 1/8
Fourth Quarter.............................................. 7 5/8 6 1/4
Fiscal year ended March 31, 1996:
First Quarter............................................... 8 1/8 6 5/8
Second Quarter.............................................. 11 6 13/16
Third Quarter............................................... 10 8 1/2
Fourth Quarter.............................................. 9 1/2 8 1/4
Fiscal year ending March 31, 1997:
First Quarter (through June 10, 1996)....................... 8 3/4 7 5/8
</TABLE>
DIVIDEND POLICY
The Board of Directors of Bancorp will have the authority to declare
dividends on the Common Stock, subject to statutory and regulatory requirements.
The Board of Directors may consider a policy of paying cash dividends on the
Common Stock in the future; however, no decision has been made as to the amount
or timing of such dividends. Declarations of dividends by the Board of
Directors, if any, will depend upon a number of factors, including investment
opportunities available to Bancorp or Carver, capital requirements, regulatory
limitations, Bancorp's and Carver's results of operations, financial and tax
considerations and general economic conditions. Bancorp will receive an initial
cash infusion from Carver in the amount of $100,000. Shortly after consummation
of the Reorganization, management of the Bank expects to make a capital
distribution of $5.7 million to Bancorp, which may be used by Bancorp after the
Reorganization to, among other things, fund the payment of cash dividends, if
any are declared. No assurances can be given that dividends, if commenced, will
continue to be paid.
Carver has not paid cash or stock dividends since the date of the
Conversion. There are significant regulatory limitations on the Bank's ability
to pay dividends depending on its capital structure and the overall
45
<PAGE> 52
health of the institution. An insured depository institution may not make a
capital distribution if, following such distribution, the institution will be
"undercapitalized" as that term is defined for purposes of the prompt corrective
action provisions of the FDICIA. In addition, the OTS Regulations limit the
ability of savings associations to pay dividends and make other capital
distributions according to the institution's level of capital and income, with
the greatest flexibility afforded to institutions that meet or exceed their
fully phased-in capital requirements. Capital distributions include cash
dividends, payments to repurchase, redeem, retire or otherwise acquire an
institution's shares, payments to stockholders of another institution in a
cash-out merger, other distributions charged against capital and any other
transaction that the OTS determines to entail a payout of capital. The OTS also
may prohibit a proposed capital distribution that would otherwise be permitted
by regulation if the OTS determines that the distribution would constitute an
unsafe or unsound practice. Although the Bank is currently in compliance with
all capital ratios, there can be no assurance that this will continue or that
the OTS will not otherwise prevent the Bank from paying dividends or otherwise
making capital distributions.
Unlike the Bank, Bancorp is not subject to OTS regulatory restrictions on
the payment of dividends to its stockholders, although the source of such
dividends could be, in part, dependent upon dividends from the Bank in addition
to the net proceeds retained by Bancorp and earnings thereon. Bancorp is subject
to the requirements of Delaware law, which generally limit dividends to an
amount equal to the excess of the net assets of Bancorp (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.
46
<PAGE> 53
PRO FORMA CONSOLIDATED CAPITALIZATION
The following table presents the capitalization of Carver as of March 31,
1996 and the pro forma consolidated capitalization of Bancorp and its
subsidiary, Carver, as of March 31, 1996, as adjusted to give effect to the
Reorganization as described in this Proxy Statement-Prospectus.
<TABLE>
<CAPTION>
CARVER BANCORP AND SUBSIDIARY
--------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------- ---------- -------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Stockholders' equity:
Preferred stock, par value $0.01 per share:
Authorized................................. 1,000,000 -- 2,000,000 --
Issued and outstanding..................... -- -- -- --
Common stock, par value $.01 per share:
Authorized................................. 5,000,000 -- 10,000,000 --
Issued and outstanding..................... 2,314,375 $ 23 2,314,375 $ 23
Additional paid-in capital...................... 21,436 21,436
Retained earnings (deficit)..................... 16,098 16,098
Common Stock acquired by ESOP................... (1,548) (1,548)
Unrealized (loss) on securities available for
sale, net..................................... (1,245) (1,245)
------- -------
Total stockholders' equity............ $34,765 $34,765
======= =======
</TABLE>
47
<PAGE> 54
BUSINESS OF BANCORP
GENERAL
Bancorp is a business corporation organized under the laws of the State of
Delaware on May 9, 1996. The only office of Bancorp, and its principal place of
business, is located at the administrative offices of Carver at 75 West 121st
Street, New York 10027-4589. Bancorp's telephone number is (212) 876-4747.
Bancorp was organized for the purpose of becoming the holding company of
Carver. On the Effective Date, Carver will become a wholly owned subsidiary of
Bancorp, which will thereby become a savings and loan company, and each
stockholder of Carver will, subject to the exercise of dissenters' rights,
become a stockholder of Bancorp without any change in the number of shares owned
or in respective ownership percentages.
Bancorp has not yet undertaken any operating business activities and does
not currently propose to do so. In the future, Bancorp may become an operating
company or acquire other thrift institutions, commercial banks or bank holding
companies, or engage in or acquire such other activities or businesses as may be
permitted by applicable law, although there are no present plans or intentions
to do so.
Subject to regulatory approval and/or consent, it is expected that Bancorp
will receive an initial cash infusion from Carver in the amount of $100,000 and
shortly after consummation of the Reorganization, Carver will transfer to
Bancorp cash and/or investment securities having a value of $5.7 million to be
used for working capital and other purposes. Additional financial resources may
be available to Bancorp in the future through borrowings, debt or equity
financings, or dividends from acquired entities or new businesses. Some or all
of the foregoing will be subject to compliance with certain regulatory and tax
restrictions. In particular, dividends from Carver to Bancorp will be subject to
regulatory limitations and will result in taxable income to Carver to the extent
that they are deemed not to be made out of Carver's net profits or surplus. See
"Market for the Common Stock" and "Dividend Policy."
Because Bancorp is a newly formed corporation with no operating history,
historical information with respect to legal proceedings, dividends,
management's discussion of operations, financial data or accountants is not
available. There is currently no established public trading market on which
Bancorp Common Stock is traded and Bancorp does not have any record of paying
dividends. See "Description of Bancorp Capital Stock," "Market for the Common
Stock" and "Dividend Policy."
PROPERTY
Initially, Bancorp will neither own nor lease any real or personal property
but will utilize the premises, and property of Carver without the payment of any
rental fees to Carver.
COMPETITION
It is expected that for the near future the primary business of Bancorp
will be the ongoing business of Carver. Therefore, the competitive conditions to
be faced by Bancorp will be the same as those faced by Carver. In addition, many
banks and financial institutions have formed, or are in the process of forming,
holding companies. It is likely that these holding companies will attempt to
acquire commercial banks, thrift institutions or companies engaged in
bank-related activities. Thus, Bancorp will face competition in undertaking any
such acquisitions and in operating subsequent to any such acquisitions. Bancorp
has no present plans or intentions to undertake any such acquisitions. See
"Business of the Bank -- Competition."
EMPLOYEES
At the present time, Bancorp does not intend to have any employees other
than its management. See "Management of Bancorp." It will utilize the support
staff of Carver from time to time without the payment of any fees. If Bancorp
acquires other financial institutions or pursues other lines of business, it may
at such time hire additional employees.
48
<PAGE> 55
BUSINESS OF THE BANK
GENERAL
Carver 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 53 West 125th Street in New York City, at which time, the Bank
obtained federal deposit insurance and became a member of the Federal Home Loan
Bank ("FHLB") of New York. In 1961, Carver opened its first branch office in the
Bedford-Stuyvesant section of Brooklyn, New York and over the next 20 years
added three other branches in Brooklyn and Manhattan, New York. In 1982, the
Bank acquired Allied Federal Savings and Loan Association in a supervisory
transaction. The Bank opened its Roosevelt, Long Island office in 1984 and
acquired two additional branches in 1989 and 1990. The Bank converted to a
federal savings bank in 1986 and changed its name at that time to Carver Federal
Savings Bank. On October 24, 1994, the Bank converted from mutual to stock form
and issued 2,314,375 shares of its common stock, par value $0.01 per share.
Carver was founded to provide an African-American operated institution
where residents of underserved communities could invest their savings and obtain
credit. The Bank's principal business consists of attracting passbook and other
savings accounts through it branch offices and investing those funds in mortgage
loans and other investments permitted to federal savings banks. The Bank has
undertaken a restructuring of its balance sheet and is now placing primary
emphasis on its whole loan portfolio through direct lending, as well as the
purchase of whole loans. As a result of this effort, the loan portfolio is
expected to substantially increase as a percentage of total assets. Therefore,
future earnings for the Bank will be derived more from direct lending and
purchase activities than from investing in securities. The Bank is also
continuing its strategy of growth by leveraging its strong capital position
through increased average borrowings to fund increases in average
interest-earning assets. Based on asset size as of March 31, 1996, Carver is the
largest minority-run financial institution in the United States.
LENDING ACTIVITIES
General. The principal lending activity of the Bank is the origination of
conventional mortgage loans for the purpose of purchasing or refinancing
owner-occupied, one- to four-family residential properties in its primary market
area. At March 31, 1996, one- to four-family mortgage loans comprised $58.5
million, or 69.23%, of the Bank's gross loan portfolio. The Bank also originates
or participates in loans for the construction or renovation of commercial
property and residential housing developments and occasionally originates
permanent financing upon completion. In addition, the Bank originates consumer
loans secured by deposits, second mortgages on residential property, or
automobiles, as well as unsecured personal loans and occasionally originates
loans secured by commercial and nonresidential real estate.
Prior to the 1980s, the Bank's residential lending activities consisted
primarily of originating fixed-rate mortgage loans with maturities of up to 30
years for retention in the loan portfolio. Fundamental changes in the regulation
of savings institutions in the early 1980s and prevailing economic conditions at
the time combined to increase significantly both the level and volatility of the
Bank's cost of funds. Since the early 1980s, the Bank has sought to build a more
rate-sensitive loan portfolio by originating adjustable-rate mortgages and
purchasing adjustable-rate loans. Carver has continued to originate fixed-rate
mortgage loans, primarily for sale in the secondary market, and maintains a
portfolio of such loans originated in the early 1980s. The types of
adjustable-rate mortgages offered have one- and three-year adjustment periods
with interest rate adjustments based upon the one- and three-year U.S. Treasury
bills, respectively. At March 31, 1996, the Bank's one- to four-family mortgage
loan portfolio had $28.8 million of adjustable-rate loans (comprising 64.72% of
such portfolio) and $15.7 million (or 35.28% of such portfolio) of fixed-rate
loans.
The Bank has continued to originate fixed-rate, one- to four-family
mortgage loans in response to consumer demand generated by the recent decline in
market interest rates. In an environment of declining interest rates, borrowers
tend to prefer long-term, fixed-rate mortgage loans rather than adjustable-rate
mortgage loans with short-term interest rate changes. In the recent period of
rising interest rates, however, borrowers tended to prefer adjustable-rate loans
because of their initially lower interest rates. Because the
49
<PAGE> 56
Bank's adjustable-rate loans are originated for retention in its own portfolio
rather than for sale in the secondary market, such originations depend upon the
level of interest rate risk that the Bank is willing to accept given its
capital, profitability and other factors. In turn, its origination of fixed-rate
loans depends upon the Bank's ability to dispose of such loans in the secondary
market and thus depends in large part upon satisfaction of loan underwriting
guidelines established by potential loan purchasers.
The Bank intends to continue monitoring the interest rate environment,
prepayment activity, interest rate risk and other factors in developing its
strategy with respect to the volume and pricing of its fixed-rate loans and in
its lending activities generally.
Loan Portfolio Composition. The following table sets forth selected data
relating to the composition of Carver's loan portfolio by type of loan at the
dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family......... $58,547 69.23 % $31,572 61.63 % $32,302 59.93 % $37,355 64.05 % $35,129 65.17 %
Multi-family................ 2,490 2.94 2,165 4.23 2,384 4.42 2,726 4.67 2,900 5.38
Nonresidential.............. 11,138 13.18 8,660 16.90 8,862 16.45 9,157 15.70 5,442 10.10
Construction................ 6,971 8.24 3,179 6.21 3,932 7.30 1,899 3.26 2,149 3.99
Consumer and commercial loans:
Savings account............. 1,011 1.20 1,099 2.14 1,209 2.24 1,576 2.70 1,711 3.17
Student education........... 1,162 1.37 1,346 2.63 1,457 2.70 1,729 2.96 1,573 2.92
Other(1).................... 3,244 3.84 3,209 6.26 3,749 6.96 3,886 6.66 5,003 9.27
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$84,563 100.00 % $51,230 100.00 % $53,895 100.00 % $58,328 100.00 % $53,907 100.00 %
======= ======= ======= ======= =======
Add:
Premium on loans............ 882 366 537 560 382
Less:
Loans in process............ (1,406) (1,853) (1,911) (439) (977)
Deferred fees and loan
discounts................. (225) (208) (233) (319) (744)
Allowance for loan losses... (1,206) (1,075) (1,268) (1,597) (858)
------- ------- ------- ------- -------
Total................. $82,608 $48,460 $51,020 $56,533 $51,710
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Other loans include second mortgage, home equity, personal, auto and
commercial business loans.
Loan Maturity Schedule. The following table sets forth information at
March 31, 1996 regarding the dollar amount of loans maturing in Carver'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
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<PAGE> 57
prepayments, which significantly shorten the average life of all mortgage loans
and may cause the Bank's actual repayment experience to differ from that shown
below.
<TABLE>
<CAPTION>
DUE DURING THE YEAR DUE AFTER DUE AFTER DUE AFTER
ENDING MARCH 31, 3 THROUGH 5 THROUGH 10 THROUGH DUE AFTER
------------------------- 5 YEARS AFTER 10 YEARS AFTER 20 YEARS AFTER 20 YEARS AFTER
1997 1998 1999 MARCH 31, 1996 MARCH 31, 1996 MARCH 31, 1996 MARCH 31, 1996 TOTAL
------- ------ ------ -------------- -------------- -------------- -------------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to
four-family..... $14,012 $2,433 $2,533 $5,800 $2,843 $ 24 $ 30,902 $58,547
Multi-family...... 122 94 125 4 725 878 542 2,490
Nonresidential.... 3,222 620 1,465 2,352 787 -- 2,692 11,138
Construction...... 2,704 4,267 -- -- -- -- -- 6,971
Consumer and
commercial loans:
Savings
accounts........ 1,011 -- -- -- -- -- -- 1,011
Student
education....... -- -- -- -- 1,162 -- -- 1,162
Other............. 747 -- 523 979 990 -- 5 3,244
------ ----- ----- ----- ----- ---- ------ ------
Total........... $21,818 $7,414 $4,646 $9,135 $6,507 $ 902 $ 34,141 $84,563
====== ===== ===== ===== ===== ==== ====== ======
</TABLE>
The following table sets forth, at March 31, 1996, the dollar amount of
loans maturing subsequent to the year ending March 31, 1997 which have
predetermined interest rates and floating or adjustable interest rates.
<TABLE>
<CAPTION>
PREDETERMINED FLOATING OR
RATE ADJUSTABLE RATES TOTAL
------------- ---------------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family..................................... $15,692 $ 28,843 $44,535
Multi-family............................................ 1,952 416 2,368
Nonresidential.......................................... 5,306 2,610 7,916
Construction............................................ 4,267 -- 4,267
Consumer and commercial loans:
Savings accounts........................................ -- -- --
Student education....................................... 554 608 1,162
Other................................................... 1,274 1,223 2,497
------- ------- -------
Total................................................ $29,045 $ 33,700 $62,745
======= ======= =======
</TABLE>
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life 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 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.
One- to Four-Family Residential Lending. Carver's principal lending
activity has been the origination of loans secured by first mortgages on
existing one- to four-family residences in the Bank's market area. The mortgage
loan amounts range between $28,000 and $499,000. At March 31, 1996, $58.5
million, or 69.23%, of the Bank's total loans were secured by one- to
four-family residences, a substantial majority of which were existing,
owner-occupied, single-family residences in the Bank's market area. The Bank's
current policy is to sell its fixed-rate loan originations to the Federal
National Mortgage Association ("FNMA") or the State of New York Mortgage Agency
("SONYMA") and to retain its adjustable-rate loan originations in its portfolio.
At March 31, 1996, $42.50 million, or 71.13%, of the Bank's one- to four-family
residential loans had adjustable interest rates, and $17.3 million, or 28.87%,
had fixed rates. During the year ended March 31, 1996,
51
<PAGE> 58
the Bank originated $11.2 million of adjustable-rate loans, which represents
83.63% of total loan originations for the year.
Carver's one- to four-family residential mortgage loans generally are for
terms of 25 to 30 years, amortized on a monthly basis, with principal and
interest due each month. Residential real estate loans often remain outstanding
for significantly shorter periods than their contractual terms. Borrowers may
refinance or prepay loans at their option without penalty. These loans
customarily contain "due-on-sale" clauses which permit the Bank to accelerate
repayment of a loan upon transfer of ownership of the mortgaged property.
The Bank's lending policies generally limit the maximum loan-to-value 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 loan-to-value ratios in excess
of 80%. The maximum loan-to-value ratio on mortgage loans secured by
non-owner-occupied properties is limited to 80%. Under a special loan program
the loan-to-value ratio may go to 100%. This special loan program consists of
loans originated and sold to SONYMA secured by detached single family homes
purchased by first time home buyers under SONYMA.
Carver's fixed-rate, one- to four-family residential mortgage loans are
underwritten in accordance with applicable guidelines and requirements for sale
to FNMA or SONYMA in the secondary market. The Bank has emphasized the
origination of fixed-rate loans for immediate or prompt sale to FNMA since 1993
and to SONYMA since 1984. The Bank also originates, to a limited extent, loans
underwritten according to Federal Home Loan Mortgage Corporation ("FHLMC")
standards. Loans are sold without recourse, and servicing of loans sold to FNMA
is retained by the Bank while servicing for loans sold to SONYMA transfers with
the loans. All loans, whether held in portfolio or serviced after sale, are
serviced by an outside sub-servicer. At March 31, 1996, the Bank, through its
sub-servicer, was servicing approximately $4.3 million of loans for others.
Carver offers one-year, three-year, five/one and five/three year
adjustable-rate, one- to four-family residential mortgage loans. These loans are
indexed to the weekly average rate on the one-year and three-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 or three years, generally with limitations on
adjustments of two percentage points per adjustment period and six percentage
points over the life of the one-year adjustable-rate mortgage and five
percentage points over the life of a three-year adjustable-rate mortgage.
The retention of adjustable-rate loans in the Bank's portfolio helps reduce
the Bank'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. Further, adjustable-rate loans which provide for initial rates of
interest below the fully indexed rates may be subject to increased risk of
delinquency or default as the higher, fully indexed rate of interest
subsequently replaces the lower, initial rate. In order to mitigate such risk,
the Bank qualifies borrowers at a rate equal to two percentage points above any
discounted introductory rate on one year ARM's, one percentage point above any
discounted introductory rate on three year ARM's and at the discounted
introductory rate on five/three ARM's. In addition, 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 sensitivity is limited
by the periodic and lifetime interest rate adjustment limitations and the
ability of borrowers to convert the loans to fixed-rates. 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. Finally,
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.
Construction Lending. Carver also offers construction loans to qualified
developers for construction of one- to four-family residences in the Bank's
market area. Typically, the Bank has emphasized lending to individuals to
refurnish or rehabilitate multi-family dwellings or church buildings and
construction of planned residential developments. The Bank does not lend to
private developers for speculative single-family housing
52
<PAGE> 59
construction. These loans generally have adjustable interest rates and are
underwritten in accordance with the same standards as the Bank's mortgages on
existing properties, except the loans generally provide for disbursement in
stages during a construction period from 12 to 24 months, during which period
the borrower is required to make monthly payments of accrued interest on the
outstanding loan balance. Construction loans generally have a maximum
loan-to-value ratio of 70%. Borrowers must satisfy all credit requirements which
would apply to the Bank's permanent mortgage loan financing for the subject
property. While the Bank's construction loans generally require repayment in
full upon the completion of construction, the Bank occasionally makes
construction loans with the intent to convert to permanent loans following
construction.
The Bank currently originates such loans primarily for the construction of
churches, multi-family buildings, planned residential developments and
affordable housing programs. At March 31, 1996, the Bank had $6.9 million in
construction loans outstanding, comprising 8.24% of the Bank's gross loan
portfolio. The largest construction loan outstanding at March 31, 1996 was a
$1.7 million participation in a $2.9 million loan to fund construction of 22
two-family homes in the Bedford-Stuyvesant section of Brooklyn, New York. These
loans are currently performing according to the terms and conditions of their
respective notes. Subsequent to completion of the dwelling units, Carver expects
to offer permanent financing to the individual purchasers, subject to their
respective satisfaction of underwriting standards.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the 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 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 which is insufficient to assure full repayment.
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 area
limiting the aggregate amount of outstanding construction loans and imposing a
stricter loan-to-value ratio requirement than required for one- to four-family
mortgage loans.
Nonresidential Lending. The Bank occasionally originates nonresidential
loans to churches as permanent financing following completion of construction.
At March 31, 1996, nonresidential mortgage loans totaled $11.1 million, or
13.18% of the gross loan portfolio. These loans generally have 5, 7 or 10 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 60% loan-to-value
ratio. The Bank determines the appropriate amount and type of security for such
loans based upon the structure of the particular religious organization. As a
general matter, the Bank will obtain a first mortgage on the underlying real
property and personal guarantees of key members of the congregation and will
also require the church to obtain key person life insurance on specific members
of the church's leadership. In addition, the Bank performs a cash flow analysis
of the church to determine its ability to service the proposed loan. Under the
Bank's current loan policy, the maximum loan amount for such lending is $1.0
million. Loans to churches generally average approximately $300,000. At March
31, 1996, non-residential church loans totaled $4.8 million, or approximately
5.70% of the Bank's gross loan portfolio. Management believes that Carver has
originated the most church loans in its market area. The largest of such loans
outstanding was a $925,000 construction loan to a church located in the New York
City borough of Bronx. This loan was performing according to the terms of the
loan at March 31, 1996.
Loans secured by nonresidential real estate 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 church's financial condition, requiring personal guarantees of
church leaders or key person life insurance on the pastor of the congregation,
limiting the size of such loans and establishing the quality of the collateral
securing the loan.
53
<PAGE> 60
Under the loans-to-one-borrower limits of the OTS, with certain limited
exceptions, loans and extensions of credit to a person outstanding at one time
generally shall not exceed 15% of the unimpaired capital and surplus of the
savings banks. Loans and extensions of credit fully secured by readily
marketable collateral may comprise an additional 10% of unimpaired capital and
surplus. At March 31, 1996, the Bank had no lending relationships in excess of
the OTS loans-to-one-borrower limits.
Multi-Family and Commercial Real Estate Lending. The Bank engages in the
origination of multi-family and commercial real estate loans in order to benefit
from the higher origination fees and interest rates, as well as shorter terms to
maturity and repricing, than could be obtained from one- to four-family mortgage
loans. Multi-family and commercial property lending, however, entails
significant 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, the payment experience on such loans
typically is dependent on the successful operation of the real estate project,
and these risks can be significantly impacted by supply and demand conditions in
the market for multi-family residential units.
The Bank's multi-family residential loans are primarily secured by
apartment buildings and mixed-use structures typically with more than 15 units
within the Bank's delineated area although loans may be extended for structures
with less than 15 units if owner-occupied. The maximum loan amounts for such
loans are $750,000 and may not exceed 70% of the lesser of cost or appraised
value or purchase price whichever is less. Such loans generally amortize on the
basis of a 10, 15, 20 and 25 year period but require a balloon payment after
five years. The Bank has recently started issuing fifteen year fixed rate loans
based on match funding from the Federal Home Loan Bank under the Community
Investment Program. At March 31, 1996, multi-family loans totaled $2.5 million
and comprised 2.94% of the Bank's gross loan portfolio. Because of regulatory
limitations on amount that the Bank may lend to a single borrower or group of
related borrowers, and to minimize its overall risk in such lending, Carver
generally originates and sells participation interests in larger multi-family
loans or acquires participation interests in such loans. In particular, the Bank
has participated through the Thrift Associations Service Corporation ("TASCO"),
a lending consortium formed by smaller New York thrift institutions to
facilitate their participation in larger real estate development projects, in
loans secured by low-income housing projects located in New York City. The Bank
has also participated in other loans originated by this consortium for
multi-family housing and for other purposes. At March 31, 1996, all such loans
were performing in accordance with their original or restructured terms.
At March 31, 1996, the Bank held approximately $934,000 (net of reserves)
in participations in TASCO loans and did not have any real estate owned
attributable to TASCO participations. The Bank has been required to establish
reserves in connection with the restructuring of various TASCO participations.
The stockholders in TASCO have recently approved a proposal to liquidate the
entity which will involve the sale or other disposition of the remaining TASCO
loans. At March 31, 1996, such disposition was still in process. See "Asset
Quality -- Nonperforming Assets."
Consumer Lending. Carver has given new emphasis to consumer lending. The
Bank's consumer loans primarily consist of loans secured by deposit accounts at
the Bank, government-guaranteed loans to finance higher education (some of which
are sold in the secondary market), automobile loans, personal loans, home equity
loans or second mortgages on single-family residences in the Bank's market area.
At March 31, 1996, the Bank had approximately $3.0 million in consumer loans, or
3.61% of the Bank's gross loan portfolio.
Carver makes loans secured by deposits for up to 90% of the amount of the
deposit. The interest rate on these loans generally is at 10.00%, and interest
is billed on a monthly basis. These loans are payable on demand, and the deposit
account must be pledged as collateral to secure the loan.
Carver has participated in the Federal Family Education Loan Program since
1964. The Bank's student loans are guaranteed by the New York Higher Education
Service Corporation, an independent agency of the State of New York. At March
31, 1996, the student loan portfolio totaled approximately $1.2 million, or
1.37% of the Bank's loan portfolio.
The Bank also originates second mortgage loans secured by the borrower's
residence. These loans, combined with the first mortgage loan, are limited to
75% of the appraised value of the residence.
54
<PAGE> 61
On September 19, 1995, the Board of Directors pursuant to the Office of
Thrift Supervision regulation 12 C.F.R. Section 516.2 and 545.82, passed a
resolution approving the formation of an operating subsidiary named C.F.S.B.
Credit Corp. to undertake the operations regarding the issuance of credit cards.
The resolution also includes a capital investment of $75,000 along with a
revolving line of credit of $2,500,000.
On March 1, 1996, the Bank started its credit card operations, issuing both
secured, unsecured and business Visa and MasterCards. The interest rate on these
credit cards is generally 4.50% above The Wall Street Journal Published Prime
Lending Rate. As of March 31, 1996 the Bank had 47 cards issued with $240,000
line of credit and outstanding balance of $9,000.
Consumer loans generally involve more risk than first mortgage loans.
Repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of damage, loss or
depreciation, and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, loan
collections are dependent on the borrower's continuing financial stability, and
thus are 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, and a borrower may be able to assert against the Bank
claims and defenses which it has against the seller of the underlying
collateral. In underwriting consumer loans, the Bank 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 Bank's risks associated with
consumer loans are further minimized by the modest amount of consumer loans made
by the Bank that are not secured by certificates of deposit or otherwise
guaranteed as to repayment. At March 31, 1996 the Bank had $877,000 in unsecured
personal loans or 1.04% of the Bank's gross loan portfolio.
Other Commercial Loans. The Bank also makes a limited number of commercial
loans, secured by passbook accounts and for terms of up to two years with
interest-only payments until maturity, with the interest rate negotiated on a
loan-by-loan basis. At March 31, 1996, the Bank had $1.1 million in commercial
loans outstanding, of which the largest such loan was to a church for $600,000
secured by a $600,000 certificate of deposit and for a five-year term with an
interest rate at two percentage points above the certificate rate.
Loan Processing and Approval. Carver'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 either a salary, salary plus
commissions or commissions. Loan application forms are available at each of the
Bank's offices and are submitted to the loan origination office located in the
Bank's loan center located next to the Bank's Chelsea Office for processing.
Applications for all fixed-rate one- to four-family real estate loans are
underwritten in accordance with FNMA and SONYMA guidelines, and all of the loan
applications for other types of loans are underwritten in accordance with the
Bank's own comparable guidelines, as stated in the Bank's lending policy, which
are comparable to those of FNMA and SONYMA.
Upon receipt of a completed loan application from a prospective borrower, a
credit report and verifications are ordered to verify specific information
relating to the loan applicant's employment, 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 a fee appraiser approved by the Bank.
It is Carver's policy to record a lien on the real estate securing the loan
and to obtain a title insurance policy which insures that the property is free
of prior encumbrances. Borrowers must also obtain hazard insurance policies
prior to closing and, when the property is in a flood plain as designated by the
Department of Housing and Urban Development, paid flood insurance policies. 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.
The Board of Directors has the overall responsibility and authority for
general supervision of Carver's loan policies. The Board has established written
lending policies for the Bank. The Bank's chief lending officer has
55
<PAGE> 62
authority to approve all consumer loans below $50,000, the President has
authority to approve such loans below $100,000, and the executive committee of
the Board of Directors must approve loans at or above $100,000. The credit card
manager has authority to approve credit limits up to $50,000. All mortgage loans
that conform to FNMA standards and limits can be approved by the Chief Lending
Officer. The Officers' Loan Committee composed of the President, the Chief
Lending Officer, and another member appointed by the Board, approves
non-conforming loans up to $450,000. Loans above $450,000 must be approved by
the executive committee of the Board of Directors, and loans above $750,000 must
be approved by the full Board of Directors.
Loan applicants are promptly notified of the decision of the Bank. It has
been management's experience that substantially all approved loans are funded.
Originations, Purchases and Sales of Loans. Originations of one- to
four-family real estate loans are generally within the Bank's market area,
although the Bank does occasionally extend loans to other boroughs of New York
City in which it does not presently have branches. All such loans, however,
satisfy the Bank's underwriting criteria regardless of location, and the Bank
seeks to further reduce its lending risk by limiting its lending to the New York
City Metropolitan area. In fiscal year 1996, the Bank increased its emphasis on
lending by hiring new employees to pursue originations of one- to four-family
loans throughout the Bank's market area and establishing a Loan Center in the
Chelsea area. The Bank also continues to offer fixed-rate mortgage loans in
response to consumer demand but requires that such loans satisfy guidelines of
either FNMA or SONYMA to ensure subsequent sale in the secondary market.
Management believes the increase in fiscal year 1996 in originations of one- to
four-family loans was due both to the new employees hired solely to originate
loans as well as the Bank's continued emphasis on FNMA loans to satisfy consumer
demand for 30-year loans with fixed interest rates while managing the Bank's
interest rate risk exposure.
The Bank purchases adjustable and fixed rate one- to four-family
residential real estate loans for its portfolio to manage its interest rate risk
and to satisfy its regulatory requirement of investment in housing-related
loans. Loans purchased by the Bank entail certain risks not necessarily
associated with loans the Bank originates. In an effort to reduce these risks,
with its existing personnel and through the use of an independent consultant,
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, although specific rates and terms may
differ from those offered by the Bank. The Bank further seeks to reduce its risk
by requiring in each buy/sale agreement a series of warrants and representations
as to the underwriting standards and the enforceability of the legal documents.
The warrants and representations remain in effect for the life of the loan.
Anything found to be misrepresented must be cured within ninety (90) days of
discovery or trigger certain repurchase provisions in the buy/sale agreement.
For the fiscal year ended, loans purchased from a New York based commercial bank
consisting of single family residential mortgages total $26.3 million, which
represents 7.15% of total assets at March 31, 1996. The loans consist of $9.4
million or 36.0% of fixed rate mortgages and $16.9 million or 64.0% of
adjustable rate mortgage loans.
56
<PAGE> 63
The following table sets forth certain information with respect to Carver's
loan originations, purchases and sales during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1996 1995 1994
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans originated:
Real estate:
One- to four-family....................................... $ 8,162 $ 7,859 $3,829
Multi-family.............................................. 1,720 125 400
Nonresidential............................................ 1,953 -- 900
Construction.............................................. 828 1,884 2,928
Consumer..................................................... 734 1,442 1,359
------- ------- ------
Total loans originated.................................... $13,397 $11,310 $9,416
======= ======= ======
Loans purchased................................................ $26,333 $ -- $ --
======= ======= ======
Loans sold(1).................................................. $ 1,948 $ 3,940 $1,666
======= ======= ======
</TABLE>
- ---------------
(1) Comprised solely of one- to four-family loans, with loans purchased with
servicing.
Interest Rates and Loan Fees. Interest rates charged by Carver on mortgage
loans are primarily determined by competitive loan rates offered in its market
area and minimum yield requirements for loans purchased by the FNMA 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 charges fees in connection with loan commitments and originations,
rate lock-ins, loan modifications, late payments and 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 three points (one point being equivalent to 1%
of the principal amount of the loan) in connection with the origination of
fixed-rate and adjustable-rate residential mortgage loans. The loan origination
fee, net of certain direct loan origination expenses, is deferred and accrete
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 receives fees for servicing loans
for others. Servicing activities include the collection and processing of
mortgage payments, accounting for loan funds and paying real estate taxes,
hazard insurance and other loan-related expenses out of escrowed funds. Loan
servicing fees usually are charged as a percentage (usually, between 1/4% and
3/8%) of the balance of the loans being serviced. 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.
ASSET QUALITY
Nonperforming Assets. When a borrower fails to make a payment on a loan,
immediate steps are taken by Carver's sub-servicer to have the delinquency cured
and the loan restored to current status. 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 of four to five
percent of the payment 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 loan becomes 30 days
in default, a letter is mailed to the borrower requesting payment by a specified
date. If a loan becomes 60 days past due, the Bank
57
<PAGE> 64
seeks to make personal contact with the borrower and also has the collateral
property inspected. If a mortgage becomes 90 days past due, 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, management may pursue foreclosure or other appropriate action.
The following table sets forth information with respect to Carver's
nonperforming assets at the dates indicated. Loans generally are placed on
non-accrual status when they become 90 days past due. The table does not reflect
approximately $1.9 million in federal funds and certificates of deposits at
March 31, 1996, which Carver had invested in National Trust Company and which
are no longer earning interest. For further information, see "-- Investment
Activities" and "-- Legal Proceedings."
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis(1):
Real estate:
One- to four-family.............................. $ 672 $ 520 $1,027 $1,818 $1,348
Multi-family..................................... 478 -- -- -- 689
Nonresidential................................... 284 339 893 1,881 1,881
Construction..................................... 521 521 -- -- --
Consumer and commercial.......................... 79 152 283 138 125
------ ------ ------ ------ ------
Total....................................... 2,034 1,532 2,203 3,837 4,043
------ ------ ------ ------ ------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Accruing loans contractually past due 90 days or more:
Real estate:
One- to four-family.............................. 4
Multi-family..................................... 55 -- 85 709 --
Nonresidential................................... 217 -- 291 -- --
Construction..................................... 611 -- 992 -- --
Consumer and commercial.......................... 334 208 57 217 168
------ ------ ------ ------ ------
Total....................................... 1,221 208 1,425 926 168
------ ------ ------ ------ ------
Total of non-accrual and accruing 90 day
past due loans............................ 3,255 1,740 3,628 4,763 4,211
Other nonperforming assets(2):
Real estate owned:
One- to four-family.............................. 285 273 50 38 4
Multi-family..................................... -- -- 140 255 --
Nonresidential................................... 29 29 -- -- --
------ ------ ------ ------ ------
Total other nonperforming assets............ 314 302 190 293 4
------ ------ ------ ------ ------
Total nonperforming assets.................. $3,569 $2,041 $3,818 $5,056 $4,215
====== ====== ====== ====== ======
Non-accrual and accruing 90 day past due loans to
total loans......................................... 3.85% 4.20% 6.73% 8.17% 8.14%
====== ====== ====== ====== ======
Nonperforming assets to total assets.................. 0.97% 0.56% 1.24% 1.53% 1.30%
====== ====== ====== ====== ======
Troubled debt restructurings(3):
Real estate:
Multi-family and commercial...................... $ -- $1,468 $1,758 $ -- $ --
====== ====== ====== ====== ======
</TABLE>
- ---------------
(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. After a careful review of individual loan
Notes continued on following page.
58
<PAGE> 65
history and related collateral by management, the loan may continue to
accrue interest. If, however, in the opinion of management, the collection
of additional interest is doubtful, the loan will remain in non-accrual
status. 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 collectibility of the loan. During the year ended March
31, 1996, gross interest income of $138,000 would have been recorded on
loans accounted for on a non-accrual basis at the end of the year if the
loans had been current throughout the year. Instead, interest on such loans
included in income during the period amounted to $26,000.
(2) Other nonperforming assets represents 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) Troubled debt restructurings, as defined under Statement of Financial
Accounting Standards ("SFAS") No. 15, are loans where the creditor has, for
economic or legal reasons, granted concessions to the debtor that the
creditor would not otherwise consider. During the year ended March 31, 1996,
the Bank had no restructured loans. During the year ended March 31, 1995,
the Bank would have recorded interest income of $137,000 on restructured
loans had such loans been performing in accordance with the original terms.
The Bank received interest income of $47,000 in accordance with the
restructured terms.
A significant portion of the Bank's nonperforming assets are attributable
to loan participations purchased from TASCO (i.e., the Thrift Associations
Service Corporation), a service corporation formed by approximately 50 savings
institutions in New York State to originate and invest in loans on multi-family
and commercial properties in New York State and to sell participations in such
loans to member institutions.
The Bank's TASCO loan participations include a $988,000 participation in a
$71.2 million loan by TASCO and other financial institutions to a partnership
secured by a 20-story hotel located in Manhattan. The lead lender on this
project was placed in conservatorship with the FDIC, which continues to control
the project. The FDIC has agreed to certain modifications to the loan and has
given the borrower an option to purchase the loan for approximately 50% of its
face amount. Through March 31, 1996, the Bank provided an allowance for loan
losses in the amount of $553,000 in connection with this participation. As of
March 31, 1996, the modified loan was performing in accordance with its terms
and has been taken off non-accrual status.
Through TASCO, the Bank also acquired a $770,000 participation in a $23.4
million loan to a partnership secured by a 734-unit co-operative housing project
located in Kew Gardens Hills, New York. As a result of various restructurings of
this loan, the carrying value of Carver's participation has been reduced to
$478,000 at March 31, 1996. At March 31, 1996 the loan was not performing in
accordance with its restructured terms and was placed on non-accrual status.
Through March 31, 1996, the Bank provided an allowance for loan losses in the
amount of $240,000 in connection with this participation. This loan was sold
during May 1996 at an additional loss of $86,000.
The Bank's only other TASCO participation is a 10.5% participation in $3.8
million loan secured by a two-story office building in Long Island City, New
York. The borrower and sole tenant of this building is also the developer
originally involved in the Kew Gardens Hills project described above. This loan
for the building in Long Island City, however, has performed in accordance with
its original terms. At March 31, 1996, the carrying value of this asset was
$370,000.
The stockholders in TASCO have approved a liquidation of the company which
is expected to be completed when purchasers can be found for its remaining
assets. The Bank does not anticipate that it will incur any additional losses on
its investment in TASCO which has previously been written down to $0.
In addition to the TASCO participations, the Bank had an $893,000
participation, since written down to $413,000, in a $2.4 million loan to finance
the first construction phase of a project to renovate a historic theater into
office space. The writedown was based upon a reduced appraisal value obtained by
the lead lender. Although this phase of the renovation has been completed and
leased out, the borrower is currently in bankruptcy and rents are being paid
into the bankruptcy court. The lead lender on this project is also in
59
<PAGE> 66
receivership with the FDIC. At March 31, 1996, the Bank's participation remained
$413,000 and the entire amount of the loan was classified as non-accrual because
it was not performing according to its terms.
Asset Classification and Allowances for Losses. Federal regulations
require savings institutions to classify their assets on the basis of quality on
a regular 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 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 uncollectible, even if a partial
recovery could be expected in the future. The regulations also provide for a
"special mention" designation, described as assets which 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 loss, a savings institution must
either establish specific allowances for loan losses in the amount of the
portion of the asset classified loss, or charge off such amount. Federal
examiners may disagree with a savings institution's classifications. If a
savings institution does not agree with an examiner's classification of an
asset, it may appeal this determination to the OTS Regional Director. At March
31, 1996, Carver had $1.7 million of assets classified as substandard (including
$314,000 of real estate acquired in settlement of loans), $1.8 million of assets
classified as doubtful, and $752,000 of assets classified as loss. The aggregate
of the aforementioned classifications and designations totaled $4.3 million,
which represented 1.17% of the Bank's total assets and 12.7% of the Bank's
tangible regulatory capital, at March 31, 1996.
Carver reviews monthly its assets to determine whether any assets require
classification or re-classification. The Bank does not maintain a specific
"watch list" of loans with potential problems. However, it does prepare a
monthly list of those loans originated by the Bank with outstanding balances in
excess of $100,000 and those loans purchased by the Bank with outstanding
balances in excess of $100,000 which are delinquent 30 days or more, and this
list is reviewed at the regular monthly meetings of the Board of Directors.
Additionally, the Bank has a centralized loan processing structure that relies
upon an outside servicer, which generates a monthly report of nonperforming
loans. The Bank uses the Internal Auditor for its loan review, and his report is
submitted quarterly to the Board of Directors for review and approval prior to
implementation of any classifications.
In originating loans, Carver 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. The Bank increases its allowance for loan losses by charging
provisions for possible losses against the Bank's income. Federal examiners may
disagree with the savings institution as to the appropriate level of the
institution's allowance for loan losses.
The OTS, along with the other federal banking regulators, adopted a joint
policy statement on the adequacy of general valuation allowances applicable to
all federally insured depository institutions. The policy statement provides
that the primary responsibility for judging the adequacy of general valuation
allowances lies with management. Examiners will evaluate the methodology and
process used by management to establish such allowances. In addition, examiners
will judge the adequacy of the allowance by calculating whether the allowance is
at least equal to the following percentages of assets: (i) the amount of
estimated credit losses estimated to result over the next twelve months from
unclassified and Special Mention assets based on annual net charge-offs
experienced during the previous two or three years; (ii) 15% of Substandard
assets; and (iii) 50% of Doubtful assets.
Management actively monitors Carver'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
60
<PAGE> 67
necessary if economic conditions differ substantially from the economic
conditions in the assumptions used in making the initial determinations.
Carver'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. Management conducts regular reviews of the Bank's loans and
evaluates the need to establish general and specific allowances on the basis of
this review. General allowances are established by the Board of Directors 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. At March
31, 1996, the Bank held $314,000, net of loss allowance, in real estate acquired
in settlement of loans. Any amount of cost in excess of fair value is
charged-off against the allowance for loan losses. The Bank 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. See Note 1 of Notes to Consolidated
Financial Statements.
The following table sets forth an analysis of Carver's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period........................ $1,075 $1,268 $1,597 $ 858 $1,468
------ ------ ------ ------ ------
Loans charged-off(1):
Real estate:
One- to four-family.............................. -- 43 21 75 174
Multi-family..................................... -- -- 276 -- 628
Commercial....................................... -- 481 -- -- --
Consumer......................................... -- 3 52 -- --
------ ------ ------ ------ ------
Total charge-offs........................... -- 527 349 75 802
------ ------ ------ ------ ------
Recoveries:
Consumer............................................ 19 -- 1 2 --
------ ------ ------ ------ ------
Total recoveries............................ 19 -- 1 2 --
------ ------ ------ ------ ------
Net loans charged-off (Recoveries).................... (19) 527 348 73 802
------ ------ ------ ------ ------
Provision for losses.................................. 150 334 19 812 192
------ ------ ------ ------ ------
Balance at end of period.............................. $1,206 $1,075 $1,268 $1,597 $ 858
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans
outstanding......................................... 0.00% 1.06% 0.65% 0.15% 1.78%
====== ====== ====== ====== ======
Ratio of allowance to total loans..................... 1.42% 2.10% 2.35% 2.74% 1.58%
====== ====== ====== ====== ======
Ratio of allowance to nonperforming loans............. 37.05% 61.79% 34.95% 33.53% 20.38%
====== ====== ====== ====== ======
Ratio of allowance to nonaccrual loans................ 59.29% 70.17% 57.56% 41.62% 21.22%
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Loans are charged-off when management determines that they are
uncollectible.
61
<PAGE> 68
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.
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------- -------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
Real estate --
One- to four-
family.......... $ 165 69.23% $ 165 64.80% $ 231 63.97% $ 287 69.22% $ 143 73.23%
Multi-family....... 75 2.94 75 4.23 49 4.42 341 4.67 316 5.38
Nonresidential.. 616 13.18 616 16.90 782 16.44 783 15.70 208 10.10
Construction....... 15 8.24 15 6.20 15 7.30 11 3.26 18 3.99
Consumer,
commercial
and other..... 335 6.41 204 7.87 191 7.87 175 7.15 173 7.30
------- ------- ------ ------ ----- ------ ------ ------ ----- ------
Total allowance
for loan losses.. $1,206 100.00% $1,075 100.00% $1,268 100.00% $1,597 100.00% $ 858 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ===== ======
</TABLE>
Numerous financial institutions throughout the United States have incurred
losses in recent years due to significant increases in loss provisions and
charge-offs resulting largely from higher levels of loan delinquencies and
foreclosures. Depressed real estate market conditions have adversely affected
the economies of various regions and have had a severe impact on the financial
condition and businesses of many of the financial institutions doing business in
these areas. Considerable uncertainty exists as to the future improvement or
deterioration of the real estate markets in these regions, or of its ultimate
impact on these financial institutions.
As a result of declines in real estate market values and significant losses
experienced by many financial institutions, there has been a greater level of
scrutiny by regulatory authorities of the loan portfolios of financial
institutions undertaken as part of examinations of such institutions by the
FDIC, OTS or other regulators. Results of recent examinations indicate that
these regulators may be applying more conservative criteria in evaluating real
estate market values, requiring significantly increased provisions for losses on
loans and real estate acquired in settlement of such loans. While management
believes Carver has established its existing loss allowances in accordance with
generally accepted accounting principles, there can be no assurance that
regulators, in reviewing the Bank's assets, will not make the Bank increase its
loss allowance, thereby negatively affecting the Bank's reported financial
condition and results of operations.
MORTGAGE-BACKED AND RELATED SECURITIES
Carver maintains a significant portfolio of mortgage-backed securities in
the form of Government National Mortgage Association ("GNMA") pass-through
certificates, FNMA and FHLMC participation certificates and 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
U.S. Government, while FNMA and FHLMC certificates are each guaranteed by their
respective agencies as to principal and interest. Mortgage-backed securities
generally entitle the Bank 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.
The Bank's CMOs are primarily adjustable-rate CMOs issued by the Resolution
Trust Corporation ("RTC"). The Bank also invests in pools of loans guaranteed as
to principal and interest by the Small Business Administration ("SBA"). The Bank
has also invested $70.5 million in mutual funds which invest primarily in
adjustable-rate mortgage-backed securities. See "-- Investment Activities."
62
<PAGE> 69
Although mortgage-backed securities generally yield from 60 to 100 basis
points less than whole loans, they present substantially lower credit risk and
are more liquid than individual mortgage loans and may be used to collateralize
obligations of the Bank. Because the Bank 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 -- Qualified Thrift Lender Test" and "Taxation."
Mortgage-backed securities, however, expose the Bank to certain unique
risks. In a declining rate environment, accelerated prepayments of loans
underlying these securities expose the Bank 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. The Bank seeks to avoid interest rate risk by
investing in adjustable-rate mortgage-backed securities, which constitute 59.61%
of the mortgage-backed securities portfolio. The mortgage-backed securities in
the Bank's available-for-sale portfolio adjust in accordance with a treasury
index which generally lags changes in general market rates. In order to protect
the value of this security in a rising rate environment, the Bank has entered
into a four-year interest rate cap agreement with a money center bank. Whenever
the three-month London Inter-Bank Offered Rate ("LIBOR") exceeds the 5.5% strike
rate, Carver will receive the difference multiplied by the $20.0 million
"notional" amount of the agreement. The $410,000 cost of the cap agreement is
being amortized over the four-year life of the contract using the straight-line
method. Any contractual payments earned on the interest rate protection
agreement are treated as yield adjustments on the hedged securities.
The OTS has adopted a statement of policy with respect to investments in
mortgage derivative products which are defined to include CMOs, real estate
mortgage investment conduits ("REMICs"), CMO and REMIC residuals and stripped
mortgage-backed securities ("SMBSs"). The policy distinguishes between high-risk
and non high-risk mortgage securities. Mortgage derivative products with an
average life or price volatility in excess of a benchmark 30-year
mortgage-backed pass-through security are considered high-risk mortgage
securities. Under the policy, savings associations may generally only invest in
high-risk mortgage securities in order to reduce interest rate risk. In
addition, all high-risk mortgage securities acquired after February 9, 1992 must
be carried in the institution's trading account or as assets held for sale. At
March 31, 1996, the Bank had no mortgage derivative products which met the
definition of high-risk mortgage securities.
63
<PAGE> 70
The following table sets forth information regarding Carver's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Held to Maturity:
GNMA..................................................... $ 13,297 $ 22,108 $ 8,127
FNMA..................................................... 46,246 63,389 56,766
FHLMC.................................................... 55,420 77,627 67,761
SBA...................................................... 2,603 2,961 3,328
CMOs:
RTC...................................................... 11,137 12,440 14,846
FHLMC.................................................... 1,703 1,703 1,871
FNMA..................................................... -- -- --
Other.................................................... 699 906 1,144
-------- -------- --------
Total CMOs.......................................... 13,539 15,049 17,861
-------- -------- --------
Total Held to Maturity........................... 131,106 181,134 153,843
-------- -------- --------
Available-for-Sale:
GNMA..................................................... 23,058 19,735 17,858
FNMA..................................................... 10,433 -- --
FHLMC.................................................... 8,239 -- --
-------- -------- --------
Total Available for Sale............................ 41,730 19,735 17,858
-------- -------- --------
Total Mortgage-Backed Securities................. $172,836 $200,869 $171,701
======== ======== ========
</TABLE>
The following table sets forth information regarding the scheduled
maturities, carrying value, market value and weighted average yields for
Carver's mortgage-backed securities (including mortgage-backed securities
available-for-sale) at March 31, 1996. 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.
<TABLE>
<CAPTION>
ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS TOTAL INVESTMENT PORTFOLIO
--------------------- --------------------- --------------------- ---------------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE VALUE YIELD
--------- -------- --------- -------- --------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA(1).... $ 10 12.75% $ -- --% $ 36,345 6.60% $ 36,355(1) $ 36,298 6.60%
FNMA(2).... -- -- -- -- 56,679 6.55 56,679(2) 55,714 6.56
FHLMC(3)... 11,475 7.20 3,556 8.96 48,629 6.80 63,660(3) 63,846 6.99
SBA........ -- -- -- -- 2,603 6.70 2,603 2,669 6.70
CMOs:
RTC...... -- -- -- 11,137 6.88 11,137 10,864 6.88
FHLMC.... 1,703 5.53 -- -- -- -- 1,703 1,686 5.53
Other.... -- -- 699 6.18 699 687 6.18
------- ------ -------- -------- --------
Total... $ 13,188 $ 3,556 $ 156,092 $ 172,836 $171,764
======= ====== ======== ======== ========
</TABLE>
- ---------------
(1) Includes $23.0 million in securities available-for-sale.
(2) Includes $10.4 million in securities available-for-sale.
(3) Includes $8.2 million in securities available-for-sale.
64
<PAGE> 71
INVESTMENT ACTIVITIES
Carver 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 of New York, certificates of
deposits 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. Federal regulations require the Bank to
maintain an investment in FHLB of New York stock and a minimum amount of liquid
assets which may be invested in cash and specified securities. From time to
time, the OTS adjusts the percentage of liquid assets which savings banks are
required to maintain. For additional information, see "Regulation -- Liquidity
Requirements."
Carver invests in investment securities in order to diversify its assets,
manage cash flow, obtain yield and maintain the minimum levels of liquid assets
required by regulatory authorities. Such investments generally include sales of
federal funds, and purchases of federal government and agency securities and
qualified deposits in other financial institutions. The Bank has also invested
in mutual funds which invest solely in adjustable-rate mortgage-backed
securities. Although these funds yield less than the underlying securities,
these funds generally are more sensitive to changes in interest rates and are
less volatile than mortgage-backed securities. Unlike investments in
mortgage-backed securities held to maturity, however, investments in mutual
funds expose the Bank to the risk of principal loss as a result of market
declines. The funds in which the Bank is currently invested are open-end, no
load funds. Investment decisions generally are made by the Internal Investment
Committee in accordance with investment strategies approved by the Investment
Committee of the Board of Directors.
Effective March 31, 1994, the Bank adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" which generally requires that
debt and equity securities that have readily determinable fair values be carried
at fair value unless they are classified as held to maturity. In connection with
the adoption of SFAS No. 115, the Bank designated $54.5 million of investment
securities, including those previously classified as held-to-maturity, and $17.7
million of adjustable-rate mortgage-backed securities as available-for-sale.
Unrealized holding gains or losses for securities available-for-sale are
reported net of deferred income taxes as a separate component of retained
earnings. On December 30, 1995 the Bank reclassified $25.9 million of investment
securities from held to maturity to available-for-sale, as permitted under a one
time opportunity permitted by the Financial Accounting Standards Board and
regulatory agencies.
65
<PAGE> 72
The following table sets forth the carrying value of Carver's investments
at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------------------
1996 1995 1994
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
HELD TO MATURITY:
Debt securities:
U.S. government and agency securities...................... $ 8,937 $ 18,035 $12,018
Other investments:
FHLB stock................................................. 3,120 3,120 1,833
------- -------- -------
Total held to maturity............................. 12,057 21,155 13,851
------- -------- -------
AVAILABLE-FOR-SALE:
Equity securities(1):
Smith Breeden Short Duration U.S. Government Series Fund... 63,619 64,668 44,587
Federated ARMs Fund -- Institutional Shares................ 6,789 6,754 6,902
Asset Management Fund Adjustable-Rate Mortgage Portfolio... 99 99 99
Portfolio Share Funds...................................
Common and preferred stocks................................ 2,090 2,071 2,126
Other investments:
Federal funds sold......................................... 6,800 7,000 4,500
------- -------- -------
Total available for sale........................... 79,397 80,592 58,214
------- -------- -------
Total investment securities........................ $91,454 $101,747 $72,065
======= ======== =======
</TABLE>
- ---------------
(1) Equity securities were classified as available-for-sale at March 31, 1996,
1995 and 1994.
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Carver's investments at March 31, 1996.
<TABLE>
<CAPTION>
ONE YEAR OR LESS ONE TO FIVE YEARS TOTAL INVESTMENT PORTFOLIO
------------------ ------------------ ----------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE VALUE YIELD
-------- ------- -------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. government and agency
securities........................ $ -- --% $ 8,937 4.98% $ 8,937 $ 8,814 4.98%
Federal funds sold.................. 6,800 5.00 -- -- 6,800 6,800 5.00
Equity securities................... 70,507 6.38 -- -- 70,507 70,507 6.38
Common and preferred stocks......... 2,090 7.90 -- -- 2,090 2,090 7.90
FHLB stock.......................... -- -- 3,120 7.28 3,120 3,120 7.28
-------- -------- -------- -------
Total investments......... $ 79,397 $ 12,057 $ 91,454 $91,331
======= ======= ======= =======
</TABLE>
On February 6, 1995, the New York State Banking Department (the
"Department") took possession of Nationar Trust Company ("Nationar"), a trust
company owned by sixty-seven New York savings banks. The Department will manage
the business of Nationar until a suitable buyer is found. As of February 6,
1995, Carver had invested $1,366,000 in federal funds and $600,000 in
certificate of deposits, or a total of $1,966,000, with Nationar. This
$1,966,000 investment has been reclassified, net of a $256,000 allowance for
estimated losses, to other assets on Carver's statement of financial condition.
At a hearing on April 10, 1996, pursuant to the recommendation of the
Superintendent of Banks of the State of New York Banking Department (the
"Superintendent"), the judge in the instant case entered an order directing the
return of the $600,000 in certificates of deposit that had been deposited with
Nationar. The Bank received these funds, plus interest, in early June 1996. As a
result, the Bank will recover the valuation allowance of 13.0% on the $600,000
amount.
66
<PAGE> 73
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of Carver's funds for lending and
other investment purposes. In addition to deposits, the Bank derives funds from
loan principal repayments, interest payments and maturing investments. Loan
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. Borrowings may be used to supplement
the Bank's available funds, and from time to time the Bank has borrowed funds
from the FHLB of New York and through reverse repurchase agreements.
Deposits. The Bank 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. The Bank also offers Individual Retirement Accounts ("IRAs").
Carver'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. The Bank also holds deposits from various municipal and other
governmental agencies. The Bank does not accept deposits from brokers due to
their rate sensitivity. The Bank's interest rates, maturities, service fees and
withdrawal penalties on deposits are established by management on a periodic
basis. Management determines deposit interest rates and maturities 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.
Deposits in Carver as of March 31, 1996 were represented by the various
programs described below.
<TABLE>
<CAPTION>
AGGREGATE
BALANCE PERCENTAGE
WEIGHTED AVERAGE MINIMUM MINIMUM -------------- OF TOTAL
INTEREST RATE TERM CATEGORY BALANCE DEPOSITS
- ---------------- ------------- ------------------------------ ------- (IN THOUSANDS) ----------
<C> <S> <C> <C> <C> <C>
1.86% None NOW accounts $ 500 $ 16,916 6.58%
2.50 None Savings and club 300 141,873 55.21
3.17 None Money market savings accounts 500 19,444 7.57
0 None Other demand accounts 500 6,046 2.36
-------------- ----------
Total savings accounts 184,279 71.72
-------------- ----------
CERTIFICATES OF DEPOSIT
-------------------
3.69 91 days Fixed-term, fixed-rate 2,500 1,700 0.66
4.71 182-365 days Fixed-term, fixed-rate 2,500 18,404 7.16
5.29 1-2 years Fixed-term, fixed-rate 1,000 15,444 6.01
5.33 2-3 years Fixed-term, fixed-rate 1,000 14,236 5.54
4.45 3-4 years Fixed-term, fixed-rate 1,000 8 0.01
6.23 4-5 years Fixed-term, fixed-rate 1,000 11,954 4.65
6.74 5-10 years Fixed-term, fixed-rate 500 70 0.03
5.39 30 days Negotiable 80,000 10,857 4.22
-------------- ----------
Total Certificates of Deposit 72,673 28.28
-------------- ----------
Total Deposits $256,952 100.00%
=========== ========
</TABLE>
67
<PAGE> 74
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by Carver between the dates indicated.
<TABLE>
<CAPTION>
BALANCE AT PERCENTAGE BALANCE AT PERCENTAGE BALANCE AT PERCENTAGE
MARCH 31, OF TOTAL INCREASE MARCH 31, OF TOTAL INCREASE MARCH 31, OF TOTAL
1996 DEPOSITS (DECREASE) 1995 DEPOSITS (DECREASE) 1994 DEPOSITS
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings and club.... $141,873 55.21% $ 953 $140,920 56.72% $ (1,165) $142,085 56.28%
Money market
savings........... 19,444 7.57 1,546 17,898 7.21 (2,547) 20,445 8.10
NOW and demand
accounts.......... 22,962 8.94 4,317 18,645 7.50 2,322 16,323 6.46
Certificates of
deposit........... 72,673 28.28 1,690 70,983 28.57 (2,638) 73,621 29.16
-------- ------ ----- -------- ------ ------- -------- -----
Total
deposits... $256,952 100.00% $8,506 $248,446 100.00% $ (4,028) $252,474 100.00%
======== ====== ===== ======== ====== ======= ======== =====
</TABLE>
The following table sets forth the average balances and interest rates
based on month-end balances for certificates of deposit and non-certificate
accounts as of the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand.... $ 4,761 0.00% $ 3,814 0.00% $ 2,913 0.00%
Savings and club............... 140,204 2.50 144,092 2.43 140,447 2.65
Certificates................... 74,060 5.36 70,684 4.41 75,745 4.58
Money market savings
accounts..................... 18,770 3.19 19,135 2.82 24,277 2.66
NOW accounts................... 15,539 2.02 13,904 1.62 9,876 2.03
-------- -------- --------
Total................ $253,334 $251,629 $253,258
======== ======== ========
</TABLE>
The following table sets forth time deposits in specified weighted average
interest rate categories as of the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
2% - 3.99%.................................................... $ 1,686 $ 1,820 $42,405
4% - 5.99%.................................................... 58,950 60,292 21,998
6% - 7.99%.................................................... 12,037 8,871 6,631
8% - 9.99%.................................................... -- -- 2,587
------- ------- -------
Total............................................... $72,673 $70,983 $73,621
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time deposits
in specified weighted average interest rate categories at March 31, 1996.
<TABLE>
<CAPTION>
AMOUNT DUE
-------------------------------------------------------------
LESS THAN AFTER
RATE ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
- ----------------------------------------- --------- --------- --------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
2% - 3.99%............................... $ -- $ -- $ -- $ 52 $ 52
4% - 5.99%............................... 45,275 14,209 5,970 823 66,277
6% - 7.99%............................... -- 151 -- 6,193 6,344
------- ------- ------ ------ -------
Total.......................... $45,275 $14,360 $ 5,970 $ 7,068 $72,673
======= ======= ====== ====== =======
</TABLE>
68
<PAGE> 75
The following table indicates the amount of Carver's certificates of
deposit of $100,000 or more by time remaining until maturity as of March 31,
1996.
<TABLE>
<CAPTION>
MATURITY PERIOD
--------------------------------------------------------------- CERTIFICATES
OF DEPOSITS
--------------
(IN THOUSANDS)
<S> <C>
Three months or less........................................... $ 16,906
Three through six months....................................... 15,700
Six through 12 months.......................................... 12,670
Over 12 months................................................. 27,397
-------
Total................................................ $ 72,673
=======
</TABLE>
The following table sets forth Carver's deposit reconciliation for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits at beginning of period............................ $248,446 $252,474 $256,068
Net increase (decrease) before interest credited........... 134 (11,501) (11,493)
Interest credited.......................................... 8,372 7,473 7,899
------- ------- -------
Deposits at end of period........................ $256,952 $248,446 $252,474
======= ======= =======
</TABLE>
The increase in deposits of $8.5 million, or 3.42%, to $257.0 million at
March 31, 1996 from $248.5 million at March 31, 1995 was offset in part by a
decrease in FHLB borrowings. The Bank attributes the increase in deposits to
interest credited to depositors.
Borrowings. Savings deposits historically have been the primary source of
funds for Carver's lending, investment and general operating activities. The
Bank is authorized, however, to use advances and securities sold under agreement
to repurchase (Repos) from the FHLB of New York to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. The FHLB of New York
functions as a central reserve bank providing credit for savings institutions
and certain other member financial institutions. As a member of the FHLB system,
the Bank is required to own stock in the FHLB of New York 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 of New York are secured by the Bank's stock in the FHLB and a blanket
pledge of the Bank's mortgage loan and mortgage-backed securities portfolios. At
March 31, 1996, the Bank had $25.4 million in advances and $22.0 million in
securities sold under agreements to repurchase outstanding from the FHLB of New
York.
69
<PAGE> 76
The following table sets forth certain information regarding the Bank's
short-term borrowings at the dates and for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED MARCH 31,
-------------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amounts outstanding at end of period:
FHLB advances............................................... $25,400 $62,400 $30,400
Securities sold under agreements to repurchase.............. 47,000 18,188 9,530
Weighted average rate paid at period end:
FHLB advances............................................... 6.84% 7.20% 4.52%
Securities sold under agreements to repurchase.............. 5.60% 7.22 3.50
Maximum amount of borrowings outstanding at any month end:
FHLB advances............................................... $62,400 $62,400 $54,000
Securities sold under agreements to repurchase.............. 47,000 18,188 9,530
Approximate average amounts outstanding for period:
FHLB advances............................................... $45,538 $45,049 $42,293
Securities sold under agreements to repurchase.............. 25,654 9,177 2,383
Approximate weighted average rate paid during period (1):
FHLB advances............................................... 7.52% 5.56% 5.16%
Securities sold under agreements to repurchase.............. 6.36% 6.02 3.50
</TABLE>
- ---------------
(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.
SUBSIDIARY ACTIVITIES
As a federally chartered savings institution, Carver is permitted to invest
up to 2% of its assets in subsidiary service corporations plus an additional 1%
in subsidiaries engaged in specified community purposes. Other than a recently
established subsidiary of the Bank, as further discussed below, Carver's only
investment in service corporations is its interest in a captive insurance
corporation for financial institutions. At March 31, 1996, the net book value of
the Bank's service corporation investments was $399,000.
Carver is also authorized to make investments of any amount in operating
subsidiaries that engage solely in activities that federal savings institutions
may conduct directly. On March 8, 1995, the Bank formed C.F.S.B. Realty Corp. as
a wholly-owned subsidiary which will hold real estate acquired through
foreclosure pending eventual disposition. At March 31, 1996, this subsidiary had
$335,000 in total capital and net operation expense of $70,000.
On September 19, 1995, the Bank formed C.F.S.B. Credit Corp. as a
wholly-owned subsidiary which will undertake the operations regarding the
issuance of credit cards. At March 31, 1996, this subsidiary had $63,000 in
total capital and net operation expense of $12,000.
MARKET AREA AND COMPETITION
The Bank's primary market area for deposits consists of the areas served by
its eight branches and the Bank considers its lending market to include Bronx,
Kings, New York, Queens and Richmond counties, together comprising New York
City, and Lower Westchester and Nassau Counties, New York. The Bank's branches
are primarily located in economically disadvantaged areas of New York City which
have traditionally been characterized by high unemployment, low income and low
levels of home ownership. The majority of the Bank's branches are located in
areas where the number of persons below the poverty line is greater than 27% of
the population and constitutes as much as 41% of the population in some areas
according to 1990 census figures. The number of persons on some form of public
assistance exceeds 30% of the population in these areas according to the same
census. Although the New York metropolitan area enjoys a fairly diversified
70
<PAGE> 77
economy, the manufacturing base which has traditionally provided jobs to
residents of the communities served by the Bank has been steadily shrinking and
the other sectors of the economy have failed to provide comparable employment
opportunities. The New York metropolitan area has also recently experienced an
economic downturn which raised general unemployment rates throughout the region
and which particularly affected the communities served by the Bank. Although the
New York metropolitan area is generally believed to have begun recovering from
the downturn, the communities served by the Bank have historically lagged in
such recoveries.
Although the Bank's branches are located in areas that have been
historically undeserved by other financial institutions, the Bank 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. Many of the Bank's competitors have
substantially greater resources than the Bank and offer a wider array of
financial services and products than the Bank. The Bank believes that it can
compete with these institutions by offering a competitive range of services as
well as through the personalized attention and community commitment which has
always been the Bank's hallmark.
EMPLOYEES
As of March 31, 1996, Carver had 96 full-time and 14 part-time employees,
none of whom was represented by a collective bargaining agreement. Management
believes its relations with its employees are good.
71
<PAGE> 78
PROPERTIES
The following table sets forth certain information regarding Carver's and
other material properties at March 31, 1996.
<TABLE>
<CAPTION>
NET BOOK
VALUE AT
LEASE MARCH 31, 1996
YEAR OWNED OR EXPIRATION ----------------------
OPENED LEASED DATE
------- ---------- ----------- (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MAIN OFFICE:
75 West 125th Street........................ 1996 Owned -- $5,640
New York, New York
BRANCH OFFICES:
2815 Atlantic Avenue........................ 1990 Owned -- 356
Brooklyn, New York
(East New York Office)
1281 Fulton Street.......................... 1989 Owned -- 1,964
Brooklyn, New York
(Bedford-Stuyvesant Office)
1009-1015 Nostrand Avenue................... 1975 Owned -- 238
Brooklyn, New York
(Crown Heights Office)
261 8th Avenue.............................. 1964 Leased 10/31/04 --
New York, New York
(Chelsea Office)
117-02 Guy Brewer Boulevard................. 1981 Leased 11/30/96 --
Jamaica, New York
(Jamaica Office)
115-02 Merrick Boulevard.................... 1982 Leased 2/28/11 --
Jamaica, New York
(St. Albans Office)
302 Nassau Road............................. 1985 Leased 6/30/05 --
Roosevelt, New York
(Roosevelt Office)
-------
Total............................. $8,198
================
</TABLE>
The net book value of Carver's investment in premises and equipment totaled
approximately $9.9 million at March 31, 1996.
LEGAL PROCEEDINGS
From time to time, Carver is a party to various legal proceedings incident
to its business. At March 31, 1996, except as set forth below, there were no
legal proceedings to which the Bank or its subsidiaries was a party, or to which
any of their property was subject, which were expected by management to result
in a material loss.
On January 2, 1996, the United States District Court for the Southern
District of New York dismissed the class action encaptioned Dougherty v. Carver
Federal Savings Bank for lack of subject matter jurisdiction. The class action
complaint contained allegations of material misrepresentations and omissions of
material facts in the Bank's prospectus for its initial public offering and the
failure to have the appraisal of the Bank's shares prepared by an independent
appraiser. By separate order on the same date, the court made its ruling
applicable to Gomberg v. Carver Federal Savings Bank and Uminer v. Carver
Federal Savings Bank, two other class actions filed in the Southern District of
New York which asserted claims essentially identical to those asserted in
Dougherty v. Carver Federal Savings Bank. The plaintiffs in Dougherty v. Carver
Federal Savings Bank have filed notice in the United States Court of Appeals for
the second circuit of their intention to appeal. The case(s) are now pending
appeal in the United States Court of Appeals for the Second Circuit.
72
<PAGE> 79
On September 19, 1995, Carver filed an action for declaratory judgment, for
damages for breach of contract, and for breach of a contractual trust, against
Nationar and the Superintendent, in the Supreme Court of New York State, County
of New York. When the Superintendent sold Carver's ESOP loan to a third party
purchaser, it did not transfer Carver's $1,966,000 in collateral along with the
loan. The $1,966,000 in collateral consisted of two separate sums in the amounts
of $1,366,000 and $600,000. The purpose of the lawsuit was to secure the return
of the entire $1,966,000 in collateral rather than a portion of it. The Bank
believes that it has adequate reserves at 13.0% of the claims, against possible
loss on these claims.
By order entered April 10, 1996, on the recommendation of the
Superintendent, the Court directed the return of $600,000 in collateral. The
Bank received these funds, plus interest, in early June 1996. As a result, the
Bank will recover the valuation allowance of 13.0% on the $600,000 amount. Since
the Bank expects that it will receive 90% of the $1,366,000 amount as a general
creditor, the lawsuit has been discontinued.
73
<PAGE> 80
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. 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 Bancorp. The Bank has not been subject to a tax audit
within the past five fiscal years. For federal income tax purposes, after the
Reorganization, Bancorp and the Bank will file consolidated income tax returns
and report their income on a calendar year basis using the accrual method of
accounting and will be subject to federal income taxation in the same manner as
other corporations with some exceptions, including particularly the Bank's tax
reserve for bad debts, discussed below.
Tax Bad Debt Reserves. Savings institutions such as the Bank which meet
certain definitional tests primarily relating to their assets and the nature of
their business ("qualifying thrifts") are permitted to establish a tax reserve
for bad debts and to make annual additions thereto, which additions may, within
specified formula limits, be deducted in arriving at their taxable income. The
Bank's deduction with respect to "qualifying loans," which are generally loans
secured by certain interests in real property, may be computed using an amount
based on the Bank's actual loss experience (the "Experience Method"), or a
percentage equal to 8% of the Bank's taxable income (the "PTI Method"), computed
without regard to this deduction and with additional modifications and reduced
by the amount of any permitted addition to the non-qualifying reserve. Use of
the PTI Method has the effect of reducing the marginal rate of federal tax on
the Bank's income to 31.3%, exclusive of any minimum or environmental tax, as
compared to the generally applicable maximum corporate federal income tax rate
of 34%. (The marginal rate of tax would be 32.2% if the Bank's taxable income
exceeds $10,000,000 and is therefore subject to a maximum tax rate of 35%). The
Bank's deduction with respect to non-qualifying loans must be computed under the
Experience Method which is based on the Bank's actual charge-offs. Each year the
Bank reviews the most favorable way to calculate the deduction attributable to
an addition to the tax bad debt reserve.
The Bank presently satisfies the qualifying thrift definitional tests. If
the Bank failed to satisfy such tests in any taxable year, it would be unable to
use the PTI Method in computing additions to its tax bad debt reserve and may be
required to recapture (i.e., take into income) a portion of its bad debt
reserves over a multi-year period. Such bad debt reserve recapture could cause
the Bank to incur substantial tax liability. (If the Bank were a "large bank,"
i.e., one with assets having a tax basis in excess of $500 million, which it now
is not, at the time it failed to satisfy such tests, it would be unable to make
additions to its tax bad debt reserve. Instead, the Bank would be permitted to
deduct bad debts only as they occur and would be required to recapture its
cumulative bad debt reserves over a multi-year period.) Among other things, the
qualifying thrift definitional tests require the Bank to hold at least 60% of
its assets as "qualifying assets." Qualifying assets generally include cash,
obligations of the United States or any agency or instrumentality thereof,
certain obligations of a state or political subdivision thereof, loans secured
by interests in improved residential real property or by savings accounts,
student loans and property used by the Bank in the conduct of its banking
business. The Bank's ratio of qualifying assets to total assets exceeded 60%
through the close of its last taxable year. Although there can be no assurance
that the Bank will satisfy the 60% test in the future, management believes that
this level of qualifying assets can be maintained by the Bank.
The amount of the addition to the reserve for losses on qualifying real
property loans under the PTI Method cannot exceed the amount necessary to
increase the balance of the reserve for losses on qualifying real property loans
at the close of the taxable year to 6% of the balance of the qualifying real
property loans outstanding at the end of the taxable year. As of the close of
its last taxable year, the Bank's tax reserve for bad debts on qualifying real
property loans was less than 6% of its qualifying real property loans
outstanding. Also, if the Bank uses the PTI Method, its aggregate addition to
its reserve for losses on qualifying real property loans cannot, when added to
the addition to the reserve for losses on non-qualifying loans, exceed the
amount by which: (i) 12% of the amount that the total deposits or withdrawable
accounts of depositors of the Bank at the close of the taxable year exceeds (ii)
the sum of the Bank's surplus, undivided profits and reserves at the beginning
of such year. As of the close of its last taxable year, 12% of the Bank's
deposits and withdrawable accounts, less its surplus, undivided profits and
reserves, exceeded the balance of its reserve for losses on qualifying real
property loans.
74
<PAGE> 81
Pending Legislation Regarding Bad Debt Reserves. Under pending legislative
proposals, the PTI Method would be repealed and the Bank would be permitted to
use only the Experience Method of computing additions to its bad debt reserve.
In addition, the Bank would be required to recapture (i.e., take into income)
over a six year period beginning April 1, 1996 the excess of the balance of its
bad debt reserves as of March 31, 1996 over the greater of (a) the balance of
such reserves as of March 31, 1988 or (b) an amount that would have been the
balance of such reserves as of March 31, 1996 had the Bank always computed the
additions to its reserves using the Experience Method. (If the Bank were a
"large bank," which it now is not, it would be unable to make additions to its
tax bad debt reserve, would be permitted to deduct bad debts only as they occur
and would additionally be required to recapture over a six year period the
excess of the balance of its bad debt reserves as of March 31, 1996 over the
balance of such reserves as of March 31, 1988). However, under the proposed
legislation, such recapture requirements would be suspended for each of two
successive taxable years beginning April 1, 1996 in which the Bank originates a
minimum amount of certain residential loans based upon the average of the
principal amounts of such loans made by the Bank during its six taxable years
preceding 1996.
Distributions. To the extent that: (i) the Bank's tax bad debt reserve for
losses on qualifying real property loans exceeds the amount that would have been
allowed under the Experience Method (the "Excess Bad Debt Reserve"); and (ii)
the Bank makes "non-dividend distributions" to Bancorp that are considered to
have been made from the Excess Bad Debt Reserve or the supplemental reserve for
losses on loans ("Excess Distributions"), then 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, as calculated for federal income tax purposes,
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 will not be considered to result in a distribution from the
Bank's bad debt reserves.
The amount of additional taxable income created from an Excess Distribution
is an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the Excess Distribution. Thus, if, after the Reorganization,
the Bank makes a "non-dividend distribution" that is an Excess Distribution,
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 34% federal corporate
income tax rate. See "Regulation and Supervision" and "Dividend Policy" for
limits on the payment of dividends by the Bank. The Bank does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax ("AMT") on
alternative minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased
by certain preference items, including the excess of the tax bad debt reserve
deduction using the PTI Method over the deduction that would have been allowable
under the Experience Method. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Bank currently has none. AMTI is also adjusted by
determining the tax treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of those items.
Thus, the Bank's AMTI is increased by an amount equal to 75% of the amount by
which the Bank's adjusted current earnings exceeds its AMTI (determined without
regard to this adjustment and prior to reduction for net operating losses). In
addition, for taxable years beginning after December 31, 1986 and before January
1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain
modifications) over $2 million is imposed on corporations, including the Bank,
whether or not an AMT is paid. The Bank does not expect to be subject to the
AMT, but may be subject to the environmental tax liability. Under pending
legislative proposals, the environmental tax would be extended to taxable years
beginning before January 1, 2007.
Elimination of Dividends; Dividends Received Deduction. Bancorp may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. A 70% dividends received deduction
generally applies with respect to dividends received from corporations that are
not members of such affiliated group, except that an 80% dividends received
deduction applies if Bancorp and the Bank own more than 20% of the stock of a
corporation paying a dividend. Under pending legislative proposals, the 70%
dividends received deduction would be reduced to 50% with respect to dividends
paid after enactment of the legislation.
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STATE AND LOCAL TAXATION
State of New York. The Bank and Bancorp are subject to New York State
franchise tax on net income or one of several alternative bases, whichever
results in the highest tax. "Net income" means federal taxable income with
adjustments. The Bank and Bancorp will file combined returns. The New York State
tax rate for fiscal years 1996 and 1997 is 11.0925% and 10.6425%, respectively
(including temporary surcharges and commuter transportation surcharge) of net
income. In general, Bancorp will not be 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.
New York City. The Bank and Bancorp are also subject to a similarly
calculated New York City banking corporation tax of 9% on income allocated to
New York City.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, Bancorp 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.
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REGULATION AND SUPERVISION
GENERAL
The Bank is subject to extensive regulation, examination, and supervision
by the OTS, as its chartering agency, and the FDIC, as its deposit insurer. The
Bank's deposit accounts are insured up to applicable limits by the SAIF
administered by the FDIC, and it is a member of the FHLB of New York. The Bank
must file reports with the OTS and the FDIC 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 OTS and the FDIC conduct periodic examinations to
assess the Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings association can engage and is intended primarily for the
protection of the insurance fund and depositors. Assuming that the holding
company form of organization is utilized, the Company, as a savings association
holding company, will also be 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 have significant 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
policies, whether by the OTS, the FDIC, or the Congress, could have a material
adverse impact on the Company, the Bank, and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations, and it does not
purport to be a comprehensive description of all such statutes and regulations.
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS
Business Activities. The Bank derives its lending and investment powers
from the Home Owner's Loan Act, as amended ("HOLA"), and the regulations of the
OTS thereunder. 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. These investment powers are
subject to various limitations, including (a) a prohibition against the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories; (b) a limit of 400% of an association's capital on
the aggregate amount of loans secured by non-residential real estate property;
(c) a limit of 10% of an association's assets on commercial loans; (d) a limit
of 35% of an association's assets on the aggregate amount of consumer loans and
acquisitions of certain debt securities; (e) a limit of 5% of assets on
non-conforming loans (loans in excess of the specific limitations of HOLA); and
(f) a limit of the greater of 5% of assets or an association's capital on
certain construction loans made for the purpose of financing what is or is
expected to become residential property.
Loans to One Borrower. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. Additional amounts may be
lent, not in excess of 10% of unimpaired capital and surplus, if such loans or
extensions of credit are fully secured by readily-marketable collateral. Such
collateral is defined to include certain debt and equity securities and bullion,
but generally does not include real estate. At March 31, 1996, the Bank's limit
on loans to one borrower was $5.2 million. At March 31, 1996, the Bank's largest
aggregate amount of loans to one borrower was $1.3 million and the second
largest borrower had an aggregate balance of $925,000.
QTL Test. HOLA requires a savings association to meet a QTL test. Under
the QTL test, a savings association is required to maintain at least 65% of its
"portfolio assets" in certain "qualified thrift investments"
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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) certain intangibles,
including goodwill and credit card and purchased mortgage servicing rights, and
(c) the value of property used to conduct the association's business. "Qualified
thrift investments" includes 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 up to 10% of the
association's portfolio assets. At March 31, 1996, the Bank maintained
approximately 75.4% 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.
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (a) engaging in any new activity not
permissible for a national bank, (b) paying dividends not permissible under
national bank regulations, (c) obtaining new advances from any FHLB, and (d)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, within one year of the date a
savings association ceases to meet the QTL test, any company controlling the
association would have to register under, and become subject to the requirements
of, the Bank Holding Company Act of 1956, as amended. If the savings association
does not requalify under the QTL test within the three-year period after it
failed the QTL test, it would be required to terminate any activity and to
dispose of any investment not permissible for a national bank and would have to
repay as promptly as possible any outstanding advances from an FHLB. A savings
association that has failed the QTL test may requalify under the QTL test and be
free of such limitations, but it may do so only once.
Capital Requirements. The OTS regulations require savings associations to
meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 3% of core capital to such adjusted total assets, and a
risk-based capital ratio requirement of 8% of core and supplementary capital to
total risk-based assets. In determining the amount of risk-weighted assets for
purposes of the risk-based capital requirement, a savings association must
compute its risk-based 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 United States Government or its agencies to 100% for consumer and
commercial loans, as assigned by the OTS capital regulation based on the risks
OTS believes are inherent in the type of asset.
Tangible capital is defined, generally, as common stockholder's equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related earnings, minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles other than certain purchased
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 core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, and the allowance for loan and lease losses.
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.
When determining its compliance with the risk-based capital requirement, a
savings association with "above normal" interest rate risk is required to deduct
a portion of such capital from its total capital to account for the "above
normal" interest rate risk. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) resulting from a hypothetical 2%
increase or decrease in market rates of interest, divided by the estimated
economic value of the association's assets, as calculated in accordance with
guidelines set forth by the OTS. At the times when the 3-month Treasury bond
equivalent yield falls below 4%, an association may compute its interest rate
risk on the basis of a decrease equal to one-half of that Treasury rate rather
than on the basis of 2%. A savings association whose measured interest rate risk
exposure exceeds 2% would be considered to have "above normal" risk. The
interest rate risk component is an amount equal to one-half of the difference
between the association's measured interest rate risk and 2%,
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multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Any required deduction for
interest rate risk becomes effective on the last day of the third quarter
following the reporting date of the association's financial data on which the
interest rate risk was computed.
At March 31, 1996, the Bank met each of its capital requirements. The table
below presents the Bank's regulatory capital as compared to the OTS regulatory
capital requirements at March 31, 1996:
<TABLE>
<CAPTION>
CAPITAL EXCESS
BANK REQUIREMENTS CAPITAL
------- ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tangible capital........................................... $33,462 $ 5,495 $27,967
Core capital............................................... 33,522 10,992 22,530
Risk-based capital......................................... 33,801 9,638 24,163
</TABLE>
A reconciliation between regulatory capital and GAAP capital at March 31,
1996 in the accompanying financial statements is presented below:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
GAAP capital................................................. $ 34,765 $34,765 $ 34,765
Unrealized loss on securities available-for-sale, net........ 1,245 1,245 1,245
General valuation allowances................................. 0 0 319
Qualifying intangible assets................................. 0 60 60
Goodwill..................................................... (1,609) (1,609) (1,609)
Excess of net deferred tax................................... (939) (939) (939)
Assets required to be deducted............................... 0 0 (40)
------- ------- -------
Regulatory capital........................................... $ 33,462 $33,522 $ 33,801
======= ======= =======
</TABLE>
Limitation on Capital Distributions. OTS regulations currently impose
limitations upon capital distributions by savings associations, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger, and other
distributions charged against capital. At least 30-days written notice must be
given to the OTS of a proposed capital distribution by a savings association,
and capital distributions in excess of specified earnings or by certain
institutions are subject to approval by the OTS. An association that has capital
in excess of all fully phased-in regulatory capital requirements before and
after a proposed capital distribution and that is not otherwise restricted in
making capital distributions, could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year equal to the
greater of (a) 100% of its net earnings to date during the calendar year plus
the amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year, or (b) 75% of its net earnings for the previous four quarters.
Any additional capital distributions would require prior OTS approval. In
addition, the OTS can prohibit a proposed capital distribution, otherwise
permissible under the regulation, if the OTS has determined that the association
is in need of more than normal supervision or if it determines that a proposed
distribution by an association would constitute an unsafe or unsound practice.
Furthermore, under the OTS prompt corrective action regulations, the Bank would
be prohibited from making any capital distribution if, after the distribution,
the Bank failed to meet its minimum capital requirements, as described above.
See "-- Prompt Corrective Regulatory Action."
The OTS has proposed regulations that would simplify the existing
procedures governing capital distributions by savings associations. Under the
proposed regulations, the approval of the OTS would be required only for an
association that is deemed to be in troubled condition or that is
undercapitalized or would be undercapitalized after the capital distribution. A
savings association would be able to make a capital distribution without notice
to or approval of the OTS if it is not held by a savings association holding
company, is not deemed to be in troubled condition, has received either of the
two highest composite supervisory ratings,
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and would continue to be adequately capitalized after such distribution. Notice
would have to be given to the OTS by any association that is held by a savings
association holding company or that had received a composite supervisory rating
below the highest two composite supervisory ratings. An association's capital
rating would be determined under the prompt corrective action regulations. See
"-- Prompt Corrective Regulatory Action."
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 5%. OTS regulations also require each
savings association to maintain an average daily balance of short-term liquid
assets at a specified percentage (currently 1%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's average liquidity ratio for the month ended March 31,
1996 was 28.5%, which exceeded the applicable requirements. The Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
Assessments. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report. During January 1996,
the Bank paid an assessment of $88,600.
Branching. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such a branch is
available (a) in states that expressly authorize branches of savings
associations located in another state and (b) to an association that qualifies
as a "domestic building and loan association" under the Internal Revenue Code of
1986, which imposes qualification requirements similar to those for a "qualified
thrift lender" under HOLA. See "-- QTL Test." The authority for a federal
savings association to establish an interstate branch network would facilitate a
geographic diversification of the association's activities. This authority under
HOLA and the OTS regulations preempts any state law purporting to regulate
branching by federal savings associations.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation 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 financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings association,
to assess the association's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such association. 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.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the proposed system would focus on
three tests: (a) a lending test, to evaluate the institution's record of making
loans in its assessment areas; (b) 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 (c) a service test, to evaluate the institution's delivery of
services through its branches, ATMs, and other offices. The amended CRA
regulations also clarify how an institution's CRA performance would be
considered in the application process.
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Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. The OTS
regulations prohibit a savings association (a) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the Bank Holding Company Act ("BHC Act")
and (b) from purchasing the securities of any affiliate other than a subsidiary.
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings association and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings association's capital and surplus. Extensions of credit to affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A, and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the association as those prevailing at the time for comparable
transactions with nonaffiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to nonaffiliated companies.
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") thereunder. 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 association's capital. In addition, extensions of credit in excess
of certain limits must be approved by the association's board of directors.
Enforcement. Under the Federal Deposit Insurance Act ("FDI Act"), the OTS
has primary enforcement responsibility over savings associations and has the
authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any shareholder, attorney,
appraiser and accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings association.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders, and
certain written agreements and conditions continue, up to $1 million per day for
such violations if the person obtained a substantial pecuniary gain as a result
of such violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $1 million and imprisonment for up to 30 years. In addition,
regulators have substantial discretion to take enforcement action against an
institution that fails to comply with its regulatory requirements, particularly
with respect to its capital requirements. Possible enforcement actions range
from the imposition of a capital plan and capital directive to receivership,
conservatorship, or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS that enforcement
action be taken with respect to a particular savings association. If action is
not taken by the Director of the OTS, the FDIC has authority to take such action
under certain circumstances.
Standards for Safety and Soundness. The FDI Act, as amended by FDICIA and
the Riegle Community Development and Regulatory Improvement Act of 1994
("Community Development Act"), requires the OTS, together with the other federal
bank regulatory agencies, to prescribe standards, by regulations or guidelines,
relating to internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate risk exposure, asset
growth, asset quality, earnings, stock valuation, and compensation, fees and
benefits and such other operational and managerial standards as the agencies
deem appropriate. The OTS and the federal bank regulatory agencies have adopted,
effective
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August 9, 1995, a set of guidelines prescribing safety and soundness standards
pursuant to FDICIA, as amended. The guidelines establish general standards
relating to internal controls and information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth,
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. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director or principal
shareholder. The OTS and the other agencies determined that stock valuation
standards were not appropriate. In addition, the OTS adopted regulations
pursuant that authorize, but do not require, the OTS to order an institution
that has been given notice by the OTS that it is not satisfying any of such
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 FDICIA. 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. The OTS and
the federal bank regulatory agencies also proposed guidelines for asset quality
and earnings standards.
Real Estate Lending Standards. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of financing
the construction of improvements on real estate. The OTS regulations require
each savings association to establish and maintain written internal real estate
lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its real
estate lending activities. The standards also must be consistent with
accompanying OTS guidelines, which include loan-to-value ratios for the
different types of real estate loans. Banks are also permitted to make a limited
amount of loans that do not conform to the proposed loan-to-value limitations so
long as such exceptions are reviewed and justified appropriately. The guidelines
also list a number of lending situations in which exceptions to the
loan-to-value standards are justified.
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain, and is authorized to
take other, supervisory actions against undercapitalized savings associations.
For this purpose, a savings association would be placed in one of five
categories based on the association's capital. Generally, a savings association
is treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10.0%, its ratio of core capital to risk-weighted assets is
at least 6.0%, its ratio of core capital to total assets is at least 5.0%, and
it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings association will be treated as "adequately capitalized"
if its ratio of total capital to risk-weighted assets is at least 8.0%, its
ratio of core capital to risk-weighted assets is at least 4.0%, and its ratio of
core capital to total assets is at least 4.0% (3.0% if the association receives
the highest rating on the CAMEL financial institutions rating system). A savings
association that has a total risk-based capital of less than 8.0% or a leverage
ratio or a Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if
the association receives the highest rating on the CAMEL financial institutions
rating system) is considered to be "undercapitalized." A savings association
that has a total risk-based capital of less than 6.0% or a Tier 1 risk-based
capital ratio or a leverage ratio of less than 3.0% is considered to be
"significantly undercapitalized." A savings association that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. See "-- Capital Requirements."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three undercapitalized
categories. The OTS is required
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to monitor closely the condition of an undercapitalized association and to
restrict the asset growth, acquisitions, branching, and new lines of business of
such an association. Significantly undercapitalized associations are subject to
restrictions on compensation of senior executive officers; such an association
may not, without OTS consent, pay any bonus or provide compensation to any
senior executive officer at a rate exceeding the officer's average rate of
compensation (excluding bonuses, stock options and profit-sharing) during the 12
months preceding the month when the association became undercapitalized. A
significantly undercapitalized association may also be subject, among other
things, to forced changes in the composition of its board of directors or senior
management, additional restrictions on transactions with affiliates,
restrictions on acceptance of deposits from correspondent associations, further
restrictions on asset growth, restrictions on rates paid on deposits, forced
termination or reduction of activities deemed risky, and any further operational
restrictions deemed necessary by the OTS.
If one or more grounds exist for appointing a conservator or receiver for
an association, the OTS may require the association to issue additional debt or
stock, sell assets, be acquired by a depository association holding company or
combine with another depository association. The OTS and the FDIC have a broad
range of grounds under which they may appoint a receiver or conservator for an
insured depositary association. Under FDICIA, the OTS is required to appoint a
receiver (or with the concurrence of the FDIC, a conservator) for a critically
undercapitalized association within 90 days after the association becomes
critically undercapitalized or, with the concurrence of the FDIC, to take such
other action that would better achieve the purposes of the prompt corrective
action provisions. Such alternative action can be renewed for successive 90-day
periods. However, if the association continues to be critically undercapitalized
on average during the quarter that begins 270 days after it first became
critically undercapitalized, a receiver must be appointed, unless the OTS makes
certain findings with which the FDIC concurs and the Director of the OTS and the
Chairman of the FDIC certify that the association is viable. In addition, an
association that is critically undercapitalized is subject to more severe
restrictions on its activities, and is prohibited, without prior approval of the
FDIC from, among other things, entering into certain material transactions or
paying interest on new or renewed liabilities at a rate that would significantly
increase the association's weighted average cost of funds.
When appropriate, the OTS can require corrective action by a savings
association holding company under the "prompt corrective action" provisions of
FDICIA.
Insurance of Deposit Accounts. The Bank is a member of the SAIF of the
FDIC, and the Bank pays its deposit insurance assessments to the SAIF of the
FDIC. The FDIC also maintains another insurance fund, the Bank Insurance Fund
("BIF"), which primarily insures the deposits of banks and state chartered
savings banks.
Pursuant to FDICIA, the FDIC established a new risk-based assessment system
for determining the deposit insurance assessments to be paid by insured
depositary institutions. Under the new assessment system, which began in 1993,
the FDIC assigns an institution to one of three capital categories based on the
institution's financial information as of the reporting period ending seven
months before the assessment period. The three capital categories consist of (a)
well capitalized, (b) adequately capitalized, or (c) undercapitalized. The FDIC
also assigns an institution to one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. 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. Beginning in 1993, the assessment rates for both the BIF and the SAIF
had ranged from 0.23% 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 0.31% of deposits for an institution in the lowest category
(i.e., undercapitalized and substantial supervisory concern).
The FDI Act requires that the BIF and the SAIF funds each be recapitalized
until reserves are at least 1.25% of the deposits insured by that fund. After a
fund reached the 1.25% reserve ratio, the assessment rates
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<PAGE> 90
for that fund could be reduced. The FDIC has reported that the BIF reached the
required reserve ratio during May 1995. As a result of the recapitalization of
the BIF, the FDIC reduced BIF-assessment rates. The FDIC initially reduced the
BIF assessment rates, effective June 1, 1995, to a range of 0.04% to 0.27% of
deposits. Having subsequently determined that the BIF had sufficient reserves in
excess of the required 1.25% ratio, the FDIC reduced the BIF-assessment rate for
"well capitalized" institutions without any significant supervisory concerns to
the statutory minimum of $2,000 annually beginning with the first half of 1996,
and the rates for other BIF-insured institutions will range from 0.03% to 0.27%
of deposits.
The FDIC has reported that, under current law and reasonably optimistic
financial projections, the SAIF is not expected to be recapitalized until 2001.
SAIF reserves have not grown as quickly as the BIF reserves due to a number of
factors, including the fact that a significant portion of SAIF assessments have
been and are currently being used to make payments on bonds ("FICO bonds")
issued in the late 1980s by the Financing Corporation to recapitalize the now
defunct Federal Savings and Loan Insurance Corporation. Accordingly, the FDIC
has determined that SAIF-insured institutions should continue to pay assessments
at the current SAIF assessment rates, which range from 0.23% of deposits to
0.31% of deposits. The Bank's assessment rate for the first half of 1996 is
0.23% of deposits.
The resulting disparity in deposit insurance assessments rates between the
SAIF members and the BIF members is likely to provide institutions paying only
the BIF assessments with certain competitive advantages in the pricing of loans
and deposits, and in lowered operating costs, pending any legislative action to
remedy the disparity. Congress has considered proposed legislation to address
these issues.
The proposed Balanced Budget Act of 1995 ("Budget Act"), which was approved
by the Congress but vetoed by the President, included provisions that focused on
a recapitalization of the SAIF. Under the provisions of the Budget Act, all
SAIF-member institutions would have paid a special assessment to recapitalize
the SAIF, and the assessment base for the payments on the FICO bonds would have
been expanded to include the deposits of both BIF- and SAIF-insured
institutions. The amount of the special assessment required to recapitalize the
SAIF was then estimated to be approximately 80 basis points of the
SAIF-assessable deposits. This estimate of the special assessment was less than
the special assessment of 85 to 90 basis points that had been previously
estimated. The special assessment would have been imposed as of the first
business day of January 1996 or on such other date prescribed by the FDIC not
later than 60 days after enactment of the Budget Act, based on the amount of
SAIF deposits on March 31, 1995.
The Budget Act also provided for the merger of the BIF and SAIF on January
1, 1998, with such merger being conditioned upon the prior elimination of the
thrift charter. Congressional leaders had also agreed that Congress should
consider and act upon separate legislation to eliminate the thrift charter as
early as possible in 1996. If adopted, such legislation would require that the
Bank, as a federal savings bank, convert to a bank charter.
The veto of the Budget Act by the President was not based on the above
described provisions of the Budget Act, and the federal banking regulators
continue to seek a legislative solution for the recapitalization of the SAIF. In
February 1996, representatives of the FDIC, the OTS and the Treasury Department
stated to Congress that, unless Congress adopts legislation to strengthen the
SAIF, SAIF's current problems could result in an erosion of the SAIF deposit
base, could cause a default on the FICO bonds, and could leave the SAIF unable
to meet its obligations to insured depositors.
If enacted by Congress, legislation to recapitalize the SAIF as proposed in
the Budget Act would have the effect of reducing the capital of SAIF member
institutions by the after-tax cost of the special SAIF assessment, plus any
related additional tax liabilities. The legislation would also have the effect
of reducing any differential that may otherwise be required in the assessment
rates for the BIF and SAIF.
Management cannot predict whether the above legislation or any other
legislative proposal will be enacted as described above or, if enacted, the
amount of any special SAIF assessment, whether ongoing SAIF premiums will be
reduced to a level equal to that of BIF premiums or whether, if thrifts are
required to convert to a bank charter, there will be any relief from the
additional tax liabilities that would be incurred upon the recapture of their
bad debt reserves. It also cannot be predicted whether some other legislative
action will be
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<PAGE> 91
taken to address the BIF/SAIF disparity and what consequences such action could
have for SAIF members. A significant increase in SAIF insurance premiums, either
absolutely or relative to BIF premiums or a significant one-time fee to
recapitalize the SAIF could have an adverse effect on the operating expenses and
results of operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of the regional FHLBs composing the FHLB System. Each FHLB
provides a central credit facility primarily for its member institutions. The
Bank, as a member of the FHLB of New York, is required to acquire and hold
shares of capital stock in the FHLB of New York in an amount at least equal to
the greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year or 1/20 of
its advances (borrowings) from the FHLB of New York. The Bank was in compliance
with this requirement with an investment in the capital stock of the FHLB of New
York at December 31, 1995, of $3.1 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.
The 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. The FHLB of New York paid
dividends on the capital stock of $115,600 and $74,000 for the six months ended
December 31, 1995 and 1994 and $200,000, $204,000 and $281,000 during the years
ended June 30, 1995, 1994 and 1993, respectively. If dividends were reduced, or
interest on future FHLB advances increased, the Bank's net interest income would
likely also be reduced. Further, there can be no assurance that the impact of
FDICIA and the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") on the FHLBs will not also cause a decrease in the value of the
FHLB stock held by the Bank.
Federal Reserve System. The Bank is subject to provisions of the FRA and
the FRB's regulations pursuant to which depositary institutions may be required
to maintain non-interest-earning reserves against their deposit accounts and
certain other liabilities. Currently, reserves must be maintained against
transaction accounts (primarily NOW and regular checking accounts). The FRB
regulations generally require that reserves be maintained in the amount of 3% of
the aggregate of transaction accounts up to $52.0 million. The amount of
aggregate transaction accounts in excess of $52.0 million are currently subject
to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%.
The FRB regulations currently exempt $4.3 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Bank is in compliance with the foregoing 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. The balances
maintained to meet the reserve requirements imposed by the FRB may be used to
satisfy liquidity requirements imposed by the OTS. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window," but FRB
regulations require such institutions to exhaust all FHLB sources before
borrowing from a Federal Reserve Bank.
REGULATION OF HOLDING COMPANY
The Company, if utilized, will be a non-diversified unitary savings
association holding company within the meaning of HOLA, as amended. As such, the
Company will be required to register with the OTS and will be subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Company and its non-savings
association subsidiaries, if any. Among other
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<PAGE> 92
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 association.
HOLA prohibits a savings association holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
association or holding company thereof, without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by HOLA;
or acquiring or retaining control of a depository institution that is not
insured by the FDIC. In evaluating an application by a holding company to
acquire a savings association, the OTS must consider the financial and
managerial resources and future prospects of the company and savings association
involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community, and competitive factors.
As a unitary savings association holding company, the Company generally
will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that the Bank continues to satisfy
the QTL test. See "-- Regulation of Federal Savings Associations -- QTL Test"
for a discussion of the QTL requirements. Upon any non-supervisory acquisition
by the Company of another savings association or savings bank that meets the QTL
test and is deemed to be a savings association by the OTS and that will be held
as a separate subsidiary, the Company would become a multiple savings
association holding company and would be subject to limitations on the types of
business activities in which it could engage. HOLA limits the activities of a
multiple savings association holding company and its non-insured association
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the BHC Act, subject to the prior approval of the OTS,
and to other activities authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings association holding company controlling savings associations in
more than one state, subject to two exceptions: an acquisition of a savings
association in another state (a) in a supervisory transaction, and (b) pursuant
to authority under the laws of the state of the association to be acquired that
specifically permit such acquisitions. The conditions imposed upon interstate
acquisitions by those states that have enacted authorizing legislation vary.
Some states impose conditions of reciprocity, which have the effect of requiring
that the laws of both the state in which the acquiring holding company is
located (as determined by the location of its subsidiary savings association)
and the state in which the association to be acquired is located, have each
enacted legislation allowing its savings associations to be acquired by
out-of-state holding companies on the condition that the laws of the other state
authorize such transactions on terms no more restrictive than those imposed on
the acquiror by the state of the target association. Some of these states also
impose regional limitations, which restrict such acquisitions to states within a
defined geographic region. Other states allow full nationwide banking without
any condition of reciprocity. Some states do not authorize interstate
acquisitions of savings associations.
Transactions between the Bank and the Company and its other subsidiaries
would be subject to various conditions and limitations. See "-- Regulation of
Federal Savings Associations -- Transactions with Related Parties." The Bank
would have to give 30-days written notice to the OTS prior to any declaration of
the payment of any dividends or other capital distributions to the Company. See
"-- Regulation of Federal Savings Associations -- Limitation on Capital
Distributions."
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of the Common Stock to be issued pursuant to the Conversion. Upon completion of
the Conversion, the Company's Common Stock will be registered with the SEC under
the Exchange Act. The Company will then be subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares of
the Common Stock purchased by persons who are not affiliates of the Company may
be resold without registration. Shares purchased by an affiliate of the Company
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<PAGE> 93
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (a) 1% of the outstanding shares of the
Company or (b) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
In the event that the holding company form of organization is not utilized,
the shares of the Bank's common stock to be issued and sold in the Conversion
are exempt from registration under Section 3(a)(5) of the Securities Act. Prior
to the sale of all shares of its common stock, the Bank will register its
capital stock under Section 12(g) of the Exchange Act. Upon such registration,
the proxy rules, tender offer rules, insider trading restrictions, annual and
periodic reporting and other requirements of the Exchange Act will also be
applicable to the Bank but under the jurisdiction of the OTS. The Bank is
required by the OTS to maintain said registration for a period of at least three
years following Conversion. The Bank will, however, register with and report to
the OTS and not to the SEC.
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<PAGE> 94
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Bank's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loan and
investment and mortgage-backed securities portfolios and the interest paid on
its interest-bearing liabilities, such as deposits and borrowings. The Bank has
undertaken a restructuring of its balance sheet and is now placing primary
emphasis on its whole loan portfolio through direct lending, as well as the
purchase of whole loans. As a result of this effort, the loan portfolio is
expected to substantially increase as a percentage of total assets. Therefore,
future earnings for the Bank will be derived more from direct lending and loan
purchase activities than from investing in securities. The Bank's net income is
also affected by the generation of non-interest income, such as loan fees and
service charges, as well as gains on sales of securities held for sale. In
addition, net income is affected by the level of the provision for loan losses,
as well as operating expenses. The Bank is also continuing its strategy of
growth by leveraging its strong capital position through increased average
borrowings to fund increases in average interest-earning assets.
The operations of the Bank and the entire thrift industry are significantly
affected by prevailing economic conditions, competition and the monetary and
fiscal policies of governmental agencies. Lending activities are influenced by
the demand for and supply of housing, competition among lenders, the level of
interest rates and the availability of funds. Deposit flow and costs of funds
are influenced by prevailing market rates of interest, primarily on competing
investments, account maturities, and the levels of personal income and savings
nationwide.
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of Carver's net income, is
determined by the difference or "spread" between the yield earned on the Bank's
interest-earning assets and the rates paid on its interest-bearing liabilities
and the relative amounts of such assets and liabilities. Because Carver's
interest-bearing liabilities consist primarily of shorter term deposit accounts,
the Bank's interest rate spread can be adversely affected by changes in general
interest rates if its interest-earning assets are not sufficiently sensitive to
changes in interest rates. Management has sought to reduce the Bank's exposure
to changes in interest rates by more closely matching the effective maturities
and repricing periods of its interest-earning assets and interest-bearing
liabilities through a variety of strategies, including the origination and
purchase of adjustable-rate loans for its portfolio, investment in
adjustable-rate and shorter-term mortgage-backed securities, and the sale of
substantially all long-term fixed-rate loans originated into the secondary
market.
Carver has also managed interest rate risk through the origination and
purchase of loans, primarily with adjustable interest rates, and management of
its investment and mortgage-backed securities portfolios. During fiscal year
1995, the Bank substantially increased its portfolio of adjustable-rate and
short duration mortgage-backed securities. Funding for these purchases came from
the proceeds from the Bank's initial public offering of its common stock and
from additional borrowings in the form of reverse repurchase agreements and
short-term advances from the Federal Home Loan Bank ("FHLB") of New York. During
fiscal year 1996, the Bank's loan portfolio increased by $34.1 million, or
70.47%. The growth in the mortgage portfolio was funded by internal deposit
growth and funding from FHLB advances. Under SFAS 115, in connection with a one
time opportunity permitted by the Financial Accounting Standards Board and
regulatory agencies, the Bank reclassified $25.2 million of mortgage-backed
securities from held-to-maturity to available-for-sale in December 1995 in order
to increase the flexibility of the Bank's balance sheet to meet increased need
for future loan originations and purchases.
INTEREST RATE SENSITIVITY ANALYSIS
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
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that period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets maturing or repricing within a
specific period of time and the amount of interest-bearing liabilities repricing
within that same time period. A gap is considered positive when the amount of
rate-sensitive assets exceeds the amount of rate-sensitive liabilities and is
considered negative when the amount of interest rate sensitive liabilities
exceed the amount of rate-sensitive assets. Generally, during a period of
falling interest rates a negative gap could result in an increase in net
interest income, while a positive gap could adversely affect net interest
income, and during a period of rising interest rates a negative gap could
adversely affect net interest income, while a positive gap could result in an
increase in net interest income. As illustrated below, Carver had a positive
one-year gap equal to 28.14% of total rate-sensitive assets at March 31, 1996,
as a result of which its net interest income could be adversely affected by
falling interest rates, and positively affected by rising 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 as of March 31, 1996. Maturity and repricing
dates have been projected by applying the assumptions set forth below to
contractual maturity and repricing dates. The information presented in the
following table is derived from data incorporated in "Schedule CMR: Consolidated
Maturity and Rate," which is part of the Bank's quarterly reports filed with the
Office of Thrift Supervision ("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.
<TABLE>
<CAPTION>
OVER OVER
OVER ONE THREE FIVE
THREE FOUR TO THROUGH THROUGH THROUGH OVER
MONTHS TWELVE THREE FIVE TEN TEN
OR LESS MONTHS YEARS YEARS YEARS YEARS TOTAL
-------- -------- -------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Loans................... $ 24,438 $ 23,095 $ 20,619 $ 3,669 $ 5,789 $ 4,998 $ 82,608
Federal funds sold...... 6,800 -- -- -- -- -- 6,800
Investment securities
(1).................. 82,718 -- 1,937 -- -- -- 84,655
Mortgage-backed
securities........... 95,113 21,883 21,530 11,382 14,488 8,439 172,835
-------- -------- -------- -------- -------- ------- --------
Total................ 209,069 44,978 44,086 15,050 20,277 13,437 346,898
-------- -------- -------- -------- -------- ------- --------
Rate-sensitive
liabilities:
Deposits................ 39,285 59,154 65,923 35,026 35,389 22,175 256,952
Borrowings.............. 20,000 38,000 14,000 -- 1,948 -- 73,948
-------- -------- -------- -------- -------- ------- --------
Total................ 59,285 97,154 79,923 35,026 37,337 22,175 330,900
-------- -------- -------- -------- -------- ------- --------
Interest sensitivity
gap.................. 149,784 (52,176) (35,837) (19,976) (17,060) (8,738) 15,997
-------- -------- -------- -------- -------- ------- --------
Cumulative interest
sensitivity gap...... 149,784 97,608 61,771 41,795 24,735 15,997
-------- -------- -------- -------- -------- -------
Ratio of cumulative gap
to total
rate-sensitive
assets............... 43.18% 28.14% 17.81% 12.05% 7.13% 4.61%
-------- -------- -------- -------- -------- -------
</TABLE>
- ---------------
(1) Includes securities available-for-sale.
The preceding table was prepared utilizing certain assumptions regarding
prepayment and decay rates as determined by the OTS for savings associations
nationwide as of December 31, 1995. While management does not believe that these
assumptions will be materially different from Carver's actual experience, the
actual interest rate sensitivity of the Bank's assets and liabilities could vary
significantly from the information set forth in the table due to market and
other factors. The following assumptions were used: (i) adjustable-rate
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<PAGE> 96
first mortgage loans will prepay at the rate of 6% per year and (ii) fixed-rate
first mortgage will prepay annually as follows:
<TABLE>
<CAPTION>
ANNUAL PREPAYMENT RATE
--------------------------------------
COUPON RATE 30-YEAR 15-YEAR 5-YEAR BALLOON
------- ------- --------------
<S> <C> <C> <C>
6.50%...................................... 9.00% 8.00% 13.00%
7.00....................................... 9.00 9.00 16.00
7.50....................................... 11.00 11.00 19.00
8.00....................................... 13.00 14.00 25.00
8.50....................................... 16.00 -- --
9.00....................................... 20.00 -- --
9.50....................................... 25.00 -- --
10.00....................................... 28.00 -- --
</TABLE>
In addition, it is assumed that fixed maturity deposits are not withdrawn
prior to maturity, transaction accounts will decay at a rate of 37% in the first
year and passbook accounts will decay at a rate of 17% in the first year, and
money market accounts will reflect a 79% decay rate in year one.
Certain shortcomings are inherent in the method of analysis presented in
the table above. Although certain assets and liabilities may have similar
maturity 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 which restrict changes in interest rates on a short-term basis and
over the life of the asset. In the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Additionally, an increased credit risk
may result as the ability of many borrowers to service their debt may decrease
in the event of an interest rate increase. Virtually all of the adjustable-rate
loans in the Bank's portfolio contain conditions which restrict the periodic
change in interest rate.
The ratio of cumulative gap to total rate sensitive assets for the first
year increased from positive 25.76% at March 31, 1995 to positive 28.14% at
March 31, 1996. Adjustable-rate assets account for 67% of the Bank's total
interest-sensitive assets at March 31, 1996.
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to the Bank's
average interest-earning assets and average interest-bearing liabilities and
reflects the average yield on assets and the average cost of liabilities for the
years indicated. Such yields and costs are derived by dividing income or expense
by the average balances of assets or liabilities, respectively, for the periods
shown. Average balances are derived from average month-end balances, except for
federal funds which are derived from daily balances. Management does not believe
that the use of average monthly balances instead of average daily balances on
all other accounts has caused any material difference in the information
presented.
The table also presents information for the years indicated with respect to
the difference between the weighted average yield earned on interest-earning
assets and the weighted average rate paid on interest-bearing liabilities, or
"interest rate spread," which savings institutions have traditionally used as an
indicator of profitability. Another indicator of an institution's net interest
income is its "net interest margin," which is its net interest income divided by
the average balance of interest-earning assets. Net interest income is affected
by the interest rate spread and by the relative amounts of interest-earning
assets and interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income.
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<TABLE>
<CAPTION>
AT MARCH 31, YEAR ENDED MARCH 31,
--------------------- -------------------------------------------------------------------
1996 1996 1995
--------------------- -------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/COST BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- ---------- -------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans(1)........................... $ 82,608 8.25% $ 58,136 $ 4,800 8.26% $ 49,609 $ 4,092 8.25%
Investment securities(2)........... 88,116 6.50 91,639 5,807 6.34 81,466 5,230 6.42
Mortgage-backed securities(3)...... 172,836 6.80 188,136 12,217 6.49 179,963 10,159 5.65
Federal funds sold................. 6,800 5.00 11,949 705 5.90 5,738 269 4.69
-------- -------- -------- -------- --------
Total interest-earning assets...... 350,360 7.03 349,860 23,529 6.73 316,776 19,750 6.23
-------- --------
Non-interest earning assets.......... 17,297 13,977 15,369
-------- -------- --------
Total assets................ $367,657 $363,837 $332,145
========= ========= =========
LIABILITIES:
Interest-bearing liabilities:
Deposits:
DDA(4)........................... $ 6,046 0 $ 4,761 0 0 $ 3,814 0 0
NOW.............................. 16,916 1.86 15,539 314 2.02 13,904 226 1.62
Savings and Clubs................ 141,873 2.50 140,204 3,507 2.50 144,092 3,591 2.49
Money market accounts............ 19,444 3.17 18,770 599 3.19 19,135 541 2.83
Certificates of deposit.......... 72,673 5.27 74,060 3,970 5.36 66,870 3,115 4.66
-------- --- -------- -------- --- -------- -------- ---
Total deposits....................... $256,952 3.23 $253,334 8,390 3.31 $247,815 7,473 3.02
Borrowed money....................... 73,948 6.08 73,253 5,204 7.10 54,226 3,059 5.64
-------- --- -------- -------- --- -------- -------- ---
Total interest-bearing liabilities... 330,900 3.87 326,587 13,594 4.16 302,041 10,532 3.49
-------- --------
Non-interest bearing liabilities..... 1,992 2,230 6,710
-------- -------- --------
Total liabilities.................... 332,892 328,817 308,750
Stockholders' equity................. 34,765 35,020 23,394
-------- -------- --------
Total liabilities and
stockholders' equity...... $367,657 $363,837 $332,145
========= ========= =========
Net interest income.................. $ 9,935 $ 9,218
======== ========
Interest rate spread................. 3.16% 2.57% 2.74%
========== ========== ==========
Net interest margin.................. 2.85% 2.91%
========== ==========
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................ 1.07x 1.05x
========== ==========
<CAPTION>
1994
--------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST
-------- -------- ----------
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans(1)........................... $ 53,744 $ 4,558 8.48%
Investment securities(2)........... 44,678 2,272 5.09
Mortgage-backed securities(3)...... 195,040 10,452 5.36
Federal funds sold................. 6,314 182 2.88
-------- --------
Total interest-earning assets...... 299,776 17,464 5.83
--------
Non-interest earning assets.......... 12,572
--------
Total assets................ $312,348
=========
LIABILITIES:
Interest-bearing liabilities:
Deposits:
DDA(4)........................... $ 918 0 0
NOW.............................. 12,792 257 2.01
Savings and Clubs................ 142,048 3,722 2.62
Money market accounts............ 21.111 579 2.74
Certificates of deposit.......... 73,476 3,365 4.58
-------- -------- ---
Total deposits....................... $250,345 7,923 3.16
Borrowed money....................... 44,676 2,244 5.02
-------- -------- ---
Total interest-bearing liabilities... 295,021 10,167 3.45
--------
Non-interest bearing liabilities..... 3,583
--------
Total liabilities.................... 298,604
Stockholders' equity................. 13,744
--------
Total liabilities and
stockholders' equity...... $312,348
=========
Net interest income.................. $ 7,297
========
Interest rate spread................. 2.38%
==========
Net interest margin.................. 2.43%
==========
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................ 1.02x
==========
</TABLE>
- ---------------
(1) Includes non-accrual loans
(2) Includes FHLB stock and fair value of investments available-for-sale of
$72.6 million at March 31, 1996.
(3) Includes fair value of mortgage-backed securities available-for-sale of
$41.7 million at March 31, 1996.
(4) Demand deposit accounts (DDA) are non-interest bearing liabilities.
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<PAGE> 98
RATE/VOLUME ANALYSIS
The following table sets forth information regarding the extent to which
changes in interest rates and changes in volume of interest related assets and
liabilities have affected Carver's interest income and expense during the
periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided for changes attributable to
(i) changes in volume (changes in volume multiplied by new rate), (ii) changes
in rates (change in rate multiplied by old volume), and (iii) total change.
Changes in rate/volume (changes in rate multiplied by the changes in volume) are
allocated proportionately between changes in rate and changes in volume.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
---------------------------- ----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans................................ $ 704 $ 4 $ 708 $ (345) $ (121) $ (466)
Investment securities(1)........... 645 (68) 577 2,246 712 2,958
Mortgage-backed securities(1)...... 531 1,527 2,058 (978) 685 (293)
Federal funds sold................... 367 69 436 (16) 103 87
------ ------ ------ ------ ------ ------
Total interest-earning
assets................... 2,247 1,532 3,779 907 1,379 2,286
------ ------ ------ ------ ------ ------
Interest-bearing liabilities:
NOWs............................... 33 54 87 18 (50) (32)
Savings and Clubs.................. (97) 14 (83) 51 (182) (131)
Money Market Accounts.............. (11) 71 60 (56) 18 (38)
Certificates of Deposit............ 385 468 853 (97) (152) (249)
------ ------ ------ ------ ------ ------
Total Deposits..................... 310 607 917 (84) (366) (450)
Borrowed money..................... 1,352 793 2,145 516 299 815
------ ------ ------ ------ ------ ------
Total interest-bearing
liabilities.............. 1,662 1,400 3,062 432 (67) 365
------ ------ ------ ------ ------ ------
Net change in net interest income.... $ 585 $ 132 $ 717 $ 475 $1,446 $1,921
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Includes securities available-for-sale.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1996 AND 1995
The Bank's total assets decreased by $305,000, or 0.09% from $367.9 million
at March 31, 1995 to $367.6 million at March 31, 1996. The decrease in assets
was not significant. The Bank's portfolio of mortgage-backed securities
available-for-sale increased $22.0 million, or 111.1%, to $41.7 million at March
31, 1996 from $19.7 million at March 31, 1995 and its portfolio of
mortgage-backed securities held-to-maturity decreased $50.0 million, or 27.6%,
to $131.1 million at March 31, 1996 from $181.1 million at March 31, 1995. The
reason for change in those two portfolios was mainly due to a transfer of $25.2
million of mortgage-backed securities from the held-to-maturity portfolio to the
available-for-sale portfolio as allowed by SFAS 115. See "-- Asset Liability
Management." Investment securities held-to-maturity decreased $9.1 million, or
50.45%, to $8.9 million at March 31, 1996 from $18.0 million at March 31, 1995.
This decrease in investment securities was due to call back of bonds of $9
million. The Bank's securities available-for-sale and held-to-maturity consisted
primarily of U.S. Government and agency securities and mutual funds invested in
similar securities. The Bank's mortgage-backed securities consisted entirely of
securities which meet the regulatory definition of non-high risk mortgage
securities. The Bank's loans receivable increased to $82.6 million at March 31,
1996 as compared to $48.5 million at March 31, 1995. In fiscal year 1996 Carver
purchased $26.3 million of single family loans.
The Bank's total liabilities decreased by $268,000, or 0.08%, from $333.2
million at March 31, 1995 to $332.8 million at March 31, 1996 as the result of
decreased borrowings partially offset by increased deposits.
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<PAGE> 99
At March 31, 1996, the Bank's FHLB of New York advances were $25.4 million, a
decrease of $37.0 million, or 59.29%, as compared to advances of $62.4 million
at March 31, 1995. Securities sold under agreements to repurchase increased
$28.8 million, or 158.41%, to $47.0 million at March 31, 1996 from $18.2 million
at March 31, 1995. The Bank used the principal payments of securities to
decrease the borrowing in order to reduce the cost of fund.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1995 AND 1994
The Bank's total assets increased by $59.5 million, or 19.3%, from $308.5
million at March 31, 1994 to $368.0 million at March 31, 1995. The increase in
assets was principally due to significant increases in the Bank's portfolios of
securities available-for-sale and mortgage-backed and investment securities
held-to-maturity. The Bank's portfolio of securities available-for-sale
increased $21.8 million, or 30.4%, to $93.3 million at March 31, 1995 from $71.6
million at March 31, 1994 and its portfolio of mortgage-backed securities
held-to-maturity increased $27.3 million, or 17.7%, to $181.1 million at March
31, 1995 from $153.8 million at March 31, 1994. Investment securities
held-to-maturity increased $6.0 million, or 50.1%, to $18.0 million at March 31,
1995 from $12.0 million at March 31, 1994. The Bank's loans receivable decreased
to $48.5 million at March 31, 1995 as compared to $51.0 million at March 31,
1994. The Bank increased its portfolios of securities and mortgage-backed
securities in order to expand its earning asset base and increase net interest
income. The increase in earning assets was funded with the proceeds from the
sale of 2,314,375 shares of Common Stock in the Conversion and from the proceeds
from additional borrowings. The increase in the securities available-for-sale
and held-to-maturity consisted primarily of U.S. Government and agency
securities and mutual funds invested in similar securities. The additional
mortgage-backed securities consisted entirely of securities which meet the
regulatory definition of non high-risk mortgage securities. With the capital
received from the Conversion, the Bank has the capacity for additional asset
growth funded with borrowings.
The Bank's total liabilities increased by $38.8 million, or 13.2%, from
$294.3 million at March 31, 1994 to $333.2 million at March 31, 1995 as the
result of increased borrowings in the form of advances from the FHLB of New York
and repurchase agreements. At March 31, 1995, the Bank's FHLB of New York
advances were $62.4 million, an increase of $32.0 million, or 105.3%, as
compared to advances of $30.4 million at March 31, 1994. Securities sold under
agreements to repurchase increased $8.7 million, or 90.9%, to $18.2 million at
March 31, 1995 from $9.5 million at March 31, 1994. The Bank used these
increases in FHLB advances and repurchase agreements to fund its increase in
investment and mortgage-backed securities held-to-maturity and securities
available-for-sale. The increase in borrowings offset a decline in deposits of
$4.0 million, or 1.6%, to $248.5 million at March 31, 1995 from $252.5 million
at March 31, 1994. The Bank attributes the decline in deposits to competition
from other investment alternatives during a period of generally rising rates and
the purchase of Common Stock by depositors in the Conversion.
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<PAGE> 100
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
Net Income. Net income for the year ended March 31, 1996, decreased by
$92,000, or 10.88%, to $753,000 from $845,000 for the year ended March 31, 1995.
The decline in net income resulted primarily from an increase in non-interest
expense. During fiscal year 1996, Carver invested substantially in improving the
Bank's infrastructure. These investments encompassed upgrading technology,
increasing lending department staff, expanding marketing efforts, and re-opening
the Bank's headquarters which had been destroyed by fire. The Bank also incurred
increased legal costs in defending the class action suit brought by the
shareholders which was dismissed for lack of subject matter jurisdiction, as
well as higher legal costs associated with operating as a public company. See
"Business of the Bank -- Legal Proceedings."
Net Interest Income. Net interest income before provision for loan losses
for the year ended March 31, 1996 increased $716,000, or 7.77%, to $9.9 million
as compared to $9.2 million for the year ended March 31, 1995. The Bank's
interest rate spread narrowed from 2.74% in fiscal year 1995 to 2.57% in fiscal
year and its interest margin decreased from 2.91% in fiscal year 1995 to 2.85%
in fiscal year 1996. This decrease in interest rate spread and interest margin
resulted from increased cost of deposits and borrowed money which was partially
offset by an increase in average yield on interest earning assets. The ratio of
the Bank's average interest-earning assets to interest-bearing liabilities
improved to 1.07x in fiscal year 1996 from 1.05x in fiscal year 1995. The
improvement in this ratio primarily reflects an increase in stockholders' equity
and non-interest-bearing liabilities.
Interest Income. The Bank's interest income for the fiscal year ended
March 31, 1996 increased $3.8 million, or 19.13%, to $23.5 million as compared
to $19.8 million for the fiscal year ended March 31, 1995. The increase in
interest income resulted primarily from a 50 basis point increase in the average
yield on interest-bearing assets, from 6.23% during fiscal year 1995 to 6.73%
during fiscal year 1996. The increase in average yield reflects the higher
interest rate environment experienced during fiscal year 1996 and, to a lesser
extent, the increased percentage of interest-earning assets represented by
higher yielding loans during the year.
The increase in interest income resulted in part from a $2.1 million, or
20.26%, increase in income from mortgage-backed securities due to increases in
the Bank's portfolio of securities held-to-maturity and securities
available-for-sale during fiscal year 1996. This increase was primarily due to
an increase of $8.2 million, or 4.54%, in the average balance of mortgage-backed
securities during fiscal year 1996 as compared to fiscal year 1995. The increase
in income from these assets was enhanced by an increase of 84 basis points in
yields to 6.49% during fiscal year 1996 from 5.65% during fiscal year 1995. The
higher average balance and higher yield in mortgage-backed securities portfolio
during fiscal year 1996 reflect the investment of funds from deposit growth.
Interest income from loans increased $708,000, or 17.30%, to $4.8 million during
fiscal year 1996 as compared to $4.1 million during fiscal year 1995. The
increase in income from loans was primarily due to an increase in average
balance of $8.5 million, or 17.19%, during fiscal year 1996 as compared to
fiscal year 1995 reflecting the implementation of the Bank's strategy of
increasing loan originations and purchases. Interest income from investment
securities increased $577,000, or 11.03%, to $5.8 million during fiscal year
1996 as compared to $5.2 million for the year ended March 31, 1995. This
increase in interest income is due to an increase in the average balance of
investment securities of $10.2 million during fiscal year 1996 as compared to
fiscal year 1995. The average yield on investment securities decreased by 8
basis points during fiscal year 1996 to 6.34% as compared to 6.42% during fiscal
year 1995. Interest income from federal funds sold increased $436,000, or
162.08%, to $705,000 during fiscal year 1996 as compared to $269,000 during
fiscal year 1995. This increase in interest income reflects an increase in the
average balance of federal funds sold of $6.2 million, or 108.24%, to $11.9
million during fiscal year 1996 as compared to $5.7 million during fiscal year
1995. The increase in interest income from federal funds sold is in part due to
121 basis points in average yield during fiscal year 1996 as compared to fiscal
year 1995.
Interest Expense. Total interest expense increased $3.1 million, or
29.07%, to $13.6 million for fiscal year 1996 as compared to $10.5 million for
fiscal year 1995. The increase was attributable to an increase in average
interest-bearing liabilities due to an increase in deposits and borrowings. The
interest expense on deposits for the year ended March 31, 1996, increased
$917,000, or 12.27%, from $7.5 million for the year ended March 31, 1995 to $8.4
million for the year ended March 31, 1996. The increase resulted from a $5.5
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<PAGE> 101
million, or 2.23%, increase in the average balance of deposits and a 29 basis
point increase in the average cost of deposits, from 3.02% for the year ended
March 31, 1995 to 3.31% for fiscal year 1996. The increase in deposit costs is
due principally to an increase in higher rate certificate accounts. Interest
expense on borrowings for the year ended March 31, 1996, increased $2.1 million,
or 70.12%, from $3.1 million for the year ended March 31, 1995 to $5.2 million
for the year ended March 31, 1996. The increase resulted from a $19.0 million,
or 35.09%, increase in the average balance of borrowings, reflecting the Bank's
leveraging strategy, and a 146 basis point increase in the average cost of
borrowings, from 5.64% for fiscal year 1995 to 7.10% for fiscal year 1996, due
to the impact of the higher interest rate environment experienced during the
fiscal year.
Provision For Loan Losses. The provision for loan losses decreased by
$203,000 from $334,000 for the year ended March 31, 1995, to $131,000 for the
year ended March 31, 1996. There were no charge-offs during fiscal year 1996.
Recovery of charge-offs amounted to $19,000 during the same period. The
charge-offs net of recoveries during fiscal year 1995 amounted to $527,000. The
net effect of the provision for loan losses and the net recovery during fiscal
year 1996 was an increase of the Bank's total allowance for loan losses from
$1.1 million at March 31, 1995 to $1.2 million at March 31, 1996. At March 31,
1996, the allowance for loan losses represented 1.42% of the gross loan
portfolio compared to 2.1% at March 31, 1995. In determining its provision for
loan losses, management establishes loss allowances on identified problem loans
and the remainder of the loan portfolio. See "Business of the Bank -- Asset
Quality."
Non-Interest Income. Non-interest income for fiscal year 1996 increased
$32,000, or 5.62%, to $608,000, from $576,000 for fiscal year 1995, due
primarily to an increase in loan fees income.
Non-Interest Expense. Non-interest expense increased $1.1 million, or
14.00%, to $9.1 million for fiscal year 1996 as compared to $7.9 million for
fiscal year 1995. During fiscal year 1996 the Bank invested substantially in
improving its infrastructure. These investments encompassed upgrading
technology, increasing management and lending department staff, expanding
marketing efforts, and re-opening the Bank's headquarters which had been
destroyed by fire. These investments increased operating expenses for fiscal
year 1996. Salaries and employee benefits for fiscal year 1996 increased
$408,000, or 13.26%, to $3.5 million from $3.1 million for fiscal year 1995.
This increase was due to increases in management and lending department staff,
incentive compensation and ESOP expense. Net occupancy expense for fiscal year
1996 increased $123,000, or 14.39%, to $978,000 from $853,000 in fiscal year
1995. Increases in rent, cleaning expense and the opening of the Bank's new
headquarters account for the increase in occupancy expense. Advertising expense
for fiscal year 1996 increased $105,000, or 164.56%, to $168,000 from $64,000 in
fiscal year 1995. Carver retained during fiscal year 1996 the services of a
marketing company to expand marketing efforts in order to increase origination
of loans and deposits for the branches. FDIC insurance premium expense decreased
$113,000, or 15.45%, to $618,000 during fiscal year 1996 as compared to $731,000
during fiscal year 1995 due to lower premium rates. Legal expenses during fiscal
year 1996 increased $227,000, or 183.35%, to $351,000 from $124,000 during
fiscal year 1995. The increase in legal expenses was due mainly to defending the
class action law suit brought by certain shareholders as well as higher legal
costs associated with operating as a public company. See "Business of the
Bank -- Legal Proceedings." Other non-interest expense (not including legal
expenses) increased $488,000, or 34.01%, due to increases on a variety of
miscellaneous expense categories.
Income Tax Expense. Income tax expense for fiscal year 1996 decreased to
$606,000, compared to $674,000 for fiscal year 1995, because of lower earnings.
The Bank's effective tax rate remains the same as for fiscal year 1995.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1995 AND 1994
Net Income. Net income for the year ended March 31, 1995, decreased by
$238,000, or 21.9%, to $845,000 from $1.1 million for the year ended March 31,
1994. The decline in net income, however, resulted primarily from certain
non-recurring income during the year ended March 31, 1994. Net income for fiscal
year 1994 included $323,000 in income related to an insurance settlement in
connection with the involuntary conversion of the Bank's main office building as
the result of an electrical fire and $252,000 in income attributable to the
cumulative effect of a change in accounting principle related to the adoption of
Statement
95
<PAGE> 102
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." Income before extraordinary income and cumulative effect of change in
accounting principle for the year ended March 31, 1995 increased $337,000, or
66.3%, to $845,000 as compared to $508,000 for the year ended March 31, 1994.
This increase was attributable to an increase in net interest income which more
than offset a decline in non-interest income and increases in non-interest
expense and income taxes.
Net Interest Income. Net interest income before provision for loan losses
for the year ended March 31, 1995 increased $1.9 million, or 26.3%, to $9.2
million as compared to $7.3 million for the year ended March 31, 1994. The
Bank's interest rate spread widened from 2.38% in fiscal year 1994 to 2.74% in
fiscal year 1995 and its net interest margin increased from 2.43% in fiscal year
1994 to 2.91% in fiscal year 1995. This increase in the interest rate spread and
net interest margin resulted from deposits repricing upward at a slower rate
than interest rates on interest-earning assets. The Bank's net interest income
was aided by an improvement in the ratio of the Bank's average interest-earning
assets to interest-bearing liabilities to 1.05x in fiscal year 1995 from 1.02x
in fiscal year 1994. The improvement in this ratio primarily reflects an
increase in stockholders' equity and non-interest-bearing liabilities. Although
the Bank's ratio of interest-earning assets to interest-bearing liabilities may
be adversely impacted by its planned construction of a new office building which
will increase its level of non-earning assets, it is anticipated that this
effect will be substantially mitigated by the continued deployment of Conversion
proceeds into interest-earning assets.
Interest Income. The Bank's interest income for the fiscal year ended
March 31, 1995 increased $2.3 million, or 13.1%, to $19.8 million as compared to
$17.5 million for the fiscal year ended March 31, 1994. The increase in interest
income resulted primarily from a 40 basis point increase in the average yield on
interest-bearing assets, from 5.83% during fiscal year 1994 to 6.23% during
fiscal year 1995. The increase in average yield reflects the higher interest
rate environment during fiscal year 1995. The Bank also experienced a $17.0
million, or 5.7%, increase in the average balance of interest-earning assets,
principally as a result of the Bank's investment of the proceeds from the
Conversion and additional borrowings.
The increase in interest income resulted in part from a $3.0 million, or
130.2%, increase in income from investments and other interest-earning assets
due to substantial increases in the Bank's portfolio of securities
held-to-maturity and securities available-for-sale during fiscal year 1995. This
increase was primarily due to an increase of $36.8 million, or 82.3%, in the
average balance of investment securities during fiscal year 1995 as compared to
fiscal year 1994. The increase in income from these assets was enhanced by an
increase of 133 basis points in yields to 6.42% during fiscal year 1995 from
5.09% during fiscal year 1994. The higher average balance and higher yield in
the investment securities portfolio during fiscal year 1995 reflect investment
of the net proceeds from the Conversion and additional borrowings and the upward
adjustment of adjustable-rate securities. Interest income from federal funds
sold increased $87,000, or 47.8%, to $269,000 for fiscal year 1995 from $182,000
for fiscal year 1994. This increase resulted from a 181 basis point increase in
the average rate earned which offset a $576,000, or 9.1%, decrease in the
average balance of federal funds sold during fiscal year 1995. The increases in
interest income from these assets offset declines in interest income from loans
receivable and mortgage-backed securities. Interest earned on loans declined
$466,000, or 10.2%, to $4.0 million for fiscal year 1995 compared to $4.6
million for fiscal year 1994 due to the repayment of higher yielding
adjustable-rate loans including certain loans which had been purchased at a
premium and the downward repricing of adjustable-rate loans in portfolio whose
rate adjustments tend to lag the market. The declines are reflected in a
decrease of $4.1 million, or 7.7%, in the average balance of loans outstanding
and a 23 basis point decrease in the average yield on loans from 8.48% for
fiscal year 1994 to 8.25% for fiscal year 1995. Interest income from
mortgage-backed securities declined $293,000, or 2.8%, to $10.2 million for
fiscal year 1995 compared to $10.5 million for fiscal year 1994, primarily due
to a $15.1 million, or 7.7%, decrease in the average balance of mortgage-backed
securities in fiscal year 1995 as a result of the Bank's sale of certain
securities in the latter part of fiscal year 1994 as part of a portfolio
restructuring. The decline in average mortgage-backed securities offset an
increase of 29 basis points in the average yield of such securities from 5.36%
in 1994 to 5.65% in 1995.
Interest Expense. Interest expense for fiscal year 1995 increased by
$365,000, or 3.6%, from $10.1 million in fiscal year 1994 to $10.5 million in
fiscal year 1995. Interest expense on deposits for the year ended March 31,
1995, decreased $450,000, or 5.7%, from $7.9 million for the year ended March
31, 1994 to $7.5
96
<PAGE> 103
million for the year ended March 31, 1995. The decrease resulted from a $2.5
million, or 1.0%, decrease in the average balance of interest-bearing deposits
and a 14 basis point reduction in the average cost of deposits, from 3.16% for
the year ended March 31, 1994 to 3.02% for fiscal year 1995. The reduction in
deposit costs is due principally to a decline in higher rate certificate and
money market deposit accounts. Interest expense on borrowings for the year ended
March 31, 1995 increased $815,000, or 36.3%, from $2.2 million for the year
ended March 31, 1994 to $3.0 million for the year ended March 31, 1995. The
increase resulted from a $9.6 million, or 21.4%, increase in the average balance
of borrowings and a 62 basis point increase in the average cost of borrowings,
from 5.02% for fiscal year 1994 to 5.64% for fiscal year 1995.
The provision for loan losses increased by $315,000 from $19,000 for the
year ended March 31, 1994, to $334,000 for the year ended March 31, 1995.
Charge-offs net of recoveries during fiscal year 1995 totaled $527,000 as
compared to $348,000 during fiscal year 1994. Charge-offs during fiscal year
1995 related to the write-down of one commercial real estate loan in which the
Bank has a participation interest. The Bank's total allowance for loan losses
decreased to $1.1 million at March 31, 1995 from $1.3 million at March 31, 1994
and equaled 2.1% of the gross loan portfolio compared to 2.4% at March 31, 1994.
In determining its provision for loan losses, management establishes loss
allowances on identified problem loans and the remainder of the loan portfolio.
Non-Interest Income. Non-interest income for fiscal year 1995 decreased
$1.1 million, or 66.0%, to $576,000, from $1.7 million for fiscal year 1994. The
decrease was due to the $1.1 million in gains on sales of investments which the
Bank recognized during fiscal year 1994 compared to no such gains during fiscal
year 1995. The Bank realized a $1.1 million gain from the sale of $126.9 million
in mortgage-backed and investment securities during fiscal year 1994 to
restructure the Bank's portfolio. The sale also helped to reduce interest rate
risk by reducing the duration of the investment and mortgage-backed securities
portfolios. Non-interest income was further reduced by a $37,000 write-down of
investment securities compared to a $5,000 write-down in fiscal year 1994. These
write-downs are related to the Bank's investment in a service corporation which
is in liquidation. The absence of gains on sale of investments during fiscal
year 1995 offset an increase of $58,000, or 13.5%, in other non-interest income
due to higher deposit service charges as a result of a change in the Bank's fee
structure.
Non-Interest Expense. Non-interest expense increased by $92,000, or 1.2%,
to $7.9 million for fiscal year 1995 as compared to $7.8 million for fiscal year
1994. The increase was primarily due to a provision for loss on other assets
which offset declines in expenses relating to the amortization of intangibles,
occupancy and equipment expenses and losses on foreclosed real estate. The
provision for loss on other assets related to the Bank's funds held by Nationar
which the New York Banking Department placed in receivership in February 1995.
Amortization expense declined $293,000, or 54.8%, due to the amortization during
fiscal year 1994 of the goodwill remaining from its 1982 acquisition of another
financial institution. Net occupancy and equipment expenses declined $107,000,
or 6.4%. Such expenses were higher during fiscal year 1994 due to certain
relocation and maintenance costs. The Bank's loss on foreclosed real estate
declined $125,000, or 78.6%, due to reduced foreclosure activity. Federal
deposit insurance premium expense increased $66,000, or 9.9%, due to a credit
given during fiscal year 1994 for the Bank's payments into the FSLIC secondary
reserve. Other non-interest expense increased $330,000, or 26.9%, due to
increases on a variety of miscellaneous expense categories.
Income Tax Expense. Income taxes for fiscal year 1995 increased to
$674,000 compared to $613,000 for fiscal year 1994 because of higher earnings
before extraordinary income and the cumulative effect of change in accounting
principle. The Bank's effective tax rate, however, declined to 44.4% from 54.7%
for the prior year period primarily as the result of decline in nondeductible
intangible expenses.
Extraordinary Income. During fiscal year 1994, the Bank recognized
$322,000 in extraordinary income, net of income taxes of $284,000. The
extraordinary income related to an insurance settlement in connection with an
electrical fire at its main office that destroyed the building. The Bank
received $909,000 of a $1,028,000 settlement which resulted in a gross gain on
involuntary disposition of $606,000.
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<PAGE> 104
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES
During fiscal year 1994, the Bank adopted SFAS No. 109 "Accounting for
Income Taxes" which requires the use of the asset and liability method in
accounting for income taxes rather than the deferred method used previously.
Accordingly, the Bank established deferred tax assets and liabilities for the
temporary differences between the financial reporting basis of the Bank's assets
and liabilities at enacted tax rates expected to be in effect when such amounts
are settled or realized. The cumulative effect of this accounting change
resulted in the recognition of $252,000 in additional income during fiscal year
1994.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, FHLB advances, and
proceeds from principal and interest payments on loans and mortgage-backed
securities and investment securities. While maturities and scheduled
amortization of loans and investments are predictable sources of funds, deposit
flows and mortgage prepayments are greatly influenced by changes in general
interest rates, economic conditions and competition.
The Bank is required to maintain an average daily balance of liquid assets
and short term liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings as defined by OTS regulations. The minimum
required liquidity and short-term liquidity ratios are currently 5% and 1%,
respectively. The Bank's liquidity ratios were 33.00% and 38.93% at March 31,
1996 and 1995, respectively.
The Bank's most liquid assets are cash and short-term investments including
mutual funds. The levels of these assets are dependent on the Bank's operating,
lending and investing activities during any given period. At March 31, 1996 and
1995, assets qualifying for short-term liquidity, including cash and short-term
investments, totaled $85.8 million and $87.5 million, respectively.
The primary investment activity of the Bank is the origination and purchase
of loans and, to a lesser extent, purchase of investment and mortgage-backed
securities. During fiscal year 1996 the Bank purchased $26.3 million of whole
loan mortgages and originated $13.4 million in mortgage and other loans. During
fiscal year 1996 no securities were purchased. During fiscal year 1995 the Bank
purchased $50.4 million in mortgage-backed securities and originated $11.3
million in loans. During fiscal years 1996 and 1995, the Bank received $27.5
million and $22.2 million, respectively, in principal payments. During fiscal
year 1996 there was a cash flow of $9 million due to call back of government
agency bonds.
At March 31, 1996, the Bank had outstanding loan commitments of $4.9
million. The Bank financed the construction of its new main building, which was
destroyed by fire, for $5.4 million with its own funds. Certificates of deposits
which are scheduled to mature in one year or less from March 31, 1996 totaled
$45.3 million. Management believes that a significant percentage of such
deposits will remain with the Bank.
REGULATORY CAPITAL POSITION
The Bank must satisfy three capital standards as set by the OTS. These
standards include a ratio of core capital to adjusted total assets of 3.0%, a
tangible capital standard expressed as 1.5% of total adjusted assets, and a
combination of core and "supplementary" capital equal to 8.0% of risk-weighted
assets. The risk-based capital standard currently addresses only the credit risk
inherent in the assets in a thrift's portfolio; it does not address other risks
that thrifts face, such operating, liquidity and interest-rate risks. The OTS
recently finalized regulations that add an interest rate risk component to
capital requirements under certain circumstances. The Bank does not expect that
this regulation will require it to reduce its capital for purposes of
determining compliance with its risk-based capital requirement. In addition, the
OTS has recently adopted regulations that impose certain restrictions on savings
associations that have a total risk-based capital ratio that is less than 8.0%,
a ratio of Tier 1 capital (or core capital) to risk-weighted assets of less than
4.0% or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or
3.0% if the institution receives the highest rating under the OTS examination
rating system). See "Regulation and Supervision -- Regulation of Federal Savings
Associations -- Capital Requirements."
98
<PAGE> 105
The Bank presently exceeds all capital requirements as currently
promulgated. At March 31, 1996, the Bank had tangible, core, Tier 1 to
risk-weighted assets, and risk-based capital ratios of 9.13%, 9.15%, 27.82% and
28.06%, respectively.
The following table reconciles the Bank's stockholders' equity at March 31,
1996, under generally accepted accounting principles to regulatory capital
requirements:
<TABLE>
<CAPTION>
REGULATORY CAPITAL REQUIREMENTS (UNAUDITED)
-------------------------------------------------
GAAP TANGIBLE TIER/CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
------- -------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Stockholders Equity at March 31, 1996............. $34,765 $ 34,765 $34,765 $ 34,765
=======
Add:
Unrealized loss on securities
available-for-sale, net...................... 1,245 1,245 1,245
General valuation allowances.................... 0 0 319
Qualifying intangible assets.................... 0 60 60
Deduct:
Goodwill........................................ (1,609) (1,609) (1,609)
Excess of net deferred tax assets............... (939) (939) (939)
Assets required to be deducted.................. 0 0 (40)
------- ------- -------
Regulatory capital.............................. 33,462 33,522 33,801
Minimum capital................................. 5,495 10,992 9,638
------- ------- -------
Regulatory capital excess....................... $ 27,967 $22,530 $ 24,163
======= ======= =======
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and accompanying notes appearing elsewhere herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Bank'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 the Bank's
performance than do the effects of the general level of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114 ("SFAS 114"), "Accounting by
Creditors for Impairment of a Loan." SFAS 114 generally would require all
creditors to account for impaired loans, except those loans that are accounted
for at fair value or at the lower of cost or fair value, at the present value of
the expected future cash flows discounted at the loan's effective interest rate.
SFAS 114 also provides that impaired loans should not be included in real estate
owned for financial reporting purposes, but rather should be included in the
loan portfolio. SFAS 114 is effective for fiscal years beginning after December
15, 1994. In October 1994, the FASB amended certain provisions of SFAS 114 via
the issuance of Statement of Financial Accounting Standards No. 118 ("SFAS
118"), "Accounting by Creditors for Impairment of a Loan -- Income Recognition
and Disclosures." SFAS 118 amends SFAS 114 by eliminating provisions describing
how a creditor should report income on an impaired loan and increasing
disclosure requirements as to information on recorded investments in certain
impaired loans and how a creditor recognizes related interest income. The
effective date of SFAS 118 is the same as for SFAS 114. SFAS 114, as amended by
SFAS 118, when adopted on April 1, 1995, did not have a material adverse effect
on the Bank's financial condition or results of operation.
99
<PAGE> 106
POSSIBLE IMPACT OF PROPOSED LEGISLATION
Insurance of Deposit Accounts. The FDI Act requires that the BIF and the
SAIF funds each be recapitalized until reserves are at least 1.25% of the
deposits insured by that fund. After a fund reached the 1.25% reserve ratio, the
assessment rates for that fund could be reduced. The FDIC has reported that the
BIF reached the required reserve ratio during May 1995. As a result of the
recapitalization of the BIF, the FDIC reduced BIF-assessment rates. The FDIC
initially reduced the BIF assessment rates, effective June 1, 1995, to a range
of 0.04% to 0.27% of deposits. Having subsequently determined that the BIF had
sufficient reserves in excess of the required 1.25% ratio, the FDIC reduced the
BIF- assessment rate for "well capitalized" institutions without any significant
supervisory concerns to the statutory minimum of $2,000 annually beginning with
the first half of 1996, and the rates for other BIF-insured institutions will
range from 0.03% to 0.27% of deposits.
The FDIC has reported that, under current law and reasonably optimistic
financial projections, the SAIF is not expected to be recapitalized until 2001.
SAIF reserves have not grown as quickly as the BIF reserves due to a number of
factors, including the fact that a significant portion of SAIF assessments have
been and are currently being used to make payments on FICO bonds. Accordingly,
the FDIC has determined that SAIF-insured institutions should continue to pay
assessments at the current SAIF assessment rates, which range from 0.23% of
deposits to 0.31% of deposits. The Bank's assessment rate for the first half of
1996 is 0.23% of deposits.
The resulting disparity in deposit insurance assessments rates between the
SAIF members and the BIF members is likely to provide institutions paying only
the BIF assessments with certain competitive advantages in the pricing of loans
and deposits, and in lowered operating costs, pending any legislative action to
remedy the disparity. Congress has considered proposed legislation to address
these issues.
The proposed Budget Act, which was approved by the Congress but vetoed by
the President, included provisions that focused on a recapitalization of the
SAIF. Under the provisions of the Budget Act, all SAIF-member institutions would
have paid a special assessment to recapitalize the SAIF, and the assessment base
for the payments on the FICO bonds would have been expanded to include the
deposits of both BIF- and SAIF-insured institutions. The amount of the special
assessment required to recapitalize the SAIF was then estimated to be
approximately 80 basis points of the SAIF-assessable deposits. This estimate of
the special assessment was less than the special assessment of 85 to 90 basis
points that had been previously estimated. The special assessment would have
been imposed as of the first business day of January 1996 or on such other date
prescribed by the FDIC not later than 60 days after enactment of the Budget Act,
based on the amount of SAIF deposits on March 31, 1995.
The Budget Act also provided for the merger of the BIF and SAIF on January
1, 1998, with such merger being conditioned upon the prior elimination of the
thrift charter. Congressional leaders had also agreed that Congress should
consider and act upon separate legislation to eliminate the thrift charter as
early as possible in 1996. If adopted, such legislation would require that the
Bank, as a federal savings bank, convert to a bank charter.
The veto of the Budget Act by the President was not based on the above
described provisions of the Budget Act, and the federal banking regulators
continue to seek a legislative solution for the recapitalization of the SAIF. In
February 1996, representatives of the FDIC, the OTS and the Treasury Department
stated to Congress that, unless Congress adopts legislation to strengthen the
SAIF, SAIF's current problems could result in an erosion of the SAIF deposit
base, could cause a default on the FICO bonds, and could leave the SAIF unable
to meet its obligations to insured depositors.
If enacted by Congress, legislation to recapitalize the SAIF as proposed in
the Budget Act would have the effect of reducing the capital of SAIF member
institutions by the after-tax cost of the special SAIF assessment, plus any
related additional tax liabilities. The legislation would also have the effect
of reducing any differential that may otherwise be required in the assessment
rates for the BIF and SAIF.
Management cannot predict whether the above legislation or any other
legislative proposal will be enacted as described above or, if enacted, the
amount of any special SAIF assessment, whether ongoing SAIF premiums will be
reduced to a level equal to that of BIF premiums or whether, if thrifts are
required to convert
100
<PAGE> 107
to a bank charter, there will be any relief from the additional tax liabilities
that would be incurred upon the recapture of their bad debt reserves. It also
cannot be predicted whether some other legislative action will be taken to
address the BIF/SAIF disparity and what consequences such action could have for
SAIF members. A significant increase in SAIF insurance premiums, either
absolutely or relative to BIF premiums or a significant one-time fee to
recapitalize the SAIF could have an adverse effect on the operating expenses and
results of operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Bad Debt Reserves. Under section 593 of the Code, thrift institutions such
as the Bank, which meet certain definitional tests, primarily relating to their
assets and the nature of their business, are permitted to establish a tax
reserve for bad debts and to make annual additions thereto, which additions may,
within specified limitations, be deducted in arriving at their taxable income.
The Bank's deduction with respect to "qualifying loans," which are generally
loans secured by certain interests in real property, may currently be computed
using an amount based on the Bank's actual loss experience (the "Experience
Method"), or a percentage equal to 8.0% of the Bank's taxable income (the "PTI
Method"), computed without regard to this deduction and with additional
modifications and reduced by the amount of any permitted addition to the non-
qualifying reserve. Similar deductions for additions to the Bank's bad debt
reserve are permitted under the New York State Bank Franchise Tax and the New
York City Banking Corporation Tax; however, for purposes of these taxes, the
effective allowable percentage under the PTI method is 32% rather than 8%.
Under pending legislative proposals, section 593 of the Code would be
amended and the Bank would be permitted to use only the Experience Method of
computing additions to its tax bad debt reserves, and would additionally be
required to recapture (that is, take into income) over a six-year period,
beginning with the Bank's taxable year beginning on April 1, 1996, the excess of
the balance of its bad debt reserves (other than the supplemental reserve) as of
March 31, 1996 over the greater of (a) the balance of such reserves as of March
31, 1988, or over a lesser amount if the Bank's loan portfolio has decreased
since March 31, 1988, or (b) an amount that would have been the balance of such
reserves as of March 31, 1996, had the Bank always computed the addition to its
reserves under the Experience Method. However, such recapture requirements would
be suspended for each of two successive taxable years beginning April 1, 1996 in
which the Bank originates a minimum amount of certain residential loans based
upon the average of the principal amounts of such loans made by the Bank during
its six taxable years preceding April 1, 1996. In addition, if section 593 of
the Code is so amended, the Bank may be required for New York State and New York
City tax purposes to include in its entire net income the excess of its New York
State and New York City reserves for losses on qualifying real property loans
over its reserve for losses on such loans maintained for federal income tax
purposes (the "Excess Reserves"). Accordingly, if the pending legislative
proposals are enacted in their present form, unless further legislation is
adopted in New York, the Bank may be required to take its Excess Reserves into
income in computing its New York State and City taxes for its taxable year
beginning April 1, 1996. The enactment of such legislation in its present form
would not result in a significant increase in the tax liability of the Bank.
Since the Bank has already provided a deferred income tax liability of this
potential recapture for financial reporting purposes, any such federal and New
York State and City tax liability resulting from the Bank's recapture of its bad
debt reserves, however, should not adversely affect the Bank's results of
operations. Generally Accepted Accounting Principles have not required that the
difference resulting from the 1987 New York State and New York City bad debt
deduction in excess of the federal bad debt deduction be reflected on the
financial statements.
101
<PAGE> 108
MANAGEMENT OF BANCORP
DIRECTORS
The Board of Directors of Bancorp currently consists of the four Continuing
Directors of Carver and the three directors who are nominated for re-election at
the Annual Meeting. The directors of Bancorp are divided into three classes,
with one class to be elected each year at the annual meeting of stockholders of
Bancorp. Directors elected at each annual meeting will serve for a term of three
years and until their successors are duly elected and qualified. Approval of the
Plan of Reorganization by the holders of Carver Common Stock at the Annual
Meeting will be deemed to be approval of such persons as the directors of
Bancorp without further action and without changes in classes or terms.
The names of the directors of Bancorp and their terms are set forth below.
There are no arrangements or understandings between Bancorp and any person
pursuant to which such person was elected as a director.
<TABLE>
<CAPTION>
TERM POSITION CURRENTLY HELD
NAME EXPIRES WITH BANCORP
- --------------------------------- ------- -------------------------------------------
<S> <C> <C>
Thomas L. Clark, Jr.............. 1998 Director, President and Chief Executive
Officer
David N. Dinkins................. 1999 Director
Linda H. Dunham.................. 1997 Director
Richard T. Greene................ 1997 Director
Herman Johnson, CPA.............. 1998 Director
David R. Jones................... 1999 Chairman of the Board, Director
M. Moran Weston, Ph.D............ 1997 Vice Chairman of the Board, Director
</TABLE>
EXECUTIVE OFFICERS
The executive officers of Bancorp are: Thomas L. Clark, Jr., President and
Chief Executive Officer; Biswarup Mukherjee, Executive Vice President and Chief
Financial Officer; Howard R. Dabney, Vice President and Chief Lending Officer;
Raymond L. Bruce, Vice President and Corporate Counsel; and Margaret R. Lewis,
Corporate Secretary and Personnel Officer.
COMPENSATION
It is expected that until such time as the officers and directors of Carver
devote significant time to the separate management of Bancorp's affairs, which
is not expected to occur until Bancorp becomes actively involved in additional
businesses, no separate compensation will be paid for their services to Bancorp.
However, Bancorp may determine that such compensation is appropriate in the
future and may at such time enter into employment contracts with certain key
executive officers. See "Management of Carver -- Compensation and Employee
Benefit Plans."
EMPLOYEE BENEFIT PLANS
As the directors, officers and employees of Bancorp will not initially be
compensated by Bancorp but will continue to serve and be compensated by Carver,
no separate benefit plans for directors, officers and employees of Bancorp are
anticipated at this time. Bancorp will assume the ESOP, the Option Plan, the MRP
and the Incentive Compensation Plan, which will continue to cover directors,
officers and employees of Carver pursuant to the same terms as in effect under
the plans as maintained by Carver. Carver will continue to maintain its other
benefit programs. See "Proposal 1 -- Election of Directors -- Certain Employee
Benefit Plans and Employment Agreements," and "Proposal 3 -- Formation of
Holding Company -- Effect of Reorganization on Employee Benefit Plans."
102
<PAGE> 109
MANAGEMENT OF CARVER
DIRECTORS
For information with respect to nominees for election as directors of the
Bank at the Annual Meeting and the other directors of the Bank, including their
age, business experience, compensation paid by the Bank, stock ownership, and
service on committees of the Board of Directors, see "Proposal 1 -- Election of
Directors."
EXECUTIVE OFFICERS
The Reorganization will not result in any change of the officers of Carver.
The age at April 30, 1996 and position held with the Bank of each person
currently serving as an executive officer of Carver is set forth below. In
addition, a brief biography of each individual is provided.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ------------------------------------------
<S> <C> <C>
Thomas L. Clark, Jr................ 52 President and Chief Executive Officer,
Director
Biswarup Mukherjee................. 63 Executive Vice President and Chief
Financial Officer
Howard R. Dabney................... 53 Vice President and Chief Lending Officer
Margaret R. Lewis.................. 66 Corporate Secretary and Personnel Officer
Raymond L. Bruce................... 44 Vice President and Corporate Counsel
</TABLE>
THOMAS L. CLARK, JR., is currently President and Chief Executive Officer, a
position he assumed on February 1, 1995. Mr. Clark is also a member of the
Bank's Board of Directors. Prior to assuming his current position, Mr. Clark was
employed by the New York State Banking Department from 1976 until 1995 and, from
1987 until 1995, served as Deputy Superintendent of Banks for New York State and
as secretary of the New York State Banking Board. From 1970 until 1976, Mr.
Clark was employed by Buffalo Savings Bank in various capacities. Mr. Clark is
the founder and president of African-American Men of Westchester, Inc. In
addition, Mr. Clark was recently elected Vice Chairman of the American League of
Financial Institutions, the national trade association representing minority
savings institutions, serves as Vice Chairman of the Community Bankers
Association of New York State's Community Reinvestment Committee and is a member
of the Advisory Board of Small Business Development Centers of New York State.
BISWARUP MUKHERJEE is the Executive Vice President and Chief Financial
Officer. Presently, he also performs the function of Chief Operating Officer.
Mr. Mukherjee joined the Bank in March 1987 as Vice President and Chief
Financial officer and was promoted to Executive Vice President in September
1992. Mr. Mukherjee worked for other savings and loan associations as vice
president and Controller. He has 24 years experience in the thrift industry. He
holds masters degrees in Accounting and Finance. He is also an Associate Member
of the Chartered Institute of Management Accountants in England.
HOWARD R. DABNEY is Vice President and Chief Lending Officer of the Bank,
positions he has held since joining the Bank in 1982. Mr. Dabney currently
serves on the board of directors of the Jamaica Service Program for Older
Adults, on the advisory board of Bridge Street Community Development Center and
on the board of directors of the Counseling Center for Human Development. He
also serves on committees for the Brooklyn Navy Yard Development Corporation and
the Consortium for Community Development.
MARGARET R. LEWIS joined the Bank in 1960 and is presently Corporate
Secretary and Personnel Officer. She formerly served on the board of directors
of the Institute of Financial Education and the Women's Association of Savings
Institutions, formerly the Women's Association of Savings and Loan Institutions.
Ms. Lewis currently serves as a member of the Job Services Employment Committee
of the New York State Department of Labor for the Harlem Area, and on the
Committee on Human Resources Management of the Community Bankers Association of
New York State.
RAYMOND L. BRUCE, ESQ. is Vice President and General Counsel and oversees
the bank's litigation, contracts, compliance and other legal concerns. Prior to
joining Carver in April of 1995, Mr. Bruce was an Assistant Counsel at the New
York State Banking Department (from 1992 to 1993), which is responsible for
103
<PAGE> 110
regulating New York State-chartered banking organizations. From 1988 to 1992,
Mr. Bruce served as Counsel both to Assemblyman Herman D. Farrell, Jr. (then
Chairman to the Assembly Banks Committee) and to the New York State Assembly
Banks Committee. There, he was responsible for the planning, development and
management of New York State legislation which addressed an assortment of
critical issues in the banking industry.
COMPENSATION AND EMPLOYEE BENEFIT PLANS
For a discussion of the compensation paid to certain executive officers of
Carver, employment agreements entered into with certain of Carver's officers and
a description of the material benefit plans and programs with respect to
Carver's executive officers, see "Proposal 1 -- Election of
Directors -- Compensation Committee Report on Executive Compensation,"
"-- Summary Compensation Table," "-- Certain Employee Benefit Plans and
Employment Agreements."
OTHER MATTERS
As of the date of this Proxy-Statement Prospectus, the Board of Directors
knows of no business which will be presented for consideration at the Annual
Meeting other than as stated in the Notice of Annual Meeting of Stockholders.
If, however, other matters are properly brought before the Annual Meeting, it is
the intention of the Board of Directors to direct the vote of the shares
represented by proxy on such matters in accordance with their best judgment.
PROPOSALS FOR 1997 ANNUAL MEETING
Any stockholder wishing to have a proposal considered for inclusion in
Bancorp's proxy statement and form of proxy relating to the 1997 Annual Meeting
of stockholders must, in addition to other applicable requirements, set forth
such proposal in writing and file it with the Corporate Secretary of Bancorp on
or before March 31, 1997. In the event the Reorganization is not consummated,
any such proposal must be set forth in writing and filed with the Corporate
Secretary of Carver on or before March 31, 1997.
104
<PAGE> 111
FINANCIAL STATEMENTS
A copy of the Annual Report containing financial statements at March 31,
1996 and March 31, 1995, prepared in conformity with generally accepted
accounting principles, accompanies this Proxy Statement-Prospectus. The
consolidated financial statements have been audited by Mitchell & Titus, LLP,
whose report thereon appears in the Annual Report. An additional copy of the
Annual Report will be furnished without charge to stockholders upon request.
The Bank is required to file an annual report on Form 10-K for its fiscal
year ended March 31, 1996 with the OTS. Stockholders may obtain, free of charge,
a copy of such annual report (excluding exhibits) by writing to Raymond L.
Bruce, Carver Federal Savings Bank, 75 West 125th Street, New York, New York
10027-4512.
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING, PLEASE
SIGN, DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY CARD IN THE POSTAGE-PAID
ENVELOPE PROVIDED.
By Order of the Board of Directors
/s/ Margaret R. Lewis
MARGARET R. LEWIS
Corporate Secretary
New York, New York
June 27, 1996
105
<PAGE> 112
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
Independent Auditors' Report of Mitchell & Titus, LLP................................ F-2
Independent Auditors' Report of Radics & Co., LLC.................................... F-3
Consolidated Statements of Financial Condition at March 31, 1996 and 1995............ F-4
Consolidated Statements of Income for the Years Ended March 31, 1996, 1995 and
1994............................................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended March
31, 1996, 1995 and 1994............................................................ F-6
Consolidated Statements of Cash Flows for the Years Ended March 31, 1996, 1995 and
1994............................................................................... F-7
Notes to Consolidated Financial Statements........................................... F-9
</TABLE>
F-1
<PAGE> 113
MITCHELL & TITUS, LLP
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
Carver Federal Savings Bank
We have audited the accompanying consolidated statements of financial
condition of Carver Federal Savings Bank (the "Bank") and subsidiaries as of
March 31, 1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the year ended March 31, 1996. These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Carver
Federal Savings Bank and Subsidiaries as of March 31, 1996, and the results of
their operations and cash flows for the year ended March 31, 1996, in conformity
with generally accepted accounting principles.
/s/ MITCHELL & TITUS, LLP
--------------------------------------
Mitchell & Titus, LLP
May 31, 1996
New York, New York.
F-2
<PAGE> 114
To The Board of Directors and Stockholders
Carver Federal Savings Bank
We have audited the accompanying consolidated statement of financial
condition of Carver Federal Savings Bank (the "Bank") and subsidiary as of March
31, 1995 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the two-year period
ended March 31, 1995. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the
second preceding paragraph present fairly, in all material respects, the
financial position of Carver Federal Savings Bank and Subsidiary as of March 31,
1995 and the results of their operations and cash flows for each of the years in
the two-year period ended March 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to consolidated financial statements, the Bank
changed its method of accounting for income taxes, as of April 1, 1993, to
conform with Statement of Financial Accounting Standards No. 109 and its method
of accounting for certain debt and equity investments, at March 31, 1994, to
conform to Statement of Financial Accounting Standards No. 115.
/s/ RADICS & CO., LLC
--------------------------------------
Radics & Co., LLC
(formerly Stephen P. Radics & Co.)
May 12, 1995
F-3
<PAGE> 115
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH
-----------------------------
NOTES 1996 1995
-------------------- ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and amounts due from depository
institutions.............................. $ 3,225,950 $ 4,817,805
Federal funds sold.......................... 6,800,000 7,000,000
------------ ------------
Total cash and cash equivalents... 1 and 19 10,025,950 11,817,805
Securities available for sale............... 1, 3, 13 and 19 114,328,245 93,327,730
Investment securities held to maturity, net
(estimated fair value of $8,814,000 in
1996 and $17,732,000 in 1995)............. 1, 4, 13 and 19 8,937,075 18,034,662
Mortgage-backed securities held to maturity,
net (estimated fair value of $129,813,000
in 1996 and $175,305,000 in 1995)......... 1, 5, 12, 13 and 19 131,105,405 181,133,663
Loans receivable, net....................... 1, 6, 13 and 19 82,608,065 48,459,389
Real estate owned, net...................... 1 314,261 302,392
Property and equipment, net................. 1 and 8 9,956,981 4,328,381
Federal Home Loan Bank of New York stock, at
cost...................................... 13 3,120,000 3,120,000
Accrued interest receivable, net............ 1, 9 and 19 2,688,199 2,707,509
Excess of cost over net assets acquired,
net....................................... 1 and 10 1,669,082 1,898,970
Other assets................................ 14 and 16 2,904,078 2,831,623
------------ ------------
Total assets...................... $367,657,341 $367,962,124
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits.................................... 11 and 19 $256,951,883 $248,445,964
Securities sold under agreements to
repurchase................................ 12 and 19 47,000,000 18,188,000
Advances from Federal Home Loan Bank of New
York...................................... 13 and 19 25,400,000 62,400,000
Other borrowed money........................ 17 and 19 1,548,122 1,730,254
Advance payments by borrowers for taxes and
insurance................................. 483,055 822,742
Other liabilities........................... 14 and 16 1,509,500 1,574,003
------------ ------------
Total liabilities................. 332,892,560 333,160,963
------------ ------------
Commitments and contingencies............... 18 and 19 -- --
STOCKHOLDERS' EQUITY........................ 15
Preferred stock, $0.01 par value per share;
1,000,000 authorized; none issued......... -- --
Common stock; $0.01 par value per share;
5,000,000 authorized; 2,314,375 issued and
outstanding............................... 2 23,144 23,144
Additional paid-in capital.................. 2 21,436,235 21,465,072
Retained earnings -- substantially
restricted................................ 2 and 14 16,098,728 15,345,644
Common stock acquired by Employee Stock
Ownership Plan ("ESOP")................... 2 and 17 (1,548,122) (1,730,254)
Unrealized (loss) on securities available
for sale, net............................. (1,245,204) (302,445)
------------ ------------
Total stockholders' equity........ 34,764,781 34,801,161
------------ ------------
Total liabilities and
stockholders' equity............ $367,657,341 $367,962,124
============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 116
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
MARCH
-----------------------------------------
NOTES 1996 1995 1994
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans............................................... 1 $ 4,800,482 $ 4,092,330 $ 4,557,729
Mortgage-backed securities.......................... 12,217,281 10,158,697 10,451,970
Debt and equity securities.......................... 5,415,806 4,983,129 1,979,773
Other interest-earning assets....................... 1,095,336 516,045 474,755
----------- ----------- -----------
Total interest income..................... 23,528,905 19,750,201 17,464,227
----------- ----------- -----------
INTEREST EXPENSE:
Deposits............................................ 11 8,390,201 7,472,812 7,923,818
Advances and other borrowed money................... 5,204,068 3,058,828 2,243,394
----------- ----------- -----------
Total interest expense.................... 13,594,269 10,531,640 10,167,212
----------- ----------- -----------
Net interest income................................. 9,934,636 9,218,561 7,297,015
Provision for loan losses........................... 1 and 6 130,892 333,697 19,061
----------- ----------- -----------
Net interest income after provision for loan
losses............................................ 9,803,744 8,884,864 7,277,954
----------- ----------- -----------
NON-INTEREST INCOME:
Loan fees and service charges....................... 78,084 121,569 132,906
Write-down of investment securities................. -- (37,139) (5,352)
Gain on sale of securities held for sale............ 4 and 5 -- -- 1,132,082
Other............................................... 529,873 491,157 432,646
----------- ----------- -----------
Total non-interest income................. 607,957 575,587 1,692,282
----------- ----------- -----------
NON-INTEREST EXPENSES:
Salaries and employee benefits...................... 16 and 17 3,482,928 3,075,041 2,995,351
Net occupancy expense............................... 1 and 18 975,795 853,025 916,981
Equipment........................................... 1 685,657 707,057 750,313
Loss on foreclosed real estate...................... 1 76,582 34,008 158,894
Advertising......................................... 168,084 63,534 95,979
Federal insurance premium........................... 618,169 731,141 665,045
Amortization of intangibles......................... 1 229,898 241,915 534,827
Bank charges........................................ 308,391 239,207 276,079
Security service.................................... 234,856 182,907 227,837
Provision for loss on other assets.................. 18 -0 - 255,580 --
Other............................................... 2,272,383 1,557,687 1,227,386
----------- ----------- -----------
Total non-interest expenses............... 9,052,743 7,941,102 7,848,692
----------- ----------- -----------
Income before income taxes, extraordinary income and
cumulative effect of change in accounting
principle......................................... 1,358,958 1,519,349 1,121,544
Income taxes...................................... 1 and 14 605,874 674,297 613,377
----------- ----------- -----------
Income before extraordinary income and cumulative
effect of change in accounting principle....... -- 753,084 845,052 508,167
Extraordinary income, net of income taxes of
$283,666.......................................... 8 -- -- 322,396
----------- ----------- -----------
Income before cumulative effect of change in
accounting principle.............................. 753,084 845,052 830,563
Cumulative effect, as of April 1, 1993, of change in
accounting principle.............................. 1 -- -- 252,082
Net income................................ $ 753,084 $ 845,052 $ 1,082,645
----------- ----------- -----------
Net income per common share......................... $ 0.35 $ 0.40(2) N/A(1)
=========== =========== ===========
Weighted average number of shares outstanding....... 1 2,156,346 2,136,615 N/A(1)
</TABLE>
- ---------------
(1) Carver Federal Savings Bank converted to stock form on October 24, 1994.
(2) Historical net income per common share from October 24, 1994 (date of
conversion) to March 31, 1995 was $0.17.
See notes to consolidated financial statements.
F-5
<PAGE> 117
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
RETAINED COMMON (LOSS) ON
ADDITIONAL EARNINGS- STOCK SECURITIES
COMMON PAID-IN SUBSTANTIALLY ACQUIRED AVAILABLE
STOCK CAPITAL RESTRICTED BY ESOP FOR SALE NET TOTAL
-------- ----------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance -- March 31, 1993.... $ -- $ -- $13,417,947 $ -- $ -- $13,417,947
Net income for the year ended
March 31, 1994............. -- -- 1,082,645 -- -- 1,082,645
Unrealized (loss) on
securities available for
sale, net.................. -- -- -- -- (330,765 ) (330,765)
------- ----------- ----------- ----------- ----------- -----------
Balance -- March 31, 1994.... -- -- 14,500,592 -- (330,765 ) 14,169,827
Net income for the year ended
March 31, 1995............. -- -- 845,052 -- -- 845,052
Net proceeds from common
stock issued in stock
conversion................. 23,144 21,495,847 -- -- -- 21,518,991
Acquisition of common stock
by ESOP.................... -- -- -- (1,821,320) -- (1,821,320)
Allocation of ESOP stock..... -- (30,775) -- 91,066 -- 60,291
Decrease in unrealized (loss)
on securities available for
sale, net.................. -- -- -- -- 28,320 28,320
------- ----------- ----------- ----------- ----------- -----------
Balance -- March 31, 1995.... 23,144 21,465,072 15,345,644 (1,730,254) (302,445 ) 34,801,161
Net Income for the year ended
March 31, 1996............. -- -- 753,084 -- -- 753,084
Allocation of ESOP stock..... -- (28,837) -- 182,132 -- 153,295
Decrease in unrealized (loss)
in securities available for
sale, net.................. -- -- -- -- (942,759 ) (942,759)
------- ----------- ----------- ----------- ----------- -----------
Balance -- March 31, 1996.... $ 23,144 $21,436,235 $16,098,728 $(1,548,122) $(1,245,204 ) $34,764,781
======= =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 118
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 753,084 $ 845,052 $ 1,082,645
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of premises
and equipment............................ 301,918 222,699 240,311
Amortization of intangibles................ 229,888 241,915 534,827
Other amortization and accretion, net...... 651,014 1,130,807 2,044,799
Allocation of ESOP stock................... 153,295 60,291 --
Purchases of securities held for sale...... -- -- (111,863,247)
Proceeds from sales of securities held for
sale..................................... -- -- 126,859,009
Proceeds from sale of loans................ 1,948,143 3,940,215 1,665,792
Gain on sales of securities held for
sale..................................... -- -- (1,132,082)
Gain on involuntary conversion of
property................................. -- -- (606,062)
Write-down of equity security.............. -- 37,139 5,352
Provision for loan losses.................. 130,892 333,697 19,061
Provision for real estate owned losses..... -- -- 136,888
Provision for losses on other assets....... -- 255,580 --
Deferred income taxes...................... (380,541) (75,869) (43,471)
(Increase) decrease in accrued interest
receivable............................... 19,310 (549,524) 469,949
Decrease (increase) in refundable income
taxes.................................... 238,157 651,369 336,433
(Increase) decrease in other assets........ (72,455) (1,606,419) (165,040)
Increase (decrease) in other liabilities... 731,894 234,420 139,908
------------ ------------ -------------
Net cash provided by operating
activities.......................... 4,704,489 5,721,372 19,725,072
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments on securities held to
maturity................................... 96,335 -- --
Principal repayments on securities available
for sale................................... 2,965,441 1,133,751 818,066
Purchase of securities available for sale..... -- (23,022,923) --
Proceeds from calls of investment
securities................................. 9,000,000 2,971,005 --
Purchase of investment securities............. -- (9,011,875) (14,989)
Principal repayments on mortgage-backed
securities................................. 23,663,432 22,254,234 80,549,321
Purchase of mortgage-backed securities........ -- (50,436,456) (84,879,827)
Loans purchased............................... (26,911,379) -- --
Net change in loans receivable................ (9,357,887) (2,031,338) 3,807,240
Proceeds from sale of real estate owned....... -- 139,614 --
Proceeds from fire insurance claims, net...... -- -- 574,304
Additions to premises and equipment........... (5,930,518) (1,594,145) (305,010)
(Purchase) redemption of Federal Home Loan
Bank of New York stock..................... -- (1,287,100) 1,117,100
------------ ------------ -------------
Net cash (used in) provided by
investing activities................ (6,474,576) (60,885,233) 1,666,205
------------ ------------ -------------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 119
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits............ $ 8,505,919 $ (4,027,784) $ (3,594,086)
Net increase (decrease) in short-term
borrowings.................................. (19,188,000) 41,658,000 9,530,000
Proceeds of long-term borrowings............... 11,000,000 20,821,320 10,400,000
Repayment of long-term borrowings.............. -- (20,091,066) (39,000,000)
(Decrease) in advance payments by borrowers for
taxes and insurance......................... (339,687) (129,938) (109,179)
Net proceeds from issuance of common stock..... -- 21,518,991 --
Acquisition of common stock by ESOP............ -- (1,821,320) --
------------ ------------ ------------
Net cash provided by (used in) financing
activities.................................. (21,768) 57,928,203 (22,773,265)
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.................................... (1,791,855) 2,764,342 (1,381,988)
Cash and cash equivalents -- beginning........... 11,817,805 9,053,463 10,435,451
------------ ------------ ------------
Cash and cash equivalents -- ending.............. $ 10,025,950 $ 11,817,805 $ 9,053,463
============ ============ ============
Supplemental schedule of noncash activities:
Transfers to securities available for sale
from:
Securities held for sale....................... $ -- $ -- $ 52,418,586
Investment securities.......................... -- -- 2,071,364
Mortgage-backed securities..................... 25,891,771 -- 17,711,833
------------ ------------ ------------
$ 25,891,771 $ -- $ 72,201,783
============ ============ ============
Transfers to securities held for sale from:
Investment securities.......................... $ -- $ -- $ 701,036
Mortgage-backed securities..................... -- -- 66,421,888
------------ ------------ ------------
$ -- $ -- $ 67,122,924
============ ============ ============
Unrealized gain (loss) on securities available
for sale:
Unrealized gain (loss)........................... $ 1,778,783 $ 53,435 $ (624,085)
Deferred income tax.............................. (836,033) (25,115) 293,320
------------ ------------ ------------
$ 942,760 $ 28,320 $ (330,765)
============ ============ ============
Loans receivable transferred to real estate
owned.......................................... $ -- $ 252,292 $ 33,509
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest....................................... $ 13,344,140 $ 10,342,385 $ 10,227,228
============ ============ ============
Federal, state and city income taxes............. $ 449,197 $ 98,795 $ 352,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 120
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidated Financial Statement Presentation
The consolidated financial statements include the accounts of the Bank and
its wholly owned subsidiaries, C.F.S.B. Realty Corp. and C.F.S.B. Credit Corp.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
consolidated statement of financial condition and revenues and expenses for the
period then ended. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
changes in the near-term relate to prepayment assumptions on mortgage-backed
securities, the determination of the allowance for loan losses and the valuation
of real estate owned. Management believes that prepayment assumptions on
mortgage-backed securities are appropriate, the allowance for loan losses is
adequate and real estate owned is properly valued. While management uses
available information to recognize losses on loans and real estate owned, future
additions to the allowance for loan losses or future write downs of real estate
owned may be necessary based on changes in economic conditions in the Bank's
market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses
and real estate owned valuations. Such agencies may require the Bank to
recognize additions to the allowance for loan losses or additional write downs
of real estate owned based on their judgments about information available to
them at the time of their examination.
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from depository
institutions and federal funds sold. Generally, federal funds sold are sold for
one-day periods.
Investment and Mortgage-Backed Securities
In May 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting
for Certain Investments in Debt and Equity Securities." SFAS 115 generally
requires that debt and equity securities that have readily determinable fair
values be carried at fair value unless they are classified as held to maturity.
Securities can be classified as held to maturity and carried at amortized cost
only if the reporting entity has a positive intent and ability to hold those
securities to maturity. If not classified as held to maturity, such securities
must be classified as trading securities or securities available for sale.
Unrealized holding gains or losses for securities available for sale are to be
excluded from earnings and reported net of deferred income taxes as a separate
component of retained earnings. Unrealized holding gains and losses for trading
securities are to be included in earnings. The Bank, as permitted, adopted SFAS
115 as of March 31, 1994. Upon adoption, the Bank reclassified $52,419,000 of
securities held for sale, $2,071,000 of investment securities and $17,712,000 of
mortgage-backed securities as available for sale and, accordingly, recorded an
unrealized gain, net of deferred income taxes, of $330,765 as a separate
component of retained earnings. At December 30, 1995, the Bank reclassified
$25,892,000 of investment securities held to maturity, to securities available
for sale, as permitted under a one time relaxation of SFAS No. 115.
On February 17, 1994, the Bank entered into a four year interest rate
protection agreement for a notional amount of $20,000,000 as a hedge against
possible losses in the securities available for sale portfolio. The interest
rate protection agreement, which is in effect until January 10, 1998, is indexed
to the three-month London Inter-Bank Offered Rate ("LIBOR") with a strike rate
of 5.5%. The $410,000 paid for the contract is treated as a premium and is
included in the investment securities available for sale portfolio. The premium
is
F-9
<PAGE> 121
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amortized over the term of the contract on the straight-line basis. Premium
amortization for the fiscal year ended March 31, 1996, totalled $102,500.
Premium amortization is treated as a yield adjustment on the hedged securities.
At March 31, 1996, the three-month LIBOR stood at 5.4727%.
Investment and mortgage-backed securities held to maturity are carried at
cost, adjusted for the amortization of premiums and the accretion of discounts
using the level-yield method over the remaining period until maturity.
Gains or losses on sales of securities of all classifications are
recognized on the specific identification method.
Loans Receivable
Loans receivable are carried at unpaid principal balances plus unamortized
premiums, less the allowance for loan losses and deferred loan fees and
discounts.
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 by use of the interest method.
Premiums and discounts on loans purchased are amortized and accreted,
respectively, as an adjustment of yield over the contractual lives of the
related loans by use of the interest method.
Loans are placed on non-accrual status when they are past due three months
or more as to contractual obligations. When a loan is placed on non-accrual
status, any interest accrued but not received is reversed against interest
income. A non-accrual loan is restored to accrual status when principal and
interest payments become less than three months past due.
Allowance for Loan Losses
An allowance for loan losses is maintained at a level considered adequate
to absorb future loan losses. Management of the Bank, in determining the
allowance for loan losses, considers the risks inherent in its loan portfolio
and changes in the nature and volume of its loan activities, along with the
general economic and real estate market conditions.
The Bank maintains a loan review system which allows for a periodic review
of its loan portfolio and the early identification of potential problem loans.
Such system takes into consideration, among other things, delinquency status,
size of loans, type of collateral and financial condition of the borrowers. Loan
loss allowances are established for problem loans based on a review of such
information and/or appraisals of the underlying collateral. On the remainder of
its loan portfolio, loan loss allowances are based upon a combination of factors
including, but not limited to, actual loan loss experience, composition of loan
portfolio, current economic conditions and management's judgment. Although
management believes that adequate loan loss allowances have been established,
actual losses are dependent upon future events and, as such, further additions
to the level of the loan loss allowance may be necessary in the future.
Concentration of Risk
The Bank's real estate and lending activities are concentrated in real
estate and loans secured by real estate located in the State of New York.
Premises and Equipment
Premises and equipment are comprised of land and construction in progress,
at cost, and buildings, building improvements, furnishings and equipment and
leasehold improvements, at cost, less accumulated
F-10
<PAGE> 122
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
depreciation and amortization. Depreciation and amortization charges are
computed using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Buildings and improvements............................. 10 to 50 years
Furnishings and equipment.............................. 3 to 10 years
Leasehold improvements................................. The lesser of useful life or term of lease
</TABLE>
Significant renewals and betterments are charged to the property and
equipment account. Maintenance and repairs are charged to expense in the year
incurred.
Real Estate Owned
Real estate acquired by foreclosure or deed in lieu of foreclosure is
recorded at the lower of cost or fair value at the date of acquisition and
thereafter carried at the lower of cost or fair value less estimated selling
costs. The amounts ultimately recoverable from real estate owned could differ
from the net carrying value of these properties because of economic conditions
and the current softness in the local real estate market.
Costs incurred to improve properties or get them ready for sale are
capitalized. Revenues and expenses related to the holding and operating of
properties are recognized in operations as earned or incurred. Gain or loss on
sale of properties is recognized as incurred.
Excess of Cost Over Net Assets Acquired
In connection with the acquisition of two branches, core deposit premiums
paid and other capitalized acquisition costs are being amortized to expense over
periods from five to fifteen years using the straight-line method.
Interest-Rate Risk
The Bank is principally engaged in the business of attracting deposits from
the general public and using these deposits, together with borrowings and other
funds, to originate loans secured by real estate and purchase investment and
mortgage-backed securities. The potential for interest-rate risk exists as a
result of the shorter duration of the Bank's interest-sensitive liabilities
compared to the generally longer duration of interest-sensitive assets. In a
rising rate environment, liabilities will reprice faster than assets, thereby
reducing the market value of long-term assets and net interest income. For this
reason, management regularly monitors the maturity structure of the Bank's
assets and liabilities in order to measure its level of interest-rate risk and
plan for future volatility.
Income Taxes
Federal, state and city income taxes have been provided on the basis of
reported income. The amounts reflected on the tax returns differ from these
provisions due principally to temporary differences in the treatment of certain
items of income and expense for financial statement and income tax reporting
purposes.
The FASB issued Statement of Financial Accounting Standards No. 109 ("SFAS
109"), "Accounting for Income Taxes", which required that the Bank compute
income tax expense and deferred income taxes differently beginning on April 1,
1993. Specifically, SFAS 109 specifies the "liability method" of accounting for
income taxes and thus requires that deferred income taxes in the consolidated
statement of condition be adjusted each year to reflect the cumulative taxable
and deductible temporary differences and net operating loss and tax credit
carryforwards at the then existing income tax rates. The new rules also provide
that qualified thrift lenders recognize the future tax consequences related to
the allowance for loan losses recorded for book purposes and any increase in the
bad debt reserve for income tax reporting purposes above that existing at
December 31, 1987. The effect of the adoption of SFAS 109, effective April 1,
1993, was to
F-11
<PAGE> 123
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
increase retained earnings, net income, and deferred income tax assets by
$252,082. The effect on net income is presented separately in the consolidated
statement of income as a change in accounting principle.
Net Income Per Common Share
Net income per common share for the year ended March 31, 1996 is based on
net income for the entire year. However, the pro forma net income per common
share for the year ended March 31, 1995 is based on net income for the entire
year, as if the Bank had converted to stock form (see Note 2) on the first day
of the fiscal year, and the weighted average number of common shares outstanding
during the period. For the purpose of these calculations, unreleased ESOP shares
are not considered to be outstanding. Historical net income per share is
calculated based on prorated earnings from October 24, 1994 (the date of
conversion) to March 31, 1995. Net income per common share for the year ended
March 31, 1994 is not presented as the Bank was a mutual savings Bank and no
common stock was outstanding.
Impact of New Accounting Standards
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 114 ("SFAS 114"), "Accounting by Creditors for Impairment of a Loan." SFAS
114 generally would require all creditors to account for impaired loans, except
those loans that are accounted for at fair value or at the lower of cost or fair
value, at the present value of the expected future cash flows discounted at the
loan's effective interest rate. SFAS 114 also provides that in-substance
foreclosed loans should not be included in real estate owned for financial
reporting purposes, but rather should be included in the loan portfolio. SFAS
114 is effective for fiscal years beginning after December 15, 1994. In October
1994, the FASB amended certain provisions of SFAS 114 via the issuance of
Statement of Financial Accounting Standards No. 118 ("SFAS 118"), "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures." SFAS
118 amends SFAS 114 by eliminating provisions describing how a creditor should
report income on an impaired loan and increasing disclosure requirements as to
information on recorded investments in certain impaired loans and how a creditor
recognizes related interest income. The effective date of SFAS 118 is the same
as for SFAS 114. SFAS 114, as amended by SFAS 118, when adopted on April 1,
1995, did not have a material adverse effect on the Bank's consolidated
financial condition or results of operations.
Reclassification
Certain amounts for the years ended March 31, 1994 have been reclassified
to conform to the current period's presentation.
2. CONVERSION TO STOCK FORM OF OWNERSHIP
On October 24, 1994, the Bank issued an initial offering of 2,314,375
shares of common stock (par value $0.01) at a price of $10 per share resulting
in net proceeds of $21,519,000. As part of the initial public offering and in
order to grant priority to eligible depositors, the Bank established a
liquidation account at the time of conversion, in an amount equal to the surplus
and reserves of the Bank at September 30, 1994. In the unlikely event of a
complete liquidation of the Bank (and only in such event), eligible depositors
who continue to maintain accounts shall be entitled to receive a distribution
from the liquidation account. The total amount of the liquidation account may be
decreased if the balances of eligible deposits decreased as measured on the
annual determination dates. The balance of the liquidation account was
approximately $6,348,000 and $7,769,000 at March 31, 1996 and 1995,
respectively. The Bank may not declare or pay a cash dividend on, or repurchase
any of its conversion stock, if the effect thereof would be to cause its net
worth to be reduced below either: (i) the amount required for the liquidation
account; or (ii) the amount of applicable regulatory capital requirements.
F-12
<PAGE> 124
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ---------------------- CARRYING
COST GAINS LOSSES VALUE
------------ ------- ---------- ------------
<S> <C> <C> <C> <C>
Mortgage-backed securities.............. $ 42,520,115 $ 0 $ 612,117 $ 41,907,998
Equity securities:
Mutual funds.......................... 71,935,268 1,427,439 70,507,829
Common and preferred stock............ 2,090,298 50,400 2,090,298
Interest rate agreement for a notional
amount of $20,000,000................. 182,406 360,286 (177,880)
------------ -------- ---------- ------------
$116,677,687 $50,400 $2,399,842 $114,328,245
============ ======== ========== ============
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1995
---------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ----------------------- CARRYING
COST GAINS LOSSES VALUE
------------ -------- ---------- ------------
<S> <C> <C> <C> <C>
Mortgage-backed securities............. $ 19,646,759 $ 0 $ 699,476 $ 18,947,283
Equity securities:..................... 0
Mutual funds......................... 71,935,268 414,268 71,521,000
Common and preferred stock........... 2,031,447 40,000 2,071,447
Interest rate agreement for a notional
amount of $20,000,000................ 284,906 503,094 788,000
------------ -------- ---------- ------------
$ 93,898,380 $543,094 $1,113,744 $ 93,327,730
============ ======== ========== ============
</TABLE>
Securities in the available for sale portfolio were transferred thereto as
of March 31, 1994 and 1996 upon the initial adoption of and subsequent
relaxation of SFAS 115. There have been no sales from the available for sale
portfolio.
4. INVESTMENT SECURITIES HELD TO MATURITY, NET
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------------------------
GROSS UNREALIZED
CARRYING ---------------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
------------ ------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Government (including agencies):
After one year through five years..... $ 8,937,075 -- 123,277 $ 8,813,798
============ ======== ========== ============
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1995
--------------------------------------------------------
GROSS UNREALIZED
CARRYING ---------------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
------------ ------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Government (including agencies):
After one year through five years..... $ 18,034,662 -- 302,226 $ 17,732,436
============ ======== ========== ============
</TABLE>
There were no sales of securities held to maturity during the years ended
March 31, 1996, 1995 and 1994. Proceeds from calls of investment securities held
to maturity during the years ended March 31, 1996 and 1995 were $9,000,000 and
$2,971,000, respectively. No gains or losses were realized on these calls.
Proceeds from sales of investment securities held for sale during the year
ended March 31, 1994 were $34,527,000 resulting in gross gains of $31,000 and
gross losses of $83,000.
There were no sales of investment securities held for sale during the year
ended March 31, 1996 and 1995.
F-13
<PAGE> 125
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY, NET
<TABLE>
<CAPTION>
MARCH 31, 1996 MARCH 31, 1995
-------------------------------------------------- --------------------------------------------------
PRINCIPAL UNAMORTIZED UNEARNED CARRYING PRINCIPAL UNAMORTIZED UNEARNED CARRYING
BALANCE PREMIUMS DISCOUNTS VALUE BALANCE PREMIUMS DISCOUNTS VALUE
------------ ----------- --------- ------------ ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government National
Mortgage Association.... $ 13,427,764 $ 266 $131,405 $ 13,296,625 $ 22,337,205 $ 663 $230,179 $ 22,107,689
Federal Home Loan
Mortgage Corporation.... 54,138,973 1,486,330 204,821 55,420,482 75,876,235 2,020,855 269,987 77,627,103
Federal National Mortgage
Association............. 45,768,352 667,099 189,472 46,245,979 62,945,515 733,597 290,205 63,388,907
Small Business
Administration.......... 2,621,569 18,569 2,603,000 2,983,008 22,163 2,960,845
Collateralized mortgage
obligations:
Resolution Trust
Corporation........... 10,948,712 188,362 11,137,074 12,216,035 223,965 12,440,000
Federal Home Loan
Mortgage
Corporation........... 1,703,274 1,703,274 1,703,274 1,703,274
Others.................. 697,539 1,432 698,971 886,504 19,341 905,845
------------ --------- -------- ------------ ------------ --------- -------- ------------
$129,306,183 $2,343,489 $544,267 $131,105,405 $178,947,776 $2,998,421 $812,534 $181,133,663
============ ========= ======== ============ ============ ========= ======== ============
</TABLE>
A summary of gross unrealized gains and losses and estimated fair value
follows:
<TABLE>
<CAPTION>
MARCH 31, 1996 MARCH 31, 1995
----------------------------------------------------- --------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
CARRYING ----------------------- ESTIMATED CARRYING --------------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE VALUE GAINS LOSSES FAIR VALUE
------------ ---------- ---------- ------------ ----------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government National
Mortgage
Association......... $ 13,296,625 $ 176,200 $ 390,909 $ 13,081,916 $22,107,689 $329,503 $ 725,557 $21,711,635
Federal Home Loan
Mortgage
Corporation.......... 55,420,482 699,524 513,067 55,606,939 77,627,103 471,099 1,921,284 76,176,918
Federal National
Mortgage
Association.......... 46,245,979 98,910 1,127,575 45,217,314 63,388,907 62,406 2,993,581 60,457,732
Small Business
Administration....... 2,603,000 66,086 2,669,086 2,960,845 544,608 2,416,237
Collateralized
mortgage obligations:
Resolution Trust
Corporation........ 11,137,074 273,031 10,864,043 12,440,000 423,165 12,016,835
Federal Home Loan
Mortgage
Corporation........ 1,703,274 17,032 1,686,242 1,703,274 55,356 1,647,918
Others............... 698,971 11,825 687,146 905,845 28,206 877,639
----------- ---------- ---------- ----------- ------------ -------- ---------- ------------
$131,105,405 $1,040,720 $2,333,439 $129,812,686 $181,133,663 $863,008 $6,691,757 $175,304,914
=========== ========== ========== =========== ============ ======== ========== ============
</TABLE>
The following is a schedule of final maturities as of March 31, 1996:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
After one through five years......................... $ 4,059 $ 4,076
After five through ten years......................... 3,877 3,883
After ten years...................................... 123,169 121,854
-------- --------
$131,105 $ 129,813
======== ========
</TABLE>
There were no sales of mortgage-backed securities held to maturity during
the years ended March 31, 1996, 1995 and 1994.
F-14
<PAGE> 126
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LOANS RECEIVABLE, NET
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Real estate mortgage:
One-to four family.............................. $59,466,442 $31,538,744
Multi-family.................................... 2,490,355 2,165,300
Non-residential................................. 11,138,426 8,660,363
Equity and second mortgages..................... 364,085 1,655,898
----------- -----------
73,459,308 44,020,305
----------- -----------
Agency for International Development.............. 9,441 13,634
----------- -----------
Real estate construction.......................... 6,965,301 3,179,452
----------- -----------
Commercial loans.................................. 1,090,941 931,500
----------- -----------
Consumer:
Passbook or certificate......................... 1,011,371 1,098,739
Student education............................... 1,094,351 1,345,801
Other........................................... 931,319 640,354
----------- -----------
3,037,041 3,084,894
----------- -----------
Total loans............................. 84,562,032 51,229,785
Add: Premium on loans............................. 882,138 365,716
----------- -----------
Less: Loans in process............................ 1,406,150 1,853,484
Allowance for loan losses....................... 1,205,496 1,074,604
Deferred loan fees and discounts................ 224,459 208,024
----------- -----------
2,836,105 3,136,112
----------- -----------
$82,608,065 $48,459,389
=========== ===========
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance-beginning.............................. $1,074,605 $1,267,676 $1,597,136
Provision charged to operations................ 130,892 333,697 19,061
Recoveries of amounts previously charged off... -- -- 1,420
Loans charged off.............................. -- (526,769) (349,941)
---------- ---------- ----------
Balance-ending................................. $1,205,497 $1,074,604 $1,267,676
========== ========== ==========
</TABLE>
Non-accrual loans consist of loans for which the accrual of interest has
been discontinued as a result of such loans becoming three months or more
delinquent as to principal and/or interest payments. Interest income on
non-accrual loans is recorded as received. Restructured loans consist of loans
where borrowers have been granted concessions in regards to the terms of their
loans due to financial or other difficulties which rendered them unable to
service their loans under the original contractual terms. Such loans are
performing in
F-15
<PAGE> 127
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accordance with their restructured terms. The balances of non-accrual and
restructured loans and their impact in interest income are as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Non-accrual loans................................ $2,034 $1,532 $2,203
Restructured loans............................... 0 1,468 1,758
------ ------ ------
$2,034 $3,000 $3,961
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
1996 1995 1994
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income which would have been recorded had
loans performed in accordance with original
contracts........................................... $ 138 $ 298 $ 328
Interest income received.............................. 26 77 52
---- ---- ----
Interest income lost.................................. $ 112 $ 221 $ 276
==== ==== ====
</TABLE>
The following is a summary of loans to the Bank's directors and officers
(and to any associates of such persons), exclusive of loans to any such person
which in aggregate did not exceed $60,000:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Balance-beginning...................................... $451,567 $468,567
Loans originated....................................... 0 175,900
Repayments............................................. (23,138) (192,900)
------- -------
Balance-ending......................................... $428,429 $451,567
======= =======
</TABLE>
7. LOAN SERVICING
The mortgage loan portfolios serviced for the Federal Home Loan Mortgage
Corporation and Federal National Mortgage Association are not included in the
accompanying financial statements. The unpaid principal balances of these loans
aggregated $4,317,000, $3,911,000 and $1,295,000 at March 31, 1996, 1995 and
1994, respectively.
Custodial escrow balances, maintained in connection with the foregoing loan
servicing, were approximately $89,000, $136,000 and $138,000 at March 31, 1996,
1995 and 1994, respectively.
F-16
<PAGE> 128
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PREMISES AND EQUIPMENT, NET
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Land.............................................. $ 450,952 $ 450,952
Buildings and improvements........................ 8,222,217 2,231,649
Leasehold improvements............................ 712,884 582,516
Furnishings and equipment......................... 2,253,985 826,051
Construction in process........................... 0 1,621,546
---------- ----------
11,640,038 5,712,714
Less accumulated depreciation and amortization.... 1,683,057 1,384,333
---------- ----------
$ 9,956,981 $ 4,328,381
========== ==========
</TABLE>
In March 1996, the Bank's main office building was completed and officially
opened for business. At this time, construction in progress cost was
reclassified to premises and equipment.
9. ACCRUED INTEREST RECEIVABLE, NET
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Loans............................................... $1,076,014 $ 698,234
Mortgage-backed securities.......................... 1,258,479 1,511,786
Investments and other interest-bearing assets....... 557,775 690,516
2,892,268 2,900,536
Less allowance for uncollected interest............. (204,069) (193,027)
---------- ----------
$2,688,199 $2,707,509
========== ==========
</TABLE>
10. EXCESS OF COST OVER ASSETS ACQUIRED, NET
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Core deposit premium................................ $1,609,284 $1,828,247
Acquisition costs................................... 59,798 70,723
---------- ----------
$1,669,082 $1,898,970
========== ==========
</TABLE>
F-17
<PAGE> 129
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. DEPOSITS
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------------------------------------
1996 1995
--------------------------------- ---------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT PERCENT RATE AMOUNT PERCENT
-------- ------------ ------- -------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Demand:
Interest-bearing................ 1.86% $ 16,970,517 6.61% 1.95% $ 14,913,365 6.00%
Non-interest-bearing............ 0.00 6,015,986 2.33 3,731,633 1.50
---- ----
----
------ ------------ ------ ------ -------
-----
1.37 22,986,503 8.94 1.56 18,644,998 7.50
---- ----
----
------ ------------ ------ ------ -------
-----
Savings and club.................. 2.50 141,847,681 55.20 2.50 140,920,470 56.72
Money management.................. 3.17 19,443,771 7.57 3.17 17,897,789 7.21
Certificates of deposit........... 5.27 72,673,928 28.29 5.03 70,982,707 28.57
---- ----
----
------ ------------ ------ ------ -------
-----
3.42 233,965,380 91.06 3.33 229,800,966 92.50
---- ----
----
------ ------------ ------ ------ -------
-----
3.24% $256,951,883 100.00 3.20% $248,445,964 100.00%
====== ============ ====== ============ ====== ============
</TABLE>
The scheduled maturities of certificates of deposits are as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
One year or less....................................... $30,961 44,388
After one year to three years.......................... 29,680 18,727
After three years to five years........................ 11,962 7,373
After five years....................................... 70 495
------- -------
$72,673 70,983
======= =======
</TABLE>
The aggregate amount of certificates of deposit with minimum denominations
of $100,000 or more was approximately $9,163,000 and $10,318,000 at March 31,
1996 and 1995, respectively.
Interest expense on deposits consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Demand......................................... $ 330,562 $ 226,102 $ 257,131
Savings and clubs.............................. 3,507,068 3,591,611 3,722,037
Money management............................... 599,280 540,545 579,460
Certificates of deposit........................ 3,965,252 3,130,616 3,377,235
---------- ---------- ----------
8,402,162 7,488,874 7,935,863
Penalty for early withdrawals of certificates
of deposit................................... (11,961) (16,062) (12,045)
---------- ---------- ----------
$8,390,201 $7,472,812 $7,923,818
========== ========== ==========
</TABLE>
F-18
<PAGE> 130
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
<TABLE>
<CAPTION>
MARCH 31,
INTEREST ---------------------------
LENDER MATURITY RATE 1996 1995
- ----------------------- ------------------ -------- ----------- -----------
<S> <C> <C> <C> <C>
Securities
broker-dealer November 20, 1995 7.00% $11,188,000
Securities
broker-dealer November 30, 1995 7.57% 7,000,000
Federal Home Loan Bank April 11, 1996 5.70% $ 7,000,000
Securities
broker-dealer May 17, 1996 5.75% 6,000,000
Federal Home Loan Bank June 13, 1996 5.65% 7,000,000
Federal Home Loan Bank July 1, 1996 5.28% 3,000,000
Federal Home Loan Bank July 31, 1996 5.15% 5,000,000
Securities
broker-dealer August 16, 1996 5.69% 6,000,000
Securities
broker-dealer September 9, 1996 5.64% 7,000,000
Securities
broker-dealer November 27, 1996 5.64% 6,000,000
----------- -----------
$47,000,000 $18,188,000
=========== ===========
</TABLE>
Information concerning borrowings collateralized by securities sold under
agreements to repurchase are summarized as follows:
<TABLE>
<CAPTION>
FOR YEAR ENDED MARCH
31,
---------------------
1996 1995
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Average balance during the year................................ $25,654 $ 9,177
Average interest rate during the year.......................... 5.60% 6.02%
Maximum month-end balance during the year...................... $47,000 $18,188
Mortgage-backed securities underlying the agreements at year
end:
Carrying value............................................... $53,544 $18,893
Estimated fair value......................................... $53,384 $18,650
</TABLE>
13. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------------------------
1996 1995
MATURING ------------------------------ ------------------------------
YEAR ENDED WEIGHTED WEIGHTED
MARCH 31, AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT
- ---------------------------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
1996......................... 0.00% $ 0 6.97% $48,000,000
1997......................... 5.36% 11,000,000 0.00% 0
1998......................... 8.10% 14,000,000 8.10% 14,000,000
2004......................... 3.58% 400,000 3.58% 400,000
----------- -----------
6.84% $25,400,000 7.20% $62,400,000
=========== ===========
</TABLE>
At March 31,1996 and 1995, the advances were secured by pledges of the
Bank's investment in the capital stock of the Federal Home Loan Bank of New York
totalling $3,120,000 and a blanket assignment of the Bank's unpledged qualifying
mortgage, mortgage-backed securities and investment portfolios.
F-19
<PAGE> 131
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. INCOME TAXES
The Bank qualifies as a thrift institution under the provisions of the
Internal Revenue Code and is therefore permitted to deduct from taxable income
an allowance for bad debts based on the greater of: (1) actual loan losses (the
"experience method"); or (2) eight percent of taxable income before such bad
debt deduction less certain adjustments (the "percentage of taxable income
method"). For the tax years ended December 31, 1995 and 1994, the deduction for
bad debts was computed using the experience method. For the year ended March 31,
1996, the deductions for bad debt was computed using the percentage method.
retained earnings at March 31, 1996, includes approximately $4,183,000 of such
bad debts, for which federal income taxes have not been provided. If such amount
is used for purpose other than bad debts losses, includings distributions in
liquidation, it will be subject to federal income tax at the current rate.
The components of income taxes are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current.................................... $785,816 $750,166 $688,432
Deferred................................... (179,942) (75,869) (75,055)
--------- -------- --------
$605,874 $674,297 $613,377
========= ======== ========
</TABLE>
The following table presents a reconciliation between the reported income
taxes and the federal income taxes which would be computed by applying the
normal federal income tax rate of 34% to income before income taxes:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------
1996 PERCENT 1995 PERCENT 1994 PERCENT
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Income taxes......................... $462,046 34.00 $516,579 34.00 $381,325 34.00
Increases (reductions) in income
taxes resulting from:
Statutory bad debts deduction...... (36,000) (2.65)
Accretion of purchase accounting
discount........................ (29,277) (1.93) (70,310) (6.27)
Amortization of intangibles........ 99,848 8.90
Dividend exclusion write down of
real estate owned............... (37,600) (2.77)
State and city income taxes, net of
federal income tax effect....... 190,845 14.04 156,032 10.27 153,691 13.70
Other items, net................... 26,583 1.96 30,963 2.04 48,823 4.35
-------- ----- -------- ----- -------- -----
Effective income taxes............... $605,874 44.58 $674,297 44.38 $613,377 54.68
======== ===== ======== ===== ======== =====
</TABLE>
F-20
<PAGE> 132
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At March 31, 1996, income taxes payable of $379,076 are included in other
liabilities. At March 31, 1995, income taxes payable of $79,038 are included in
other liabilities. The tax effects of existing temporary differences that give
rise to significant portions of deferred tax assets and deferred tax liabilities
are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1996 1995
----------- --------
<S> <C> <C>
Reserve for uncollected interest..................... $ 95,912 $ 90,078
Loan and real estate owned losses in excess of bad
debts deduction.................................... 300,627 154,633
Deferred loan fees................................... 105,496 46,766
Accrued pension...................................... 55,643 111,174
Writedown of common stock............................ 19,829 19,829
Reserve for losses on other assets................... 119,269 119,269
Unrealized loss on securities available for sale..... 1,104,237 268,205
Other................................................ 0 6,841
---------- --------
1,801,013 816,795
---------- --------
Deferred tax liabilities
Gain on involuntary conversion....................... 282,685 282,685
Savings premium...................................... 554,820 582,900
Depreciation......................................... 24,204 27,878
---------- --------
Sub total.................................. 861,709 893,463
---------- --------
Net deferred tax assets (liabilities) included in
other assets or (liabilities)...................... $ 939,304 ($76,668)
========== ========
</TABLE>
15. REGULATORY CAPITAL
The operations and profitability of the Bank are significantly affected by
legislation and the policies of the various regulatory agencies. The Financial
Institution Reform, Recovery and Enforcement Act 1989 ("FIRREA"), among other
things, increased the capital requirements of all savings institutions and their
affiliates and generally expanded the regulatory oversight of savings
institutions Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
imposes increased requirements on the operations of financial institutions that
fall below certain capital standards. As required by the FIRREA, the OTS
promulgated capital requirements for financial institutions consisting of
minimum tangible and core capital ratios of 1.50% and 3.00%, respectively, of
the institution's adjusted total assets and a minimum risk-based capital ratio
of 8.00% of the institution's risk weighted assets. Although the minimum core
capital ratio is 3.00%, the FDICIA stipulates that an institution with less than
4.00% core capital is deemed undercapitalized. At March 31,1996 and 1995, the
Bank exceeded all the current capital requirements.
The following table sets out the Bank's various regulatory capital
categorized at March 31, 1996.
<TABLE>
<CAPTION>
1996
----------------------
DOLLARS PERCENTAGE
------- ----------
(THOUSANDS)
<S> <C> <C>
Tangible capital.............................. $33,462 9.13%
Tangible equity............................... $34,765 9.46%
Core/leverage capital......................... $33,522 9.15%
Tier 1 risk-based capital..................... $33,522 27.82%
Total risk-based capital...................... $33,801 28.06%
</TABLE>
F-21
<PAGE> 133
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reconciles the Bank's stockholders' equity at March 31,
1996, under generally accepted accounting principles to regulatory capital
requirements:
<TABLE>
<CAPTION>
REGULATORY CAPITAL REQUIREMENTS
--------------------------------------------------------
TANGIBLE TIER/CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
GAAP -------- --------- ----------
CAPITAL
--------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Stockholders' Equity at March 31,
1996................................. $ 34,765 $34,765 $34,765 $ 34,765
=======
Add:
Unrealized loss on securities
available for sale, net........... 1,245 1,245 1,245
General valuation allowances......... 0 0 319
Qualifying intangible assets......... 0 60 60
Deduct:
Goodwill............................. (1,609 ) (1,609) (1,609)
Excess of net deferred tax assets.... (939 ) (939) (939)
Asset required to be deducted.......... 0 0 (40)
------- ------- -------
Regulatory capital..................... 33,462 33,522 33,801
Minimum capital requirement............ 5,495 10,992 9,638
------- ------- -------
Regulatory capital excess.............. 27,967 22,530 24,163
======= ======= =======
</TABLE>
16. BENEFIT PLANS
Pension Plan
The Bank has a non-contributory defined benefit pension plan covering all
eligible employees. The benefits are based on each employee's term of service.
The Bank's policy is to fund the plan with contributions which equal the maximum
amount deductible for federal income tax purposes. The following table sets
forth the plan's funded status:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligation including
vested benefits of $1,690,000 and $1,296,000,
respectively.............................................. $1,776,395 $1,414,900
========== ==========
Projected benefit obligation................................ $2,101,224 $1,920,100
Plan assets at fair value................................... 2,510,985 2,257,200
---------- ----------
Plan assets in excess of projected benefit obligation....... 409,761 337,100
Unrecognized net obligation being amortized over 19.75
years..................................................... 393,075 437,700
Unrecognized prior service cost............................. 22,375 1,900
Unrecognized net (gain)..................................... (926,811) (889,200)
Accrual for three months.................................... 0 (25,400)
---------- ----------
(Accrued) pension cost included in other liabilities........ $ (101,600) $ (137,900)
========== ==========
</TABLE>
F-22
<PAGE> 134
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost.................................... $ 95,323 $ 122,675 $ 173,320
Interest cost................................... 137,100 137,813 180,099
Return on plan assets........................... (174,058) (182,798) (188,722)
Net deferral and amortization................... (94,665) (1,803) 27,152
========= ========= =========
Net periodic pension cost....................... $ (36,300) $ 75,887 $ 191,849
========= ========= =========
</TABLE>
Significant actuarial assumptions used in determining plan benefits are:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Annual salary increase...................................... 5.00% 6.00% 5.50%
Long-term return on assets.................................. 8.00% 8.00% 8.00%
Discount rate used in measurement of benefit obligations.... 7.00% 8.25% 7.25%
</TABLE>
Savings Incentive Plan
The Bank has a savings incentive plan, pursuant to Section 401(k) of
Internal Revenue Code, for all eligible employees of the Bank. Employees may
elect to save up to 15% of their compensation and may receive a percentage
matching contribution from the Bank with respect to 50% of the eligible
employee's contributions up to the maximum allowed by law. Total incentive plan
expenses for the years ended March 31, 1996, 1995 and 1994 were $52,700,
$51,900, and $62,600, respectively.
Directors' Retirement Plan
Concurrent with the conversion to the stock form of ownership, the Bank
adopted a retirement plan for non-employee directors. The benefits are payable
based on the term of service as a director.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligation including
vested benefits of $318,829 and $303,112 for the year
ended March 31, 1996 and 1995 respectively........... $348,896 $327,624
========= =========
Projected benefit obligation........................... $378,355 $353,835
Plan assets at fair value.............................. -- --
--------- ---------
Projected benefit obligation in excess of plan
assets............................................... 378,355 353,835
Unrecognized past service cost......................... (331,779) (330,525)
Additional minimum liability........................... 302,320 304,314
--------- ---------
Accrued liability included in other liabilities........ $348,896 $327,624
========= =========
</TABLE>
Net periodic pension cost for the year ended March 31,1995 included the
following:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Service cost............................................ $ 18,267 $ 2,424
Interest cost........................................... 28,417 7,077
Net deferral and amortization........................... 55,236 13,809
-------- -------
Net pension cost........................................ $ 101,920 $ 23,310
======== =======
</TABLE>
F-23
<PAGE> 135
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The actuarial assumptions used in determining plan benefits include annual
fee at 2.80% for both years, and a discount rate of 7.50%, and 8.00%, for the
years ended March 31, 1996 and 1995, respectively. The additional minimum
liability included as an intangible asset in other assets are $302,230 and
$304,314 for the years ended March 31, 1996 and 1995, respectively.
17. 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, at a rate of 3.00% over the average federal funds rate. 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.
The activities of the ESOP is accounted for in accordance with Statement of
Position 93-6, "Accounting for Employee Stock Ownership Plan", which was issued
by the American Institute of Certified Public Accountants in November 1993.
Accordingly, the ESOP shares pledged as collateral are reported as unearned
ESOP shares in the consolidated statements of financial condition. As shares are
committed to be released from collateral, the Bank reports compensation expense
equal to the current market price of the shares, and the share become
outstanding for net income per common share computations. ESOP compensation
expense was $153,295 and $60,291 for the years ended March 31, 1996 and 1995,
respectively.
The ESOP shares at March 31,1996 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Allocated shares.................................. -- --
Shares committed to be released................... 27,320 9,106
Unreleased shares................................. 154,812 173,026
---------- ----------
Total ESOP shares................................. 182,132 182,132
========== ==========
Fair value of unreleased shares................... $ 1,593,655 $ 1,189,554
========== ==========
</TABLE>
MANAGEMENT RECOGNITION PLAN
Pursuant to the management recognition plan approved at the stockholders
meeting held on September 12, 1995, the Bank recognized $56,570 as expense for
the year ended March 31, 1996.
18. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing need of its customers.
These financial instruments primarily include commitments to extend credit
and to sell loans. Those instruments involve, to varying degrees, elements of
credit and interest rate in excess of the amount recognized in the statement of
financial condition. The contract amounts of those instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments.
F-24
<PAGE> 136
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 loan commitments as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
COMMITMENTS TO ORIGINATE LOANS
Mortgage............................................ $ 4,905,316 $ 4,586,459
Consumer loans...................................... 0 2,200
----------- -----------
Total..................................... $ 4,905,316 $ 4,588,659
========= =========
COMMITMENTS TO SELL LOANS
Mortgage............................................ $ 1,948,000 $ 3,919,000
Consumer loans...................................... 0 1,000,000
----------- -----------
Total..................................... $ 1,948,000 $ 4,919,000
========= =========
</TABLE>
At March 31, 1996, of the $4,905,000 in outstanding commitments to
originate mortgage loans, $1,252,000 are at fixed rates within a range of 5.00%
to 8.75%, $2,830,000 are for balloon loans, ranging from 5-7 years, whose rates
will be set at 1.50%-2.00% above the prime rate at the date of closing and
$823,000 are adjustable rate with initial rates ranging from 5.25% to 7.50%.
At March 31, 1996, undisbursed from approved commercial lines of credit
totalled $2,600,000. All such lines are secured, including $2,000,000 in
warehouse lines of credit secured by the underlying warehoused mortgages,
expired within one year, and carry interest rates that float at from 1.50% to
2.00% above the prime rate.
At March 31, 1996, undisbursed funds from approved lines of credit under a
homeowners' equity lending program with an interest rate of 1.25% over the prime
rate adjusted on a monthly basis amounted to approximately $48,000. Unless they
are specifically cancelled by notice from the Bank, these funds represent firm
commitments available to the respective borrowers on demand.
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
credit-worthiness 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 counterparty. 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 $302,000, $269,000 and $299,000
for the years ended March 31, 1996, 1995, and 1994,
F-25
<PAGE> 137
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. As of March 31, 1996, minimum rental commitments under all
noncancellable leases with initial or remaining terms of more than one year and
expiring through 2011 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31
------------ MINIMUM RENTAL
--------------
(IN THOUSANDS)
<S> <C>
1997....................................... $ 232
1998....................................... 220
1999....................................... 226
2000....................................... 228
Thereafter.................................... 1,799
-------
$2,705
============
</TABLE>
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.
Nationar
On February 6, 1995, the New York State Banking Department (the
"Department") took possession of Nationar Trust Company ("Nationar"), a trust
company owned by sixty-seven New York savings banks. The Bank had invested
$1,366,000 in federal funds and $600,000 in certificates of deposit with
Nationar. In addition to such investments, Nationar made a loan to the ESOP in
the amount of $1,821,320, which was paid down to $1,548,122 at March 31, 1996,
and holds as collateral 182,132 shares owned by the ESOP.
On September 19, 1995, Carver Federal Savings Bank filed an action for
declaratory judgment, for damages for breach of contract, and for breach of
contractual trust, against Nationar and Neil Levin, the Superintendent of Banks,
in the Supreme Court of New York State, County of New York. When the
Superintendent sold Carver Federal Savings Bank's ESOP loan to a third party
purchaser, it did not transfer the $1,966,000 in collateral along with the loan.
When Nationar failed, the New York State Banking Department did not return
$600,000 which was another sum of collateral that Carver placed on deposit with
Nationar. The purpose of the lawsuit was to secure the entire return of both the
$1,366,000 in collateral, and the $600,000 deposited with Nationar rather than a
portion of it. The Bank believes that it has adequate reserve at 13.0% of the
claims, against possible loss of these claims.
By order entered April 10, 1996, on the recommendation of the
Superintendent, the Court directed the return of $600,000 in collateral. The
Bank received these funds, plus interest, in early June 1996. As a result, the
Bank will recover the valuation allowance of 13.0% on the $600,000 amount. Since
the Bank expects that it will receive 90% of the $1,366,000 amount as a general
creditor, the lawsuit has been discontinued.
Stockholder Litigation
On April 5, 1995, a class action suit was filed against the Bank in federal
court alleging that the Offering Circular used in the Bank's conversion to stock
form was materially false and misleading. The suit seeks rescission, restitution
or unspecified money damages. Bank management believes that the lawsuit is
without merit and intends to vigorously defend against the suit.
On January 2, 1996, the United States District Court for the Southern
District of New York dismissed the class action encaptioned Dougherty vs. Carver
Federal Savings Bank for lack of subject matter jurisdiction. By separate order
on the same date, the court made its ruling applicable to Gomberg vs. Carver
Federal Savings Bank and Uminer vs. Carver Federal Savings Bank, two other class
actions filed in the Southern District of New York which asserted claims
essentially identical to those asserted in the Dougherty suit. The plaintiffs in
Dougerty have filed notice in the United States Court of Appeals for the second
circuit of their
F-26
<PAGE> 138
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
intent to appeal. The case(s) are now pending appeal in the United States Court
of Appeal for the Second circuit.
Miscellaneous
In the conduct of the Bank's business, it is also involved in normal
litigation matters. In the opinion of management, the ultimate disposition of
such litigation should not have a material adverse effect on the financial
position or results of operations of the Bank.
19. 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.
Advances from Federal Home Loan Bank of New York, Securities sold under
agreement to repurchase and Other borrowed money
The fair values of advances from 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.
F-27
<PAGE> 139
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commitments
The fair value of commitments to originate loans is equal to the
amount of commitment. The carrying amounts and estimated fair values of the
Bank's financial instruments at March 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------------------------------
1996 1995
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents............... $ 10,026 $ 10,026 $ 11,818 $ 11,818
Securities available for sale........... 114,328 111,991 93,328 93,328
Investment securities................... 8,937 8,814 18,035 17,732
Mortgage-backed securities.............. 131,105 129,813 181,134 175,305
Loans receivable........................ 82,608 83,983 48,459 48,570
Accrued interest receivable............. 2,688 2,688 2,708 2,708
FINANCIAL LIABILITIES
Deposits................................ $256,952 $ 249,386 $248,446 $ 246,309
Securities sold under agreements to
repurchase............................ 47,000 47,101 18,188 18,295
Advances from Federal Home Loan Bank of
New York.............................. 25,400 25,452 62,400 62,766
Other borrowed money.................... 1,548 1,548 1,730 1,730
COMMITMENTS
To originate loans...................... $ 4,905 $ 4,905 $ 4,589 $ 4,589
To sell loans........................... 1,948 1,948 4,919 4,919
To fund line of credit.................. 5,200 5,200 2,142 2,142
To purchase mortgage-backed
securities............................ 0 0
</TABLE>
Limitations
The fair value estimates are made at year end 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 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 on- and
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
F-28
<PAGE> 140
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996
---------------------------------------
FIRST SECOND THIRD FOURTH
QTR. QTR. QTR. QTR.
------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income......................... $5,914 $5,936 $5,883 $5,796
Interest expense........................ 3,457 3,554 3,347 3,236
------ ------ ------ ------
Net interest income................ 2,457 2,382 2,536 2,560
Provision for loan losses............... (19) 5 75 70
Non-interest income (loss).............. 131 153 143 181
Non-interest expense.................... 2,144 2,401 2,194 2,313
Income taxes............................ 197 53 270 86
Extraordinary Income....................
------ ------ ------ ------
Net income.............................. $ 266 $ 76 $ 140 $ 271
====== ====== ====== ======
Net income per common share............. $ 0.12 $ 0.04 $ 0.07 $ 0.12
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1995
---------------------------------------
FIRST SECOND THIRD FOURTH
QTR. QTR. QTR. QTR.
------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income......................... $4,506 $4,483 $4,612 $6,149
Interest expense........................ 2,259 2,390 2,611 3,271
----- ----- ----- -----
Net interest income................... 2,247 2,093 2,001 2,878
Provision for loan losses............... 95 19 (27) 247
Non-interest income (loss).............. 177 124 196 78
Non-interest expense.................... 1,807 1,928 1,865 2,341
Income taxes............................ 225 127 192 130
----- ----- ----- -----
Net income.............................. $ 297 $ 143 $ 167 $ 238
===== ===== ===== =====
Net income per common share............. N/A N/A $ 0.08 $ 0.11
</TABLE>
Net income per common share for the quarter ended December 31, 1994 was
calculated using the net income for the full quarter.
21. SUBSEQUENT EVENT
On March 19, 1996, the Board of Directors of Carver Federal Savings Bank
("Bank") resolved to reorganize the Bank into a savings association holding
company structure (the "Reorganization") pursuant to an Agreement and Plan of
Reorganization ("Plan of Reorganization"). On May 9, 1996, Carver Bancorp, Inc.
was incorporated under the General Corporation Law of the State of Delware for
the purpose of becoming the holding company for the Bank.
The Reorganization will provide greater flexibility to meet the future
competitive and financial needs of the Bank. It will also increase flexibility
with respect to potential expansion through mergers and acquisitions, which may
be funded by the additional equity offerings. A holding company structure will
also allow the Board of Directors of Bancorp to repurchase shares of Bancorp
common stock and declare dividends in the future.
F-29
<PAGE> 141
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to the Plan of Reorganization, Carver Interim Federal Savings Bank
("Interim"), will be formed in order to facilitate the Reorganization. Interim
will be a stock-form savings bank formed under the Rules and Regulations of the
Office of Thrift Supervision ("OTS").
Under the Plan of Reorganization, Interim will merge with the Bank, with
the Bank as the surviving institution, and all of the outstanding common stock
of the Bank (other than shares held by stockholders exercising dissenters'
rights, if any) will be converted on a one-to-one basis, for Bancorp's common
stock. Thereafter, Interim will cease to exist as a separate entity and the Bank
will become a wholly owned subsidiary of Bancorp and will continue its current
business and operations as a federally chartered stock savings bank using its
current name.
The Plan of Reorganization is subject to the approval of the OTS and the
Bank's stockholders at the July 29, 1996 Annual Stockholders Meeting.
F-30
<PAGE> 142
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
CARVER FEDERAL SAVINGS BANK,
CARVER BANCORP, INC.
AND
CARVER INTERIM FEDERAL SAVINGS BANK
DATED AS OF MAY 21, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-1
<PAGE> 143
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION ("Agreement"), dated as of May
21, 1996, is made by and among CARVER FEDERAL SAVINGS BANK, a stock savings bank
organized and existing under the laws of the United States of America and having
an office at 75 West 125th Street, New York, New York 10027 ("Carver"), CARVER
BANCORP, INC., a corporation organized and existing under the laws of the State
of Delaware and having an office at 75 West 125th Street, New York, New York
10027 ("Bancorp") and the incorporator of CARVER INTERIM FEDERAL SAVINGS BANK,
Raymond L. Bruce, Esq., having an office at 75 West 125th Street, New York, New
York 10027 ("Interim").
WITNESSETH:
WHEREAS, as of the date of this Agreement, the authorized capital stock of
Carver consists of 6,000,000 shares, of which (i) 5,000,000 shares are common
stock of par value of $0.01 per share, of which 2,314,375 shares are issued and
outstanding and (ii) 1,000,000 shares are serial preferred stock, of par value
$0.01 per share, issuable in classes and series, none of which shares are issued
and outstanding.
WHEREAS, Bancorp is a business corporation, having been incorporated on May
9, 1996 pursuant to a Certificate of Incorporation filed with the Secretary of
State of the State of Delaware and recorded in the Office of the Recorder of
Deeds in the County of New Castle on that date. The registered office of Bancorp
is located at 1209 Orange Street in the City of Wilmington, County of New
Castle. The name of the registered agent at such office is The Corporation Trust
Company. As of the date of this Agreement, the authorized capital stock of
Bancorp consists of 12,000,000 shares, as follows: (a) 10,000,000 shares are
common stock, par value $0.01 per share, of which 100 shares are issued and
outstanding to Carver; and (b) 2,000,000 shares are preferred stock, par value
$0.01 per share, issuable in classes and series, none of which shares are issued
and outstanding.
WHEREAS, Interim is a stock savings bank in formation under the Rules and
Regulations of the Office of Thrift Supervision, and, upon formation, the
authorized capital stock of Interim will consist of 1,000 shares of common
stock, par value $0.01 per share, all of which shall be issued to and owned by
Bancorp;
WHEREAS, the parties are entering into this Agreement in order to set forth
the terms and conditions pursuant to which Interim will merge with and into
Carver (the "Merger") and, simultaneously therewith, Bancorp will exchange one
share of Bancorp common stock for each outstanding share of Carver common stock,
and thereby become the holding company for Carver (the "Exchange"). Hereinafter,
the Merger and Exchange may be referred to as the "Reorganization;" and
WHEREAS, the Reorganization is to be accomplished through the following
steps: (a) the formation of Bancorp, incorporated at the direction of Carver for
the primary purpose of becoming the sole stockholder of Interim and subsequently
becoming the sole stockholder of Carver; (b) the formation of Interim, which
shall be wholly owned by Bancorp; (c) the merger of Interim with and into Carver
with Carver as the surviving institution; and (d) pursuant to the Merger, (i)
all of the issued and outstanding shares of Bancorp Common Stock held by Carver
shall be contributed to Bancorp and canceled, (ii) all of the issued and
outstanding shares of Carver common stock, subject to the exercise of
dissenters' rights as set forth in Section 1.10 below, shall be converted, by
operation of law, on a one-for-one basis, into an equal number of issued and
outstanding shares of Bancorp common stock; and (iii) all of the issued and
outstanding shares of Interim common stock shall be converted, by operation of
law, on a one-for-one basis, into an equal number of issued and outstanding
shares of Carver common stock (and shall not be further converted into shares of
Bancorp common stock), which shall be all of the issued and outstanding shares
of Carver common stock, and shall be owned by Bancorp. Subsequent to the
Reorganization, all of the issued and outstanding shares of Carver common stock
shall be owned by Bancorp, and all of the issued and outstanding shares of
Bancorp common stock shall be owned by those non-dissenting stockholders who,
prior to the Reorganization, owned shares of Carver common stock.
A-2
<PAGE> 144
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, agreements, representations and warranties herein contained, the
parties hereto do hereby agree as follows:
ARTICLE I
TERMS
1.1 Merger.
(a) Interim shall be merged with and into Carver under this Agreement, and
the separate existence of Interim shall cease. The name of Carver shall be
retained by the surviving bank, and the Federal Stock Charter of Carver, as
amended, shall be the charter of the surviving bank, except that immediately
after the Merger, Carver and Bancorp shall cause the first paragraph of Section
5 of Carver's Federal Stock Charter to be amended in its entirety to read as
follows:
Section 5. Capital stock. The total number of shares of all classes
of the capital stock which the savings bank has authority to issue is
1,000, all of which shall be common stock, par value $0.01 per share. The
shares may be issued from time to time as authorized by the board of
directors without the approval of its stockholders except as otherwise
provided in this Section 5 or to the extent that such approval is required
by governing law, rule, or regulation. The consideration for the issuance
of the shares shall be paid in full before their issuance and shall not be
less than the par value. Neither promissory notes nor future services shall
constitute payment or part payment for the issuance of shares of the
savings bank. The consideration for the shares shall be cash, tangible or
intangible property (to the extent direct investment in such property would
be permitted), labor or services actually performed for the savings bank,
or any combination of the foregoing. In the absence of actual fraud in the
transaction, the value of such property, labor, or services, as determined
by the board of directors of the savings bank, shall be conclusive. Upon
payment of such consideration, such shares shall be deemed to be fully paid
and nonassessable. In the case of a stock dividend, that part of the
surplus of the savings bank which is transferred to stated capital upon the
issuance of shares as a share dividend shall be deemed to be the
consideration for their issuance.
(b) On the Effective Date (as defined in Article II below), the corporate
existence of Carver shall continue and all of the rights, privileges, powers and
franchises of Carver and Interim shall be possessed by Carver. All property and
assets belonging to each prior to the Merger shall be vested in Carver and shall
be thereafter as effectually the property of Carver as they were of the separate
and respective Carver and Interim; provided that if at any time any further
assignments, assurances in law, instruments of assumption, or any other actions
are necessary or desirable to vest or to perfect or confirm of record in Carver
the title to and possession of any property, rights, privileges, powers,
immunities, franchises and interests of either Carver or Interim, or otherwise
to carry out the provisions of this Agreement, the proper officers and directors
of the respective Carver and Interim as of the Effective Date shall execute and
deliver the same.
(c) On the Effective Date, except as otherwise provided by this Agreement
or effected by the Merger contemplated hereby, all corporate acts, plans,
policies, approvals, and authorizations of Carver, its stockholders, Board of
Directors, committees elected or appointed by the Board of Directors, officers
and agents, that were valid and effective immediately before the Effective Date,
shall be deemed for all purposes to be the acts, plans, policies, approvals and
authorizations of the surviving Carver and shall be effective and binding on the
surviving Carver as the same were with respect to Carver prior to the Merger.
(d) On the Effective Date, the assets, liabilities, reserves and accounts
of Carver and Interim shall be taken up on the books of the surviving Carver at
the amounts at which they, respectively, shall be carried on the books of said
corporations, subject to such adjustments or eliminations of intercompany items
as may be applicable in giving effect to the Merger.
(f) On the Effective Date, each depositor having a savings account with
Carver shall thereafter have a savings account of an equal amount with the
surviving Carver.
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1.2 Conversion of Carver Common Stock. Simultaneously with the Merger,
all of the issued and outstanding shares of Carver common stock, subject to the
exercise of dissenters' rights as set forth in Section 1.10 below, shall be
converted, by operation of law, on a one-for-one basis, into an equal number of
issued and outstanding shares of Bancorp common stock, in accordance with the
terms of this Agreement. On the Effective Date, certificates representing shares
of Carver common stock shall be deemed to be certificates representing shares of
Bancorp common stock, and the holders thereof shall have no further rights in
Carver, except in the case of dissenting stockholders, whose certificates of
shares of Carver common stock shall represent only the right to receive payment
for their shares in cash as set forth in Section 1.10 below.
1.3 Manner of Exchanging Stock Certificates. In connection with the
exchange of the issued and outstanding shares of Carver common stock for shares
of Bancorp common stock, it shall not be necessary for non-dissenting holders of
Carver common stock to exchange their existing certificates of Carver common
stock for certificates of Bancorp common stock. On the Effective Date,
non-dissenting holders of Carver common stock shall automatically become holders
of Bancorp common stock, and their stock certificates shall automatically
represent the same number and type of shares of Bancorp common stock. After the
Effective Date, as outstanding certificates of Carver common stock are presented
for transfer or, upon the request of any holder of certificates of Carver common
stock, new certificates of Bancorp shall be issued by the registrar and transfer
agent for Carver common stock. Any stock certificate presented for transfer to a
name other than that in which the surrendered certificate is registered must be
properly endorsed and otherwise in proper form for transfer and accompanied by
evidence of payment of any applicable stock transfer or other taxes.
1.4 Conversion of Interim Common Stock. On the Effective Date, each share
of Interim common stock issued and outstanding immediately prior to the
Effective Date shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into, and shall become, one share of Carver
common stock so that, from and after the Effective Date, all of the issued and
outstanding shares of Carver common stock shall be held by Bancorp. Shares of
Carver common stock that were originally Interim common stock shall not be
further converted into or exchanged for Bancorp common stock.
1.5 Board of Directors. Each person serving as a director of Carver on
the Effective Date shall continue to serve as such following the Effective Date
and until the completion of his term, subject to and in accordance with the
provisions of the Bylaws of Carver as in effect on the Effective Date or as
thereafter amended. Thereafter, Bancorp, as sole stockholder of Carver, shall
elect Carver's Board of Directors. Each person serving as a director of Bancorp
on the Effective Date shall continue to serve as such following the Effective
Date and until completion of his or her term. Thereafter, the members of
Bancorp's Board of Directors shall be elected in accordance with the Bylaws and
Certificate of Incorporation of Bancorp. The names, residential addresses and
the terms of the seven (7) directors of Carver and of Bancorp are:
CLASS I, EXPIRING IN 1996
David R. Jones David N. Dinkins
297 Prospect Place 215 East 68th Street -- #13D
Brooklyn, New York 11238 New York, New York 10021
CLASS II, EXPIRING IN 1997
Linda Dunham(1) M. Moran Weston, Ph. D.
117 Kensington Drive 228 Promenade Circle
Fort Lee, New Jersey 07024 Heathrow, Florida 32746
Richard T. Greene
175-40 Murdock Avenue
St. Albans, New York 11434
- ---------------
(1) Pursuant to the Bylaws of Carver Federal Savings Bank (the "Bank"), if the
Board of Directors expands its size by appointing an additional director,
such director must be put up for election at the next annual meeting of
stockholders. To remain consistent with the Bylaws of the Bank, Ms. Dunham
will serve as a director until the 1996 Annual Meeting of Stockholders of
Bancorp, at which point she will be nominated to serve for a one-year term
as a director, expiring in 1997.
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CLASS III, EXPIRING IN 1998
Thomas L. Clark, Jr. Herman Johnson, CPA
65 Kent Road 33 Westbrook Lane
White Plains, New York 10603-3105 Roosevelt, New York 11575
1.6 Officers and Employees. On the Effective Date, the persons serving as
officers and employees of Carver shall, subject to and in accordance with the
provisions of the Bylaws of Carver as in effect on the Effective Date or as
thereafter amended, continue to hold the same offices and positions in Carver,
and the persons serving as officers and employees of Bancorp on the Effective
Date shall, subject to and in accordance with the provisions of the Bylaws of
Bancorp as in effect on the Effective Date or as thereafter amended, continue to
hold the same offices and positions in Bancorp.
1.7 Charters and Bylaws. On the Effective Date, and until thereafter
amended pursuant to Section l.1(a) above or otherwise, Bancorp shall operate
under its Certificate of Incorporation and Bylaws then in effect and Carver
shall operate under its Federal Stock Charter and Bylaws then in effect.
1.8 Offices. On the Effective Date, the principal office of Bancorp shall
be the same as the principal office of Carver. All of the existing offices of
Carver shall initially be continued as offices of the surviving Carver, but may
later be eliminated or expanded as the Board of Directors of Carver shall
determine. The principal and branch offices of Carver, all located in New York,
are:
MANHATTAN:
75 West 125th Street (main office)
261 8th Avenue
BROOKLYN:
2815 Atlantic Avenue
1281 Fulton Street
1009-1015 Nostrand Avenue
QUEENS:
117-02 Guy Brewer Boulevard, Jamaica
115-02 Merrick Boulevard, Jamaica
LONG ISLAND:
302 Nassau Road, Roosevelt
1.9 Stockholder Approval. Carver shall submit this Agreement to its
stockholders for approval, in accordance with section 552.13(h) of the Rules and
Regulations of the Office of Thrift Supervision (the "OTS"); provided, however,
that if necessary or desirable in the judgment of the parties hereto, this
Agreement may be substantively amended or terminated by the parties hereto, as a
result of comments from regulatory authorities or otherwise, at any time in
accordance with the provisions of Section 4.1 of this Agreement.
1.10 Dissenters' Rights. Any stockholder of Carver entitled to vote on
this Agreement who does not vote in favor of it shall have the right to receive
payment from Carver of the fair value of his or her shares of Carver common
stock as defined in, and upon compliance with, the conditions set forth herein
and in Section 552.14 of the Rules and Regulations of the OTS. Carver shall, not
less than 20 days prior to the meeting of Carver stockholders at which this
Agreement shall be submitted for approval, give notice to each stockholder of
Carver of the right to demand payment of the appraised value of the
stockholder's shares. A stockholder intending to enforce such right shall file
with Carver, before or at the meeting of Carver stockholders at which this
Agreement shall be submitted for approval (but before the stockholders vote on
such approval), a writing identifying himself or herself and stating his or her
intention to demand appraisal of and payment for his or her shares. Upon filing
such a notice of a demand of appraisal rights, the stockholder shall thereafter
neither be
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entitled to vote such stock for any purpose nor be entitled to the payment of
dividends or other distributions on the stock (except dividends or other
distributions payable to, or a vote to be taken by, stockholders of record at a
date that is on or prior to the Effective Date), except the right to be paid the
fair value of the stockholder's shares. If this Agreement is approved by
Carver's stockholders, Carver shall, within 10 days of the Effective Date, give
a notice to each stockholder who has filed such a writing. The notice shall (a)
state the Effective Date, (b) make a written offer to each such stockholder to
pay for the stockholder's shares at a specified price that Carver deems to be
the fair value of the shares and (c) inform each such stockholder (i) that, if
the stockholder disagrees with the fair value of the shares, the stockholder
must petition the OTS within 60 days of the Effective Date and demand that the
OTS determine the fair market value of the stockholder's shares, (ii) inform
each such stockholder that he or she must submit, within 60 days of the
Effective Date, his or her shares of Carver common stock to the transfer agent
for Carver for notation thereon that an appraisal and payment has been demanded
with respect to such shares and that appraisal proceedings are pending, and
(iii) inform each such stockholder that if the stockholder does not, within 60
days of the Effective Date, file such a petition or does not submit his or her
stock certificates for such notation, the stockholder will be deemed to have
accepted the terms offered under the Reorganization and shall no longer be
entitled to appraisal rights. A stockholder may not dissent as to less than all
of the shares of Carver common stock, held by the stockholder of record, that
the stockholder beneficially owns. All shares acquired by Carver pursuant to
this Section 1.10 shall be canceled upon receipt.
1.11 Stock Based Compensation Plans. On the Effective Date, Bancorp shall
adopt and assume sponsorship of the Carver Federal Savings Bank Employee Stock
Ownership Plan ("ESOP"), the Carver Federal Savings Bank 1996 Stock Option Plan
("Option Plan"), the Carver Federal Savings Bank Management Recognition Plan
("MRP") and the Carver Federal Savings Bank Incentive Compensation Plan
("Incentive Plan"), including all of Carver's obligations with respect to any
outstanding options, stock appreciation rights or restricted stock granted
pursuant to such plans. All outstanding options to purchase Carver common stock
granted pursuant to the Option Plan or the Incentive Plan prior to the
Reorganization will become options to purchase the same number of shares of
Bancorp common stock with the same terms, conditions and exercise price as the
original options granted, all stock appreciation rights with respect to shares
of Carver common stock granted pursuant to the Option Plan prior to the
Reorganization will become stock appreciation rights with respect to the same
number of shares of Bancorp common stock, and all grants of restricted shares of
Carver common stock granted pursuant to the MRP or the Incentive Plan prior to
the Reorganization will become grants of restricted shares of Bancorp common
stock. In addition, all shares of Carver common stock held by the trust
established for the ESOP shall be exchanged on a one-for-one basis for Bancorp
common stock in accordance with the terms of section 1.2 of this Agreement.
ARTICLE II
EFFECTIVE DATE
The effective date of the Reorganization ("Effective Date") shall be the
later of the date of (a) the consummation of the Reorganization or (b) the date
specified on the endorsement by the Secretary of the OTS of the articles of
reorganization with respect to the Reorganization in accordance with section
552.13(j) of the Rules and Regulations of the OTS.
ARTICLE III
CONDITIONS
The obligations of Carver, Interim and Bancorp to consummate the
transactions contemplated by this Agreement are expressly subject to the
satisfaction of each of the following conditions:
(a) The due authorization and delivery of this Agreement by the
respective Boards of Directors of Carver and Bancorp, and by the
incorporator of Interim at or prior to the Effective Date, which
authorizations shall not have been revoked or modified as of the Effective
Date;
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(b) The approval of this Agreement and the transactions contemplated
hereby by the OTS in accordance with the OTS Regulations;
(c) The approval of the Merger by the OTS in accordance with
applicable laws and regulations;
(d) The receipt of either: (i) a ruling from the Internal Revenue
Service acceptable in form and substance to Carver and its counsel, or (ii)
an opinion of Carver's counsel, in either case to the effect that, for
federal income tax purposes:
(A) No gain or loss will be recognized by stockholders of Carver
upon the transfer of their shares of Carver common stock to Bancorp
solely in exchange for shares of Bancorp common stock;
(B) No gain or loss will be recognized by Bancorp upon its receipt
of shares of Carver common stock in exchange for shares of Bancorp
common stock;
(C) The aggregate basis of the shares of Bancorp common stock to be
received by each stockholder of Carver will be the same as the aggregate
basis of the shares of Carver common stock exchanged therefor;
(D) The holding period of the shares of Bancorp common stock to be
received by each stockholder of Carver in the transaction will include
the holding period of the shares of Carver common stock exchanged
therefor; provided, that each such stockholder held such shares of
Carver common stock as a capital asset on the Effective Date; and
(e) The approval of this Agreement by the holders of at least 50% plus
one share of the outstanding shares of Carver common stock entitled to vote
thereon; and
(f) The procurement of all other consents and approvals and the
satisfaction of all other requirements necessary for the consummation of
the Reorganization.
ARTICLE IV
TERMINATION; EXPENSES; AMENDMENT
4.1 Amendment and Termination. Any term or condition of this Agreement may
be amended in whole or in part at any time prior to the Effective Date, whether
before or after approval by the stockholders of Carver, to the extent authorized
by applicable law, rules and regulations, by an agreement in writing among the
parties hereto, executed in the same manner as this Agreement except that, after
approval by the stockholders of Carver, this Agreement may not be amended in any
respect deemed by the Board of Directors of Carver to be materially adverse to
the stockholders of Carver without the approval of such stockholders. This
Agreement may be terminated at any time prior to the Effective Date, whether
before or after approval by the stockholders of Carver, (a) at the option of the
Board of Directors of Carver or Bancorp or the incorporator of Interim if any
one or more of the conditions to the obligations of any of them under this
Agreement shall not have been satisfied and shall not have been waived at or
prior to the Effective Date, (b) at the option of the Board of Directors of
Carver for any reason, or (c) by the mutual consent of each of the parties
hereto.
4.2 Waiver. Any of the terms or conditions of this Agreement may be waived
at any time by any party that is, or the stockholders of which are, entitled to
the benefit of such terms or conditions, except that after approval of this
Agreement by the stockholders of Carver, no term or condition shall be waived
without the approval of the stockholders of Carver if the Board of Directors of
Carver determines that such a waiver would be materially adverse to the
stockholders of Carver.
4.3 Liability. In the event of the termination of this Agreement pursuant
to this Article IV, this Agreement shall be void and of no further force or
effect, and there shall be no liability or obligation of any nature on the part
of any of the parties hereto or their respective directors, incorporators,
officers, employees or stockholders by reason of this Agreement.
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4.4 Costs and Expenses. Each party shall pay all costs and expenses
incurred by it in connection with this Agreement and the transactions
contemplated hereby.
ARTICLE V
MISCELLANEOUS
5.1 Notices. Any notice, direction, request, demand, waiver or other
communication required or permitted to be given under this Agreement shall be in
writing and shall be deemed to have been duly given if delivered personally or
by telecopy, telex or similar mode of transmission or, if mailed, by certified
mail, return receipt requested with first class postage prepaid, to the parties
at the addresses listed below, or to such other address as any party may, by
written notice, specify to the other parties:
If to Carver:
Carver Federal Savings Bank
75 West 125th Street
New York, New York 10027
Attention: Raymond L. Bruce, Vice President and Corporate
Counsel
If to Bancorp:
Carver Bancorp, Inc.
c/o Carver Federal Savings Bank
75 West 125th Street
New York, New York 10027
Attention: Raymond L. Bruce, Vice President and Corporate
Counsel
If to Interim:
Carver Interim Federal Savings Bank
c/o Carver Federal Savings Bank
75 West 125th Street
New York, New York 10027
Attention: Raymond L. Bruce, Vice President and Corporate
Counsel
With a copy to:
Kofi Appenteng, Esq.
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
5.2 Governing Law. This Agreement shall be construed under and governed by
the laws of the State of New York without giving effect to the principles of
conflict of laws thereof.
5.3 No Third Party Beneficiaries. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person, firm or
corporation, other than the parties hereto and their respective stockholders, or
any of them, any rights, remedies, obligations or licenses under or by reason of
this Agreement or the Reorganization contemplated thereby.
5.4 Headings. The headings of articles and sections contained herein are
included solely for convenience of reference. If there is any conflict between
such headings and the text of the Agreement, the text shall control.
5.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which when duly executed shall be deemed an original, and
such counterparts shall together constitute one and the same instrument.
5.6 Severability. If any provision of this Agreement or the application
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Agreement and the
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application of such provisions to other persons or circumstances shall not be
affected thereby and shall be enforced to the greatest extent permitted by law.
5.7 General Interpretive Principles. For purposes of this Agreement,
except as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Agreement have the meanings assigned to them in
this Agreement and include the plural as well as the singular, and the words of
any gender shall include each other gender where appropriate; (b) accounting
terms not otherwise defined herein have the meanings assigned to them in
accordance with generally accepted accounting principles; (c) references herein
to an "Article" or "Section" or other subdivision without reference to a
document are to designated an Article, Section or other subdivision of this
Agreement; (d) the words "herein," "hereof," "hereto" and other words of similar
import refer to this Agreement as a whole and not to any particular provision;
and (f) the term "include" or "including" shall mean without limitation by
reason of enumeration.
5.8 Entire Agreement and Parties in Interest. This Agreement, including
the documents and other writings referred to herein or delivered pursuant
hereto, contains the entire agreement and understanding of the parties with
respect to their subject matter. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective successors and
assigns.
IN WITNESS WHEREOF, Carver, Bancorp and Interim have each caused this
Agreement to be executed on their behalf.
Attest: CARVER FEDERAL SAVINGS BANK
By /s/ THOMAS L. CLARK, JR.
By /s/ MARGARET R. LEWIS ----------------------------------
----------------------------------- Thomas L. Clark, Jr.
Margaret R. Lewis President and Chief Executive
Corporate Secretary Officer
Attest: CARVER BANCORP, INC.
By /s/ THOMAS L. CLARK, JR.
By /s/ MARGARET R. LEWIS ----------------------------------
----------------------------------- Thomas L. Clark, Jr.
Margaret R. Lewis President and Chief Executive
Corporate Secretary Officer
Attest: CARVER INTERIM FEDERAL SAVINGS
BANK
By /s/ MARGARET R. LEWIS (stock-form savings bank in
----------------------------------- formation)
Margaret R. Lewis By /s/ RAYMOND L. BRUCE, ESQ.
Corporate Secretary ----------------------------------
Raymond L. Bruce, Esq.
Corporate Secretary
Vice President and Corporate
Counsel
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APPENDIX B
SECTION 552.14 DISSENTER AND APPRAISAL RIGHTS.
(a) Right to demand payment of fair or appraised value. Except as provided
in paragraph (b) of this section, any stockholder of a Federal stock association
combining in accordance with Section 552.13 of this part shall have the right to
demand payment of the fair or appraised value of his stock: Provided, That such
stockholder has not voted in favor of the combination and complies with the
provisions of paragraph (c) of this section.
(b) Exceptions. No stockholder required to accept only qualified
consideration for his or stock shall have the right under this section to demand
payment of the stock's fair or appraised value, is such stock was listed on a
national securities exchange or quoted on the National Association of Securities
Dealers' Automated Quotation System ("NASDAQ") on the date of the meeting at
which the combination was acted upon or stockholder action is not required for a
combination made pursuant to Section 552.13(h)(2) of this part. "Qualified
consideration" means cash, shares of stock of any association or corporation
which at the effective date of the combination will be listed on a national
securities exchange or quoted on NASDAQ, or any combination of such shares of
stock and cash.
(c) Procedure.
(1) Notice. Each constituent Federal stock association shall notify
all stockholders entitled to rights under this section, not less than
twenty days prior to the meeting at which the combination agreement is to
be submitted for stockholder approval, of the right to demand payment of
appraised value of shares, and shall include in such notice a copy of this
section. Such written notice shall be mailed to stockholders of record and
may be part of management's proxy solicitation for such meeting.
(2) Demand for appraisal and payment. Each stockholder electing to
make a demand under this section shall deliver to the Federal stock
association, before voting on the combination, a writing identifying
himself or herself and stating his or her intention thereby to demand
appraisal of and payment for his or her shares. Such demand must be in
addition to and separate from any proxy or vote against the combination by
the stockholder.
(3) Notification of effective date and written offer. Within ten days
after the effective date of the combination, the resulting association
shall:
(i) Give written notice by mail to stockholders of constituent
Federal stock associations who have complied with the provisions of
paragraph (c)(2) of this section and have not voted in favor of the
combination, of the effective date of the combination;
(ii) Make a written offer to each stockholder to pay for dissenting
shares at a specified price deemed by the resulting association to be
the fair value thereof; and
(iii) Inform them that, within sixty days of such date, the
respective requirements of paragraphs (c)(5) and (c)(6) of this section
(set out in the notice) must be satisfied.
The notice and offer shall be accompanied by a balance sheet and
statement of income of the association the shares of which the dissenting
stockholder holds, for a fiscal year ending not more than sixteen months
before the date of notice and offer, together with the latest available
interim financial statements.
(4) Acceptance of offer. If within sixty days of the effective date of
the combination the fair value is agreed upon between the resulting
association and any stockholder who has complied with the provisions of
paragraph (c)(2) of this section, payment therefor shall be made within
ninety days of the effective date of the combination.
(5) Petition to be filed if offer not accepted. If within sixty days
of the effective date of the combination the resulting association and any
stockholder who has complied with the provisions of paragraph (c)(2) of
this section do not agree as to the fair value, then any such stockholder
may file a
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petition with the Office, with a copy by registered or certified mail to
the resulting association, demanding a determination of the fair market
value of the stock of all such stockholders. A stockholder entitled to file
a petition under this section who fails to file such petition within sixty
days of the effective date of the combination shall be deemed to have
accepted the terms offered under the combination.
(6) Stock certificates to be noted. Within sixty days of the effective
date of the combination, each stockholder demanding appraisal and payment
under this section shall submit to the transfer agent his certificates of
stock for notation thereon that an appraisal and payment have been demanded
with respect to such stock and that appraisal proceedings are pending. Any
stockholder who fails to submit his or her stock certificates for such
notation shall no longer be entitled to appraisal rights under this section
and shall be deemed to have accepted the terms offered under the
combination.
(7) Withdrawal of demand. Notwithstanding the foregoing, at any time
within sixty days after the effective date of the combination, any
stockholder shall have the right to withdraw his or her demand for
appraisal and to accept the terms offered upon the combination.
(8) Valuation and payment. The Director shall, as he or she may elect,
either appoint one or more independent persons or direct appropriate staff
of the Office to appraise the shares to determine their fair market value,
as of the effective date of the combination, exclusive of any element of
value arising from the accomplishment or expectation of the combination.
Appropriate staff of the Office shall review and provide an opinion on
appraisals prepared by independent persons as to the suitability of the
appraisal methodology and the adequacy of the analysis and supportive data.
The Director after consideration of the appraisal report and the advice of
the appropriate staff
(9) Costs and expenses. The costs and expenses of any proceeding under
this section may be apportioned and assessed by the Director as he or she
may deem equitable against all or some of the parties. In making this
determination the Director shall consider whether any party has acted
arbitrarily, vexatiously, or not in good faith in respect to the rights
provided by this section.
(10) Voting and distribution. Any stockholder who has demanded
appraisal rights as provided in paragraph c(2) of this section shall
thereafter neither be entitled to vote such stock for any purpose nor be
entitled to the payment of dividends or other distributions on the stock
(except dividends or other distribution payable to, or a vote to be taken
by stockholders of record at a date which is on or prior to, the effective
date of the combination): Provided, That if any stockholder becomes
unentitled to appraisal and payment of appraised value with respect to such
stock and accepts or is deemed to have accepted the terms offered upon the
combination, such stockholder shall thereupon be entitled to vote and
receive the distributions described above.
(11) Status. Shares of the resulting association into which shares of
the stockholders demanding appraisal rights would have been converted or
exchanged, had they assented to the combination, shall have the status of
authorized and unissued shares of the resulting association.
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APPENDIX C
CERTIFICATE OF INCORPORATION
OF
CARVER BANCORP, INC.
UNDER SECTION 102 OF
THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
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CERTIFICATE OF INCORPORATION
OF
CARVER BANCORP, INC.
THE UNDERSIGNED, for the purpose of forming a corporation pursuant to
Section 102 of the General Corporation Law of the State of Delaware, does hereby
certify that this Certificate of Incorporation of Carver Bancorp, Inc. was duly
adopted in accordance with the provisions of Section 102 of the General
Corporation Law of the State of Delaware, and further certifies as follows:
ARTICLE I
NAME
The name of the corporation is Carver Bancorp, Inc. (the "Corporation").
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware.
ARTICLE IV
CAPITAL STOCK
SECTION 1. SHARES, CLASSES AND SERIES AUTHORIZED. The total number of
shares of all classes of capital stock which the Corporation shall have
authority to issue is twelve million (12,000,000) shares, of which two million
(2,000,000) shares shall be preferred stock, par value one cent ($.01) per share
(the "Preferred Stock"), and ten million (10,000,000) shares shall be common
stock, par value one cent ($.01) per share (the "Common Stock"). The Preferred
Stock and Common Stock are sometimes hereinafter collectively referred to as the
"Capital Stock."
SECTION 2. DESIGNATIONS, POWERS, PREFERENCES, RIGHTS, QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS RELATING TO THE CAPITAL STOCK. The following is a
statement of the designations, powers, preferences and rights in respect of the
classes of the Capital Stock, and the qualifications, limitations or
restrictions thereof, and of the authority with respect thereto expressly vested
in the Board of Directors of the Corporation (the "Board of Directors"):
(a) Preferred Stock. The Preferred Stock may be issued from time to
time in one or more series, the number of shares and any designation of
each series and the powers, preferences and rights of the shares of each
series, and the qualifications, limitations or restrictions thereof, to be
as stated and expressed in a resolution or resolutions providing for the
issue of such series adopted by the Board of
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Directors, subject to the limitations prescribed by law. The Board of
Directors in any such resolution or resolutions is expressly authorized to
state for each such series:
(i) the voting powers, if any, of the holders of stock of such
series in addition to any voting rights affirmatively required by law;
(ii) the rights of stockholders in respect of dividends, including,
without limitation, the rate or rates per annum and the time or times at
which (or the formula or other method pursuant to which such rate or
rates and such time or times may be determined) and conditions upon
which the holders of stock of such series shall be entitled to receive
dividends and other distributions, and whether any such dividends shall
be cumulative or non-cumulative and, if cumulative, the terms upon which
such dividends shall be cumulative;
(iii) whether the stock of each such series shall be redeemable by
the Corporation at the option of the Corporation or the holder thereof,
and, if redeemable, the terms and conditions upon which the stock of
such series may be redeemed;
(iv) the amount payable and the rights or preferences to which the
holders of the stock of such series shall be entitled upon any voluntary
or involuntary liquidation, dissolution or winding up of the
Corporation;
(v) the terms, if any, upon which shares of stock of such series
shall be convertible into, or exchangeable for, shares of stock of any
other class or classes or of any other series of the same or any other
class or classes, including the price or prices or the rate or rates of
conversion or exchange and the terms of adjustment, if any; and
(vi) any other designations, preferences, and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, so far as they are not inconsistent
with the provisions of this Certificate of Incorporation and to the full
extent now or hereafter permitted by the laws of the State of Delaware.
All shares of the Preferred Stock of any one series shall be identical to
each other in all respects, except that shares of any one series issued at
different times may differ as to the dates from which dividends thereon, if
cumulative, shall be cumulative.
Subject to any limitations or restrictions stated in the resolution or
resolutions of the Board of Directors originally fixing the number of shares
constituting a series, the Board of Directors may by resolution or resolutions
likewise adopted increase (but not above the total number of authorized shares
of Preferred Stock) or decrease (but not below the number of shares of the
series then outstanding) the number of shares of the series subsequent to the
issue of shares of that series; and in case the number of shares of any series
shall be so decreased, the shares constituting the decrease shall resume that
status that they had prior to the adoption of the resolution originally fixing
the number of shares constituting such series.
(b) Common Stock. All shares of Common Stock shall be identical to
each other in every respect. The shares of Common Stock shall entitle the
holders thereof to one vote for each share on all matters on which
stockholders have the right to vote. The holders of Common Stock shall not
be permitted to cumulate their votes for the election of directors.
Subject to the preferences, privileges and powers with respect to each
class or series of Preferred Stock having any priority over the Common Stock,
and the qualifications, limitations or restrictions thereof, the holders of the
Common Stock shall have and possess all rights pertaining to the Capital Stock.
ARTICLE V
LIMITATION ON BENEFICIAL OWNERSHIP OF STOCK
SECTION 1. APPLICABILITY OF ARTICLE. The provisions of this Article V shall
become effective upon the consummation of the reorganization whereby Carver
Bancorp, Inc. will become the holding company for
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Carver Federal Savings Bank, a savings bank organized under the laws of the
United States (the "Bank"). All terms used in this Article V and not otherwise
defined herein shall have the meanings ascribed to such terms in Section 3 of
Article VIII, below.
SECTION 2. PROHIBITIONS RELATING TO BENEFICIAL OWNERSHIP OF VOTING
STOCK. No Person (other than the Corporation, any Subsidiary, or any pension,
profit-sharing, stock bonus or other compensation plan maintained by the
Corporation or by a member of a controlled group of corporations or trades or
businesses of which the Corporation is a member for the benefit of the employees
of the Corporation and/or any Subsidiary, or any trust or custodial arrangement
established in connection with any such plan) shall directly or indirectly
acquire or hold the beneficial ownership of more than ten percent (10%) of the
issued and outstanding Voting Stock of the Corporation. Any Person so prohibited
who directly or indirectly acquires or holds the beneficial ownership of more
than ten percent (10%) of the issued and outstanding Voting Stock in violation
of this Section 2 shall be subject to the provisions of Sections 3 and 4 of this
Article V, below. The Corporation is authorized to refuse to recognize a
transfer or attempted transfer of any Voting Stock to any Person who
beneficially owns, or who the Corporation believes would become by virtue of
such transfer the beneficial owner of, more than ten percent (10%) of the Voting
Stock.
SECTION 3. EXCESS SHARES. If, notwithstanding the foregoing prohibition, a
Person shall, voluntarily or involuntarily, become or attempt to become the
purported beneficial owner (the "Purported Owner") of shares of Voting Stock in
excess of ten percent (10%) of the issued and outstanding shares of Voting
Stock, the number of shares in excess of ten percent (10%) shall be deemed to be
"Excess Shares," and the holder thereof shall be entitled to cast one hundredth
(1/100) of one vote per share for each Excess Share.
The restrictions set forth in this Article V shall be noted conspicuously
on all certificates evidencing ownership of Voting Stock.
SECTION 4. POWERS OF THE BOARD OF DIRECTORS.
(a) The Board of Directors may, to the extent permitted by law, from time
to time establish, modify, amend or rescind, by Bylaw or otherwise, regulations
and procedures not inconsistent with the express provisions of this Article V
for the orderly application, administration and implementation of the provisions
of this Article V. Such procedures and regulations shall be kept on file with
the Secretary of the Corporation and with the Transfer Agent, shall be made
available for inspection by the public and, upon request, shall be mailed to any
holder of Voting Stock of the Corporation.
(b) When it appears that a particular Person has become a Purported Owner
of Excess Shares in violation of Section 2 of this Article V, or of the rules
and regulations of the Board of Directors with respect to this Article V, and
that the provisions of this Article V require application, interpretation, or
construction, then a majority of the directors of the Corporation shall have the
power and duty to interpret all of the terms and provisions of this Article V,
and to determine on the basis of information known to them after reasonable
inquiry all facts necessary to ascertain compliance with this Article V,
including, without limitation, (i) the number of shares of Voting Stock
beneficially owned by any Person or Purported Owner, (ii) whether a Person or
Purported Owner is an Affiliate or Associate of, or is acting in concert with,
any other Person or Purported Owner, (iii) whether a Person or Purported Owner
has an agreement, arrangement or understanding with any other Person or
Purported Owner as to the voting or disposition of any shares of the Voting
Stock, (iv) the application of any other definition or operative provision of
this Article V to the given facts, or (v) any other matter relating to the
applicability or effect of this Article V.
The Board of Directors shall have the right to demand that any Person who
is reasonably believed to be a Purported Owner of Excess Shares (or who holds of
record Voting Stock beneficially owned by any Person reasonably believed to be a
Purported Owner in excess of such limit) supply the Corporation with complete
information as to (i) the record owner(s) of all shares of Voting Stock
beneficially owned by such Person or Purported Owner and (ii) any other factual
matter relating to the applicability or effect of this Article V as may
reasonably be requested of such Person or Purported Owner.
Any applications, interpretations, constructions or any other
determinations made by the Board of Directors pursuant to this Article V, in
good faith and on the basis of such information and assistance as was
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then reasonably available for such purpose, shall be conclusive and binding upon
the Corporation and its stockholders and neither the Corporation nor any of its
stockholders shall have the right to challenge any such construction,
application or determination.
SECTION 5. SEVERABILITY. In the event any provision (or portion thereof) of
this Article V shall be found to be invalid, prohibited or unenforceable for any
reason, the remaining provisions (or portions thereof) of this Article V shall
remain in full force and effect, and shall be construed as if such invalid,
prohibited or unenforceable provision had been stricken herefrom or otherwise
rendered inapplicable, it being the intent of this Corporation and its
stockholders that each such remaining provision (or portion thereof) of this
Article V remain, to the fullest extent permitted by law, applicable and
enforceable as to all stockholders, including Purported Owners, if any,
notwithstanding any such finding.
SECTION 6. EXCLUSIONS. This Article V shall not apply to (a) any offer or
sale with a view towards public resale made exclusively by the Corporation to
any underwriter or underwriters acting on behalf of the Corporation, or to the
selling group acting on such underwriter's or underwriters' behalf, in
connection with a public offering of the Common Stock; or (b) any
reclassification of securities (including any reverse stock split), or
recapitalization of the Corporation, or any merger or consolidation of the
Corporation with any of its Subsidiaries or any other transaction or
reorganization that does not have the effect, directly or indirectly, of
changing the beneficial ownership interests of the Corporation's stockholders,
other than pursuant to the exercise of any dissenters' appraisal rights, except
as a result of immaterial changes due to fractional share adjustments, which
changes do not exceed, in the aggregate, one percent (1%) of the issued and
outstanding shares of such class of equity or convertible securities.
ARTICLE VI
BOARD OF DIRECTORS
SECTION 1. NUMBER OF DIRECTORS. The number of directors of the Corporation
shall be as determined only by resolution of the Board of Directors, but shall
not be less than five (5) nor more than fifteen (15).
SECTION 2. CLASSIFICATION OF BOARD. Subject to the rights of any holders of
any series of Preferred Stock that may be issued by the Corporation pursuant to
a resolution or resolutions of the Board of Directors providing for such
issuance and subject to the provisions hereof, the directors of the Corporation
shall be divided into three classes with respect to term of office, each class
to contain, as near as may be possible, one-third of the entire number of the
Board, with the terms of office of one class expiring each successive year. One
class of directors shall be initially elected for a term expiring at the annual
meeting of stockholders to be held in 1996, another class shall be initially
elected for a term expiring at the annual meeting of stockholders to be held in
1997, and another class shall be initially elected for a term expiring at the
annual meeting of stockholders to be held in 1998. At each annual meeting of
stockholders, the successors to the class of directors (other than directors
elected by holders of shares of one or more series of Preferred Stock) whose
term expires at that time shall be elected by the stockholders to serve until
the annual meeting of stockholders held three years next following and until
their successors shall be elected and qualified.
In the event of any intervening changes in the authorized number of
directors (other than directors elected by holders of shares of one or more
series of Preferred Stock), only the Board of Directors shall designate the
class or classes to which the increases or decreases in directorships shall be
apportioned in order more nearly to achieve equality of number of directors
among the classes; provided, however, that no such apportionment or
redesignation shall shorten the term of any incumbent director.
Unless and to the extent that the Bylaws so provide, elections of directors
need not be by written ballot.
SECTION 3. VACANCIES. Subject to the limitations prescribed by law and this
Certificate of Incorporation, all vacancies in the office of director, including
vacancies created by newly created directorships resulting from an increase in
the number of directors (subject to the provisions of Article VI, Section 5
hereof relating to directors elected by holders of one or more series of
Preferred Stock), shall be filled only by a vote of a majority of the directors
then holding office, whether or not a quorum, and any director so elected shall
serve
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for the remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until his successor shall
be elected and qualified.
SECTION 4. REMOVAL OF DIRECTORS. Any or all of the directors (subject to
the provisions of Article VI, Section 5 hereof relating to directors elected by
holders of shares of one or more series of Preferred Stock) may be removed at
any time, but only for cause, and any such removal shall require the vote, in
addition to any vote required by law, of not less than eighty percent (80%) of
the total votes eligible to be cast by the holders of all outstanding shares of
Capital Stock entitled to vote generally in the election of directors at a
meeting of stockholders expressly called for that purpose. For purposes of this
Section 4, conduct worthy of removal for "cause" shall include (a) conduct as a
director of the Corporation or any subsidiary of the Corporation, which conduct
involves willful material misconduct, breach of fiduciary duty involving
personal pecuniary gain or gross negligence in the performance of duties, (b)
conduct, whether or not as a director of the Corporation or a subsidiary of the
Corporation, which conduct involves dishonesty or breach of fiduciary duty and
is punishable by imprisonment for a term exceeding one year under state or
federal law or (c) removal of such person from the Board of Directors of the
Bank, if such person is so serving, in accordance with the Federal Stock Charter
and Bylaws of the Bank.
SECTION 5. DIRECTORS ELECTED BY PREFERRED STOCKHOLDERS. Notwithstanding
anything set forth in the Bylaws to the contrary, the qualifications, term of
office and provisions governing vacancies, removal and other matters pertaining
to directors elected by holders of one or more series of Preferred Stock shall
be as set forth in a resolution or resolutions adopted by the Board of Directors
setting forth the designations, preferences and rights relating to any such
series of Preferred Stock pursuant to Article IV, Section 2 hereof.
SECTION 6. EVALUATION OF ACQUISITION PROPOSALS. The Board of Directors of
the Corporation, when evaluating any offer to the Corporation or to the
stockholders of the Corporation from another party to (a) purchase for cash, or
exchange any securities or property for, any outstanding equity securities of
the Corporation, (b) merge or consolidate the Corporation with another
corporation or (c) purchase or otherwise acquire all or substantially all of the
properties and assets of the Corporation, shall, in connection with the exercise
of its judgment in determining what is in the best interest of the Corporation
and its stockholders, give due consideration to the extent permitted by law not
only to the price or other consideration being offered, but also to all other
relevant factors including, without limitation, the financial and managerial
resources and future prospects of the other party, the possible effects on the
business of the Corporation and its subsidiaries and on the employees,
customers, suppliers and creditors of the Corporation and its subsidiaries, the
effects on the communities in which the Corporation's and its subsidiaries'
facilities are located and the commitment and ability of the other party to
remain faithful to the special mission of the Corporation and its subsidiaries
in the communities in which the Corporation and its subsidiaries are located in
the tradition begun by Carver Federal Savings Bank.
SECTION 7. POWER TO CALL SPECIAL MEETING OF STOCKHOLDERS. Special meetings
of stockholders, for any purpose, may be called at any time only by resolution
of at least three-fourths of the Directors of the Corporation then in office, by
the Chairman of the Board or by the President and Chief Executive Officer. At a
special meeting, no business shall be transacted and no corporate action shall
be taken other than that stated in the notice of meeting prescribed by the
Bylaws of the Corporation.
ARTICLE VII
ACTION BY STOCKHOLDERS WITHOUT A MEETING
Except as otherwise provided for or fixed pursuant to the provisions of
Article IV of this Certificate of Incorporation relating to the rights of
holders of any series of Preferred Stock, no action that is required or
permitted to be taken by the stockholders of the Corporation at any annual or
special meeting of stockholders may be effected by written consent of
stockholders in lieu of a meeting of stockholders.
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ARTICLE VIII
CERTAIN BUSINESS COMBINATIONS
SECTION 1. HIGHER VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS. In
addition to any affirmative vote required by law, by this Certificate of
Incorporation, or by the provisions of any series of Preferred Stock that may at
the time be outstanding, and except as otherwise expressly provided for in
Section 2 of this Article VIII, any Business Combination, as hereinafter
defined, shall require the affirmative vote of not less than eighty percent
(80%) (to the extent permitted by law, but in no event less than two-thirds) of
the total number of votes eligible to be cast by the holders of all outstanding
shares of Voting Stock, voting together as a single class (it being understood
that for purposes of this Article VIII each share of the Voting Stock shall have
the number of votes granted to it pursuant to Article IV and Article V of this
Certificate of Incorporation or in any resolution or resolutions of the Board of
Directors for issuance of shares of Preferred Stock), together (to the extent
permitted by law) with the affirmative vote of at least fifty percent (50%) of
the total number of votes eligible to be cast by the holders of all outstanding
shares of the Voting Stock not beneficially owned by the Interested Stockholder
involved or any Affiliate or Associate thereof, voting together as a single
class. Such affirmative vote shall be required notwithstanding the fact that no
vote may be required, or that a lesser percentage may be specified, by law or in
any agreement with any national securities exchange or otherwise.
SECTION 2. WHEN HIGHER VOTE IS NOT REQUIRED. The provisions of Section 1
of this Article VIII shall not be applicable to any particular Business
Combination, and such Business Combination shall require only such affirmative
vote as is required by law or any other provision of this Certificate of
Incorporation, if the Business Combination shall have been approved by a
majority of the Disinterested Directors then in office or if all of the
conditions specified in the following subsections (a) through (g) are met:
(a) The aggregate amount of the cash and the Fair Market Value as of
the Consummation Date of consideration other than cash to be received per
share by holders of Common Stock in such Business Combination shall be at
least equal to the higher of the following:
(i) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes, soliciting dealers' fees,
dealer-management compensation, and other expenses, including, but not
limited to, costs of newspaper advertisements, printing expenses and
attorneys' fees) paid by the Interested Stockholder for any shares of
Common Stock acquired by it (A) within the two year period immediately
prior to the Announcement Date, or (B) in the transaction in which it
became an Interested Stockholder, whichever is higher, plus interest
compounded annually from the Determination Date through the Consummation
Date at the prime rate of interest of Citibank, N.A. (or other major
bank headquartered in New York City selected by a majority of the
Disinterested Directors then in office) from time to time in effect in
New York City, less the aggregate amount of any cash dividends paid and
the Fair Market Value of any dividends paid, other than in cash, per
share of Common Stock from the Determination Date through the
Consummation Date in an amount up to but not exceeding the amount of
such interest payable per share of Common Stock; or
(ii) the Fair Market Value per share of Common Stock on the
Announcement Date or on the Determination Date, whichever is higher.
(b) The aggregate amount of the cash and the Fair Market Value as of
the Consummation Date of consideration other than cash to be received per
share by holders of shares of any class or series of outstanding Voting
Stock, other than Common Stock, in such Business Combination shall be at
least equal to the highest of the following (such requirement being
applicable to each such class or series of outstanding Voting Stock,
whether or not the Interested Stockholder has previously acquired any
shares of such class or series of Voting Stock):
(i) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes, soliciting dealers' fees,
dealer-management compensation, and other expenses, including, but not
limited to, costs of newspaper advertisements, printing expenses and
attorneys' fees) paid by the Interested Stockholder for any shares of
such class or series of Voting Stock acquired by it (A) within the two
year period immediately prior to the Announcement Date, or (B) in the
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transaction in which it became an Interested Stockholder, whichever is
higher, plus interest compounded annually from the Determination Date
through the Consummation Date at the prime rate of interest of Citibank,
N.A. (or other major bank headquartered in New York City selected by a
majority of the Disinterested Directors then in office) from time to
time in effect in New York City, less the aggregate amount of any cash
dividends paid, and the Fair Market Value of any dividends paid other
than in cash, per share of such class or series of Voting Stock from the
Determination Date through the Consummation Date in an amount up to but
not exceeding the amount of such interest payable per share of such
class or series of Voting Stock;
(ii) (if applicable) the highest preferential amount per share to
which the holders of shares of such class or series of Voting Stock are
entitled in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; or
(iii) the Fair Market Value per share of such class or series of
Voting Stock on the Announcement Date or on the Determination Date,
whichever is higher.
(c) The consideration to be received by holders of any particular
class or series of outstanding Voting Stock (including Common Stock) in
such Business Combination shall be in cash or in the same form as the
Interested Stockholder has previously paid for shares of such class or
series of Voting Stock. If the Interested Stockholder has paid for shares
of any class or series of Voting Stock with varying forms of consideration,
the form of consideration for such class or series of Voting Stock in such
Business Combination shall be either cash or the form used to acquire the
largest number of shares of such class or series of Voting Stock previously
acquired by it.
(d) The holders of all outstanding shares of Voting Stock not
beneficially owned by the Interested Stockholder immediately prior to the
Consummation Date shall be entitled to receive in such Business Combination
cash or other consideration for their shares in compliance with subsections
(a), (b) and (c) of this Section 2.
(e) After the Determination Date and prior to the Consummation Date:
(i) except as approved by a majority of the Disinterested Directors
then in office, there shall have been no failure to declare and pay, or
set aside for payment, at the regular date therefor any full quarterly
dividends (whether or not cumulative) on any outstanding Preferred
Stock;
(ii) there shall have been (A) no reduction in the annual rate of
dividends paid on the Common Stock (except as necessary to reflect any
subdivision of the Common Stock), except as approved by a majority of
the Disinterested Directors then in office, and (B) an increase in such
annual rate of dividends as necessary to reflect any reclassification
(including any reverse stock split), recapitalization, reorganization or
any similar transaction that has the effect of reducing the number of
outstanding shares of the Common Stock, unless the failure so to
increase such annual rate is approved by a majority of the Disinterested
Directors then in office; and
(iii) such Interested Stockholder shall not have become the
beneficial owner of any additional shares of Voting Stock except (a) as
part of the transaction that results in such Interested Stockholder
becoming an Interested Stockholder, (b) as the result of a stock
dividend paid by the Corporation or (c) upon the exercise or conversion
of securities of the Corporation issued pro rata to all holders of
Common Stock which are exercisable for or convertible into shares of
Voting Stock.
(f) After the Determination Date, the Interested Stockholder shall not
have received the benefit, directly or indirectly (except proportionately
as a stockholder), of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax advantages provided by
or through the Corporation or an Affiliate of the Corporation, whether in
anticipation of or in connection with such Business Combination or
otherwise.
(g) A proxy or information statement describing the proposed Business
Combination in accordance with the requirements of the Securities Exchange
Act of 1934, as amended, whether or not the Corporation is then subject to
such requirements, and the rules and regulations thereunder (or any
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subsequent provisions replacing such Act, rules or regulations) shall be
mailed to stockholders of the Corporation at least thirty (30) days prior
to the consummation of such Business Combination (whether or not such proxy
or information statement is required to be mailed pursuant to such Act or
subsequent provisions). The first page of such proxy or information
statement shall prominently display the recommendation, if any, that a
majority of the Disinterested Directors then in office may choose to make
to the holders of Voting Stock regarding the proposed Business Combination.
Such proxy or information statement shall also contain, if a majority of
the Disinterested Directors then in office so requests, an opinion of a
reputable investment banking firm (which firm shall be engaged solely on
behalf of the stockholders of the Corporation other than the Interested
Stockholder and shall be selected by a majority of the Disinterested
Directors then in office, furnished with all information it reasonably
requests, and paid a reasonable fee for its services by the Corporation
upon the Corporation's receipt of such opinion) as to the fairness (or lack
of fairness) of the terms of the proposed Business Combination from the
point of view of the holders of Voting Stock other than the Interested
Stockholder.
SECTION 3. DEFINITIONS. For purposes of this Article VIII, the following
terms shall have the following meanings:
(a) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended, as in effect on the
date of filing by the Secretary of State of the State of Delaware of this
Certificate of Incorporation, whether or not the Corporation was then
subject to such rule.
(b) "Announcement Date" shall mean the date of the first public
announcement of the proposal of the Business Combination.
(c) A Person shall be deemed the "beneficial owner," or to have
"beneficial ownership," of any shares of Voting Stock that:
(i) such Person or any of its Affiliates or Associates beneficially
owns, directly or indirectly; or
(ii) such Person or any or its Affiliates or Associates, directly
or indirectly, has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding (but a Person shall not be
deemed to be the beneficial owner of any Voting Stock solely by reason
of an agreement, arrangement or understanding with the Corporation to
effect a Business Combination) or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, or (B) the
right to vote, or to direct the vote of, pursuant to any agreement,
arrangement or understanding; or
(iii) is beneficially owned, directly or indirectly, by any other
Person with which such first mentioned Person or any of its Affiliates
or Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares of
Voting Stock;
provided, however, that no director or officer of the Corporation (nor any
Affiliate or Associate of any such director or officer) (y) shall, solely by
reason of any or all of such directors or officers acting in their capacities as
such, be deemed, for any purposes hereof, to beneficially own any Voting Stock
of the Corporation beneficially owned by any other such director or officer (or
any Affiliate or Associate thereof) or (z) shall be deemed to beneficially own
any Voting Stock of the Corporation owned by any pension, profit-sharing, stock
bonus or other compensation plan maintained by the Corporation or by a member of
a controlled group of corporations or trades or businesses of which the
corporation is a member for the benefit of employees of the Corporation and/or
any Subsidiary, or any trust or custodial arrangement established in connection
with any such plan, not specifically allocated to such Person's personal
account.
(d) The term "Business Combination" shall mean any transaction that is
referred to in any one or more of the following paragraphs (i) through
(vi):
(i) any merger or consolidation of the Corporation or any
Subsidiary (other than a merger pursuant to Section 253 of the General
Corporation Law of the State of Delaware) with (A) any
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Interested Stockholder, or (B) any other entity (whether or not such
other entity is itself an Interested Stockholder) which is, or after
such merger or consolidation would be, an Affiliate or Associate of any
Interested Stockholder; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with
any Interested Stockholder or any Affiliate or Associate of any
Interested Stockholder of any assets of the Corporation or any
Subsidiary having an aggregate Fair Market Value equal to five percent
(5%) or more of the total assets of the Corporation or the Subsidiary in
question, as of the end of its most recent fiscal year ending prior to
the time the determination is being made; or
(iii) the issuance or transfer by the Corporation or any Subsidiary
(in one transaction or a series of transactions) of any securities of
the Corporation or any Subsidiary to any Interested Stockholder or any
Affiliate or Associate of any Interested Stockholder other than (A) on a
pro rata basis to all holders of Voting Stock, (B) in connection with
the exercise or conversion of securities issued pro rata that are
exercisable for, or convertible into, securities of the Corporation or
any Subsidiary of the Corporation or (C) the issuance or transfer of
such securities having an aggregate Fair Market Value equal to less than
one percent (1%) of the aggregate Fair Market Value of all of the
outstanding Capital Stock; or
(iv) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder; or
(v) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any
other transaction (whether or not with or into or otherwise involving an
Interested Stockholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any
class or series of equity or convertible securities of the Corporation
or any Subsidiary that is directly or indirectly owned by any Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder,
except as a result of immaterial changes due to fractional share
adjustments, which changes do not exceed, in the aggregate, 1% of the
issued and outstanding shares of such class or series of equity or
convertible securities; or
(vi) the acquisition by the Corporation or a Subsidiary of any
securities of an Interested Stockholder or its Affiliates or Associates.
(e) "Consummation Date" shall mean the date of the consummation of the
Business Combination.
(f) "Determination Date" shall mean the date on which the Interested
Stockholder became an Interested Stockholder.
(g) "Disinterested Director" shall mean any member of the Board of
Directors of the Corporation who is not an Affiliate or Associate of, or
otherwise affiliated with, the Interested Stockholder and who either was a
member of the Board of Directors prior to the Determination Date, or was
recommended for election by a majority of the Disinterested Directors in
office at the time such director was nominated for election. If there is no
Interested Stockholder, each member of the Board of Directors shall be a
Disinterested Director.
(h) "Fair Market Value" shall mean (i) in the case of stock, the
highest closing price during the 30-day period immediately preceding the
date in question of a share of such stock on the Composite Tape for New
York Stock Exchange listed stocks, or, if such stock is not quoted on the
Composite Tape, the New York Stock Exchange, or, if such stock is not
listed on such Exchange, on the principal United States securities exchange
registered under the Securities Exchange Act of 1934, as amended, on which
such stock is listed, or, if such stock is not listed on any such exchange,
the highest closing bid quotation with respect to a share of such stock
during the 30-day period preceding the date in question on the Nasdaq Stock
Market or any system then in use, or if no such quotation is available, the
fair market value
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on the date in question of a share of such stock as determined in good
faith by a majority of the Disinterested Directors then in office, in each
case with respect to any class of stock, appropriately adjusted for any
dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater number
of shares of such stock or any combination or reclassification of
outstanding shares of such stock into a smaller number of shares of such
stock; and (ii) in the case of property other than cash or stock, the fair
market value of such property on the date in question as determined in good
faith by a majority of the Disinterested Directors then in office.
(i) References to "highest per share price" shall in each case with
respect to any class of stock reflect an appropriate adjustment for any
dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater number
of shares of such stock or any combination or reclassification of
outstanding shares of such stock into a smaller number of shares of such
stock.
(j) "Interested Stockholder" shall mean any Person (other than the
Corporation, any Subsidiary, or any pension, profit-sharing, stock bonus or
other compensation or employee benefit plan maintained by the Corporation
or by a member of a controlled group of corporations or trades or
businesses of which the corporation is a member for the benefit of
employees of the Corporation and/or any Subsidiary, or any trust or
custodial arrangement established in connection with any such plan) who or
which:
(i) is the beneficial owner of ten percent (10%) or more of the
Voting Stock; or
(ii) is an Affiliate or Associate of the Corporation and at any
time within the two-year period immediately prior to the date in
question was the beneficial owner of ten percent (10%) or more of the
then outstanding Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares of
Voting Stock that were at any time within the two-year period
immediately prior to the date in question beneficially owned by any
other Interested Stockholder, if such assignment or succession shall
have occurred in the course of a transaction or series of transactions
not involving a public offering within the meaning of the Securities Act
of 1933, as amended, and not executed on any exchange or in the
over-the-counter market through a registered broker or dealer.
In determining whether a Person is an Interested Stockholder pursuant to this
subsection (j), the number of shares of Voting Stock deemed to be outstanding
shall include shares deemed owned through application of subsection (c) of this
Section 3 but shall not include any other shares of Voting Stock that may be
issuable pursuant to any agreement, arrangement or understanding, or upon
exercise of conversion rights, warrants or options, or otherwise.
(k) "Person" shall mean any corporation, partnership, trust,
unincorporated organization or association, syndicate, any other entity or
a natural person, together with any Affiliate or Associate of such person
or any other person acting in concert with such person.
(l) "Subsidiary" shall mean any corporation or entity of which a
majority of any class or series of equity securities is owned, directly or
indirectly, by the Corporation; provided, however, that for the purposes of
the definition of Interested Stockholder set forth in subsection (j) of
this Section 3, the term "Subsidiary" shall mean only a corporation or
entity of which a majority of each class or series of outstanding voting
securities is owned, directly or indirectly, by the Corporation.
(m) "Voting Stock" shall mean all of the outstanding shares of Capital
Stock entitled to vote generally in the election of directors.
SECTION 4. POWERS OF THE DISINTERESTED DIRECTORS. When it appears that a
particular Person may be an Interested Stockholder and that the provisions of
this Article VIII need to be applied or interpreted, then a majority of the
directors of the Corporation who would qualify as Disinterested Directors shall
have the power and duty to interpret all of the terms and provisions of this
Article VIII, and to determine on the basis of information known to them after
reasonable inquiry of all facts necessary to ascertain compliance with this
Article VIII, including, without limitation, (a) whether a Person is an
Interested Stockholder, (b) the
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number of shares of Voting Stock beneficially owned by any Person, (c) whether a
Person is an Affiliate or Associate of another, (d) the Fair Market Value of (i)
the assets that are the subject of any Business Combination, (ii) the securities
to be issued or transferred by the Corporation or any Subsidiary in any Business
Combination, (iii) the consideration other than cash to be received by holders
of shares of any class or series of Common Stock or Voting Stock other than
Common Stock in any Business Combination, (iv) the outstanding Capital Stock, or
(v) any other item the Fair Market Value of which requires determination
pursuant to this Article VIII, and (e) whether all of the applicable conditions
set forth in Section 2 of this Article VIII have been met with respect to any
Business Combination.
Any constructions, applications, or determinations made by the Board of
Directors or the Disinterested Directors pursuant to this Article VIII, in good
faith and on the basis of such information and assistance as was then reasonably
available for such purpose, shall be conclusive and binding upon the Corporation
and its stockholders, and neither the Corporation nor any of its stockholders
shall have the right to challenge any such construction, application or
determination.
SECTION 5. EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED
STOCKHOLDERS. Nothing contained in this Article VIII shall be construed to
relieve any Interested Stockholder from any fiduciary obligations imposed by
law.
SECTION 6. AMENDMENT, REPEAL, ETC. Notwithstanding any other provisions of
this Certificate of Incorporation or the Bylaws (and notwithstanding the fact
that a lesser percentage may be specified by law, this Certificate of
Incorporation or the Bylaws of the Corporation), in addition to any affirmative
vote required by applicable law and any voting rights granted to or held by
holders of Preferred Stock, any amendment, alteration, repeal or rescission of
any provision of this Article VIII must also be approved by either (i) a
majority of the Disinterested Directors, or (ii) the affirmative vote of not
less than eighty percent (80%) of the total number of votes eligible to be cast
by the holders of all outstanding shares of the Voting Stock, voting together as
a single class, together with the affirmative vote of not less than fifty
percent (50%) of the total number of votes eligible to be cast by the holders of
all outstanding shares of the Voting Stock not beneficially owned by any
Interested Stockholder or Affiliate or Associate thereof, voting together as a
single class.
ARTICLE IX
LIMITATION OF DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is expressly prohibited by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended.
Any amendment, termination or repeal of this Article IX or any provisions
hereof shall not adversely affect or diminish in any way any right or protection
of a director of the Corporation existing with respect to any act or omission
occurring prior to the time of the final adoption of such amendment, termination
or repeal.
In addition to any requirements of law or of any other provisions of this
Certificate of Incorporation, the affirmative vote of the holders of not less
than eighty percent (80%) of the total number of votes eligible to be cast by
the holders of all outstanding shares of Capital Stock entitled to vote thereon
shall be required to amend, alter, rescind or repeal any provision of this
Article IX.
ARTICLE X
INDEMNIFICATION
SECTION 1. ACTIONS, SUITS OR PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF
THE CORPORATION. To the fullest extent permitted by the General Corporation Law
of the State of Delaware, the Corporation shall indemnify any person who is or
was or has agreed to become a director or officer of the Corporation who was or
is made a party to or is threatened to be made a party to any threatened,
pending or completed action, suit
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or proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the Corporation) by reason of the fact that
he or she is or was or has agreed to become a director or officer of the
Corporation, or by reason of any action alleged to have been taken or omitted in
such capacity, and the Corporation may indemnify any other person who is or was
or has agreed to become an employee or agent of the Corporation who was or is
made a party to or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he or she is or was or has agreed to become an employee
or agent of the Corporation, or by reason of any action alleged to have been
taken or omitted in such capacity, against costs, charges, expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her or on his or her behalf in connection with
such action, suit or proceeding and any appeal therefrom, if he or she acted in
good faith and in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement or conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
in, or not opposed to, the best interests of the Corporation and, with respect
to any criminal action or proceeding, had reasonable cause to believe that his
or her conduct was unlawful. Notwithstanding anything contained in this Article
X, but subject to Section 7 hereof, the Corporation shall not be obligated to
indemnify any director or officer in connection with an action, suit or
proceeding, or part thereof, initiated by such person against the Corporation
unless such action, suit or proceeding, or part thereof, was authorized or
consented to by the Board of Directors.
SECTION 2. ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. To the
fullest extent permitted by the General Corporation Law of the State of
Delaware, the Corporation shall indemnify any person who is or was or has agreed
to become a director or officer of the Corporation who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he or she is or was or has agreed to become a director
or officer of the Corporation, or by reason of any action alleged to have been
taken or omitted in such capacity, and the Corporation may indemnify any other
person who is or was or has agreed to become an employee or agent of the
Corporation who was or is made a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he or
she is or was or has agreed to become an employee or agent of the Corporation,
or by reason of any action alleged to have been taken or omitted in such
capacity, against costs, charges and expenses (including attorneys' fees)
actually and reasonably incurred by him or her or on his or her behalf in
connection with the defense or settlement of such action or suit and any appeal
therefrom, if he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the Corporation,
except no indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of such liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such costs, charges and expenses which the Court of Chancery or
such other court shall deem proper. Notwithstanding anything contained in this
Article X, but subject to Section 7 hereof, the Corporation shall not be
obligated to indemnify any director or officer in connection with an action or
suit, or part thereof, initiated by such person against the Corporation unless
such action or suit, or part thereof, was authorized or consented to by the
Board of Directors.
SECTION 3. INDEMNIFICATION FOR COSTS, CHARGES AND EXPENSES OF A SUCCESSFUL
PARTY. To the extent that a director, officer, employee or agent of the
Corporation has been successful, on the merits or otherwise (including, without
limitation, the dismissal of an action without prejudice), in defense of any
action, suit or proceeding referred to in Section 1 or 2 of this Article X, or
in defense of any claim, issue or matter therein, such person shall be
indemnified against all costs, charges and expenses (including attorneys' fees)
actually and reasonably incurred by such person or on such person's behalf in
connection therewith.
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SECTION 4. INDEMNIFICATION FOR EXPENSES OF A WITNESS. To the extent that
any person who is or was or has agreed to become a director or officer of the
Corporation is made a witness to any action, suit or proceeding to which he or
she is not a party by reason of the fact that he or she was, is or has agreed to
become a director or officer of the Corporation, or is or was serving or has
agreed to serve as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, at the
written request of the Corporation, such person shall be indemnified against all
costs, charges and expenses actually and reasonably incurred by such person or
on such person's behalf in connection therewith.
To the extent that any person who is or was or has agreed to become an
employee or agent of the Corporation is made a witness to any action, suit or
proceeding to which he or she is not a party by reason of the fact that he or
she was, is or has agreed to become an employee or agent of the Corporation, or
is or was serving or has agreed to serve as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, at the written request of the Corporation, such person may be
indemnified against all costs, charges and expenses actually and reasonably
incurred by such person or on such person's behalf in connection therewith.
SECTION 5. DETERMINATION OF RIGHT TO INDEMNIFICATION. Any indemnification
under Section 1 or 2 of this Article X (unless ordered by a court) shall be
made, if at all, by the Corporation only as authorized in the specific case upon
a determination that indemnification of the director, officer, employee or agent
is proper under the circumstances because he or she has met the applicable
standard of conduct set forth in Section 1 or 2 of this Article X. Any
indemnification under Section 4 of this Article X (unless ordered by a court)
shall be made, if at all, by the Corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper under the circumstances. Such determinations shall
be made by (a) a majority vote of directors who were not parties to such action,
suit or proceeding even though less than a quorum of the Board of Directors, or
(b) if there are no such directors, or if such directors so direct, by
independent counsel in a written opinion or (c) by the stockholders of the
Corporation. To obtain indemnification under this Article X, any person referred
to in Section 1, 2, 3 or 4 of this Article X shall submit to the Corporation a
written request, including therewith such documents as are reasonably available
to such person and are reasonably necessary to determine whether and to what
extent such person is entitled to indemnification.
SECTION 6. ADVANCEMENT OF COSTS, CHARGES AND EXPENSES. Costs, charges and
expenses (including attorneys' fees) incurred by or on behalf of a director or
officer in defending a civil or criminal action, suit or proceeding referred to
in Section 1 or 2 of this Article X shall be paid by the Corporation in advance
of the final disposition of such action, suit or proceeding; provided, however,
that the payment of such costs, charges and expenses incurred by or on behalf of
a director or officer in advance of the final disposition of such action, suit
or proceeding shall be made only upon receipt of a written undertaking by or on
behalf of the director or officer to repay all amounts so advanced in the event
that it shall ultimately be determined that such director or officer is not
entitled to be indemnified by the Corporation as authorized in this Article X or
by law. No security shall be required for such undertaking and such undertaking
shall be accepted without reference to the recipient's financial ability to make
repayment. The majority of the directors who were not parties to such action,
suit or proceeding may, upon approval of such director or officer of the
Corporation, authorize the Corporation's counsel to represent such person, in
any action, suit or proceeding, whether or not the Corporation is a party to
such action, suit or proceeding.
SECTION 7. PROCEDURE FOR INDEMNIFICATION. Any indemnification under
Section 1, 2, 3 or 4 of this Article X or advancement of costs, charges and
expenses under Section 6 of this Article X shall be made promptly, and in any
event within sixty (60) days (except indemnification to be determined by
stockholders which will be determined at the next annual meeting of
stockholders), upon the written request of the director or officer. The right to
indemnification or advancement of expenses as granted by this Article X shall be
enforceable by the director, officer, employee or agent in any court of
competent jurisdiction, if the Corporation denies such request, in whole or in
part, or if no disposition of such request is made within sixty (60) days of the
request. Such person's costs, charges and expenses incurred in connection with
successfully establishing his or her right to indemnification or advancement, to
the extent successful, in any such action shall also be indemnified by the
Corporation. It shall be a defense to any such action (other than an action
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brought to enforce a claim for the advancement of costs, charges and expenses
under Section 6 of this Article X where the required undertaking, if any, has
been received by the Corporation) that the claimant has not met the standard of
conduct set forth in Section 1 or 2 of this Article X, but the burden of proving
such defense shall be on the Corporation. Neither the failure of the Corporation
(including its directors, its independent legal counsel and its stockholders) to
have made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or she
has met the applicable standard of conduct set forth in Section 1 or 2 of this
Article X, nor the fact that there has been an actual determination by the
Corporation (including its directors, its independent legal counsel and its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
SECTION 8. SETTLEMENT. The Corporation shall not be obligated to reimburse
the costs, charges and expenses of any settlement to which it has not agreed. If
in any action, suit or proceeding (including any appeal) within the scope of
Section 1 or 2 of this Article X, the person to be indemnified shall have
unreasonably failed to enter into a settlement thereof offered or assented to by
the opposing party or parties in such action, suit or proceeding, then,
notwithstanding any other provision of this Article X, the indemnification
obligation of the Corporation to such person in connection with such action,
suit or proceeding shall not exceed the total of the amount at which settlement
could have been made and the expenses incurred by or on behalf of such person
prior to the time such settlement could reasonably have been effected. For
purposes of this Section 8, whether a person shall have "unreasonably failed to
enter into a settlement" shall be as determined by the Board.
SECTION 9. OTHER RIGHTS; CONTINUATION OF RIGHT TO INDEMNIFICATION;
INDIVIDUAL CONTRACTS. The indemnification and advancement of costs, charges and
expenses provided by or granted pursuant to this Article X shall not be deemed
exclusive of any other rights to which those persons seeking indemnification or
advancement of costs, charges and expenses may be entitled under law (common or
statutory) or any Bylaw, agreement, policy of indemnification insurance or vote
of stockholders or directors or otherwise, both as to action in his or her
official capacity and as to action in any other capacity while holding office,
and shall continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the legatees, heirs,
distributees, executors and administrators of such person. Nothing contained in
this Article X shall be deemed to prohibit the Corporation from entering into,
and the Corporation is specifically authorized to enter into, agreements with
directors, officers, employees and agents providing indemnification rights and
procedures different from those set forth herein. All rights to indemnification
under this Article X shall be deemed to be a contract between the Corporation
and each director, officer, employee or agent of the Corporation who serves or
served in such capacity at any time while this Article X is in effect.
SECTION 10. SAVINGS CLAUSE. If this Article X or any portion shall be
invalidated on any ground by any court of competent jurisdiction, the
Corporation shall nevertheless indemnify each director or officer, and may
indemnify each employee or agent, of the Corporation as to any costs, charges,
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative (including an action by or in the
right of the Corporation), to the full extent permitted by any applicable
portion of this Article X that shall not have been invalidated and to the full
extent permitted by applicable law.
SECTION 11. INSURANCE. The Corporation may purchase and maintain insurance,
at its expense, to protect itself and any person who is or was a director,
officer, employee or agent of the Corporation against any costs, charges or
expenses, liability or loss incurred by such person in any such capacity, or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify such person against such costs, charges or expenses,
liability or loss under the Certificate of Incorporation or applicable law;
provided, however, that such insurance is available on acceptable terms as
determined by the Board. To the extent that any director, officer, employee or
agent is reimbursed by an insurance company under an indemnification insurance
policy for any costs, charges, expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement to the fullest extent permitted by any
applicable portion of this Article X, the Bylaws, any agreement, the policy of
indemnification insurance or otherwise, the Corporation shall not be obligated
to reimburse the person to be indemnified in connection with such proceeding.
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SECTION 12. DEFINITIONS. For purposes of this Article X, the following
terms shall have the following meanings:
(a) "The Corporation" shall include, in addition to the resulting
corporation, any constituent corporation or entity (including any
constituent of a constituent) absorbed by way of an acquisition,
consolidation, merger or otherwise, which, if its separate existence had
continued, would have had power and authority to indemnify its directors,
officers, employee or agent so that any person who is or was a director,
officer, employee or agent of such constituent corporation or entity, or is
or was serving at the written request of such constituent corporation or
entity as a director or officer of another corporation, entity,
partnership, joint venture, trust or other enterprise, shall stand in the
same position under the provisions of this Article X with respect to the
resulting or surviving corporation or entity as he would have with respect
to such constituent corporation or entity if its separate existence had
continued;
(b) "Other enterprises" shall include employee benefit plans,
including, but not limited to, any employee benefit plan of the
Corporation;
(c) "Director or officer" of the Corporation shall include any
director, officer, partner or trustee who is or was or has agreed to serve
at the request of the Corporation as a director, officer, partner or
trustee of another corporation, partnership, joint venture, trust or other
enterprise;
(d) "Serving at the request of the Corporation" shall include any
service that imposes duties on, or involves services by a director,
officer, employee or agent of the Corporation with respect to an employee
benefit plan, its participants or beneficiaries, including acting as a
fiduciary thereof;
(e) "Fines" shall include any penalties and any excise or similar
taxes assessed on a person with respect to an employee benefit plan;
(f) To the fullest extent permitted by law, a person shall be deemed
to have acted in "good faith and in a manner he or she reasonably believed
to be in, or not opposed to, the best interests of the Corporation and,
with respect to any criminal action or proceeding, had no reasonable cause
to believe his or her conduct was unlawful," if his or her action is based
on the records or books of account of the Corporation or another
enterprise, or on information supplied to him or her by the officers of the
Corporation or another enterprise in the course of their duties, or on the
advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser
or other expert selected with reasonable care by the Corporation or another
enterprise; and
(g) A person shall be deemed to have acted in a manner "not opposed to
the best interests of the Corporation," as referred to in Sections 1 and 2
of this Article X if such person acted in good faith and in a manner he or
she reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan.
SECTION 13. SUBSEQUENT AMENDMENT AND SUBSEQUENT LEGISLATION. Neither the
amendment, termination or repeal of this Article X or of relevant provisions of
the General Corporation Law of the State of Delaware or any other applicable
laws, nor the adoption of any provision of this Certificate of Incorporation or
the Bylaws of the Corporation or of any statute inconsistent with this Article X
shall eliminate, affect or diminish in any way the rights of any director,
officer, employee or agent of the Corporation to indemnification under the
provisions of this Article X with respect to any action, suit or proceeding
arising out of, or relating to, any actions, transactions or facts occurring
prior to the final adoption of such amendment, termination or repeal.
If the General Corporation Law of the State of Delaware is amended to
expand further the indemnification permitted to directors and officers of the
Corporation, then the Corporation shall indemnify such persons to the fullest
extent permitted by the General Corporation Law of the State of Delaware, as so
amended.
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ARTICLE XI
AMENDMENTS
SECTION 1. AMENDMENTS OF CERTIFICATE OF INCORPORATION. In addition to any
affirmative vote required by applicable law and any voting rights granted to or
held by holders of any Series of Preferred Stock, any alteration, amendment,
repeal or rescission (collectively, any "Change") of any provision of this
Certificate of Incorporation must be approved by a majority of the directors of
the Corporation then in office and by the affirmative vote of the holders of a
majority (or such greater proportion as may otherwise be required pursuant to
any specific provision of this Certificate of Incorporation) of the total votes
eligible to be cast by the holders of all outstanding shares of Capital Stock
entitled to vote thereon; provided, however, that if any such Change relates to
Section 13 of Article X or Articles V, VI, VII or XI of this Certificate of
Incorporation, such Change must also be approved either (i) by not less than a
majority of the authorized number of directors and, if one or more Interested
Stockholders (as defined in Article VIII hereof) exist, by not less than a
majority of the Disinterested Directors (as defined in Article VIII hereof), or
(ii) by the affirmative vote of the holders of not less than two-thirds of the
total votes eligible to be cast by the holders of all outstanding shares of
Capital Stock entitled to vote thereon and, if the Change is proposed by or on
behalf of an Interested Stockholder or a director who is an Affiliate or
Associate (as such terms are defined in Article VIII hereof) of an Interested
Stockholder, by the affirmative vote of the holders of not less than a majority
of the total votes eligible to be cast by holders of all outstanding shares of
Capital Stock entitled to vote thereon not beneficially owned by an Interested
Stockholder or an Affiliate or Associate thereof. Notwithstanding the foregoing,
any provision of the Certificate of Incorporation that contains a supermajority
voting requirement shall only be altered, amended, rescinded, or repealed by a
vote of the Board or holders of shares of Capital Stock entitled to vote thereon
that is not less than the supermajority specified in such provision. Subject to
the foregoing, the Corporation reserves the right to amend this Certificate of
Incorporation from time to time in any and as many respects as may be desired
and as may be lawfully contained in an original certificate of incorporation
filed at the time of making such amendment.
Except as may otherwise be provided in this Certificate of Incorporation,
the Corporation reserves the right at any time, and from time to time, to amend,
alter, change or repeal any provision contained in this Certificate of
Incorporation, and to add or insert herein any other provisions authorized by
the laws of the State of Delaware at the time in force, in the manner now or
hereafter prescribed by law, and all rights, preferences and privileges of any
nature conferred upon stockholders, directors or any other persons whomsoever by
and pursuant to this Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the rights reserved in this Section 1.
SECTION 2. AMENDMENTS OF BYLAWS. In furtherance and not in limitation of
the powers conferred by statute, the Board of Directors of the Corporation is
expressly authorized to make, alter, amend, rescind or repeal from time to time
any of the Bylaws of the Corporation in accordance with the terms thereof;
provided, however, that any Bylaw made by the Board may be altered, amended,
rescinded, or repealed in accordance with the terms thereof by the holders of
shares of Capital Stock entitled to vote thereon at any annual meeting or at any
special meeting called for that purpose. Notwithstanding the foregoing, any
provision of the Bylaws that contains a supermajority voting requirement shall
only be altered, amended, rescinded, or repealed by a vote of the Board or
holders of shares of Capital Stock entitled to vote thereon that is not less
than the supermajority specified in such provision.
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ARTICLE XII
NOTICES
The name and mailing address of the incorporator of this Corporation is:
Carver Federal Savings Bank
75 West 125th Street
New York, New York 10027
Carver Federal Savings Bank caused this Certificate of Incorporation to be
signed by Thomas L. Clark, Jr., President and Chief Executive Officer, and
attested to by Margaret R. Lewis, Secretary of Carver Federal Savings Bank, this
8th day of May, 1996.
CARVER FEDERAL SAVINGS BANK
By: /s/ Thomas L. Clark, Jr.
------------------------------------
Thomas L. Clark, Jr.
President and Chief Executive
Officer
Attest:
/s/ Margaret R. Lewis
- ------------------------------------------------------
Margaret R. Lewis
Secretary
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") inter alia,
empowers a Delaware corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of another corporation or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Similar indemnity is authorized for such person against expenses
(including attorneys' fees) actually and reasonably incurred in connection with
the defense or settlement of any such threatened, pending or completed action or
suit if such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and provided
further that (unless a court of competent jurisdiction otherwise provides) such
person shall not have been adjudged liable to the corporation. Any such
indemnification may be made only as authorized in each specific case upon a
determination by the shareholders or disinterested directors or by independent
legal counsel in a written opinion that indemnification is proper because the
indemnitee has met the applicable standard of conduct.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him, and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
Article IX of the Company's Certificate of Incorporation provides that a
director shall not be personally liable to the Company or its stockholders for
damages for breach of his fiduciary duty as a director, except to the extent
such exemption from liability or limitation thereof is expressly prohibited by
the DGCL. Article X of the Company's Certificate of Incorporation requires the
Company, among other things, to indemnify to the fullest extent permitted by the
DGCL, any person who is or was or has agreed to become a director or officer of
the Company, who was or is made a party to, or is threatened to be made a party
to, or has become a witness in, any threatened, pending or completed action,
suit or proceeding, including actions or suits by or in the right of the
Company, by reason of such agreement or service or the fact that such person is,
was or has agreed to serve as a director, officer, employee or agent of another
corporation or organization at the written request of the Company.
Article X also empowers the Company to purchase and maintain insurance to
protect itself and its directors and officers, and those who were or have agreed
to become directors or officers, against any liability, regardless of whether or
not the Company would have the power to indemnify those persons against such
liability under the law or the provisions set forth in the Certificate of
Incorporation. The Company is also authorized by its Certificate of
Incorporation to enter into individual indemnification contracts with directors
and officers. The Bank currently maintains and the Company expects to purchase
directors' and officers' liability insurance consistent with the provisions of
the Certificate of Incorporation as soon as practicable.
II-1
<PAGE> 172
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(A) LIST OF EXHIBITS. (Filed herewith unless otherwise noted.)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ------------------------------------------------------------- ----------------
<C> <S> <C>
2.1 Agreement and Plan of Reorganization by and among Carver
Federal Savings Bank, Carver Bancorp, Inc. and Carver Interim
Federal Savings Bank (included as Appendix A to the Proxy
Statement-Prospectus)........................................
3.1 Certificate of Incorporation of Carver Bancorp, Inc.
(included as Appendix C to the Proxy Statement-Prospectus)...
3.2 Bylaws of Carver Bancorp, Inc................................
3.3 Federal Stock Charter of Carver Federal Savings Bank.........
3.4 Bylaws of Carver Federal Savings Bank........................
4.1 Draft Stock Certificate of Carver Bancorp, Inc...............
5.1 Opinion of Thacher Proffitt & Wood re: legality..............
8.1 Opinion of Thacher Proffitt & Wood re: tax matters...........
10.1 Carver Federal Savings Bank 1995 Stock Option Plan, effective
as of September 12, 1995.....................................
10.2 Carver Federal Savings Bank Retirement Income Plan, as
amended and restated effective as of January 1, 1989.........
10.3 Carver Federal Savings Bank 401(k) Savings Plan in RSI
Retirement Trust, as amended and restated effective as of May
1, 1993......................................................
10.4 Carver Federal Savings Bank Employee Stock Ownership Plan,
effective as of January 1, 1993..............................
10.5 Carver Federal Savings Bank Deferred Compensation Plan,
effective as of August 10, 1993..............................
10.6 Carver Federal Savings Bank Retirement Plan for Nonemployee
Directors, effective as of October 24, 1994..................
10.7 Carver Federal Savings Bank Management Recognition Plan,
effective as of September 12, 1995...........................
10.8 Carver Federal Savings Bank Incentive Compensative Plan,
effective as of September 12, 1995...........................
10.9 Employment Agreement by and between Carver Federal Savings
Bank and Thomas L. Clark, entered into as of January 3,
1995.........................................................
10.10 Employment Agreement by and between Carver Federal Savings
Bank and Biswarup Mukherjee, entered into as of April 14,
1995.........................................................
10.11 Supplemental Executive Retirement Agreement by and between
Carver Federal Savings Bank and Richard T. Greene, entered
into as of January 30, 1995..................................
16 Letter re Change in Certifying Accountant....................
23.1 Consent of Thacher Proffitt & Wood (included in Exhibits 5.1
and 8.1 to this Registration Statement)......................
23.2 Consent of Mitchell & Titus, LLP.............................
23.3 Consent of Radics & Co., LLC.................................
27.1 Financial Data Schedule (only filed in EDGAR format).........
</TABLE>
II-2
<PAGE> 173
(B) FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the Registration Statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
(4) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
<PAGE> 174
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement, or amendment thereto, to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on June
25, 1996.
CARVER BANCORP, INC.
By: /s/ THOMAS L. CLARK, JR.
-------------------------------
Thomas L. Clark, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, and
any rules and regulations promulgated thereunder, this Registration Statement,
or amendment thereto, has been signed by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ----------------------------------------------- ------------------------------ --------------
<C> <S> <C>
/s/ THOMAS L. CLARK, JR. Director, President and Chief June 25, 1996
- ----------------------------------------------- Executive Officer (Principal
Thomas L. Clark, Jr. executive officer)
* Executive Vice President and June 25, 1996
- ----------------------------------------------- Chief Financial Officer
Biswarup Mukherjee
* Director June 25, 1996
- -----------------------------------------------
David N. Dinkins
* Director June 25, 1996
- -----------------------------------------------
Linda H. Dunham
* Director June 25, 1996
- -----------------------------------------------
Richard T. Greene
* Director June 25, 1996
- -----------------------------------------------
Herman Johnson, CPA
* Director June 25, 1996
- -----------------------------------------------
David R. Jones
* Director June 25, 1996
- -----------------------------------------------
M. Moran Weston, Ph.D.
*By /s/ THOMAS L. CLARK
- -----------------------------------------------
Thomas L. Clark
Attorney-in-Fact**
- -----------------------------------------------
** By authority of power of attorney previously
filed with the Company's Registration
Statement on June 7, 1996.
</TABLE>
<PAGE> 175
EXHIBIT INDEX
ALL EXHIBITS WERE PREVIOUSLY FILED.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
------------ ---------------------------------------------------------------- ---------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization by and among Carver Federal
Savings Bank, Carver Bancorp, Inc. and Carver Interim Federal
Savings Bank (included as Appendix A to the Proxy
Statement-Prospectus)
3.1 Certificate of Incorporation of Carver Bancorp, Inc. (included
as Appendix C to the Proxy Statement-Prospectus)
3.2 Bylaws of Carver Bancorp, Inc.
3.3 Federal Stock Charter of Carver Federal Savings Bank
3.4 Bylaws of Carver Federal Savings Bank
4.1 Draft Stock Certificate of Carver Bancorp, Inc.
5.1 Opinion of Thacher Proffitt & Wood re: legality
8.1 Opinion of Thacher Proffitt & Wood re: tax matters
10.1 Carver Federal Savings Bank 1995 Stock Option Plan, effective as
of September 12, 1995
10.2 Carver Federal Savings Bank Retirement Income Plan, as amended
and restated effective as of January 1, 1989
10.3 Carver Federal Savings Bank 401(k) Savings Plan in RSI
Retirement Trust, as amended and restated effective as of May 1,
1993
10.4 Carver Federal Savings Bank Employee Stock Ownership Plan,
effective as of January 1, 1993
10.5 Carver Federal Savings Bank Deferred Compensation Plan,
effective as of August 10, 1993
10.6 Carver Federal Savings Bank Retirement Plan for Nonemployee
Directors, effective as of October 24, 1994
10.7 Carver Federal Savings Bank Management Recognition Plan,
effective as of September 12, 1995
10.8 Carver Federal Savings Bank Incentive Compensative Plan,
effective as of September 12, 1995
10.9 Employment Agreement by and between Carver Federal Savings Bank
and Thomas L. Clark, entered into as of January 3, 1995
10.10 Employment Agreement by and between Carver Federal Savings Bank
and Biswarup Mukherjee, entered into as of April 14, 1995
10.11 Supplemental Executive Retirement Agreement by and between
Carver Federal Savings Bank and Richard T. Greene, entered into
as of January 30, 1995
16 Letter re Change in Certifying Accountant
23.1 Consent of Thacher Proffitt & Wood (included in Exhibits 5.1 and
8.1 to this Registration Statement)
23.2 Consent of Mitchell & Titus, LLP
23.3 Consent of Radics & Co., LLC
27.1 Financial Data Schedule (only filed in EDGAR format)
</TABLE>
