<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|x| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-21487
CARVER BANCORP, INC.
--------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3904174
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
75 West 125th Street, New York, New York 10027
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 876-4747
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past thirty days. Yes |X| No |_|
<TABLE>
<CAPTION>
Class Outstanding at February 22, 1999
----- --------------------------------
<S> <C>
Common Stock, par value $.01 2,314,275
</TABLE>
<PAGE> 2
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as
of December 31, 1998 and March 31, 1998 (unaudited)............3
Consolidated Statements of Income for the Three and
Nine Months Ended December 31, 1998 and 1997 (unaudited).......4
Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 1998 and 1997 (unaudited)............5
Notes to Consolidated Financial Statements (unaudited).........6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..............................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................18
Item 2. Changes in Securities and Use of Proceeds......................18
Item 3. Defaults upon Senior Securities................................18
Item 4. Submission of Matters to a Vote of Security Holders............18
Item 5. Other Information .............................................18
Item 6. Exhibits and Reports on Form 8-K...............................18
SIGNATURES
2
<PAGE> 3
CARVER BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
As of As of
December 31, March 31,
ASSETS 1998 1998
------------- -------------
<S> <C> <C>
Cash and due from banks .................................... $ 13,826,870 $ 12,120,071
Federal funds sold ......................................... 15,800,000 3,000,000
------------- -------------
Total cash and cash equivalents ......................... 29,626,870 15,120,071
------------- -------------
Securities available for sale .............................. 42,369,985 28,407,505
Mortgage-backed securities held to maturity, net
(estimated fair values of $93,812,000 and $107,719,000 at
December 31, 1998 and March 31, 1997) ................... 70,966,306 91,115,861
Loans receivable ........................................... 257,042,658 278,092,337
Less allowance for loan losses .......................... (6,037,830) (3,138,000)
Loan receivables, net ................................... 251,004,828 274,954,337
------------- -------------
Real estate owned, net ..................................... 82,198 82,198
Property and equipment, net ................................ 12,034,474 11,545,627
Federal Home Loan Bank of New York stock, at cost .......... 5,754,600 5,754,600
Accrued interest receivable, net ........................... 2,581,121 2,762,843
Excess of cost over net assets acquired, net ............... 1,083,121 1,246,116
Other assets ............................................... 4,988,264 6,469,053
------------- -------------
Total assets ........................................... $ 420,491,768 $ 437,458,211
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ................................................. $ 281,623,628 $ 274,894,232
Securities sold under agreement to repurchase ............ 35,337,000 87,020,000
Advances from Federal Home Loan Bank of New York ......... 65,718,308 36,741,686
Other borrowed money ..................................... 1,038,152 1,183,858
Advance payments by borrowers for taxes and insurance .... 1,762,257 659,995
Other liabilities ........................................ 4,150,288 1,424,096
------------- -------------
Total liabilities ..................................... 389,629,633 401,923,867
------------- -------------
Stockholders' Equity:
Preferred stock, $0.01 par value per share;
1,000,000 shares authorized; none issued ............... -- --
Common stock, $0.01 par value per share; 5,000,000 shares
authorized; 2,314,275 shares issued and outstanding .... 21,144 23,144
Additional paid-in capital ............................... 21,432,528 21,418,897
Retained earnings-substantially restricted ............... 10,562,237 15,289,631
Dividends declared and paid .............................. (115,714) 0
Common stock acquired by Employee Stock Ownership Plan ... (1,038,152) (1,183,858)
Unrealized (loss) net, on securities available for sale, . 92 (13,470)
------------- -------------
Total stockholders' equity ............................. 30,862,135 35,534,344
------------- -------------
Total liabilities and stockholders' equity ................. $ 420,491,768 $ 437,458,211
============= =============
</TABLE>
3
<PAGE> 4
CARVER INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans receivable ..................... $ 4,937,816 $ 4,588,062 $ 15,497,439 $ 13,490,213
Mortgage-backed securities ........... 1,151,518 2,073,948 4,336,632 6,489,624
Investment securities ................ 629,841 238,109 1,125,263 773,775
Other interest-earning assets ........ 212,192 30,788 557,980 120,542
------------ ------------ ------------ ------------
Total interest income ............. 6,931,367 6,930,907 21,517,314 20,874,154
------------ ------------ ------------ ------------
Interest expense:
Deposits ............................. 2,037,072 2,162,459 6,249,725 6,456,748
Advances and other borrowed money .... 1,485,620 1,531,824 4,793,388 4,885,308
------------ ------------ ------------ ------------
Total interest expense ............. 3,522,692 3,694,283 11,043,113 11,342,056
------------ ------------ ------------ ------------
Net interest income .................... 3,408,675 3,236,624 10,474,201 9,532,098
Provision for loan losses .............. 3,060,569 279,920 3,810,569 618,113
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses ............ 348,106 2,956,704 6,663,632 8,913,985
------------ ------------ ------------ ------------
Non-interest income:
Loan fees and service charges ........ 10,080 33,829 119,191 100,015
Gain of (loss) on sale of securities .. 0 188,483 4,941 188,483
Other .................................. 337,257 328,053 1,370,239 930,979
------------ ------------ ------------ ------------
Total non-interest income ........ 347,337 550,365 1,494,371 1,219,477
------------ ------------ ------------ ------------
Non-interest expenses:
Salaries and employee benefits ....... 1,378,634 1,240,081 3,982,402 3,517,119
Net occupancy expenses ............... 286,180 261,644 880,142 804,069
Equipment ............................ 293,644 363,002 1,063,070 905,352
Loss on foreclosed real estate ....... 0 11,974 0 11,974
Advertising .......................... 34,419 75,716 111,568 194,466
Federal insurance premium ............ 41,400 42,119 148,841 83,622
Amortization of intangibles .......... 60,266 17,756 159,836 124,293
Legal expenses ....................... 38,790 105,000 139,665 220,000
Bank charges ......................... 96,109 113,084 280,641 308,423
Security service ..................... 110,832 96,004 302,170 238,122
Other ................................ 5,929,686 611,959 7,807,246 1,994,489
------------ ------------ ------------ ------------
Total non-interest expenses ...... 8,269,960 2,938,339 14,875,581 8,401,929
------------ ------------ ------------ ------------
Income (Loss) before income taxes ...... (7,575,517) 568,729 (6,717,578) 1,731,533
Income taxes (Benefit) ................. (1,851,134) 268,049 (1,505,458) 791,310
------------ ------------ ------------ ------------
Net income (Loss) ..................... $ (5,723,383) $ 300,680 $ (5,212,120) $ 940,221
============ ============ ============ ============
Net income (Loss) per common share ..... $ (2.59) $ 0.14 $ (2.37) $ 0.43
============ ============ ============ ============
Weighted average number of common shares
outstanding .......................... 2,208,432 2,189,918 2,203,690 2,185,376
============ ============ ============ ============
</TABLE>
4
<PAGE> 5
CARVER FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
---------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ (5,212,120) $ 940,221
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises and equipment ............... 563,371 492,535
Amortization of intangibles ........................................... 162,995 124,293
Other amortization and accretion, net ................................. 733,264 784,666
Provision for loan losses ............................................ 3,060,569 681,113
Deferred income taxes ................................................. 0 (476,662)
Allocation of Employee Stock Ownership Plan ........................... 151,162 173,526
Changes in:
Accrued interest receivable, net ...................................... (181,722) 212,956
Refundable income taxes ............................................... 0 0
Other assets .......................................................... (1,480,789) (4,710,160)
Other liabilities ..................................................... 2,726,192 272,656
------------- -------------
Net cash provided by operating activities ........................... 522,922 (2,050,168)
------------- -------------
Cash flows from investing activities:
Purchase of securities available for sale ............................. (216,170,699) (17,000,000)
Principal repayments on securities available for sale ................. 3,713,435 4,419,045
Proceeds from maturity of securities available for sale .............. 198,841,581 55,819,825
Gain from sale of securities available for sale ....................... 188,483
Purchase of investment securities held to maturity .................... 0 (7,000,000)
Proceeds from maturities and calls of investment
securities held to maturity ........................................ 1,797,042 8,480,705
Principal repayment on mortgage-backed securities
held to maturity ................................................... 19,284,289 14,414,131
Principal repayment on investment
held to maturity ................................................... 0 194,476
Net change in loans receivable ........................................ 33,846,801 6,163,779
Purchase of mortgage loans ............................................ (11,140,215) (53,544,828)
Proceeds from sale of real estate owned ............................... 0 0
Loss from sale of real estate owned ................................... 0 0
Additions to premises and equipment .................................. (1,052,218) (760,466)
Redemption of Federal Home Loan Bank stock ........................... 0 147,500
------------- -------------
Net cash (used in) provided by investing activities ................. 29,120,016 11,522,650
------------- -------------
Cash flows from financing activities:
Net increase (decrease) in deposits ................................... 6,729,396 2,634,716
Decrease in short term borrowings .................................... (51,683,000) (942,404)
Repayment of securities sold under agreements to repurchase ........... 0 0
Repayment of advances from Federal Home Loan Bank
of New York ......................................................... 0 (52,400,000)
Advances from Federal Home Loan Bank of New York ..................... 28,976,622 42,000,000
Repayment of other borrowed money .................................... (145,705) (136,599)
Net increase (decrease) in advance payments by borrowers
for taxes and insurance ............................................. 1,102,262 0
Cash dividends paid ................................................. (115,714) (115,000)
------------- -------------
Net cash provided by (used in) financing activities .................. (15,136,139) (8,959,287)
------------- -------------
Net increase (decrease) in cash and cash equivalents .................... 14,506,799 513,195
Cash and cash equivalents - beginning ................................... 15,120,071 4,230,757
------------- -------------
Cash and cash equivalents - ending ...................................... $ 29,626,870 $ 4,742,952
============= =============
Supplemental disclosure of non-cash activities:
Unrealized Gain (loss) on securities available for sale:
Unrealized Gain (loss) .............................................. 173 $ 403,683
Deferred income taxes ............................................... (82) 189,731
------------- -------------
$ 213,952 $ 436,101
============= =============
Loans receivable transferred to real estate owned ..................... $ 0 $ 32,729
============= =============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest ............................................................ $ 11,014,629 $ 11,367,056
============= =============
Federal, state and city income taxes ................................ $ 776,829 $ 0
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Carver Bancorp, Inc. (the "Holding Company" or "Bancorp"), have been
prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities
and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete consolidated
financial statements. In the opinion of management, all adjustments
(including normal recurring adjustments) necessary for fair presentation
have been included. The consolidated results of operations and other data
for the three or nine month periods ended December 31, 1998 are not
necessarily indicative of results that may be expected for the entire
fiscal year ending March 31, 1999. The unaudited consolidated financial
statements include the accounts of the Holding Company and its wholly
owned subsidiaries Alhambra Holding Corp., ("Alhambra Holding") and
Carver Federal Savings Bank (the "Bank" or "Carver Federal") and the
Bank's wholly owned subsidiaries, C.F.S.B. Realty Corp., C.F.S.B. Credit
Corp. Carver Federal and the Holding Company are referred to herein
collectively as Carver. All significant inter company accounts and
transactions have been eliminated in consolidation.
(2) EARNINGS PER SHARE CALCULATION
Net income per share for the three and nine month periods ended
December 31, 1998 and 1997 are calculated based on weighted average number
of shares outstanding during the period.
(3) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. This statement also requires that
an entity recognize all derivatives as either assets or liabilities at
fair value in the statement of financial position and those instruments at
fair value. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The adoption of this statement is not
anticipated to have a material impact on the financial position or results
of operations.
(4) ALHAMBRA HOLDING CORP.
In 1991, Carver purchased an $893,000 participation in a $2.4
million loan to finance the first construction phase of a project to
renovate a historic theatre, the Alhambra Building, into office space. The
first phase of the project was completed and leased out. The lead lender
on the project went into receivership with the FDIC and the borrower
declared bankruptcy and the rents were being paid into the bankruptcy
court. These events contributed to Carver writing down the outstanding
loan balance of the participation to $413,000.
During fiscal 1997, Carver negotiated the purchase of the FDIC's
interest in the loan for $395,000. At March 31, 1998, the Bank held 100%
interest in the original loan of $2.4 million carried on the books at
$807,000 and the Company was involved in legal action to vacate the stay
placed by the bankruptcy court on the collateral in order to proceed with
legal recourse.
In December of 1998, in connection with a court approved bankruptcy
plan, the loan asset was dividended by the Bank to the Company. The
Company contributed $600,000 in cash and the loan asset into a newly
formed wholly owned subsidiary, Alhambra Holding Corp. ("Alhambra
Holding"). Alhambra Holding used the cash and the loan to acquire 80% of
the common stock and approximately $1.4 million or 100% of the preferred
stock of Alhambra Realty Corp. ("Alhambra Realty"). As of December 31,
1998, Alhambra Realty purchased the property, holds title to the Alhambra
Building and was authorized to receive rental payments.
Carver is currently examining various options with respect to the
property owned by Alhambra Realty. These options include, but are not
limited to, completing the development of the property and leasing the
unoccupied space or conducting a sale of the property.
6
<PAGE> 7
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Explanatory Note
This Quarterly Report on Form 10-Q contains forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and business of the Company that are subject to various factors which
could cause the actual results to differ materially from these estimates. These
factors include, without limitation, changes in general, economic and market,
legislative and regulatory conditions and the development of an adverse interest
rate environment that adversely affects the interest rate spread or other income
anticipated from the Company's operations and investments.
General
Carver Bancorp, Inc., (the "Holding Company" or "Bancorp"), a Delaware
corporation, is the holding company for Carver Federal Savings Bank (the "Bank"
or "Carver Federal"), a federally chartered savings bank. Collectively, the
Holding Company and the Bank are referred to herein as the "Company" or
"Carver." On October 17, 1996, the Bank completed its reorganization into a
holding company structure (the "Reorganization") and became the wholly-owned
subsidiary of the Holding Company. At this time, the Holding Company conducts
business as a unitary savings and loan holding company and the principal
business of the Holding Company consists of the operation of its wholly-owned
subsidiary; the Bank, which operates seven full service branches in the New York
City boroughs of: Brooklyn, Queens, Manhattan, and in Nassau County, New York.
On January 28, 1998, the Company announced that the Bank had entered into
a definitive agreement to sell its branch office located in Roosevelt, New York,
to City National Bank of New Jersey. The Roosevelt Office is located in Nassau
County, New York and has deposits of approximately $10.0 million. Due to certain
regulatory issues, the transaction, which was expected to close by March 31,
1998, has not yet been consummated. Under ther terms of the definitive
agreement, either party has the right to terminate the agreement. To date,
neither party has exercised that right.
On January 25, 1999, Carver terminated Thomas L. Clark, Jr. as President
and Chief Executive Officer of the Company. Mr. Clark served in such capacity
since February 1, 1995. See Part II, Item 5 of this 10-Q.
Financial Condition
Assets
At December 31, 1998, total assets decreased $17.0 million or 3.88% to
$420.5 million compared to $437.5 million at March 31, 1998. The decrease in
total assets was primarily attributable to decreases in mortgage-backed
securities ("MBSs") held to maturity and loans receivable net, offset in part by
increases in securities held as available for sale and cash and equivalents.
At December 31, 1998, total cash and cash equivalents increased by $14.5
million or 95.94% to $29.6 million compared to $15.1 million at March 31, 1998.
The increase reflects the increased investment of repayments from loans and MBSs
into federal funds sold. The Bank invests in federal funds to maintain adequate
liquidity and earn interest on liquid assets.
Securities held as available for sale increased by $14.0 million or 49.15%
to $42.4 million at December 31, 1998 compared to $28.4 million at March 31,
1998. The increase primarily reflects the purchase of approximately $42.0
million in money market securities funded in large part with proceeds from the
sale during the second quarter of fiscal 1999 of approximately $23.8 million of
MBSs held as available for sale along with repayments on the remaining MBSs and
loans. The Bank invest in short term money market securities to improve the
yield on cash inflows until such time as these funds can be reinvested in loans
or other suitable higher yielding longer term assets.
7
<PAGE> 8
MBSs held to maturity decreased by $20.1 million or 22.11% to $71.0
million compared to $91.1 million at March 31, 1998. The decrease is
attributable to principal repayments on MBSs held to maturity. The decrease also
reflects the Bank's strategy to shift assets from MBSs and investment securities
to mortgage loans.
Other assets decreased by 1.5 million or 22.89% to $5.0 million at
December 31, 1998 compared to $6.5 million at March 31, 1998. The decrease in
other assets primarily reflects reconciliation adjustments. Other assets also
contain a $1.4 million investment in Alhambra Holding. See Notes to Financial
Statements, Alhambra Holding Corp.
Loans receivable decreased by $23.9 million or 8.71% to $251.0 million at
December 31, 1998 compared to $275.0 at March 31, 1998. The decrease primarily
reflects the receipt of principal payments on outstanding loans, offset in part
by loan purchases and loan originations. The Bank reinvests principal and
interest receipts from loans receivable into short term assets until suitable
loans can be purchased or originated.
Liabilities and Stockholders' Equity
At December 31, 1998, total deposits increased by $6.7 million or 2.49% to
$281.6 million compared to $274.9 million at March 31, 1998. The increase in
total deposits was primarily attributable increases of $7.2 million in
certificates of deposits and $1.4 million in NOW accounts, offset in part by
decreases in savings and club accounts and money market accounts. The increase
in certificate of deposits is primarily attributable to new account openings
which include a $3.5 million corporate deposit and a shift in deposits to
certificates of deposits from other types of accounts.
At December 31, 1998, total borrowings decreased by $22.9 million or
18.29% to $102.1 million compared to $125.0 million at March 31, 1998. The
decrease in total borrowings reflects a decrease in reverse repurchase
agreements ("repos") of $51.7 million or 59.39% to $35.3 million offset in part
by an increase in Federal Home Loan Bank of New York ("FHLB") advances of $29.0
million or 78.87% to $65.7 million. The Company shifted from repos to take
advantage of the longer borrowing terms available on FHLB advances. The decrease
in total borrowings primarily reflects a reduction in the need for borrowed
funds due to repayments on MBSs and loans coupled with an increase in deposits.
At December 31, 1998, stockholders' equity decreased by $4.7 million or
13.15%, to $30.9 million compared to $35.5 million at March 31, 1998. The
decrease in stockholders' equity primarily reflects a reduction in retained
earnings due to the after-tax impact of non-recurring pre-tax charges of
approximately $4.1 million in reconciliation adjustments primarily related to
the Company's conversion of its data processing operations from outside data
service providers to an in-house system, approximately $1.2 million in
consulting fees and approximately $2.5 million for a special provision for loan
losses in connection with the Bank's consumer loan portfolio.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits and principal and
interest payments on loans, mortgage-backed securities and investment
securities. While maturities and scheduled amortization of loans,
mortgage-backed securities and investment securities are predictable sources of
funds, deposit flows and loan and mortgage-backed securities prepayments are
normally strongly influenced by changes in market interest rates, economic
conditions and competition.
The primary investment activity of the Company is the origination and
purchase of loans and, to a lesser extent, the purchase of investment securities
and mortgage-backed securities. During the three month period ended December 31,
1998, the Company sold no mortgage loans and sold no investment securities.
During the three month period ended December 31, 1998, the Company purchased no
mortgage loans and purchased approximately $22.0 million of investment
securities.
The Company's most liquid assets are federal funds sold and cash and due
from banks. In addition to the liquidity provided by federal funds sold and cash
and due from banks, the Company derives liquidity from its line of credit with
the FHLB, which equals 30% of total assets. The levels of the Company's cash and
cash equivalents are dependent on the Company's operating, financing, lending
and investing activities during any given period. At December 31, 1998, the
Company's cash and cash equivalents totaled $29.6 million compared to $15.1
million at March 31, 1998.
8
<PAGE> 9
The Office of Thrift Supervision, the Bank's primary federal regulator,
requires that the Bank meet minimum tangible, core and risk-based capital
requirements. At December 31, 1998, the Bank exceeded all fully phased-in
regulatory capital requirements. The table below presents certain information
relating to the Bank's capital compliance at December 31, 1998 and March 31,
1998.
<TABLE>
<CAPTION>
At December 31, 1998 At March 31, 1998
-------------------- --------------------
% of % of
Amount Assets Amount Assets
------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tangible Capital ............. $25,664 6.14% $30,201 6.90%
Core Capital ................. 25,703 6.15 30,249 6.93
Risk Based Capital ........... 30,393 14.24 31,731 16.00
</TABLE>
Analysis of Core Earnings
The Company's profitability is primarily dependent upon net interest
income, which represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income is
dependent on the difference between the average balances and rates earned on
interest-earning assets and the average balances and rates paid on
interest-bearing liabilities. Net income is further affected by provisions for
loan losses, non-interest income, non-interest expense and income taxes. The
earnings of the Company are significantly affected by general economic and
competitive conditions, particularly changes in market interest rates, and to a
lesser extent by government policies and actions of regulatory authorities.
At December 31, 1998, Company had discontinued the operations of its
consumer loan subsidiary, CFSB Credit Corp., and ceased unsecured consumer
lending. The decision to close the subsidiary was primarily due to an increase
in non-performing consumer loans and insufficient loan originations. At December
31, 1998, consumer loans totaled approximately $12.7 million, consisting
primarily of $4.5 million in automobile loans, $3.8 million in outstanding
credit card balances, $3.8 million personal loans and $600,000 of other consumer
loans. At December 31, 1998, non-performing consumer loans totaled approximately
$1.9 million or 14.96% of total consumer loans. In response to the increase in
non-performing consumer loans and to maintain an adequate allowance for loan
losses consistent with the Company's polices, the Company took a special
provision for loan losses of approximately $2.5 million during the third
quarter. At December 31, 1998 the Company's allowance to total consumer loans
was $3.3 million or 25.98% and the ratio of allowance to non-performing consumer
loans was 174.0%. The Company has taken action regarding delinquent automobile
loans to quickly repossess and dispose of the vehicles securing such loans. The
Company has also increased its collection efforts on delinquent credit card
balances and personal loans.
The following table sets forth certain information relating to Company'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
quarters indicated. Such yields and costs are derived by dividing annualized
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 information presented. The average balance of loans includes loans
on which the Company has discontinued accruing interest. The yield and cost
include fees which are considered adjustments to yields.
9
<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
Annualized Annualized
Average Quarterly Average Average Quarterly Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loan (1).................................. $ 256,575 $4,937 7.70% $ 238,810 $ 4,588 7.68%
Investment securities (2)................. 46,849 630 5.38 16,103 204 5.07
Mortgage-backed securities (3)............ 74,454 1,152 6.19 126,895 2,074 6.54
Federal funds sold........................ 15,475 212 5.48 4,613 65 5.64
--------- ------ ----- --------- -------- -------
Total interest-earning assets............. 393,353 6,931 7.05% 386,421 6,931 7.17%
------ --------
Non interest-earning assets............... 35,384 23,250
--------- ---------
Total assets.............................. $ 428,737 $ 409,671
========= =========
Interest-bearing Liabilities
Deposits
DDA....................................... $ 7,193 $ 0 0.00% $ 8,620 $ 0 0.00%
NOW....................................... 21,016 82 1.56 18,449 87 1.89
Savings and clubs......................... 144,154 900 2.50 143,875 924 2.57
Money market accounts..................... 21,479 130 2.42 21,441 173 3.23
Certificates of deposits.................. 80,483 925 4.60 77,027 978 5.08
--------- ------ ----- --------- -------- -------
Total deposits............................ 274,326 2,037 2.97 269,412 2,162 3.21
Borrowed money............................ 104,750 1,486 5.67 104,439 1,532 5.87
--------- ------ ----- --------- -------- -------
Total interest-bearing liabilities........ 379,076 3,523 3.72% 373,851 3,694 3.95%
------ ----- -------- -------
Non-interest bearing liabilities.......... 13,408 762
--------- ---------
Total liabilities......................... 392,484 374,613
Stockholders' equity...................... 36,253 35,058
--------- ---------
Total liabilities and stockholders' equity $ 428,737 $ 409,671
========= =========
Net interest income....................... $ 3,408 $ 3,237
======= ========
Interest rate spread...................... 3.33% 3.22%
----= -------
Net interest margin....................... 3.47% 3.35%
----= -------
Ratio to average interest-
earning assets to average................
Interest-bearing liabilities.............. 103.77% 103.36%
======= -------
</TABLE>
(1) Includes non-accrual loans.
(2) Includes FHLB stock and fair value of investments available for sale of
$48.1 million at December 31, 1998.
10
<PAGE> 11
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
Annualized Annualized
Average Quarterly Average Average Quarterly Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Loan (1) ................................. $268,113 $ 15,496 7.71% $236,903 $ 13,490 7.59%
Investment securities (2) ................ 25,846 1,126 5.81 14,086 699 6.62
Mortgage-backed securities ............... 90,747 4,337 6.37 133,822 6,490 6.47
Federal funds sold ....................... 14,375 558 5.18 4,910 196 5.32
-------- -------- ------ -------- -------- ------
Total interest-earning assets ............ 399,082 21,517 7.19% 389,721 20,875 7.14%
-------- ------ -------- ------
Non interest-earning assets .............. 28,933 23,102
-------- --------
Total Assets ............................. $428,015 $412,823
======== ========
Interest-bearing Liabilities
Deposits
DDA ...................................... $ 9,546 $ 0 0.00% $ 8,364 $ -- 0.00%
NOW ...................................... 19,130 248 1.73 18,521 265 1.91
Savings and clubs ........................ 145,553 2,721 2.49 144,576 2,709 2.50
Money market accounts .................... 21,822 459 2.80 21,525 521 3.23
Certificates of deposits ................. 80,371 2,821 4.68 76,626 2,962 5.15
-------- -------- ------ -------- -------- ------
Total deposits ........................... 276,421 6,249 3.01 269,612 6,457 3.19
Borrowed money ........................... 108,329 4,793 5.90 107,162 4,885 6.08
-------- -------- ------ -------- -------- ------
Total interest-bearing liabilities ....... 384,750 11,042 3.83% 376,774 11,342 4.01%
-------- --------
Non-interest bearing liabilities ......... 7,372 1,301
-------- --------
Total liabilities ........................ 392,122 378,075
Stockholders' equity ..................... 35,893 34,748
-------- --------
Total liabilities and stockholders' equity $428,015 $412,823
======== ========
Net interest income ...................... $ 10,475 $ 9,533
======== ========
Interest rate spread ..................... 3.36% 3.13%
====== ======
Net interest margin ...................... 3.50% 3.26%
====== ======
Ratio to average interest-
earning assets to average
Interest-bearing liabilities ............. 103.72% 103.44%
====== ======
</TABLE>
- ----------
(1) Includes non-accrual loans.
(2) Includes FHLB stock and fair value of investments available for sale of
$48.1 million at December 31, 1998.
11
<PAGE> 12
Comparison of Operating Results for the
Three Months Ended December 31, 1998 and 1997
General
The Company reported a net loss for the three month period ended December
31, 1998 of $5.7 million, compared to net income of $301,000, for the three
month period ended December 31, 1997. The decrease in net income was primarily
due to increases in non-interest expense and provision for loan losses, along
with a decrease in non-interest income, offset in part by an increase in
net-interest income.
Interest Income
Interest income for the three month period ended December 31, 1998 was
unchanged at $6.9 million compared to the same period last year. The average
balance of interest-earning assets for the three month period ended December 31,
1998 increased by $6.9 million or 1.79% to $393.4 compared to $386.4 million for
the three month period ended December 31, 1997. The average yield on average
interest-earning assets decreased by 12 basis points to 7.05% for the three
month period ended December 31, 1998 compared to 7.17% for the same period last
year. The decrease in the average yield on average interest-earning assets
reflects the decline in market interest rates.
Interest income from net loans receivable increased by $349,000 or 7.61%
to $4.9 million for the three month period ended December 31, 1998 compared to
$4.6 million for the three month period ended December 31, 1997. This resulted
from an increase of $17.8 million or 7.44% in the average balance of loans
receivables to $256.6 million for the three month period ended December 31, 1998
compared to $238.8 million for the three month period ended December 31, 1997
coupled with a two basis point increase in the average yield on the loan
portfolio. The increase in the average loan portfolio balances primarily
reflects the cumulative impact of loan purchases and loan originations. The
Company carried a higher average loan portfolio balance for the three month
period compared to the period ending balance due to the reinvestment of the
normal monthly principal repayments and prepayments received on outstanding loan
balances into federal funds sold and money market securitites.
Interest income from mortgage-backed securities decreased $922,000, or
44.46%, to $1.2 million for three month period ended December 31, 1998 compared
to $2.1 million for the three month period ended December 31, 1997. This
decrease primarily reflects a decrease of approximately $52.4 million or 41.33%
in the average balance of mortgage-backed securities to $74.5 million compared
to $126.9 million coupled with a 35 basis point decrease in the average yield on
such securities. The decrease in the average yield on mortgage-backed securities
primarily reflects the decrease in market interest rates and increased
pre-payments which reduced the net yield on mortgage-backed securities.
Interest income from investment securities and other interest-earning
assets increased by $573,000 or 213.01%, to $842,000 for the three month period
ended December 31, 1998 compared to $269,000 for the same period last year. The
increase in interest income was primarily attributable to a $41.6 million or
200.84% increase in the average balance of such securities to $62.3 million for
the three month period ended December 31, 1998 compared to $20.7 million for the
three month period ended December 31, 1997. The increase in the average balance
of investment securities and other interest-earning assets for the three month
period ending December 31, 1998 reflects an investment in money market
securities. From time to time, the Bank invests in short term money market
securities and federal funds sold until such time as these monies can be
reinvested in loans or other longer term assets. See Financial
Conditions-Assets.
Interest Expense
Interest expense decreased by $171,000 or 4.63% to $3.5 million for the
three month period ended December 31, 1998 compared to $3.7 million for the same
period last year. The decrease in interest expense was primarily attributable to
a 27 basis point decrease in the average cost of average interest bearing
liabilities to 3.68% for the three month period ended December 31, 1998 compared
to 3.95% for the same period last year, offset in part by an increase of $8.7
million or 2.33% in the average balance of interest bearing liabilities to
$379.0 the three month period ended December 31, 1998 compared to $373.9 million
for the three month period ended December 31, 1997.
Interest expense on deposits decreased by $125,000 or 5.78% to $2.0
million for the three month period ended December 31, 1998 compared to $2.2 for
the same period last year. The decrease in interest expense on deposits was
primarily attributable to a 24 basis point decrease in the average cost of
deposits, offset in part by a $4.9 million or 1.82% increase in the average
balance of deposits to $274.3 million compared to $269.4 million for the same
period last year. Interest expense on borrowings decreased by $46,000 or 3.0% to
$ 1.5 million for the nine month period ended December 31, 1998 compared to $1.5
for the same period last year. The decrease in interest expense on borrowings
was primarily attributable to a 20 basis point decrease in the average cost of
borrowings due to a decrease in market interest rates.
12
<PAGE> 13
Net Interest Income Before Provisions for Loan Losses
Net interest income before provisions for loan losses increased $172,000
or 5.32%, to $3.4 million for the three month period ended December 31, 1998
compared to $3.2 million for the three month period ended December 31, 1997. The
increase in net interest income is primarily attributable to a 23 basis point
decrease in the average cost of interest bearing liabilities offset in part by a
12 basis point decrease in the average yield on interest-earning assets.
Net interest income after provision for loan losses decreased $2.6 million
or 88.23% to $348,000 for the three month period ended December 31, 1998
compared to $3.0 million for the same period last year. The decrease in net
interest income after provision for loan losses primarily reflects a special
provision of approximately $2.5 million to provide for potential losses on the
Bank's consumer loans. See Provision for Loan Losses.
The Company's interest rate spread increased by 11 basis points to 3.33%
for the three month period ended December 31, 1998 compared to 3.22% for the
three month period ended December 31, 1997. The Company's net interest margin
increased by 11 basis points to 3.47% for the three month period ended December
31, 1998 compared to 3.35% for the three month period ended December 31, 1997.
The increase in interest rate spread and net interest margin is primarily
attributable to a decrease in the cost of interest-bearing liabilities, offset
in part by a decrease in the average yield on interest-earning assets. The
Company's ratio of average interest-earning assets to average interest-bearing
liabilities was 103.77% for the three month period ended December 31, 1998
compared to 103.36% for the same period last year.
Provision for Loan Losses
The Company provided $3.1 million for loan losses for the three month
period ended December 31, 1998, compared to $280,000 for the same period last
year. The increase in the provision for the third quarter of fiscal 1999
reflects a one time special provision to significantly increase the Company's
allowance for loan losses in response to an increase in non-performing consumer
loans and to maintain an adequate level of allowance consistent with the Bank's
policies. During the third quarter, the Bank charged off approximately $314,000
in non-performing consumer loans. At December 31, 1998, non-performing loans
totaled approximately $10.1 million or 4.02% of total loans compared to $7.0
million or 2.86% at December 31, 1997. At December 31, 1998, Company's
allowance for loan losses was $6.0 million compared to $2.9 million at December
31, 1997, resulting in a ratio of allowance to non-performing loans of 59.91%
at December 31, 1998 compared to 41.13% at December 31, 1997 and a ratio of
allowances for loan losses to total loans of 2.36% and 1.18% respectively.
Non-Interest Income
Non-interest income decreased by $203,000 or 36.89% to $347,000 for the
third quarter of fiscal 1999 compared to $550,000 for the same period last year.
Non-interest income for the three month period ended December 31, 1997 reflected
a $188,000 gain on the sale of securities. Excluding the gain on sale of
securities, non-interest income for the third quarter of fiscal 1999 increased
by $15,000 compared to the same period last year. The increase in non-interest
income for the third quarter compared to the same period last year excluding the
gain on sale was primarily attributable to increases in fees from bank service
charges.
Non-Interest Expense
Non-interest expense increased by approximately $5.3 million or 181.45% to
$8.3 million for the three month period ended December 31, 1998 compared to $2.9
million for the three month period ended December 31, 1997. The increase
non-interest expense reflects non-recurring charges of $4.1 million in
reconciliation adjustments related to the conversion of the Company's data
processing system to an internal system from outside data service providers and
$1.2 million in consultant fees related to post conversion assignments. The
Company converted to an internal data processing system in April, 1998. During
the third quarter, the Company, with the assistance of outside consultants,
identified unreconcilable differences in the balance of certain accounts that
resulted from transaction processing and reconciling discrepancies. At December
31, 1998, the Company had cleared all such unreconciled differences from the
balances of these accounts.
Excluding the reconciliation adjustments and the consultant fees,
non-interest expense increased by approximately $62,000 or 0.02% to
approximately $3.0 million for three month period ended December 31, 1998
compared to $2.9 million for the same period last year. The increase in
non-interest expense during the third quarter excluding the
13
<PAGE> 14
reconciliation adjustments and the consultant fees was in large part
attributable to an increase in salary and benefits expense, offset in part by
reductions in advertising expense, equipment expense and legal expense.
The Company has been notified of an increase effective January 1, 1999, in
the rate of assessment by the Federal Deposit Insurance Corporation for deposit
insurance ("FDIC insurance") and the assessment by the Office of Thrift
Supervision (the "OTS assessment") due to a change in the OTS CAMEL rating for
the Bank. Management believes that these increases will result in an annualized
pre-tax increase in non-interest expense of approximately $500,000. The Bank is
normally examined by the OTS on an annual basis, however, examinations may occur
more or less frequently.
Income Tax Expense
In connection with the loss from operations incurred during the three
month period ended December 31, 1998, the Company has reflected a benefit
reflecting the carry back of the loss for the income taxes paid. The Company did
not incur income tax expense for the three month period ended December 31, 1998
compared to $329,000 for the three month period ended December 31, 1997. The
Company's effective tax rate for the three month period ended December 31, 1998
was 0.0% compared to 44.96% for the three month period ended December 31, 1997.
Comparison of Operating Results for the
Nine Months Ended December 31, 1998 and 1997
General
The Company reported a net loss for the nine month period ended December
31, 1998 of $5.2 million compared to net income of $940,000, for the same period
last year. The decrease in net income was primarily due to an increase in
non-interest expense and the provision for loan losses offset in part by
increases in net interest income and non-interest income.
Interest Income
Interest income increased by approximately $642,000 or 3.08% to $21.5
million for the nine month period ended December 31, 1998 compared to $20.9
million for the nine month period ended December 31, 1997. The increase in
interest income was primarily attributable to a $9.4 million or 2.40% increase
in the average balance of interest-earning assets to $399.1 the three month
period ended December 31, 1998 compared to $389.7 million for the nine month
period ended December 31, 1997 coupled with a five basis point increase in the
average yield on interest-earning assets to 7.19%. The increase in interest
income for the nine month period was primarily attributable to a shift in assets
from mortgage-backed securities to higher yielding loans.
Interest income from loans receivable increased by $2.0 million, or
14.87%, to $15.5 million for the nine months ended December 31, 1998 compared to
$13.5 million for the nine months ended December 31, 1997. The increase was
primarily attributable to a $31.2 million or 13.17% increase in the average
balance of loan receivables to $268.1 million for the nine month period ended
December 31, 1998 compared to $237.0 million for the nine month period ended
December 31, 1997, coupled with an increase of 12 basis points in the average
yield on the loan portfolio. The increase in the average loan portfolio balances
primarily reflects the impact of loan originations and purchases.
Interest income from mortgage-backed securities decreased $2.2 million, or
33.17%, to $4.3 million for the nine months ended December 31, 1998 compared to
$6.5 million for the nine months ended December 31, 1997. The decrease was
primarily attributable to a decrease of $43.1 million or 32.19% in the average
balance of mortgage-backed securities to $90.7 million for the three month
period ended December 31, 1998 compared to $133.8 million for the same period
last year. The decrease in the average balance of mortgage-backed securities
reflects the Company's strategy to shift assets from securities to higher
yielding loans.
Interest income from investment securities and other interest-earning
assets increased by $789,000 or 88.16%, to $1.7 million for the nine months
ended December 31, 1998 compared to $895,000 for the nine months ended December
31, 1997. The increase in interest income is primarily attributable to a $21.2
million or 111.74% increase in the average balance of investment securities and
other interest-earning assets to $40.2 million for the nine months ended
December 31, 1998 compared to $19.0 million for the nine months ended December
31, 1997, offset in part by an 81 basis point decrease in the average yield on
investment securities. The increase in the average balance of investment
securities and other interest-earning assets for the nine month period ending
December 31, 1998 reflects increased investment in money market securities.
14
<PAGE> 15
Interest Expense
Interest expense decreased by $298,000 or 2.64% to $11.0 million for the
nine months ended December 31, 1998 compared to $11.3 million for the nine
months ended December 31, 1997. The decrease in interest expense was primarily
attributable to a 18 basis point decrease in the average cost of
interest-bearing liabilities to 3.83% offset, in part by a $8.0 million or 2.12%
increase in the average balance of interest bearing liabilities to $384.8 the
nine month period ended December 31, 1998 compared to $376.8 million for the
nine month period ended December 31, 1997.
Interest expense on deposits decreased by $208,000 or 3.22% to $6.2
million for the nine month period ended December 31, 1998 compared to $6.5
million for the nine month period ended December 31, 1997. The decrease in
interest expense on deposits was primarily attributable to a 18 basis point
decrease in the average cost deposits, offset in part a $6.8 million or 2.53%
increase in the average balance of deposits to $276.4 million compared to $269.6
million for the same period last year. Interest expense on borrowings decreased
by $92,000 or 1.88% to $4.8 million for the nine month period ended December 31,
1998 compared to $4.9 for the same period last year. The decrease in interest
expense on borrowings is primarily attributable to an 18 basis point decrease in
the average cost of borrowings, offset in part by a $1.2 million increase in the
average balance of borrowings.
Net Interest Income Before Provisions for Loan Losses
Net interest income before provisions for loan losses increased $942,000
or 9.88%, to $10.5 million for the nine month period ended December 31, 1998
compared to $9.5 million for the nine month period ended December 31, 1997. The
increase in net interest income is primarily attributable to a 23 basis point
decrease in the average cost of interest bearing liabilities coupled with a 5
basis point increase in the average yield on interest-earning assets.
Net interest income after provision for loan losses decreased $2.2 million
or 24.71% to $6.7 million for the nine month period ended December 31, 1998
compared to $8.9 million for the same period last year. The decrease in net
interest income after provision for loan losses primarily reflects a special
provision of approximately $2.5 million incurred during the third quarter to
provide for possible losses on the Bank's consumer loan portfolio. See
Provision for Loan Losses.
The Company's interest rate spread increased by 23.0 basis points to 3.36%
for the nine month period ended December 31, 1998 compared to 3.13% for the nine
month period ended December 31, 1997. The Company's net interest margin
increased by 24 basis points to 3.50% for the nine month period ended December
31, 1998 compared to 3.26% for the nine month period ended December 31, 1997.
The increase in interest rate spread and net interest margin is primarily
attributable to an increase in the average balance and average yield on
interest-earning assets coupled with a decrease in the average cost on
interest-bearing liabilities. The Company's ratio of average interest-earning
assets to average interest-bearing liabilities decreased to 103.72% for the nine
month period ended December 31, 1998 from 103.44% for the nine month period
ended December 31, 1997.
Provision for Loan Losses
The Company provided $3.8 million for loan losses for the nine month
period ended December 31, 1998, compared to $618,000 for the same period last
year. The increase in the provision for loan losses for the nine month period
reflects a one time special provision of $2.5 million. The Company took the
special provision to significantly increase the Bank's allowance for loan losses
in response to an increase in non-performing loans and to maintain an adequate
level of allowance consistent with the Bank's policies. During the nine month
period, the Bank charged off approximately $1.0 million in non-performing
consumer loans. At December 31, 1998, non-performing loans totaled
approximately $10.1 million or 4.01% of total loans compared to $6.8 million
or 2.51% at March 31, 1998. At December 31, 1998, Carver's allowance for loan
losses was $6.0 million compared to $3.1 million at March 31, 1998, resulting
in a ratio of allowance to non-performing loans of 59.91% at December 31, 1998
compared to 45.30% at March 31, 1998, and a ratio of allowances for loan losses
to total loans of 2.36% and 1.11% respectively.
Non-Interest Income
Non-interest income increased by $275,000 or 22.54% to $1.5 million for
the nine month period ended December 31, 1998 compared to $1.2 million for the
same period last year. Non-interest income for the nine month period ended
December 31, 1997 reflected a $188,000 gain on the sale of securities. Excluding
the gain on sale of securities, non-interest income increased by $463,000 or
44.94% for the nine month period ended December 31, 1998 compared to the same
period last year reflecting early prepayment fees on loans and increases in fees
from bank service charges.
15
<PAGE> 16
Non-Interest Expenses
Non-interest expense increased by approximately $6.5 million or 77.05% to
$14.9 million for the nine month period ended December 31, 1998 compared to $8.4
million for the nine month period ended December 31, 1997. The increase in
non-interest expense reflects non-recurring charges of $4.1 million in
reconciliation adjustments related to the conversion of the Company's data
processing system to an internal system from outside data service providers and
$1.2 million in consultant fees related to post conversion assignments.
Excluding the reconciliation adjustments and the consultant fees,
non-interest expense increased by approximately $1.2 million to $9.6 million for
the nine month period ended December 31, 1998 compared to $8.4 million for the
same period last year. The increase in non-interest expense also reflects
increases of; $465,000 in salary and benefits expense, $157,000 in equipment
expense, and $64,000 in security service expense, offset in part by reductions
in advertising expense, and legal expense. FDIC insurance expense increased by
$65,000 or 77.99% to $148,000 for the nine month period ended December 31, 1998
compared to $84,000 for the same period last year. The Bank did not incur an
expense for quarterly FDIC premium during the first quarter of fiscal 1998 as a
result of the legislation enacted to recapitalize the Savings Association
Insurance Fund. The Company has been notified that the Bank's FDIC insurance
premium and OTS assessment will increase effective January 1, 1999. In addition,
the increase in non-interest expense for the nine month period reflects a
$250,000 charge that was incurred in connection with a prospective settlement of
litigation. See Legal Proceedings, Part II, Item 1 of this 10-Q.
Income Tax Expense
In connection with the loss from operations incurred during the three
month period ended December 31, 1998, the Company has reflected a benefit
reflecting the carry back of the loss for the income taxes paid of approximately
$1.5 million. In addition, the Company has available net operations loss carry
forward totaling approximatley 5.1 million, which will expire in 2019 to offset
fututre taxable income.The Company did not incur income tax expense for the
nine month period ended December 31, 1998 compared to $523,000 for the nine
month period ended December 31, 1997. The Company's effective tax rate for the
nine month period ended December 31, 1998 was 0.0% compared to 44.99% for the
nine month period ended December 31, 1997.
Year 2000 Compliance
The "Year 2000 Problem" centers on the inability of computer systems to
recognize the year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial providers, the Company and its operations may be significantly
affected by the Year 2000 Problem due to the nature of financial information.
Software, hardware, and equipment both within and outside the Company's direct
control and with whom the Company electronically or operationally interfaces
(e.g. third party vendors providing data processing, information system
management, maintenance of computer systems and credit bureau information) are
likely to be affected. Furthermore, if computer systems are not adequately
changed to identify the year 2000, many computer applications could fail or
create erroneous results. Therefore, calculations which rely on the date field
information, such as interest, payment or due dates and other operating
functions, may generate results which could be significantly misstated, and the
Company could experience a temporary inability to process transactions, send
invoices or engage in similar normal business activities. In addition, under
certain circumstances, failure to adequately address the Year 2000 Problem could
adversely affect the viability of the Company's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Year
2000 Problem could result in a significant adverse impact on the Company's
products, services and competitive condition.
The OTS and the other federal banking regulators have issued guidelines to
be followed by insured depository institutions, such as the Bank, to assure
resolution of the Year 2000 Problem. Any institution's failure to address
appropriately the Year 2000 Problem could result in supervisory action.
State of Readiness - During April 1997 the Company formulated its Year
2000 Project Plan (the "Plan") to address the Year 2000 Problem. The Company
converted its deposits and a portion of its loan portfolio to a Year 2000
Complaint System in April of 1998. The Company began testing its loan and
deposit systems in July, 1998 and is currently on the final phase of the process
of obtaining software modifications deemed necessary for compliance in all other
systems. The Company has initiated formal communications with all of its
significant suppliers to determine the extent to which the Company is vulnerable
to those third parties' failure to resolve their own Year 2000 Problem. The
Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Problem will be mitigated without
causing a material adverse effect on its operations. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Problem could have a material
16
<PAGE> 17
adverse impact on the Company's operations. As a result the Company expects to
formulate a contingency plans for its mission critical systems where possible.
The Company does maintain a disaster recovery program designed to deal with
similar failures on an ongoing basis. All business units have been directed to
update and review their existing recovery plans in addition to developing
contingency plans prior to March 31, 1999 to address the possible failure of one
or more mission critical systems. At this time, management believes that any
such impact and any resulting costs will not be material.
Monitoring and managing the Year 2000 Problem will result in additional
direct and indirect costs to the Company. Direct costs include potential charges
by third party software vendors for product enhancements, costs involved in
testing software products for Year 2000 compliance and any resulting costs for
developing and implementing contingency plans for critical software products
which are not enhanced. Indirect costs will principally consist of the time
devoted by existing employees in monitoring software vendor progress, testing
enhanced software products and implementing any necessary contingency plans.
Such costs have not been material to date. The Company believes that any such
costs to be incurred in the future will not have a material effect on its
results of operations. Both direct and indirect costs of addressing the Year
2000 Problem will be charged to earnings as incurred.
ITEM 3
Quantitative and Qualitative Disclosure About Market Risk
Quantitative and qualitative disclosure about market risk is presented at
March 31, 1998 in Item 7A to the Company's Annual Report of Form 10-K, filed
with the Securities and Exchange Commission ("SEC") on July 14, 1998 as amended
on Form 10-K/A filed with the SEC on August 13, 1998. The Company believes that
there have been no material changes in the Company's market risk at December 31,
1998 compared to March 31, 1998.
17
<PAGE> 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is a party to various legal proceedings
incident to its business. As of December 31, 1998, except as set forth below,
there were no legal proceedings to which the Company or its subsidiaries was a
party, or to which any of their property was subject, which were expected by
management to result in a material loss.
On January 2, 1996, the United States District Court for the Southern
District of New York dismissed the class action encaptioned Dougherty v. Carver
Federal Savings Bank for lack of subject matter jurisdiction. The class action
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.
In August, 1998, the plaintiffs in each of the above mentioned cases with
the consent of the defendants filed a motion with the District Court for
preliminary approval of a settlement proposed by the parties herein. In
November, 1998, Judge Makasey of the U.S. District Court preliminarily approved
the proposed settlement and scheduled a hearing on the fairness of the same for
February 16, 1999. On February 16,1999, Judge Mukasey approved the final
settlement. The Company incurred a one time charge of $250,000 during the second
quarter of fiscal year 1999 in connection with the settlement.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On January 25, Carver announced the termination of Thomas L. Clark, Jr.
as President and Chief Executive Officer. At that time, Carver engaged Spencer
Stuart, a leading executive search firm to aid Carver in finding a replacement.
In the interim, Carver established an operating committee consisting of four
directors and members of senior management to manage the day-to-day operations
of Carver until a replacement is named. The operating committee is chaired by
Director Pazel G. Jackson.
The Company filed a current report on Form 8-K on February 12, 1999
relating to the termination of Mr. Clark as Carver's President and Chief
Executive Officer.
Item 6. Exhibits and Reports on Form 8-K
None
18
<PAGE> 19
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.
Date: February 22, 1999 CARVER BANCORP, INC.
/s/ David R. Jones, Esq.
-----------------------------------------
David R. Jones, Esq.
Chairman of the Board of Directors
Date: February 22, 1999 /s/ Walter T. Bond
-----------------------------------------
Walter T. Bond
Vice President and
Acting Chief Financial Officer
19
<PAGE> 1
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
AS OF QUARTER ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
For the Three month Period Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Net income / (Loss) $(5,723,383) $ 300,680
Weighted average shares outstanding 2,208,432 2,189,918
Earning / (Loss) per shares outstanding $ (2.59) $ 0.14
<CAPTION>
For the Nine month Period Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Net income / (Loss) $(5,212,120) $ 940,221
Weighted average shares outstanding 2,203,690 2,185,376
Earning / (Loss) per shares outstanding $ (2.37) $ 0.43
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet and the statement of earnings of Carver Bancorp, Inc. for the nine month
period ended December 31, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 29,626,870
<INT-BEARING-DEPOSITS> 269,710,911
<FED-FUNDS-SOLD> 15,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,369,985
<INVESTMENTS-CARRYING> 70,966,306
<INVESTMENTS-MARKET> 70,267,378
<LOANS> 251,004,828
<ALLOWANCE> 6,037,830
<TOTAL-ASSETS> 420,491,768
<DEPOSITS> 281,623,628
<SHORT-TERM> 101,055,308
<LIABILITIES-OTHER> 4,150,288
<LONG-TERM> 1,038,152
0
0
<COMMON> 21,144
<OTHER-SE> 30,862,135
<TOTAL-LIABILITIES-AND-EQUITY> 420,491,768
<INTEREST-LOAN> 15,497,439
<INTEREST-INVEST> 1,125,263
<INTEREST-OTHER> 557,980
<INTEREST-TOTAL> 21,517,314
<INTEREST-DEPOSIT> 6,249,725
<INTEREST-EXPENSE> 11,043,113
<INTEREST-INCOME-NET> 10,474,201
<LOAN-LOSSES> 3,810,569
<SECURITIES-GAINS> 4,941
<EXPENSE-OTHER> 7,807,246
<INCOME-PRETAX> (6,717,578)
<INCOME-PRE-EXTRAORDINARY> (6,717,578)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,212,120)
<EPS-PRIMARY> (2.37)
<EPS-DILUTED> (2.37)
<YIELD-ACTUAL> 7.19
<LOANS-NON> 1,320,000
<LOANS-PAST> 8,383,000
<LOANS-TROUBLED> 576,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,137,999
<CHARGE-OFFS> 917,738
<RECOVERIES> 7,000
<ALLOWANCE-CLOSE> 6,037,830
<ALLOWANCE-DOMESTIC> 6,037,830
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
