SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K/ A
Amendment No. 1
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
COMMISSION FILE NUMBER: 0-21487
CARVER BANCORP, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3904174
- --------------------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
75 WEST 125TH STREET, NEW YORK, NEW YORK 10027
- ---------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 876-4747
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE AMERICAN STOCK EXCHANGE
(TITLE OF CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
----
As of May 31, 1997, there were 2,314,275 shares of Common Stock of the
registrant issued and outstanding, of which 2,111,321 shares were held by
non-affiliates on such date, with an aggregate market value of approximately
$20.3 million (based on the closing sales price of $9 5/8 per share of the
registrant's Common Stock on May 30, 1997).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1997 Annual Meeting of
Stockholders are incorporated by reference into Items 10, 11, 12 and 13 hereof.
<PAGE>
PART II. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
Carver's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loan, investment
and mortgage-backed securities portfolios and the interest paid on its
interest-bearing liabilities, such as deposits and borrowings. Carver has
undertaken a restructuring of its balance sheet and is now placing primary
emphasis on its whole loan portfolio through the origination of loans, as well
as the purchase of whole loans. As a result of this effort, the loan portfolio
has substantially increased as a percentage of total assets. Therefore, Carver's
future earnings will be derived from direct lending and purchase activities
replacing investing in securities. Carver'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 provision for loan losses, as well as operating
expenses.
The operations of the Bank and the entire thrift industry are
significantly affected by prevailing economic conditions, competition and the
monetary and fiscal policies of governmental agencies. Lending activities are
influenced by the demand for and supply of housing, competition among lenders,
the level of interest rates and the availability of funds. Deposit flow and
costs of funds are influenced by prevailing market rates of interest, primarily
on competing investments, account maturities, and the levels of personal income
and savings nationwide.
RECAPITALIZATION OF THE SAVINGS ASSOCIATION INSURANCE FUND (SAIF)
During the second quarter of fiscal 1997, Carver experienced a one time
pre-tax assessment of $1.6 million for recapitalization of the SAIF pursuant to
legislation which was signed into law in September of 1996. The legislation to
recapitalize the SAIF was anticipated by the industry and reduced Carver
Federal's deposit insurance premium from 23 basis points, on insured deposits of
approximately $248.4 million, to 6.5 basis points effective January 1, 1997.
RESTRUCTURING OF BALANCE SHEET
In December of 1996, the Board of Directors made a strategic decision
to accelerate the reallocation of assets out of investment securities and into
loans. The Board and management reviewed a variety of transactions that would
reallocate assets on the balance sheet and the income stream that each would
produce. The analysis resulted in a decision to divest of approximately $72
million in money market rate investment securities or mutual funds that were
carried on the books as available for sale and reinvest the proceeds into
performing one-to-four family adjustable rate mortgages. Carver experienced a
one time pre-tax charge of $1.0 million during the fourth fiscal quarter of 1997
as a result of the disposition of the mutual funds. Carver projects that net
yields and earnings will be improved by replacing the lower yielding securities
with higher yielding loans.
In combination with the asset shift, Carver further leveraged the
balance sheet by increasing total assets. To accomplish this Carver entered into
an agreement to purchase $43.0 million of performing one- to four-family
mortgage loans. The Bank increased securities sold under repurchase agreements
and borrowing from the FHLB to settle the purchase. At March 31, 1997, Carver
settled on $11 million of the loans purchased. The balance of additional loans
purchased ($32 million) settled on April 1, 1997. On April 1, 1997, $49.0
million of securities held as available for sale were sold, $17 million was
utilized to repay FHLB borrowings and $32 million was used to fund the balance
of the additional loans purchased. The average yield on the loans purchased is
expected to exceed the yield on the securities sold by approximately 175 basis
points. The average yield on the additional loans purchased is expected to
exceed the cost of the FHLB borrowings by approximately 100 basis points. As a
result of this strategy, Carver's total assets increased from $371.1 million at
March 31, 1996 to $423.6 million at March 31, 1997.
The net effect of the transactions settling on April 1, 1997, ($49
million of securities sold, $32 million in loans purchased, and retirement of
$17 million in FHLB borrowings), was a reduction in total assets of $17 million,
to $406.6 million at April 1, 1997.
1
<PAGE>
As a result of the foregoing, during fiscal 1997, the loan portfolio
increased by 140% from $82.6 million at March 31, 1996, to $197.9 million at
March 31, 1997, an increase of $115.3 million. In addition, Carver added
approximately $1.6 million to its provisions for loan losses during the fourth
quarter of fiscal 1997 in order to maintain the allowance for loan losses at an
adequate level consistent with the Bank's policies. At March 31, 1997, the
allowance for loan losses as a percentage of total loans was 1.13% as compared
to 1.42% at March 31, 1996. See "Comparison of Operating Results for the Years
Ended March 31, 1997 and 1996--Provision for Loan Losses."
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of Carver's net income, is
determined by the difference or "spread" between the yield earned on
interest-earning assets and the rates paid on its interest-bearing liabilities
and the relative amounts of such assets and liabilities. Because Carver's
interest-bearing liabilities consist primarily of shorter term deposit accounts,
Carver's interest rate spread can be adversely affected by changes in general
interest rates if its interest-earning assets are not sufficiently sensitive to
changes in interest rates. Management has sought to reduce Carver's exposure to
changes in interest rates by more closely matching the effective maturities and
repricing periods of its interest-earning assets and interest-bearing
liabilities through a variety of strategies, including the origination and
purchase of adjustable-rate loans for its portfolio, investment in
adjustable-rate and shorter-term mortgage-backed securities and the sale of all
long-term fixed-rate loans originated into the secondary market. Carver Federal
has also reduced interest rate risk through its origination and purchase of
primarily adjustable rate mortgage loans. During fiscal year 1997, loan
portfolio increased by $115.3 million, or 140%. The growth in the loan portfolio
was funded primarily by matched funding from FHLB advances and reverse
repurchase agreements. See "--Restructuring of Balance Sheet."
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 that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific period of time and the amount of interest-bearing
liabilities repricing within that same time period. A gap is considered positive
when the amount of rate-sensitive assets exceeds the amount of rate-sensitive
liabilities and is considered negative when the amount of interest rate
sensitive liabilities exceed the amount of rate-sensitive assets. Generally,
during a period of falling interest rates a negative gap could result in an
increase in net interest income, while a positive gap could adversely affect net
interest income, and during a period of rising interest rates a negative gap
could adversely affect net interest income, while a positive gap could result in
an increase in net interest income. As illustrated below, Carver had a negative
one-year gap equal to 9.95% of total rate-sensitive assets at March 31, 1997, as
a result of which its net interest income could be adversely affected by rising
interest rates, and positively affected by falling interest rates.
2
<PAGE>
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, 1997. Maturity repricing dates
have been projected by applying the assumptions set forth below to contractual
maturity and repricing dates. The information presented in the following table
is derived from data incorporated in "Schedule CMR: Consolidated Maturity and
Rate," which is part of the Bank's quarterly reports filed with OTS. The
repricing and other assumptions are not necessarily representative of the Bank's
actual results. Classifications of items in the table below are different from
those presented in other tables and the financial statements and accompanying
notes included herein and do not reflect non-performing loans.
<TABLE>
<CAPTION>
THREE OR FOUR TO OVER ONE OVER THREE
LESS TWELVE THROUGH THROUGH
MONTHS MONTHS MONTHS THREE YEARS FIVE YEARS
- ---------------------------------------- -------------------- ----------------- ------------------ --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
RATE-SENSITIVE ASSETS:
Loans................................... $ 57,890 $ 43,301 $ 33,715 $ 26,555
Federal Funds Sold...................... 0 0 0 0
Investment Securities(1)................ 51,157 7,210
Mortgage-Backed Securities.............. 2,625 4 1,150 7,598
Total................................... 111,672 43,305 42,075 34,153
RATE-SENSITIVE LIABILITIES:
Deposits................................ 27,420 48,018 55,053 36,320
Borrowings.............................. 54,000 65,335
Total................................... 81,420 113,353 55,053 36,320
Interest Sensitivity Gap................ $ 30,252 $ (70,048) $ (12,975) $ (2,167)
Cumulative Interest Sensitivity Gap..... $ 30,252 $ (39,796) $ (52,774) $ (54,941)
Ratio of Cumulative Gap to Total
Rate-Sensitive Assets.................. 7.57% (9.95)% (13.20)% (13.74)%
<CAPTION>
OVER FIVE OVER
THROUGH TEN
MONTHS TEN YEARS YEARS TOTAL
- ---------------------------------------- ------------------- ------------------ -----------
<S> <C> <C> <C>
RATE-SENSITIVE ASSETS:
Loans................................... $ 23,894 $ 12,563 $ 197,918
Federal Funds Sold...................... 0 0 0
Investment Securities(1)................ 58,367
Mortgage-Backed Securities.............. 2,621 129,522 143,520
Total................................... 26,515 142,085 399,805
RATE-SENSITIVE LIABILITIES:
Deposits................................ 59,690 39,971 266,471
Borrowings.............................. 1,766 121,101
Total................................... 61,456 39,971 387,572
Interest Sensitivity Gap................ $ (34,941) $ 102,114 $ 12,233
Cumulative Interest Sensitivity Gap..... $ (89,881) $ 52,204
Ratio of Cumulative Gap to Total
Rate-Sensitive Assets.................. (22.48)% 13.06%
</TABLE>
- --------------------------------------------
(1) Includes securities available-for-sale.
3
<PAGE>
The preceding table was prepared utilizing certain assumptions
regarding prepayment and decay rates as determined by the OTS for savings
associations nationwide as of December 31, 1995. While management does not
believe that these assumptions will be materially different from Carver's actual
experience, the actual interest rate sensitivity of the Bank's assets and
liabilities could vary significantly from the information set forth in the table
due to market and other factors. The following assumptions were used: (i)
adjustable-rate first mortgage loans will prepay at the rate of 6% per year; and
(ii) fixed-rate first mortgage loans will prepay annually as follows:
<TABLE>
<CAPTION>
COUPON RATE ANNUAL PREPAYMENT RATE
----------- ----------------------
30-YEAR 15-YEAR 5-YEAR BALLOON
------- ------- --------------
<C> <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 Carver's portfolio contain conditions which restrict the periodic
change in interest rate.
The ratio of cumulative gap to total rate sensitivity assets for the
fiscal year changed from positive 28.14% at March 31, 1996 to negative 9.95% at
March 31, 1997. The adjustable rate assets accounts was 84.83% of the Bank's
total interest sensitive assets as at March 31, 1997.
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to Carver's
average interest-earning assets and average interest-bearing liabilities and
reflects the average yield on assets and the average cost of liabilities for the
years indicated. Such yields and costs are derived by dividing income or expense
by the average balances of assets or liabilities, respectively, for the periods
shown. Average balances are derived from average month-end balances, except for
federal funds which are derived from daily balances. Management does not believe
that the use of average monthly balances instead of average daily balances on
all other accounts has caused any material difference in the information
presented.
The table also presents information for the years indicated with
respect to the difference between the weighted average yield earned on
interest-earning assets and the weighted average rate paid on interest-bearing
4
<PAGE>
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.
5
<PAGE>
<TABLE>
<CAPTION>
AT MARCH 31,
1997 1997
---------------------------- -----------------------------------------------
AVERAGE AVERAGE
YIELD AVERAGE YIELD
BALANCE COST BALANCE INTEREST COST
------------- ------------- ---------------- ------------- ---------------
(DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
ASSETS:
Loans (1) $ 197,918 8.01% $ 94,346 $ 7,844 8.31%
Investment Securities (2) 58,440 5.72 85,040 4,742 5.25
Mortgage-Backed
Securities (3) 143,520 6.35 156,454 9,979 6.38
Federal Funds Sold -- -- 5,202 282 5.42
--------- ------- -------------- ----------- ----------
Total Interest-earning assets 399,878 7.08 341,042 22,847 6.70
-----------
Non Interest Earning 23,736 25,453
--------- --------------
Assets
Total Assets $ 423,614 $ 366,495
========= ==============
Interest-bearing Liabilities:
Deposits
DDA $ 7,677 -- $ 4,774 $ -- --
Now 18,579 1.89 19,909 311 1.56
Savings and Clubs 142,953 2.50 142,410 3,542 2.49
Money Market Accounts 21,078 3.15 20,398 658 3.23
Certificate of deposits 76,185 5.37 74,583 3,844 5.15
--------- ------- -------------- ----------- ----------
Total deposits 266,471 3.26 262,074 8,355 3.19
Borrowed money 121,101 6.17 66,403 4,128 6.22
--------- ------- -------------- ----------- ----------
Total interest-bearing
liabilities 387,572 4.17 328,477 12,483 3.80
-----------
Non-interest-bearing
liabilities 2,058 3,239
--------- -------------
Total liabilities 389,630 331,716
Stockholders' equity 34,254 34,779
--------- -------------
Total liabilities and
stockholders' equity $ 423,614 $ 366,495
========= =============
Net interest income $ 10,364
===========
Interest rate spread 2.91% 2.90%
======= ==========
Net interest margin 3.04%
==========
Ratio of average interest-
earning assets to
average interest-bearing
liabilities............. 1.04x
=========
<CAPTION>
YEAR ENDED MARCH 31,
1996 1995
--------------------------------------------- -------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD AVERAGE YIELD
BALANCE INTEREST COST BALANCE INTEREST COST
-------------- -------------- --------------- -------------- ------------- --------------
(DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans (1) $ 58,136 $ 4,800 8.26% $ 49,609 $ 4,092 8.25%
Investment Securities (2) 91,639 5,807 6.34 81,466 5,230 6.42
Mortgage-Backed
Securities (3) 188,136 12,217 6.49 179,963 10,159 5.65
Federal Funds Sold 11,949 705 5.90 5,738 269 4.69
------------ ----------- ---------- ------------ ---------- -----------
Total Interest-earning assets 349,860 23,529 6.73 316,776 19,750 6.23
----------- ----------
Non Interest Earning 13,977 15,369
------------ ------------
Assets
Total Assets $ 363,837 $ 332,145
============ ============
Interest-bearing Liabilities:
Deposits
DDA $ 4,761 $ -- -- $ 3,814 $ -- --
Now 15,539 314 2.02 13,904 226 1.62
Savings and Clubs 140,204 3,507 2.50 144,092 3,591 2.49
Money Market Accounts 18,770 599 3.19 19,135 541 2.83
Certificate of deposits 74,060 3,970 5.36 66,870 3,115 4.66
------------ ----------- ---------- ------------ ---------- ----------
Total deposits 253,334 8,390 3.31 247,815 7,473 3.02
Borrowed money 73,253 5,204 7.10 54,226 3,059 5.64
------------ ----------- ---------- ------------ ---------- ----------
Total interest-bearing
liabilities 326,587 13,594 4.16 302,041 10,532 3.49
----------- ----------
Non-interest-bearing
liabilities 2,230 6,710
------------ -----------
Total liabilities 328,817 308,750
Stockholders' equity 35,020 23,394
------------ -----------
Total liabilities and
stockholders' equity $ 363,837 $ 332,145
============ ===========
Net interest income $ 9,935 $ 9,218
=========== ==========
Interest rate spread 2.57% 2.74%
========== ==========
2.85% 2.91%
Net interest margin ========== ==========
6
<PAGE>
Ratio of average interest-
earning assets to
average interest-bearing
liabilities............. 1.07x 1.05x
========== ==========
</TABLE>
- -------------------------------------
(1) Includes non-accrual loans
(2) Includes FHLB stock and fair value of investments available for sale of
$2.1 million at March 31, 1997.
(3) Includes fair value of mortgage-backed securities available for sale of
$32.8 million at March 31, 1997.
7
<PAGE>
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,
--------------------
1997 VS. 1996 1996 VS. 1996
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------ ------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans .......................... $ 3,013 $ 31 $ 3,044 $ 704 $ 4 $ 708
Investment securities(1) ......... (335) (730) (1,065) 645 (68) 577
Mortgage-backed securities(1)
Securities ................... (2,024) (214) (2,238) 531 1,527 2,058
Federal funds sold ............. (441) 18 (423) 367 69 436
--------- --------- --------- --------- --------- ---------
Total interest-earning assets .. 213 (895) (682) 2,247 1,532 3,779
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
NOWs ............................. 4 (7) (3) 33 54 87
Savings and Clubs ................ 49 (14) 35 (97) 14 (83)
Money Market Accounts ............ 66 (7) 59 (11) 71 60
Certificate of Deposits .......... (92) 36 (56) 385 468 853
--------- --------- --------- --------- --------- ---------
Total Deposits ................... 27 8 35 310 607 917
Borrowed money ................. 638 438 1,076 1,352 793 2,145
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 665 446 1,111 1,662 1,400 3,062
--------- --------- --------- --------- --------- ---------
Net change in net interest income $ 878 $ (449) $ 429 $ 585 $ 132 $ 717
========= ========= ========= ========= ========= =========
</TABLE>
- ---------
(1) Includes securities available for sale.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND 1996
Carver's total assets increased by $56.0 million, or 15.23%, from
$367.6 million at March 31, 1996 to $423.6 million at March 31, 1997. The
increase in assets was primarily due to the restructuring of the investment and
loan portfolios and leveraging the Company's balance sheet. Carver's portfolio
of securities available for sale decreased by $30.5 million, or 26.68%, to $83.8
million at March 31, 1997, from $114.3 million at March 31, 1996. The reason for
this significant change in the portfolio was the sale of the Company's portfolio
of mutual funds (which was included in securities available for sale), in
accordance with the Company's restructuring program. Accordingly the balance of
this portfolio at year end consisted of mortgage-backed securities available for
sale. Mortgage-backed securities held to maturity decreased by $20.3 million, or
15.48%, to $110.8 million at March 31, 1997, from $131.1 million at March 31,
1996, primarily due to principal repayments. Investment securities held to
maturity decreased by $7.3 million, or 82.02%, to $1.6 million at March 31,
1997, from $8.9 million at March 31, 1996. This decrease in investment
securities was due primarily to the call back of certain bonds totaling $7.0
million. Carver's loans receivable increased to $197.9 million at March 31,
1997, as compared to $82.6 million at March 31, 1996. In fiscal year 1997,
8
<PAGE>
Carver Federal purchased $83.0 million of one- to four-family mortgage loans.
See "Restructuring of Balance Sheet."
Carver's total liabilities increased by $56.8 million, or 17.07%, from
$332.8 million at March 31, 1996, to $389.6 million at March 31, 1997, as a
result of an increase in borrowings as well as increased deposits. At March 31,
1997, the Bank's FHLB advances were $45.4 million, an increase of $20.0 million,
or 78.74%, as compared to advances of $25.4 million at March 31, 1996.
Securities sold under agreements to repurchase increased $27.3 million, or
58.09%, to $74.3 million at March 31, 1997, from $47.0 million at March 31,
1996. Carver used the proceeds from the principal payments of securities to
decrease its borrowings and thereby reduce the cost of funds.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
NET INCOME (LOSS).
For fiscal 1997, the Company experienced a net loss of $1.7 million, as
compared to net income of $753,000 for the year ended March 31, 1996. Earnings
for fiscal 1997 were adversely affected by three unusual events. During the
second quarter of fiscal 1997, Carver experienced a one time pre-tax assessment
of $1.6 million for the recapitalization of the Savings Association Insurance
Fund ("SAIF") pursuant to legislation which was enacted in September of 1996.
During the fourth quarter of fiscal 1997, Carver experienced a one time pre-tax
charge of $1.0 million as a result of the disposition of approximately $72
million of money market rate investment securities, or mutual funds. During the
fourth quarter of fiscal 1997, the Company added approximately $1.6 million to
its provision for loan losses. Carver's operating results for the year were also
impacted by an increase in net interest income and an increase in non-interest
expense.
NET INTEREST INCOME.
Net interest income before provision for loan losses for the year ended
March 31, 1997, increased $429,000, or 4.32%, to $10.3 million as compared to
$9.9 million for the year ended March 31, 1996 ("fiscal 1996"). Carver's
interest rate spread widened from 2.57% in fiscal 1996 to 2.90% in fiscal 1997,
and its interest margin increased from 2.85% in fiscal 1996, to 3.04% in fiscal
1997. These increases in interest rate spread and net interest margin resulted
in part from the decreased cost of deposits and borrowed money. These increases
also reflect the replacement of certain investment and mortgage-backed
securities with higher yielding loans. The ratio of the Company's average
interest-earning assets to interest-bearing liabilities decreased to 1.04x in
fiscal 1997, from 1.07x in fiscal 1996. The changes in this ratio primarily
reflects the increase in average interest earning assets.
INTEREST INCOME.
Carver's interest income for the fiscal year ended March 31, 1997,
decreased by $682,000, or 2.90%, to $22.8 million as compared to $23.5 million
for the fiscal year ended March 31, 1996. The decrease in interest income
resulted primarily from a 3 basis point decrease in the average yield on
interest-bearing assets, from 6.73% during fiscal year 1996, to 6.70% during
fiscal year 1997 and a decline of $8.8 million in the average balance of
interest-earning assets. The decline in average yield resulted from a lower
interest rate environment.
The decrease in interest income resulted in part from a $2.2 million,
or 18.31%, decrease in income from mortgage-backed securities, reflecting a
decrease of 11 basis points in the average yield to 6.38% in fiscal 1997 from
6.49% in fiscal 1996. The decrease in interest income also resulted in part from
a $1.1 million or
9
<PAGE>
an 18.33% decrease in interest income from investment securities, primarily due
to a decrease of 76 basis points in the average yield to 5.58% during fiscal
1997 from 6.34% during fiscal 1996. A decline in the general level of interest
rates lead these assets, which are primarily adjustable rate, to reprice to
lower yields during fiscal 1997. The decline in average yields resulted in a
decline in interest income. The impact of these declines in the average yields
was offset in part by a shift in Carver's interest earning assets. The shift was
reflected in the declines in the average balances of investment securities and
mortgage-backed securities which were offset by a significant increase in the
average balance of higher yielding mortgage loans. In addition, the average
yield on mortgage loans increased slightly from 8.26% for fiscal 1996 to 8.31%
during fiscal 1997.
INTEREST EXPENSE.
Total interest expense decreased by $1.1 million, or 8.18%, to $12.4
million for fiscal 1997, as compared to $13.5 million for fiscal 1996. The
decrease was primarily attributable to a decrease of 88 basis points in the
average cost of borrowings during the fiscal 1997 as well as a decrease in
average balance on borrowings, of $6.8 million, or 9.29%, to $66.4 million for
fiscal 1997, as compared to $73.2 million for fiscal 1996. The interest expense
on deposits for the year ended March 31, 1997, decreased nominally by $35,000,
or 0.42%, from $8.39 million for the year ended March 31, 1996 to $8.36 million
for the year ended March 31, 1997 despite an increase in average deposits of
$8.7 million, or 3.43% to $262.0 million for fiscal year 1997, as compared to
$253.3 million for fiscal 1996. The decrease in average balance was offset by a
12 basis point decrease in the average cost of deposits, from 3.31% for the year
ended March 31, 1996 to 3.19% for fiscal year 1997. The increase in deposits
costs is due principally to a decline in the average cost of certificate of
deposit accounts in the lower interest rate environment.
PROVISION FOR LOAN LOSSES.
The provision for loan losses increased by $1.6 million from $131,000,
for the year ended March 31, 1996, to $1.7 million for the year ended March 31,
1997. In addition, the decision to increase the provision reflects the increase
in non-performing loans from $3.3 million at March 31, 1996 to $6.4 million at
March 31, 1997, net charge-offs of $649,000 during fiscal 1997, compared to a
net recovery of $19,000 in fiscal 1996, and the increase in the loan portfolio
to $197.8 million at March 31, 1997 from $82.6 million at March 31, 1996. The
net effect of the increased provision and the charge-offs for fiscal 1997 was an
increase in the allowance for loan losses from $1.2 million at March 31, 1996,
to $2.2 million at March 31, 1997, and equaled 1.09% of the gross loan portfolio
compared to 1.42% at March 31, 1996. The decline in the ratio of allowances to
total loans is the result of the significant increase in gross loans at March
31, 1997. In determining its provision for loan losses, management establishes
specific loss allowances on identified problem loans and general loss allowance
on the remainder of the loan portfolio.
NON-INTEREST INCOME.
Non-interest income is composed of loan fees and service charges, gains
or (losses) from the sale of securities, and fee income for banking services.
Non-interest income for fiscal year 1997, decreased by $495,000, or 81.44%, to
$113,000, from $608,000 for fiscal year 1996. The decrease was due to loss of
$1.0 million on the sale of Carver's mutual fund investments, as part of the
asset restructuring during fiscal 1997 substantially offset by increased loan
and fee services, charges, and other fees loan fee and service charge income
increased by $116,000 or 149.33% due a substantial increase in loan obligations.
Fee income for banking services increased by $315,000 or 59.53%, primarily due
to an increase in the fees charged for selected services and income from
automatic teller machines.
10
<PAGE>
NON-INTEREST EXPENSE.
Non-interest expense increased by $2.7 million, or 30.37%, to $11.8
million for fiscal 1997, as compared to $9.1 million for fiscal year 1996. This
increase was primarily attributable to a one-time pre-tax assessment of $1.6
million for the recapitalization of SAIF, pursuant to the Funds Act. Excluding
the SAIF assessment, total non-interest expense would have been $10.2 million
for fiscal 1997. During the fiscal year 1997 Carver invested substantially in
improving its infrastructure. These investments encompassed upgrading
technology, increasing staff and expanding marketing efforts. These investments
increased operating expenses for the fiscal year 1997. Salaries and employee
benefits for fiscal year 1997 increased by $562,000, or 16.13%, to $4.0 million
from $3.4 million for fiscal year 1996. This increase was primarily due to a
general increase in staff, incentive compensation and ESOP expense. Equipment
expense for fiscal 1997 increased by $403,000, or 58.72%, to $1.1 million from
$686,000 in fiscal year 1996, reflecting the increased depreciation and
maintenance cost for new furniture, fixtures and computers for Carver's new
headquarters and certain branches. Net occupancy expense for fiscal year 1997
increased by $136,000, or 13.92%, to $1.1 million from $976,000 in fiscal year
1996. Increase in rent, cleaning expenses and depreciation of leasehold expenses
account for the increase in occupancy expense. These increases in non-interest
expenses were offset in part by decreased deposit insurance premiums from
$618,000 during fiscal 1996 to $482,000 for fiscal 1997. This $137,000 or 22.9%,
decrease was due to decreased assessment rates which became effective as of the
fourth quarter of fiscal 1997. See "Impact of Recent
Legislation--Recapitalization of the Savings Association Insurance Fund SAIF."
Legal expenses during fiscal year 1997, decreased by $194,000, or 55.26%, to
$157,000 from $351,000 during fiscal year 1996. The decrease in legal cost was
due mainly to capitalization of the costs incurred in connection with the
Reorganization of approximately $225,000. This amount is being depreciated on a
straight line basis over sixty months. Other non-interest expense increased
$314,000, or 16.33%, due to increases on a variety of miscellaneous expense
categories, including, among other items, travel and expense, employee training
and charitable contribution expenses.
INCOME TAX EXPENSE.
Income tax expense (benefit) for fiscal year 1997, was a benefit of
$1.2 million, compared to $606,000 for fiscal year 1996, due to the net loss for
fiscal 1977. The Company's effective tax rates were 42.3% and 44.59% for the
years then ended March 31, 1997 and 1996, respectively.
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 FASB 115. 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 additional 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 Federal purchased
$26.3 million of single family loans.
11
<PAGE>
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 offset by increased deposits. At March 31, 1996,
the Bank's FHLB 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 funds.
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, however, resulted primarily from an increase in non interest
expense. During fiscal year 1996, Carver Federal 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 cost 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.
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 1996 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 asset. 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 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
12
<PAGE>
from deposit growth. Interest income from loans increased $708,000, or 17.30%,
to $4.8 million during fiscal year 1996 as compared $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 reflecting the implementation of Carver Federal'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
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
increased $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 fund 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, 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 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 deposits 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 was no charge-off during fiscal year 1996. Recovery of charge-off 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 provision for loan
losses and the net recovery during fiscal 1996 was an increase of the Bank's
total allowance for loan losses increased 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.
13
<PAGE>
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 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 the 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
increase in management and lending department staff, incentive compensation and
ESOP expenses. 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 Federal retained during the fiscal year 1996 the services of a marketing
company to expand marketing effort 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 rate. 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. On January 2, 1996, the United
States District Court for Southern District of New York dismissed the class
action suit for lack of subject matter jurisdiction. The plaintiffs have filed
notice in United States Court of Appeals for second circuit of their intent to
appeal. 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 for fiscal year 1995.
LIQUIDITY AND CAPITAL RESOURCES
Carver Federal's primary sources of funds are deposits, FHLB advances,
and proceeds from principal and interest payments on loans, mortgage-backed
securities. While maturities and scheduled amortization of loans and investments
are predictable sources of funds, deposit flow and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition.
The Bank is required to maintain an average daily balance of liquid
assets and short term liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings as defined by OTS regulation. The minimum
required liquidity and short-term liquidity ratios are currently 5% and 1%,
respectively. The Bank's liquidity ratios were 21.86% and 33.00% at March 31,
1997 and 1996, respectively.
The Bank's most liquid assets are cash and short-term investments
including mutual funds. The level of these assets are dependent on the Bank's
operating, financing lending and investing activities during any
14
<PAGE>
given period. At March 31,1997, and 1996, assets qualifying for short-term
liquidity, including cash and short-term investments, totaled $83.2 million and
$85.8 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 1997, Carver purchased $84.7
million in whole loan mortgages, $57.5 million in investment securities and
mortgage-backed securities, and sold $83.3 million in investment securities and
mortgage-backed securities. During fiscal year 1996 the Bank purchased $26.3
million of whole loan mortgages and originated $13.4 million mortgage and other
loans. During fiscal year 1996 no securities were purchased. During fiscal years
1997 and 1996, the Bank received $38.3 million and $27.5 million, respectively,
in principal payments. During fiscal year 1997 there was a cash flow of $7
million due to call back of government agency bonds.
At March 31, 1997, the Bank had outstanding loan commitments of $13.4
million. Certificates of deposit which are scheduled to mature in one year or
less from March 31, 1997 totaled $48.6 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 a 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 as operating, liquidity and interest-rate risks. The OTS
recently finalized regulations that add 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%, a
ratio of Tier 1 capital (or core capital) to risk-weighted assets of less 4% or
a ratio of Tier 1 capital to adjusted total assets of less than 4% (or 3% if the
institution receives the highest rating under the OTS examination rating
system).
The Bank presently exceeds all capital requirements as currently
promulgated. At March 31, 1997, the Bank had tangible, core, and Tier 1 to
risk-weighted assets, and risk-based capital ratios of 6.95%, 7.18%, 6.97% and
17.94% respectively.
15
<PAGE>
The following table reconciles the Bank's stockholders equity at March
31, 1997, under generally accepted accounting principles to regulatory capital
requirements:
<TABLE>
<CAPTION>
REGULATORY CAPITAL REQUIREMENTS
-------------------------------
GAAP TANGIBLE TIER/CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Stockholders' Equity at March 31, 1997 (1) $ 30,050 $ 30,050 $ 30,050 $ 30,050
============== ============== ============== ==============
Add:
Unrealized loss on securities available for sale, net 443 443 443
General valuation allowances 0 0 1,426
Qualifying intangible assets 0 52 52
Deduct: (1,404) (1,404) (1,404)
Goodwill 0
Excess of net deferred tax assets 0 0
Asset required to be deducted (40) (40)
-------------- -------------- --------------
Regulatory capital 29,089 29,141 30,527
Minimum capital requirement 6,277 12,555 15,260
-------------- -------------- --------------
Regulatory capital excess $ 22,812 $ 16,586 $ 15,267
============= ============== ==============
</TABLE>
- --------------------------------------------
(1) Reflects Bank only.
The Bank presently exceeds all capital requirements as currently
promulgated. At March 31, 1997, the Bank had tangible, core, and Tier 1 to
risk-weighted assets, and risk-based capital ratios of 6.95%, 7.18%, 6.97% and
17.94%, respectively.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and accompanying notes appearing elsewhere
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of Carver's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a greater impact on
Carver's performance than do the effects of the general level of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
IMPACT OF RECENT LEGISLATION
SAIF RECAPITALIZATION. For the period from January 1, through September
30, 1996, there existed a disparity of 23 cents per $100 of deposits in the
minimum deposit insurance assessment rates applicable to deposits insured by the
Bank Insurance Fund ("BIF") and the higher assessment rates applicable to
deposits insured by the Savings Association Insurance Fund ("SAIF"). In response
to this disparity, on September 30, 1996 the Deposit Insurance Funds Act of 1996
(the "Funds Act") was enacted into law. The Funds Act authorized the Federal
Deposit Insurance Corporation ("FDIC") to impose a special assessment on all
financial institutions with SAIF-assessable deposits in the amount necessary to
recapitalize the SAIF. Pursuant to such authority, the FDIC imposed a special
assessment of 65.7 basis points per $100 of an institution's SAIFassessable
deposits held on March 31, 1995. The Company's special SAIF assessment of $1.6
million was charged to expense in September 1996 and paid in November 1996. In
view of the recapitalization of the SAIF, the FDIC reduced the assessment rates
for SAIF-assessable deposits. For the calendar year 1997, the SAIF assessment
rates range from 0 to 27 basis points, which is the same range of rates
applicable to the BIF. Prior to the SAIF recapitalization, all SAIF-insured
institutions were subject to a minimum assessment of 23 basis
16
<PAGE>
points. The Funds Act also expanded the assessment base to include BIF-insured,
as well as SAIF-insured, institutions to fund payments on the bonds issued by
the Financing Corporation ("FICO bonds") to recapitalize the now defunct Federal
Savings and Loan Insurance Corporation. In order to fund such interest payments,
a separate assessment of 1.3 basis points for BIF-assessable deposits and 6.48
basis points for SAIF-assessable deposits became effective on January 1, 1997.
The Funds Act requires that, until December 31, 1999 or such earlier date on
which the last savings association ceases to exist, the rates of assessment for
FICO bond payments imposed on BIF-assessable deposits will be one-fifth of the
rate imposed on SAIF-assessable deposits. As a result of the lower overall
assessment rates, the Company's non-interest expense for the year justify months
ended March 31, 1997 was reduced by $137,000 compared to the same period in
1996.
The Funds Act also provides for the merger of the BIF and SAIF on
January 1, 1999, with such merger being conditioned upon the prior elimination
of the thrift charter. The Funds Act required the Secretary of Treasury to
conduct a study of relevant factors with respect to the development of a common
charter for all insured depository institutions and the abolition of separate
charters for banks and thrifts and to report the Secretary's conclusions and the
findings to Congress. The Secretary of the Treasury has recommended that the
separate charter for thrifts be eliminated only if other legislation is adopted
that permits bank holding companies to engage in certain non-financial
activities. Absent legislation permitting such non-financial activity, the
Secretary of the Treasury recommended retention of the thrift charter. Other
proposed legislation has been introduced in Congress that would require thrift
institutions to convert to bank charters. The Secretary of the Treasury also
recommended that the BIF and the SAIF be merged irrespective of the elimination
of the thrift charter.
TAX BAD DEBT RESERVES. Federal tax law changes were enacted in August
1996 to eliminate the "thrift bad debt" method of calculating bad debt
deductions for tax years after 1995 and to require thrifts to recapture into
taxable income (over a six-year period) all bad debt reserves accumulated after
1987. Since the Bank's federal bad debt reserves approximated the 1987 base-year
amounts, this recapture requirement had no significant impact. The tax law
changes also provide that taxes associated with the recapture of pre-1988 bad
debt reserves would become payable under more limited circumstances than under
prior law. For example, such taxes would no longer be payable in the event that
the thrift charter is eliminated and the Bank is required to convert to a bank
charter.
Amendments to the New York state and New York City tax laws redesignate
the Bank's state and New York City bad debt reserves at December 31, 1995 as the
base-year amount and also provide for future additions to each of the base-year
reserve using the percentage-of-taxable-income method. This change eliminated
the excess New York state and New York City reserves for which the Company had
recognized a deferred tax liability. Management does not expect these changes to
have a significant impact on the Bank. Taxes associated with the recapture of
the and New York City state base-year reserve would still become payable under
various circumstances, including conversion to a bank charter or failure to meet
various thrift definition tests.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS No. 125 provides
consistent standards for distinguishing transfers of financial assets that are
sales from transactions that are secured borrowings. SFAS No. 125 is effective
for transfers occurring after December 31, 1996. In December 1996, the FASB
issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB State No. 125, an Amendment of FASB Statement No. 125." In February 1997,
the FASB issued SFAS No. 128, "Earnings per Share," which
17
<PAGE>
provides for the computation, presentation and disclosure requirements for
earnings per share. SFAS No. 128 simplifies the computation of earnings per
share for common stock and potential common stock. The adoption of SFAS Nos.
125, 127 and 128 is not expected to have a material effect on Carver Bancorp's
future financial condition, results of operations or reported results of
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
18
<PAGE>
Letterhead of Mitchell & Titus LLP
To The Board of Directors and Stockholders
Carver Bancorp Inc.,
We have audited the accompanying consolidated statements of financial condition
of Carver Bancorp Inc., (the "Company") and subsidiaries as of March 31, 1997
and 1996 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the years ended March 31, 1997 and 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the second
preceding paragraph present fairly, in all material respects, the financial
position of Carver Bancorp and Subsidiaries as of March 31, 1997 and 1996, and
the results of their operations and cash flows for the years ended March 31,
1997 and 1996, in conformity with generally accepted accounting principles.
/s/ Mitchell & Titus LLP
May 30, 1997
New York, New York.
19
<PAGE>
Letterhead of Radics & Co., LLC
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders
Carver Federal Savings Bank
We have audited the accompanying consolidated statements of income, changes in
stockholders' equity and cash flows of Carver Federal Savings Bank (the "Bank")
and subsidiary for the year 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
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
provides 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 results of
operations and cash flows of Carver Federal Savings Bank and subsidiaries for
the year ended March 31, 1995, in conformity with generally accepted accounting
principles.
/s/ Radics & Co., LLC
(formerly Stephen P. Radics & Co.)
May 12, 1995
Pine Brook, New Jersey
20
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
AS OF AS OF
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 4,230,757 $ 3,225,950
Federal funds sold -- 6,800,000
--------------- ---------------
Total cash and cash equivalents (Notes 1 and 19) 4,230,757 10,025,950
Securities available for sale (Notes 1, 3, 13 and 19) 83,892,617 114,328,245
Investment securities held to maturity, net (estimated fair value of $1,673,000 in 1997
and $8,814,000 in 1996) (Notes 1, 4, 13, 18 and 19) 1,675,181 8,937,075
Mortgage-backed securities held to maturity, net (estimated fair value of $107,719,000 in
1997 and $129,813,000 in 1996) (Notes 1, 5, 12, 13, 18 and 19) 110,852,668 131,105,405
Loans receivable, net (Notes 1, 6, 13 and 19) 197,917,673 82,608,065
Real estate owned, net (Note 1) 82,198 314,261
Property and equipment, net (Notes 1 and 8) 11,342,678 9,956,981
Federal Home Loan Bank of New York stock, at cost (Note 13) 5,535,000 3,120,000
Accrued interest receivable, net (Notes 1, 9 and 19) 2,978,365 2,688,199
Excess of cost over net assets acquired, net (Notes 1 and 10) 1,456,000 1,669,082
Other assets (Notes 14 and 16) 3,650,366 2,904,078
--------------- ---------------
Total assets $ 423,613,503 $ 367,657,341
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Notes 11 and 19) $ 266,471,487 $ 256,951,883
Securities sold under agreements to repurchase (Notes 12 and 19) 74,335,000 47,000,000
Advances from Federal Home Loan Bank of New York (Notes 13 and 19) 45,400,000 25,400,000
Other borrowed money (Notes 17 and 19) 1,365,990 1,548,122
Advance payments by borrowers for taxes and insurance 670,502 483,055
Other liabilities (Notes 14 and 16) 1,386,802 1,509,500
--------------- ---------------
Total liabilities 389,629,781 332,892,560
--------------- ---------------
Commitments and contingencies (Notes 18 and 19) --
STOCKHOLDERS' EQUITY: (Note 15)
Preferred stock, $0.01 par value per share; 1,000,000 authorized; none issued --
Common stock; $0.01 par value per share; 5,000,000 authorized; 2,314,275
issued and outstanding (Note 2) 23,144 23,144
Additional paid-in capital (Note 2) 21,410,167 21,436,235
Retained earnings - substantially restricted (Notes 2 and 14) 14,359,060 16,098,728
Common stock acquired by Employee Stock Ownership Plan ("ESOP") (Notes 2 and 17) (1,365,990) (1,548,122)
Unrealized (loss) on securities available for sale, net (442,659) (1,245,204)
--------------- ---------------
Total stockholders' equity 33,983,722 34,764,781
--------------- ---------------
Total liabilities and stockholders' equity $ 423,613,503 $ 367,657,341
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements
21
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996 1995
---------------------- -------------------- -------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans (Note 1) $7,843,822 $4,800,482 $4,092,330
Mortgage-backed securities 9,978,660 12,217,281 10,158,697
Debt and equity securities 4,416,362 5,415,806 4,983,129
Other interest-earning assets 607,903 1,095,336 516,045
---------- ---------- ----------
Total interest income 22,846,747 23,528,905 19,750,201
---------- ---------- ----------
Interest expense:
Deposits (Note 11) 8,355,168 8,390,201 7,472,812
Advances and other borrowed money 4,127,743 5,204,068 3,058,828
---------- ---------- ----------
Total interest expense 12,482,911 13,594,269 10,531,640
---------- ---------- ----------
Net interest income 10,363,836 9,934,636 9,218,561
Provision for loan losses (Notes 1 and 6) 1,689,508 130,892 333,697
---------- ---------- ----------
Net interest income after provision for loan losses 8,674,328 9,803,744 8,884,864
---------- ---------- ----------
Non-interest income:
Loan fees and service charges 194,689 78,084 121,569
Write-down of investment securities -- -- (37,139)
Gain (Loss) on sale of securities held for sale (Notes 4 and 5) (927,093) -- --
Other 845,287 529,873 491,157
---------- ---------- ----------
Total non-interest income 112,883 607,957 575,587
---------- ---------- ----------
Non-interest expenses:
Salaries and employee benefits (Notes 16 and 17) 4,044,718 3,482,928 3,075,041
Net occupancy expense (Notes 1 and 18) 1,111,602 975,795 853,025
Equipment (Note 1) 1,088,258 685,657 707,057
Loss on foreclosed real estate (Note 1) 37,995 76,582 34,008
Advertising 172,795 168,084 63,534
Federal insurance premium 481,646 618,169 731,141
Amortization of intangibles (Note 1) 213,073 229,898 241,915
Legal expenses 157,023 350,921 *
Bank charges 341,272 308,391 239,207
Security Service 286,036 234,856 182,907
SAIF assessment 1,632,290 -- --
Provision for loss on other assets -- -- 255,580
Other 2,235,249 1,921,462 1,557,687
---------- ---------- ----------
Total non-interest expenses 11,801,957 9,052,743 7,941,102
---------- ---------- ----------
Income (loss) before income taxes (3,014,746) 1,358,958 1,519,349
Income taxes (Notes 1 and 14) (1,275,078) 605,874 674,297
---------- ---------- ----------
Net income (loss) $(1,739,668) $ 753,084 $ 845,052
=========== ========== ==========
Net income (loss) per common share $ (0.80) $ 0.35 $ 0.40(1)
=========== ========== ==========
Weighted average number of shares outstanding (Note 1) 2,169,276 2,156,346 2,136,615
</TABLE>
- --------------------------------------------
(1) Carver Federal Savings Bank converted to stock form on October 24,
1994. Historical net income per common share from October 24, 1994
(date of the Bank's stock conversion) to March 31, 1995 was $0.17.
* In year ended March 31, 1995, legal expenses included in the "Other"
Category.
See Notes to Consolidated Financial Statements
22
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
RETAINED COMMON (LOSS) ON
ADDITIONAL EARNINGS STOCK SECURITIES
COMMON PAID-IN SUBSTANTIALLY ACQUIRED AVAILABLE
STOCK CAPITAL RESTRICTED BY ESOP FOR SALE NET
----- ------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C>
Balance - March 31, 1994 $ -- $ -- $ 14,500,592 $ -- $ (330,765)
Net income for the year ended
March 31, 1995 -- -- 845,052 -- --
Net proceeds from common stock
issued in stock conversion 23,144 21,495,847 -- -- --
Acquisition of common stock by
ESOP -- -- -- (1,821,320) --
Allocation of ESOP stock -- (30,775) -- 91,066 --
Decrease in unrealized (loss) on
securities available for sale, net -- -- -- -- 28,320
------------ ------------ ------------ ------------ ------------
Balance - March 31, 1995 23,144 21,465,072 15,345,644 (1,730,254) (302,455)
Net income for the year ended -- -- 753,084 -- --
March 31, 1996
Allocation of ESOP stock -- (28,837) -- 182,132 --
Increase in unrealized (loss) in
securities available for sale, net -- -- -- -- (942,759)
------------ ------------ ------------ ------------ ------------
Balance - March 31, 1996 23,144 21,436,235 16,098,728 (1,548,122) (1,245,204)
Net loss for the year ended
March 31, 1997 -- -- (1,739,668) -- --
Allocation of ESOP Stock -- (26,068) -- 182,132 --
Decrease in unrealized, loss in
securities available for sale, net -- -- -- -- 802,545
------------ ------------ ------------ ------------ ------------
$ 23,144 $ 21,410,167 $ 14,359,060 $ (1,365,990) $ (442,659)
============ ============ ============ ============= =============
<CAPTION>
TOTAL
-----
<S> <C>
Balance - March 31, 1994 $ 14,169,827
Net income for the year ended
March 31, 1995 845,052
Net proceeds from common stock
issued in stock conversion 21,518,991
Acquisition of common stock by
ESOP (1,821,320)
Allocation of ESOP stock 60,291
Decrease in unrealized (loss) on
securities available for sale, net 28,320
------------
Balance - March 31, 1995 34,801,161
Net income for the year ended 753,084
March 31, 1996
Allocation of ESOP stock 153,295
Increase in unrealized (loss) in
securities available for sale, net (942,759)
------------
Balance - March 31, 1996 34,764,781
Net loss for the year ended
March 31, 1997 (1,739,668)
Allocation of ESOP Stock 156,064
Decrease in unrealized, loss in
securities available for sale, net 802,545
------------
$ 33,983,722
============
</TABLE>
See Notes to Consolidated Financial Statements
23
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income .......................................................... $ (1,739,668) $ 753,084 $ 845,052
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation and amortization of premises and equipment .................... 664,750 301,918 222,699
Amortization of intangibles ................................................ 213,082 229,888 241,915
Other amortization and accretion, net ...................................... 1,143,308 651,014 1,130,807
Provision for loan losses .................................................. 1,689,508 130,892 333,697
Provision for losses on other assets ....................................... -- -- 255,580
Gain from sale of real estate owned ........................................ (26,229) -- --
Proceeds from sale of loans ................................................ -- 1,948,143 3,940,215
Net loss on sale of securities available for sale .......................... 927,093 -- --
Write-down of equity security .............................................. -- -- 37,139
Deferred income taxes ...................................................... (387,456) (380,541) (75,869)
Allocation of ESOP stock ................................................... 156,064 153,295 60,291
(Increase) decrease in accrued interest receivable ......................... (290,166) 19,310 (549,524)
Decrease (increase) in refundable income taxes ............................. (286,000) 238,157 651,369
(Increase) decrease in other assets ........................................ (1,493,435) (72,455) (1,606,419)
Increase (decrease) in other liabilities ................................... (510,154) 731,784 234,420
------------ ------------ ------------
Net cash provided by operating activities .................................. 60,697 4,704,489 5,721,372
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments on investments held to maturity ....................... 311,894 96,335 --
Principal repayments on securities available for sale ...................... 5,357,790 2,965,441 1,133,751
Purchases of securities available for sale ................................. (57,508,308) -- (23,022,923)
Proceeds from sales and call of securities held for sale ................... 84,052,091 9,000,000 --
Purchase of investment securities held to maturity ......................... (50,000) -- (9,011,875)
Proceeds from maturities and calls of investment securities held to maturity 7,000,000 2,971,005
Principal repayment of mortgage-backed securities held to maturity ......... 19,302,028 23,663,432 22,254,234
Purchase of mortgage-backed securities held to maturity ................... -- -- (50,436,456)
Purchase of loans .......................................................... (84,708,587) (26,911,379) --
Net change in loans receivable ............................................. (32,265,562) (9,357,887) (2,031,338)
Proceeds from sale of real estate owned .................................... 258,292 -- 139,614
Additions to premises and equipment ........................................ (2,050,447) (5,930,518) (1,594,145)
(Purchase) Federal Home Loan Bank stock ................................... (2,415,000) -- (1,287,100)
------------ ------------ ------------
Net cash (used in) provided by investing activities ........................ (62,715,809) (6,474,576) (60,885,233)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ........................................ 9,519,604 8,505,919 (4,027,784)
Net increase (decrease) in short-term borrowings ........................... 58,335,000 (19,188,000) 41,658,000
Proceeds of long-term borrowings .......................................... -- 11,000,000 20,821,320
Repayment of long-term borrowings .......................................... (11,000,000) -- (20,091,066)
Repayment of other borrowed money .......................................... (182,132) -- --
Net proceeds from issuance of common stock ................................. -- -- 21,518,991
Acquisition of common stock by ESOP ........................................ -- -- (1,821,320)
Increase (Decrease) in advance payments by borrowers for taxes and insurance 187,447 (339,687) (129,938)
------------ ------------ ------------
Net cash provided by (used in) financing activities ........................ 56,859,919 (21,768) 57,928,203
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ....................... (5,795,193) (1,791,855) 2,764,342
Cash and cash equivalents - beginning ...................................... 10,025,950 11,817,805 9,053,463
------------ ------------ ============
Cash and cash equivalents -- ending ....................................... $ 4,230,757 $ 10,025,950 $ 11,817,805
============ ============ ============
Supplemental disclosure of non-cash activities:
Transfers of mortgage-backed securities ................................... $ -- 25,891,771 $ --
============
Unrealized Gain (loss) on securities available for sale:
Unrealized Gain (loss) ..................................................... 835,206 (1,778,783) 53,435
Deferred income taxes ...................................................... (397,547) 836,033 (25,115)
------------ ------------
$ 442,659 $ (942,760) $ 28,320
============ ============ ============
Loans receivable transferred to real estate owned .......................... $ 32,729 $ -- $ 252,292
============ ------------ ============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest ................................................................... $ 12,361,162 $ 13,344,140 $ 10,342,385
============ ============ ============
Federal, state and city income taxes ....................................... $ 286,000 $ 449,197 $ 98,795
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
24
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Carver Bancorp, Inc. ("Carver" or the "Holding Company") is a bank
holding company that was incorporated in May 1996 and whose principal wholly
owned subsidiary is Carver Federal Savings Bank (the "Bank"). CFSB Realty Corp.
and CFSB Credit Corp. are wholly owned subsidiaries of the Bank. The Bank was
chartered in 1948 and began operations in 1949 as Carver Federal Savings and
Loan Association, a federally chartered mutual savings and loan association. The
Bank converted to a federal savings bank in 1986 and changed its name at that
time. On October 24, 1994, Carver Federal Savings Bank converted from mutual
stock form and issued 2,314,375 shares of its common stock, par value $0.01 per
share. In connection with an agreement and plan of reorganization whereby the
Bank would become a wholly owned subsidiary of Carver, the Bank incorporated
Carver on May 9, 1996 under the General Corporation Law of the State of
Delaware. Pursuant to the Reorganization, each outstanding share of the
outstanding common stock of the Bank was converted on a one-to-one basis for
Carver's common stock, except for 100 shares with regard to which a stockholder
of the Bank exercised dissenters' rights of appraisal. Accordingly, 2,314,275
shares of Carver's common stock are presently issued and outstanding.
NATURE OF OPERATIONS
Carver's banking subsidiary's principal business consists of attracting
passbook and other savings accounts through its branch offices and investing
those funds in mortgage loans and other investments permitted federal savings
banks. Carver's banking subsidiary has seven branches located throughout the
City of New York that primarily serves the communities in which they operate.
BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Carver,
the Bank and its wholly owned subsidiaries, CFSB Realty Corp. and CFSB Credit
Corp. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
consolidated statement of financial condition and revenues and expenses for the
period then ended. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
changes in the near-term relate to prepayment assumptions on mortgage-backed
securities, the determination of the allowance for loan losses and the valuation
of real estate owned.
Management believes that prepayment assumptions on mortgage-backed
securities are appropriate, the allowance for loan losses is adequate and real
estate owned is properly valued. While management uses available information to
recognize losses on loans and real estate owned, future additions to the
allowance for loan losses or future write downs of real estate owned may be
necessary based on changes in economic conditions in Carver's market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Carver's allowance for loan losses and
real estate owned valuations. Such agencies may require Carver
25
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
to recognize additions to the allowance for loan losses or additional write
downs of real estate owned based on their judgments about information available
to them at the time of their examination.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and amounts due from depository
institutions and federal funds sold. Generally, federal funds sold are sold for
one-day periods.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
When purchased, securities are classified in either the investments
held to maturity portfolio or the securities available for sale portfolio.
Securities can be classified as held to maturity and carried at amortized cost
only if the reporting entity has a positive intent and ability to hold those
securities to maturity. If not classified as held to maturity, such securities
must be classified as securities available for sale. Unrealized holding gains or
losses for securities available for sale are to be excluded from earnings and
reported net of deferred income taxes as a separate component of retained
earnings.
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 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 amortized over the term of the
contract on the straight-line basis. Contractual payments earned, which totaled
$102,500 for the year ended March 31, 1997, are treated as yield adjustments on
the hedged securities. At March 31, 1997, the three-month LIBOR stood at
5.77344%.
Investment and mortgage-backed securities held to maturity are carried
at cost, adjusted for the amortization of premiums and the accretion of
discounts using the level-yield method over the remaining period until maturity.
Gains or losses on sales of securities of all classifications are
recognized on the specific identification method.
LOANS RECEIVABLE
Loans receivable are carried at unpaid principal balances plus
unamortized premiums, less the allowance for loan losses and deferred loan fees
and discounts.
Carver defers loan origination fees and certain direct loan origination
costs and accretes such amounts as an adjustment of yield over the contractual
lives of the related loans by use of the interest method. Premiums and discounts
on loans purchased are amortized and accreted, respectively, as an adjustment of
yield over the contractual lives of the related loans by use of the interest
method.
Loans are placed on non-accrual status when they are past due three
months or more as to contractual obligations. When a loan is placed on
non-accrual status, any interest accrued but not received is reversed against
interest income. A non-accrual loan is restored to accrual status when principal
and interest payments become less than three months past due.
26
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
A loan is considered to be impaired, as defined by FAS No. 114,
"Accounting by Creditors for Impairment of a Loan," when it is probable that
Carver will be unable to collect all principal and interest amounts due
according to the contractual terms of the loan agreement. Carver tests loans
covered under FAS No. 114 for impairment if they are on nonaccrual status or
have been restructured. Consumer credit nonaccrual loans are not tested for
impairment because they are included in large groups of smaller-balance
homogeneous loans that, by definition along with leases, are excluded from the
scope of FAS No. 114. Impaired loans are required to be measured based upon the
present value of expected future cash flows, discounted at the loan's initial
effective interest rate, or at the loan's market price or fair value of the
collateral if the loan is collateral dependent. If the loan valuation is less
than the recorded value of the loan, an impairment reserve must be established
for the difference. The impairment reserve is established by either an
allocation of the reserve for credit losses or by a provision for credit losses,
depending on the adequacy of the reserve for credit losses. Impairment reserves
are not needed when interest payments have been applied to reduce principal, or
when credit losses have been recorded so that the recorded investment in an
impaired loan is less than the loan valuation.
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level considered
adequate to absorb future loan losses. Management, in determining the allowance
for loan losses, considers the risks inherent in its loan portfolio and changes
in the nature and volume of its loan activities, along with the general economic
and real estate market conditions.
Carver maintains a loan review system which allows for a periodic
review of its loan portfolio and the early identification of potential problem
loans. Such system takes into consideration, among other things, delinquency
status, size of loans, type of collateral and financial condition of the
borrowers. Loan loss allowances are established for problem loans based on a
review of such information and/or appraisals of the underlying collateral. On
the remainder of its loan portfolio, loan loss allowances are based upon a
combination of factors including, but not limited to, actual loan loss
experience, composition of loan portfolio, current economic conditions and
management's judgment. Although management believes that adequate loan loss
allowances have been established, actual losses are dependent upon future events
and, as such, further additions to the level of the loan loss allowance may be
necessary in the future.
CONCENTRATION OF RISK
Real estate and lending activities are concentrated in real estate and
loans secured by real estate a substantial portion of which is located in the
State of New York.
27
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
PREMISES AND EQUIPMENT
Premises and equipment are comprised of land and construction in
progress, at cost, and buildings, building improvements, furnishings and
equipment and leasehold improvements, at cost, less accumulated depreciation and
amortization. Depreciation and amortization charges are computed using the
straight-line method over the following estimated useful lives:
Buildings and improvements 10 to 50 years
Furnishings and equipment 3 to 10 years
Leasehold improvements The lesser of useful life or term
of lease
Significant renewals and betterments are charged to the property and
equipment account. Maintenance and repairs are charged to expense in the year
incurred.
REAL ESTATE OWNED
Real estate acquired by foreclosure or deed in lieu of foreclosure is
recorded at the lower of cost or fair value at the date of acquisition and
thereafter carried at the lower of cost or fair value less estimated selling
costs. The amounts ultimately recoverable from real estate owned could differ
from the net carrying value of these properties because of economic conditions
and the current softness in the local real estate market.
Costs incurred to improve properties or get them ready for sale are
capitalized. Revenues and expenses related to the holding and operating of
properties are recognized in operations as earned or incurred. Gain or loss on
sale of properties is recognized as incurred.
EXCESS OF COST OVER NET ASSETS ACQUIRED
In connection with the acquisition of two branches, core deposit
premiums paid and other capitalized acquisition costs are being amortized to
expense over periods from five to fifteen years using the straight-line method.
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 interest-sensitive liabilities compared to the
generally longer duration of interest-sensitive assets. In a rising rate
environment, liabilities will reprice faster than assets, thereby reducing the
market value of long-term assets and net interest income. For this reason,
management regularly monitors the maturity structure of the assets and
liabilities in order to measure its level of interest-rate risk and plan for
future volatility.
INCOME TAXES
Federal, state and city income taxes have been provided on the basis of
reported income. The amounts reflected on the tax returns differ from these
provisions due principally to temporary differences in the treatment of certain
items of income and expense for financial statement and income tax reporting
purposes.
28
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Deferred income taxes in the consolidated statement of condition are
adjusted each year to reflect the cumulative taxable and deductible temporary
differences and net operating loss and tax credit carryforwards at the then
existing income tax rates.
NET INCOME PER COMMON SHARE
Net income per common share for the years ended March 31, 1997 and 1996
is based on net income for the entire year dividend by weighted average shares
outstanding during the year. However, the pro forma net income per share for the
fiscal 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 year. Historical net income per share is calculated based on prorated
earnings for October 24, 1994 (the date of the Bank's conversion) to March 31,
1995. For the purpose of these calculations, unreleased ESOP shares are not
considered to be outstanding.
NOTE 2. CONVERSION TO STOCK FORM OF OWNERSHIP AND
REORGANIZATION INTO A HOLDING COMPANY
On October 24, 1994, the Bank issued an initial offering of 2,314,375
shares of common stock (par value $0.01) at a price of $10 per share resulting
in net proceeds of $21,519,000. As part of the initial public offering and in
order to grant priority to eligible depositors, the Bank established a
liquidation account at the time of conversion, in an amount equal to the surplus
and reserves of the Bank at September 30, 1994. In the unlikely event of a
complete liquidation of the Bank (and only in such event), eligible depositors
who continue to maintain accounts shall be entitled to receive a distribution
from the liquidation account. The total amount of the liquidation account may be
decreased if the balances of eligible deposits decreased as measured on the
annual determination dates. The balance of the liquidation account was
approximately $5,763,000, and $6,800,000 at March 31, 1997 and 1996,
respectively. On October 17, 1996, the Bank completed a reorganization into a
holding company structure (the "Reorganization) and became the wholly-owned
subsidiary of Carver Bancorp., Inc., a savings and loan holding company.
Pursuant to an Agreement and Plan of Reorganization, dated May 21, 1996, each
share of the Bank's outstanding common stock was exchanged for one share of the
Holding Company's common stock. In connection with the Reorganization, a
shareholder of the Bank exercised common stock were purchased and 100 shares of
the Bank's common stock were purchased from such shareholder in the fourth
fiscal quarter of 1997. Accordingly 2,314,275 shares of the Company's common
stock remain outstanding. The Bank's shareholder approved the Reorganization at
the Bank's annual meeting of shareholders held on July 29, 1996. As a result of
the Reorganization, the Bank will not be permitted to pay dividends to the
Holding Company on its capital stock if the effect thereof would cause its net
worth to be reduced below either: (i) the amount required for the liquidation
account or (ii) the amount required for the Bank to comply with applicable
minimum regulatory capital requirements.
29
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 3. SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
March 31, 1997
----------------------------------------------------------------------------------
Carrying Gross Unrealized Estimated
Value Gains Losses Fair Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 33,469,963 $ -- $ 845,206 $ 32,624,757
Equity securities:
Mutual funds 49,108,306 -- -- 49,108,306
Common and preferred stock 2,049,898 -- -- 2,049,898
Interest rate agreement for a notional
amount of $5,000,000 29,750 -- -- 29,750
Interest rate agreement for a notional
amount of $20,000,000 79,906 -- -- 79,906
--------------- --------------- --------------- ---------------
$ 84,737,823 $ -- $ 845,206 $ 83,892,617
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
March 31, 1996
----------------------------------------------------------------------------------
Carrying Gross Unrealized Estimated
Value Gains Losses Fair Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Mortgage--backed securities $ 42,520,115 $ -- $ 612,117 $ 41,907,998
Equity securities: -- -- -- --
Mutual funds 71,935,268 -- 1,427,439 70,507,829
Common and preferred stock 2,039,898 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>
NOTE 4. INVESTMENT SECURITIES HELD TO MATURITY, NET
<TABLE>
<CAPTION>
March 31, 1997
---------------------------------------------------------------------------------
Carrying Gross Unrealized Estimated
Value Gains Losses Fair Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. Government (including agencies):
After one year through five years $ 1,675, 181 $ -- $ 2,094 $ 1,673,087
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
March 31, 1996
---------------------------------------------------------------------------------
Carrying Gross Unrealized 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>
30
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
There were no sales of securities held to maturity during the years
ended March 31,1997, 1996 and 1995. Proceeds from calls of investment securities
held to maturity during the years ended March 31, 1997, 1996 and 1995 were
$7,000,000, $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, 1997 were $83,265,000, resulting in gross gains of $75,000
and gross losses of $1,002,000. There were no sales of investment securities
held for sale during the years ended March 31, 1996 and 1995.
NOTE 5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY, NET
<TABLE>
<CAPTION>
March 31, 1997
----------------------------------------------------------------------------------
Principal Unamortized Unearned Carrying
Balance Premiums Discounts Value
------- -------- --------- -----
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 11,797,496 $ 40 $ 108,430 $ 11,689,106
Federal Home Loan Mortgage Corporation 43,789,880 1,132,946 154,798 44,768,028
Federal National Mortgage Association 41,007,256 603,316 144,713 41,465,859
Small Business Administration 2,263,969 -- 15,251 2,248,718
Collateralized mortgage obligations: -- -- -- --
Resolution Trust Corporation 8,240,457 113,289 -- 8,353,746
Federal Home Loan Mortgage Corporation 1,690,298 -- -- 1,690,298
Others 629,118 7,795 636,913
--------------- --------------- --------------- ---------------
$ 109,418,474 $ 1,857,386 $423,192 $ 110,852,668
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
March 31, 1996
----------------------------------------------------------------------------------
Principal Unamortized Unearned Carrying
Balance Premiums Discounts Value
------- -------- --------- -----
<S> <C> <C> <C> <C>
Government National Mortgage $ 13,427,764 $ 266 $ 131,405 $ 13,296,625
Association
Federal Home Loan Mortgage 54,138,973 1,486,330 204,821 55,420,482
Corporation
Federal National Mortgage Association 45,768,352 667,099 189,472 46,245,979
Small Business Administration 2,621,569 -- 18,569 2,603,000
Collateralized mortgage obligations:
Resolution Trust Corporation 10,948,712 188,362 -- 11,137,074
Federal Home Loan Mortgage 1,703,274 -- -- 1,703,274
Corporation
Others 697,539 1,432 -- 698,971
------------- ------------- ------------- -------------
$ 129,306,183 $ 2,343,489 $ 544,267 $ 131,105,405
============= ============= ============= =============
</TABLE>
31
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
A summary of gross unrealized gains and losses and estimated fair value
follows:
<TABLE>
<CAPTION>
March 31, 1997
--------------
Carrying Gross Unrealized Estimated
Value Gains Losses Fair Value
----- ----- ------ ----------
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 11,689,106 $ 149,141 $ 475,567 $ 11,362,680
Federal Home Loan Mortgage Corporation 44,768,028 -- 937,810 43,830,218
Federal National Mortgage Association 41,465,859 -- 1,480,513 39,985,346
Small Business Administration 2,248,718 38,806 -- 2,287,524
Collateralized mortgage obligations:
Resolution Trust Corporation 8,353,746 268,352
8,085,394
Federal Home Loan Mortgage Corporation 1,690,298 -- 29,581 1,660,717
Others 636,913 -- 7,795 629,118
------------ ------------ ------------ ------------
$110,852,668 $ 187,947 $ 3,199,618 $107,840,997
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
Carrying Gross Unrealized Estimated
Value Gains Losses Fair Value
----- ----- ------ ----------
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 13,296,625 $ 176,200 $ 390,909 $ 13,081,916
Federal Home Loan Mortgage Corporation 55,420,482 699,524 513,067 55,606,939
Federal National Mortgage Association 46,245,979 98,910 1,127,575 45,217,314
Small Business Administration 2,603,000 66,086 -- 2,669,086
Collateralized mortgage obligations:
Resolution Trust Corporation 11,137,074 -- 273,031 10,864,043
Federal Home Loan Mortgage Corporation 1,703,274 -- 17,032 1,686,242
Others 698,971 -- 11,825 687,146
------------ ------------ ------------ ------------
$131,105,405 $ 1,040,720 $ 2,333,439 $129,812,686
============ ============ ============ ============
</TABLE>
The following is a schedule of final maturities as of March 31,1997:
Carrying Estimated
Value Fair Value
----- ----------
(In Thousands)
After one through five years $ 41,425 $ 40,941
After five through ten years 69,428 66,900
After ten years -- --
-------- --------
$110,853 $107,841
======== ========
There were no sales of mortgage-backed securities held to maturity during the
years ended March 31,1997, 1996 and 1995.
32
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 6. LOANS RECEIVABLE, NET
Year Ended March 31,
----------------------
1997 1996
---- ----
Real estate mortgage:
One-to four family $139,961,350 $ 59,466,442
Multi-family 19,935,991 2,490,355
Non-residential 22,415,427 11,138,426
Equity and second mortgages 586,300 364,085
------------ ------------
182,899,068 73,459,308
------------ ------------
Agency for International Development -- 9,441
------------ ------------
Real estate construction 14,386,137 6,965,301
------------ ------------
Commercial loans 3,192,251 1,090,941
------------ ------------
Consumer:
Passbook or certificate 954,635 1,011,371
Student education 974,892 1,094,351
Other 3,600,859 931,319
------------ ------------
5,530,386 3,037,041
------------ ------------
Total loans 206,007,842 84,562,032
------------ ------------
Add: Premium on loans 1,804,938 882,138
Less: Loans in process 6,854,591 1,406,150
Allowance for loan losses 2,245,746 1,205,496
Deferred loan fees and discounts 794,770 224,459
------------ ------------
9,895,107 2,836,105
------------ ------------
$197,917,673 $ 82,608,065
============ ============
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance-beginning $ 1,204,496 $ 1,074,604 $ 1,267,676
Provision charged to operations 1,689,508 130,892 333,697
Recoveries of amounts previously charged off 49,940 -- --
Loans charged off (699,198) - (526,769)
--------------- -------------- -------------
Balance-ending $ 2,245,746 $ 1,205,496 $ 1,074,604
============== ============== =============
</TABLE>
33
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Non-accrual loans consist of loans for which the accrual of interest
has been discounted as a result of such loans becoming three months or more
delinquent as to principal and/or interest payments. Interest income on
non-accrual loans is recorded when received. Restructured loans consist of loans
where borrowers have been granted concessions in regards to the terms of their
loans due to financial or other difficulties which rendered them unable to
service their loans under the original contractual terms. Such loans are
performing in accordance with their restructured terms. The balances of
non-accrual and restructured loans and their impact in interest income are as
follows:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Non-accrual loans $ 2,872 $ 2,034 $ 1,532
Restructured loans 413 - 1,468
-------------- ------------- --------------
$ 3,285 $ 2,034 $ 3,000
============== ============= ==============
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Interest income which would have been recorded had loans
performed in accordance with original contracts $ 393 $ 138 $ 298
Interest income received 147 26 77
------------- ------------- -------------
Interest income lost $ 246 $ 112 $ 221
============= ============= =============
</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:
Year Ended March 31,
--------------------
1997 1996
---- ----
(In Thousands)
Balance-beginning $ 428,429 $ 451,567
Loans originated 235,200 --
Repayments (14,022) (23,138)
-------------- -------------
Balance-ending $ 649,607 $ 428,429
============= =============
NOTE 7. LOANS SERVICING
The mortgage loan portfolios serviced for the FHLMC and FNMA are not
included in the accompanying financial statements. The unpaid principal balances
of these loans aggregated $3,881,000, $4,317,000 and $3,911,000 at March
31,1997,1996 and 1995, respectively.
Custodial escrow balances, maintained in connection with the foregoing
loan servicing, were approximately $80,000, $89,000, and $136,000 at March
31,1997, 1996 and 1995, respectively.
34
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 8. PREMISES AND EQUIPMENT, NET
March 31,
---------
1997 1996
---- ----
Land $ 450,952 $ 450,952
Buildings and improvements 8,362,760 8,222,217
Leasehold improvements 379,331 712,884
Furnishings and equipment 3,589,757 2,253,985
Construction in process 127,848 --
----------- -----------
12,910,648 11,640,038
Less accumulated depreciation and amortization 1,567,970 1,683,057
----------- -----------
$11,342,678 $ 9,956,981
=========== ===========
Depreciation and amortization charged to operation for the years ended March 31,
1997, 1996 and 1995 were $664,000, $302,000 and $223,000, respectively.
NOTE 9. ACCRUED INTEREST RECEIVABLE, NET
March 31,
---------
1997 1996
---- ----
Loans $ 1,783,330 $ 1,076,014
Mortgage-backed securities 1,079,768 1,258,479
Investments and other interest-bearing assets 306,260 57,775
----------- -----------
3,169,358 2,892,268
Less allowance for uncollected interest (190,993) (204,069)
----------- -----------
$ 2,978,365) $ 2,688,199
=========== ===========
NOTE 10. EXCESS OF COST OVER ASSETS ACQUIRED, NET
March 31,
---------
1997 1996
---- ----
Core deposit premium $ 1,403,835 $ 1,609,284
Acquisition costs 52,165 59,798
----------- -----------
$ 1,456,000 $ 1,669,082
=========== ===========
35
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 11. DEPOSITS
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------------------------------------------------
1997 1996
------------------------------------------- -------------------------------------------
Weighted Weighted
Average Average
Rate Amount Percent Rate Amount Percent
---- ------ ------- ---- ------ -------
DEMAND:
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing 1.89% $ 18,578,712 6.97% 1.86% $ 16,970,517 6.61%
Non-interest-bearing 0.00% 7,676,924 2.88% 0.00% 6,015,986 2.33%
---- ------------ ------ ---- ------------ ------
1.34% 26,255,636 9.85% 1.37% 22,986,503 8.94%
---- ------------ ------ ---- ------------ ------
Savings and club 2.50% 142,953,248 53.65% 2.50% 141,847,681 55.20%
Money Management 3.15% 21,078,077 7.91% 3.17% 19,443,771 7.57%
Certificate of deposit 5.18% 76,184,526 28.59% 5.27% 72,673,928 28.29%
---- ------------ ------ ---- ------------ ------
3.41% 240,215,851 90.15% 3.42% 233,965,380 91.06%
---- ------------ ------ ---- ------------ ------
3.28% $266,471,487 100.00% 3.24% $256,951,883 100.00%
==== ============ ====== ==== ============ ======
</TABLE>
The scheduled maturities of certificates of deposits are as follows:
March 31,
---------
1997 1996
---- ----
(In Thousands)
One year or less $ 36,028 $ 30,961
After one year to three years 25,639 29,680
After three years to five years 14,447 11,962
After five years 71 70
----------- -----------
$ 76,185 $ 72,673
=========== ===========
The aggregate amount of certificates of deposit with minimum
denominations of $100,000 or more was approximately $9,430,000 and $9,163,000 at
March 31,1997 and 1996, respectively.
Interest expense on deposit consists of the following:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Demand $ 332,393 $ 330,562 $ 226,102
Savings and clubs 3,542,024 3,507,068 3,591,611
Money Management 657,529 599,280 540,545
Certificates of deposit 3,844,009 3,965,252 3,130,616
-------------- ------------- -------------
8,375,955 8,402,162 7,488,874
Penalty for early withdrawals of certificate of deposit (20,787) (11,961) (16,062)
--------------- ------------- -------------
$ 8,355,168 $ 8,390,201 $ 7,472,812
============== ============= =============
</TABLE>
36
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
<TABLE>
<CAPTION>
Interest March 31,
Lender Maturity Rate 1997 1996
- ----------------------- ---------------- ------ ----------- ------------
<S> <C> <C> <C> <C>
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
Federal Home Loan Bank April 30,1997 5.69% 8,000,000 -
Federal Home Loan Bank May 30, 1997 5.73% 7,000,000 -
Federal Home Loan Bank June 30, 1997 5.76% 8,000,000 -
Federal Home Loan Bank July 11, 1997 5.56% 6,000,000 -
Federal Home Loan Bank July 29, 1997 5.81% 4,000,000 -
Securities broker-dealer August 15, 1997 5.82% 4,000,000 -
Federal Home Loan Bank September 10, 1997 5.51% 6,000,000 -
Federal Home Loan Bank September 16, 1997 5.56% 5,000,000 -
Federal Home Loan Bank October 14, 1997 5.79% 5,000,000 -
Federal Home Loan Bank November 3, 1997 5.59% 4,000,000 -
Securities broker-dealer November 26, 1997 5.58% 5,835,000 -
Federal Home Loan Bank December 3, 1997 5.56% 6,500,000 -
Federal Home Loan Bank December 22, 1997 5.77% 5,000,000 -
------------- -------------
$ 74,335,000 $ 47,000,000
============= =============
</TABLE>
Information concerning borrowings collateralized by securities sold under
agreements to repurchase are summarized as follows:
<TABLE>
<CAPTION>
For The Year Ended March 31,
----------------------------
1997 1996
---- ----
(Dollars In Thousands)
<S> <C> <C>
Average balance during the year $ 26,650 $ 25,654
Average interest rate during the year 5.73% 5.60%
Maximum month-end balance during the year 74,335 47,000
Mortgage-backed securities underlying the agreements at year end:
Carrying value $ 4,898 $ 53,544
Estimated fair value 4,757 53,384
</TABLE>
37
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 13. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------------------------
1997 1996
Maturing -------------------------------- -------------------------------
Year Ended Weighted Weighted
March 31, Average Rate Amount Average Rate Amount
--------- ------------ ------ ------------ ------
<S> <C> <C> <C> <C>
1997 -- $ -- 5.36% $ 11,000,000
1998 9.69% 45,000,000 8.10% 14,000,000
2004 3.58% 400,000 3.58% 400,000
------------- -------------
$ 45,400,000 6.84% $ 25,400,000
============= =============
</TABLE>
At March 31, 1997 and 1996, the advances were secured by pledges of the
Bank's investment in the capital stock of the Federal Home Loan Bank totaling
$5,535,000 respectively and a blanket assignment of the Bank's unpledged
qualifying mortgage, mortgage-backed securities and investment portfolios.
NOTE 14. INCOME TAXES
The Bank qualifies as a thrift institution under the provisions of the
Code and is therefore permitted to deduct from taxable income an allowance for
bad debts based on the greater of: (1) actual loan losses (the "experience
method"); or (2) eight percent of taxable income before such bad debt deduction
less certain adjustments (the "percentage of taxable income method"). For the
tax years ended December 31,1996 and 1995, the deduction for bad debts was
computed using the experience method. For the year ended March 31, 1997, the
deductions for bad debt was computed using the percentage method.
Retained earnings at March 31, 1997, includes approximately $4,183,000
of such bad debts, for which federal income taxes have not been provided. If
such amount is used for purpose other than bad debts losses, including
distributions in liquidation, it will be subject to federal income tax at the
current rate.
The components of income taxes are summarized as follows:
Year Ended March 31,
--------------------
1997 1996 1995
---- ---- ----
Current $ (1,348,259) $ 785,816 $ 750,166
Deferred 73,181 (179,942) (75,869)
-------------- ------------- -------------
$ (1,275,078) $ 605,874 $ 674,297
=============== ============= =============
38
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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,
--------------------
1997 1996 1995
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Income taxes........................... $(1,025,014) (34.00) $ 462,046 34.00 $ 516,579 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)
Amortization of intangibles.......... (43,324) (1.44) (37,600) (2.77)
Dividend exclusion................... (373,400) (12.39) (190,845) 14.04
State and city income taxes, net of
federal income tax effect.......... (166,660) (5.53) 190,845 14.04 156,032 10.27
Other items, net..................... 26,583 1.96 30,963 2.04
----------- ----- --------- ----- --------- -----
Effective income taxes................. $(1,275,078) 72.30 $ 605,874 44.58 $ 674,297 44.38
=========== ===== ========= ===== ========= =====
</TABLE>
At March 31, 1997, refundable income taxes payable of $1,678,711 are
included in other assets. At March 31, 1996, income taxes payable of $379,076
are included in other liabilities. The tax effects of existing temporary
differences that give rise to significant portions of deferred tax assets and
deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
March 31,
---------
1997 1996
---- ----
DEFERRED TAX ASSETS
<S> <C> <C>
Reserve for uncollected interest $ 89,767 $ 95,912
Loan and real estate owned losses in excess of bad debts deduction (46,808) 300,627
Deferred loan fees 354,388 105,496
Accrued pension 229,535 55,643
Write down of common stock 19,829 19,829
Reserve for losses on other assets 149,985 119,269
Unrealized loss on securities available for sale 392,547 1,104,237
Other 64,579 -
------------- -------------
1,253,822 1,801,013
------------- -------------
Deferred tax liabilities
Gain on involuntary conversion 282,685 282,685
Savings premium 521,721 554,820
Depreciation 294,974 24,204
------------- -------------
Sub total 1,099,380 861,709
------------- -------------
Net deferred tax assets (liabilities) included in other
assets or (liabilities) $ 154,442 $ 939,304
============= =============
</TABLE>
39
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 15. REGULATORY CAPITAL
The operations and profitability of the Bank are significantly affected
by legislation and the policies of the various regulatory agencies. The FERREA,
among other things, increase the FDICIA imposes increased requirements on the
operations of financial institutions that fall below certain capital standards.
As required by the FERREA, 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 31,1997 and 1996, the Bank exceeded all the current
capital requirements.
The following table sets out the Bank's various regulatory capital
categorized at March 31, 1997.
1997
----
Dollars Percentage
------- ----------
(thousands)
Tangible capital $ 29,089 6.95%
Tangible equity $ 30,050 7.18%
Core/leverage capital $ 29,141 6.96%
Tier 1 risk-based capital $ 30,527 6.97%
Total risk-based capital $ 30,527 17.94%
40
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The following table reconciles the Bank's stockholders' equity at March
31, 1997, under generally accepted accounting principles to regulatory capital
requirements:
<TABLE>
<CAPTION>
Regulatory Capital Requirements
-------------------------------
Gaap Tangible Tier/core Risk-based
Capital Capital Capital Capital
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Stockholders' Equity at March 31,1997 $ 30,050 $ 30,050 $ 30,050 $ 30,050
=========
Add:
Unrealized loss on securities available for
sale, net 443 443 443
General valuation allowances -- -- 1,426
Qualifying intangible assets -- 52 52
Deduct:
Goodwill (1,404) (1,404) (1,404)
Excess of net deferred tax assets -- -- --
Asset required to be deducted -- -- (40)
--------- --------
Regulatory capital 29,089 29,141 30,527
Minimum capital requirement 6,277 12,555 15,260
-------- --------- --------
Regulatory capital excess $ 22,812 $ 16,586 $ 15,267
======== ========= ========
</TABLE>
NOTE 16. BENEFIT PLANS
PENSION PLAN
Carver has a non-contributory defined benefit pension plan covering all
eligible employees. The benefits are based on each employee's term of service.
Carver's policy is to fund the plan with contributions which equal the maximum
amount deductible for federal income tax purposes. The following table sets
forth the plan's funded status:
<TABLE>
<CAPTION>
March 31,
---------
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of benefit obligation including
vested benefits of $ 2,054,535 and $1,690,000, respectively $ 2,097,345 $ 1,776,395
============= =============
Projected benefit obligation $ 2,425,891 $ 2,101,224
------------- -------------
Plan assets at fair value 2,900,146 2,510,985
Plan assets in excess of projected benefit obligation 474,255 409,761
Unrecognized net obligation being amortized over 19.75 years 366,279 393,075
Unrecognized prior service cost 20,812 22,375
Unrecognized net (gain) (1,008,762) (926,811)
(Accrued) pension cost included in other liabilities $ 147,416 $ (101,600)
============= =============
</TABLE>
41
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost $ 115,541 $ 95,323 $ 122,675
Interest cost 158,379 137,100 137,813
Return on plan assets (318,555) (174,058) (182,798)
Net deferral and amortization 157,672 (94,665) (1,803)
-------------- ------------- -------------
Net periodic pension cost $ 55,057 $ (36,300) $ 75,887
============== ============= =============
</TABLE>
Significant actuarial assumptions used in determining plan benefits are:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Annual salary increase 5.50% 5.00% 6.00%
Long-term return on assets 8.00% 8.00% 8.00%
Discount rate used in measurement of benefit obligations 7.50% 7.00% 8.25%
</TABLE>
SAVINGS INCENTIVE PLAN
The Bank has a savings incentive plan, pursuant to Section 401(k) of
the Code, for all eligible employees of the Bank. Employees may elect to 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, 1997, 1996 and 1995 were $63,500, $52,700 and $51,900, 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>
1997 1996
------------ -------------
<C> <C> <C>
Actuarial present value of benefit obligation including vested benefits of
$303,910 and $318,829 at March 31, 1997 and 1996 respectively $ 360,564 $ 348,896
============ =============
Projected benefit obligation $ 401,463 $ 378,355
Plan assets at fair value -- --
------------ -------------
Projected benefit obligation in excess of plan assets 401,463 378,355
Unrecognized past service cost (221,093) (331,779)
Additional minimum liability 180,194 302,320
------------ -------------
Accrued liability included in other liabilities $ 360,564 $ 348,896
============ =============
</TABLE>
42
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Net periodic pension cost for the years ended March 31,1997, 1996 and 1995
included the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Service cost $ 24,330 18,267 2,424
Interest cost 31,395 28,417 7,077
Net deferral and amortization 55,324 55,236 13,809
------------ ------------
Net pension cost $ 111,049 $ 101,920 $ 23,310
============ ============ ============
</TABLE>
43
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The actuarial assumptions used in determining plan benefits include
annual fee at 2.80% for each of the three years ended March 31, 1997, and a
discount rate of 8.00%, 7.50% and 8.00%, for the years ended March 31, 1997,
1996 and 1995, respectively. The additional minimum liability included as an
intangible asset in other assets are $221,093 and $331,779 for the years ended
March 31, 1997 and 1996, respectively.
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, 1997 and 1996.
NOTE 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 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 $156,064 and $153,295 for the years ended March 31,1997
and 1996 respectively.
The ESOP shares at March 31,1997 and 1996 are as follows:
1997 1996
---------- ----------
Allocated shares 28,389 --
---------- ----------
Shares committed to be released 21,847 28,389
Unreleased shares 131,896 153,743
---------- ----------
Total ESOP shares 182,132 182,132
========== ==========
Fair value of unreleased shares $1,269,499 $1,345,251
========== ==========
44
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 18. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing need of its
customers.
These financial instruments primarily include commitments to extend
credit and to sell loans. Those instruments involve, to varying degrees,
elements of credit and interest rate in excess of the amount recognized in the
statement of financial condition. The contract amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies making commitments as it does for on-balance-sheet
instruments.
The Bank has outstanding various loan commitments as follows:
March 31,
---------
1997 1996
---- ----
Commitments To Originate Loans
Mortgage $ 13,443,419 $ 4,905,316
============= =============
Commitments To Purchase Loans
Mortgage $ 32,544,057 $ -
============= =============
Commitments To Sell Loans
Mortgage $ - $ 1,948,000
Consumer loans - -
------------- ------------
Total $ - $ 1,948,000
============= =============
At March 31,1997, of the $13,443,419 in outstanding commitments to
originate mortgage loans, $2,460,000 are at fixed rates within a range of 7.625%
to 8.50%, $9,114,000 are for balloon loans with 5 years maturity, whose rates
range between 8.00% to 11.75% and $1,870,000 commercial are adjustable rate with
initial rates ranging from 50% to 8.75%.
At March 31, 1997, all of the $32,544,057 in outstanding commitments to
purchase mortgage loans are at adjustable rates within a range 6.750 - 8.125%,
ranging from 1-7 years.
At March 31, 1997, $49,000,000 in Securities carried as "Available for
Sale" where sold for settlement on April 1, 1997.
At March 31, 1997, $17,000,000 in Borrowings on April 1, 1997, where
scheduled for repayment from the Proceeds of Securities sold.
At March 31,1997, undisbursed from approved commercial lines of credit
totaled $3,258,000. All such lines are secured, including $2,600,000 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.
45
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
At March 31, 1997, 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 $112,000.
Unless they are specifically canceled 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
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the counter-party. Collateral held consists primarily of
residential real estate, but may include income-producing commercial properties.
Rentals, including real estate taxes, under long-term operating leases
for certain branch offices aggregated approximately $ 285,000, $302,000 and
$269,000 for the years ended March 31, 1997, 1996, and 1995, respectively. As of
March 31, 1997, minimum rental commitments under all noncancellable leases with
initial or remaining terms of more than one year and expiring through 2011 are
as follows:
Year Ended March 31 Minimum Rental
------------------- --------------
(In Thousands)
1998 $ 263
1999 266
2000 293
2001 296
2002 296
Thereafter 1,330
---------
$ 2,744
=========
The Bank also has, in the normal course of business, commitments for
services and supplies. Management does not anticipate losses on any of these
transactions.
On January 2, 1996, the United States District Court for the Southern
District of New York dismissed the class action encaptioned DOUGHERTY V. CARVER
FEDERAL SAVINGS BANK for lack of subject matter jurisdiction. The class action
alleged that the offering circular, used by Carver to sell its stock in its
public offering, contained material misstatements and omissions. Further, the
complaint alleged that the Bank's shares were not appraised by an independent
appraiser. By separate order on the same date, the court made its ruling
applicable to GOMBERG V. CARVER FEDERAL SAVINGS BANK and UMINER V. CARVER
FEDERAL SAVINGS BANK, two other class actions filed in the Southern District of
New York which asserted claims essentially identical to those asserted in the
Dougherty suit.
46
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The plaintiffs filed a consolidated notice of appeal on January 29,
1996 with the United States Court of Appeals for the Second Circuit. In April
1997 the Circuit Court concluded that the District had subject matter
jurisdiction over the plaintiffs' complaint, the Circuit Court reversed and
remanded the case back to the District Court.
On 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 of the New York State Banking
Department, in the Supreme Court of New York State, County of New York. In
October of 1994, Nationar made a loan to Carver's ESOP Trust (which now belongs
to the Company) in the amount of $1,821,320, to purchase 182,132 shares.
Nationar held, as collateral: the ESOP shares, $1,366,000 and $600,000, all in
separate accounts. When the Superintendent sold Carver's ESOP loan to a third
party purchaser, it failed to transfer Carver's $1,966,000 in collateral. Carver
filed lawsuit to secure the return of the entire amount of collateral.
By order entered April 10, 1996, on the recommendations of the
Superintendent, the Court directed the return of $600,000 of the collateral. The
Bank received these funds, plus interest, in early June 1996. Subsequently, the
lawsuit was discontinued pursuant to a recommendation of counsel and an
expectation that the Bank would recover 90% of the outstanding collateral which
amounted to $1,366,000. In July and December of 1996 the Superintendent of Banks
made payments of $554,643 and $831,965 respectively to the Bank. As a result of
the full recovery of all of its collateral, along with interest, Carver was able
to reverse the 13% reserve originally established.
In the conduct of the Company's business, it is also involved in normal
litigation matters. In the opinion of management, the ultimate disposition of
such litigation should not have a material adverse effect on the financial
position or results of operations of the Company.
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is defined as the amount at
which the instrument could be exchange 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
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.
47
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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.
48
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
COMMITMENTS
The fair value of commitments to originate loans is equal to amount of
commitment.
The carrying amounts and estimated fair values of the Bank's financial
instruments at March 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
AT MARCH 31,
-----------------------------------------------------------------
1997 1996
----------------------------- -----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 4,231 $ 4,231 $ 10,026 $ 10,026
Securities available for sale 84,708 83,863 116,678 114,328
Investment securities 1,675 1,673 8,937 8,814
Mortgage-backed securities 110,853 107,841 131,105 129,813
Loans receivable 197,918 199,073 82,608 83,983
Accrued interest receivable 2,978 2,978 2,688 2,688
Financial Liabilities:
Deposits. $ 266,471 $ 265,566 $ 256,952 $ 249,386
Securities sold under agreements to repurchase 74,335 74,333 47,000 47,101
Advances from Federal Home Loan
Bank of New York 45,400 45,325 25,400 25,452
Other borrowed money 1,366 1,366 1,548 1,548
Commitments:
To originate loans $ 13,443 $ 13,443 $ 4,905 $ 4,905
To sell loans - - 1,948 1,948
To fund line of credit 5,970 5,970 5,200 5,200
</TABLE>
LIMITATIONS
The fair value estimates are made at a discrete point in time based on
relevant market information about the financial instruments. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the entire holdings of a particular financial instrument. Because no
quoted market value exists for a significant portion of the Bank's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
In addition, the fair value estimates are based on existing on an 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
49
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
tax ramifications related to the realization of unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of the estimates.
Finally, reasonable comparability between financial institutions may
not be likely due to the wide range of permitted valuation techniques and
numerous estimates which must be made given the absence of active secondary
markets for many of the financial instruments. This lack of uniform valuation
methodologies introduces a greater degree of subjectively to these estimated
fair values.
50
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 20. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended March 31, 1997
-------------------------------------------------------------------
First Second Third Fourth
Qtr. Qtr. Qtr Qtr.
----------- ----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Interest income $ 5,811 $ 5,609 $ 5,770 $ 5,657
Interest expense 3,132 3,133 3,135 3,083
----------- ----------- ---------- ----------
Net interest income. 2,679 2,476 2,635 2,574
Provision for loan losses 52 33 51 1,554
Non-interest income loss 328 282 238 (735)
Non-interest expense.. 2,464 4,158 2,559 (2,622)
Income taxes (benefits) 228 (649) 111 (966)
----------- ----------- ---------- ----------
Net income (loss) $ 263 $ (784) $ 152 $ (1,371)
=========== =========== ========== ==========
Net income (loss) per common shares 0.12 (0.36) $ 0.07 $ (0.63)
=========== ============ ========== ==========
<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
----------- ----------- ---------- ----------
Net income $ 266 $ 76 $ 140 $ 271
=========== =========== ========== ==========
Net income per common shares $ 0.12 $ 0.36 $ 0.07 $ 0.12
=========== =========== ========== ==========
</TABLE>
51
<PAGE>
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CARVER BANCORP, INC.
(Registrant)
Date: July 18, 1997 By: /s/ Thomas L. Clark, Jr.
------------------------
Thomas L. Clark, Jr.
President and Chief Executive Officer
(Duly Authorized Representative)
52
