<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] 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)
<TABLE>
<S> <C>
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)
</TABLE>
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>
<S> <C>
COMMON STOCK, PAR VALUE $.01 2,314,275
------------------------------------------------------- -----------------------------------------------------
Class Outstanding at November 15, 1999
</TABLE>
<PAGE> 2
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 1999 and March 31, 1999 (unaudited)......................................1
Consolidated Statements of Income for the Three and Six Month
Periods Ended September 30, 1999 and 1998 (unaudited)..................................2
Consolidated Statements of Cash Flows for the Three and Six Month
Periods Ended September 30, 1999 and 1998 (unaudited)..................................3
Notes to Consolidated Financial Statements (unaudited).................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................................4
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................18
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..............................................................................19
Item 6. Exhibits and Reports on Form 8-K...............................................................19
SIGNATURES.......................................................................................................20
</TABLE>
i
<PAGE> 3
CARVER BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
As of As of
September 30, March 31,
1999 1999
------------------- ------------------
<S> <C> <C>
ASSETS
Cash and due from banks................................................ $ 8,025,414 $ 11,120,748
Other interest earning assets.......................................... 11,900,000 10,200,000
------------- -------------
Total cash and cash equivalents...................................... 19,925,414 21,320,748
------------- -------------
Investment securities held to maturity................................. 24,995,563 --
Securities available for sale.......................................... 29,825,053 29,918,137
Mortgage-backed securities held to maturity, net (estimated fair values
of $56,453,619 and $65,693,568 at September 30, 1999 and
March 31, 1999)...................................................... 58,434,643 66,584,447
Loans receivable....................................................... 256,236,208 274,541,950
Less allowance for loan losses....................................... (3,552,826) (4,020,099)
------------- -------------
Loans receivable, net................................................ 252,683,382 270,521,851
------------- -------------
Real estate owned, net................................................. 468,400 184,599
Property and equipment, net............................................ 11,602,921 11,844,983
Federal Home Loan Bank of New York stock, at cost...................... 5,754,600 5,754,600
Accrued interest receivable, net....................................... 2,764,738 2,860,693
Excess of cost over net assets acquired, net........................... 923,316 1,029,853
Other assets........................................................... 5,853,865 6,422,933
------------- -------------
Total assets......................................................... $ 413,231,895 $ 416,482,844
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits............................................................. $ 279,022,695 $ 276,999,074
Securities sold under agreement to repurchase........................ 31,337,000 35,337,000
Advances from Federal Home Loan Bank of New York..................... 65,698,549 65,708,466
Other borrowed money................................................. 896,234 992,619
Other liabilities.................................................... 3,968,620 6,270,419
------------- -------------
Total liabilities................................................. 380,923,098 385,307,578
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value per share; 2,000,000 shares
authorized; none issued........................................... -- --
Common stock, $0.01 par value per share; 10,000,000 shares
authorized; 2,314,275 shares issued and outstanding............... 23,144 23,144
Additional paid-in capital........................................... 21,414,390 21,423,574
Retained earnings-substantially restricted........................... 11,767,498 10,721,168
Common stock acquired by Employee Stock Ownership Plan............... (896,235) (992,620)
Comprehensive Income, net of income tax.............................. -- --
------------- -------------
Total stockholders' equity........................................ 32,308,797 31,175,266
------------- -------------
Total liabilities and stockholders' equity...................... $ 413,231,895 $ 416,482,844
============= =============
</TABLE>
1
<PAGE> 4
CARVER BANCORP INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------------- ------------------------------------
1999 1998 1999 1998
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Interest Income:
Loans receivable, net................. $ 4,678,078 $ 5,205,367 $ 9,738,605 $ 10,559,623
Mortgage-backed securities............ 921,569 1,338,548 1,902,783 3,185,114
Investment securities................. 910,150 329,398 1,591,116 495,422
Other interest earning assets......... 184,643 127,751 327,058 345,788
-------------- -------------- -------------- ------------
Total interest income.............. 6,694,440 7,001,064 13,559,562 14,585,947
-------------- -------------- -------------- ------------
Interest expense:
Deposits.............................. 2,175,181 2,070,885 4,352,742 4,212,653
Advances and other borrowed money..... 1,387,651 1,562,363 2,790,612 3,307,768
-------------- -------------- -------------- --------------
Total interest expense............. 3,562,832 3,633,248 7,143,354 7,520,421
-------------- -------------- -------------- --------------
Net interest income..................... 3,131,608 3,367,816 6,416,208 7,065,526
Provision for loan losses............... 230,000 299,885 380,000 750,000
-------------- -------------- -------------- --------------
Net interest income after provision
for loan losses....................... 2,901,608 3,067,831 6,036,208 6,315,526
-------------- -------------- -------------- --------------
Non interest income:
Loan fees and service charges......... 6,461 60,916 17,246 109,111
Other income.......................... 506,256 511,450 970,603 1,037,923
-------------- -------------- -------------- --------------
Total non-interest income.......... 512,717 572,366 987,849 1,147,034
-------------- -------------- -------------- --------------
Non-interest expense:
Salaries and employee benefits........ 1,180,296 1,363,524 2,484,436 2,603,768
Net occupancy expenses................ 318,028 305,986 664,577 593,962
Equipment............................. 378,364 322,415 773,842 769,426
Other................................. 1,278,204 1,344,850 2,054,873 2,638,465
-------------- -------------- -------------- --------------
Total non-interest expenses........ 3,154,892 3,336,775 5,977,728 6,605,621
-------------- -------------- -------------- --------------
Income before income taxes.............. 259,433 303,422 1,046,329 856,939
Income taxes............................ 121,103 110,211 493,104 345,676
Income taxes (benefit).................. (121,103) - (493,104) -
------------ ------------ ------------ ------------
Net income.............................. $ 259,433 $ 193,211 $ 1,046,329 $ 511,263
============ ============ ============ ============
Net income per common share............. $ 0.12 $ 0.09 $ 0.47 $ 0.23
============ ============ ============ ============
Weighted average number of
common shares outstanding............. 2,223,218 2,203,562 2,220,784 2,201,306
============ ============ ============ ============
</TABLE>
2
<PAGE> 5
CARVER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
-----------------------------------------
Cash flows from operating activities: 1999 1998
------------------- ------------------
<S> <C> <C>
Net income............................................................. $ 1,046,329 $ 511,263
Adjustments:
Depreciation and amortization of premises and equipment................ 502,895 574,199
Amortization of intangibles............................................ 106,536 102,720
Other amortization and accretion, net.................................. 365,526 474,546
Provision for loan losses.............................................. 380,000 750,000
Deferred income taxes.................................................. 123,000 125,714
Allocation of ESOP stock............................................... 81,775 91,085
Changes in accrued interest receivable, net............................ 167,049 (684,690)
(Increase) decrease in other assets.................................... 569,068 (2,306,431)
Increase (decrease) in other liabilities............................... (2,301,799) 6,331,770
------------- -------------
Net cash provided by operating activities.............................. 1,040,379 5,970,156
------------- -------------
Cash flows from investing activities:
Principal repayments on available for sale securities.................. - 3,693,066
Purchases of discount notes............................................ (299,065,655) (74,615,222)
Proceeds from matured discount notes................................... 300,000,000 35,000,000
Purchase of investment securities held to maturity..................... (25,000,000) -
Proceeds from sale/call of securities held for sale.................... - 23,841,581
Proceeds from maturities and calls of investment securities held to
maturity............................................................... - 305,986
Principal repayment of mortgage backed securities held to maturity..... 8,125,990 11,606,467
Net change in loans receivable......................................... 15,807,465 17,061,818
Additions to premises and equipment.................................... (220,832) (1,225,931)
------------- -------------
Net cash (used in) provided by investing activities.................... (353,032) 16,486,800
------------- -------------
Cash flows from financing activities:
Net increase (decrease) in deposits.................................... 2,023,621 2,901,912
Net increase (decrease) in short term borrowing (repos)................ (4,000,000) (32,050,000)
Repayment of FHLB advances............................................. (9,917) -
Advances from Federal Home Loan Bank of New York....................... - 14,981,376
Repayment of other borrowed money...................................... (96,385) (91,066)
Dividends paid......................................................... - (115,714)
------------- --------------
Net cash provided by (used in) financing activities.................... (2,082,681) (14,373,492)
------------- -------------
Net increase (decrease) in cash and equivalents........................ (1,395,334) 8,083,464
Cash and equivalents - beginning....................................... 21,320,748 15,120,071
------------- -------------
Cash and equivalents - ending.......................................... $ 19,925,414 $ 23,203,535
============= =============
Unrealized gain (loss) on securities available for sale................ - 10,979
Deferred income taxes.................................................. - 5,160
============= =============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest............................................................... $ 7,143,353 $ 7,520,421
============= =============
Federal, state and city income taxes................................... - 123,100
</TABLE>
3
<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 (consisting of normal recurring adjustments)
necessary for fair presentation have been included. The consolidated results of
operations and other data for the three month and six month periods ended
September 30, 1999 are not necessarily indicative of results that may be
expected for the entire fiscal year ending March 31, 2000 ("fiscal year 2000").
The unaudited consolidated financial statements include the accounts of the
Holding Company and its wholly owned subsidiaries, Carver Federal Savings Bank
(the "Bank" or "Carver Federal") and Alhambra Holding Corp., a Delaware
corporation ("Alhambra Holding") and the Bank's wholly owned subsidiaries,
C.F.S.B. Realty Corp. and C.F.S.B. Credit Corp. Carver Federal and the Holding
Company are referred to herein collectively as "Carver" or the "Company." All
significant inter company accounts and transactions have been eliminated in
consolidation.
(2) EARNINGS PER SHARE CALCULATION
Net income per share for the three month and six month periods ended
September 30, 1999 and 1998 are calculated based on the weighted average number
of shares outstanding during the period.
(3) ALHAMBRA HOLDING CORP.
Other assets in the Unaudited Consolidated Statements of Financial
Condition includes an investment of $1.4 million in Alhambra Holding. During the
third quarter of the fiscal year ended March 31, 1999 ("fiscal year 1999"),
Carver established Alhambra Holding to hold 80% of the common stock and 100% of
the preferred stock of Alhambra Realty Corp. ("Alhambra Realty"). Alhambra
Realty was established to hold title to a certain piece of commercial real
property located in the City of New York, borough of Manhattan.
Carver acquired a majority interest in Alhambra Realty through Alhambra
Holding in connection with a workout with an existing borrower of the Bank whose
loan was secured by partially occupied commercial real property. Carver is
currently examining its options with respect to Alhambra Realty and the property
it owns, which include, but are not limited to, conducting a sale of the
property or developing the property and leasing the unoccupied space.
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, the Company's ability to improve both its
loan operations, including the origination and purchase of loans which meet its
underwriting guidelines, and deposit gathering capabilities, 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.
4
<PAGE> 7
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." 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 and 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 ("City National"). The Roosevelt Office is
located in Nassau County, New York and had deposits of approximately $8.6
million at September 30, 1999. Due to certain regulatory issues, the
transaction, which was expected to close by March 31, 1999, has not yet been
consummated. During May, 1999, the Company and City National held a meeting to
discuss the issues preventing the transaction from closing and mutually agreed
to pursue the consummation of the transaction under similar terms and conditions
as the original agreement. At September 30, 1999, the Company and City National
were actively working to complete the details required to close the transaction.
MANAGEMENT RESTRUCTURING
On November 4, 1999, the Company announced a management restructuring
with the arrival of key members of a new senior management team from major money
center banks. The new officers are:
- Benny A. Joseph, II, Senior Vice President and Chief Lending Officer, is
charged with boosting loan volume, strengthening credit policy, and
restructuring the Bank's lending department; he comes to Carver from
Fleet Financial Corporation.
- Margaret D. Peterson, who assumes a newly-created role, Senior Vice
President and Chief Administrative Officer, integrating Human Resources,
Information Technology, Facilities and Vendor Management, is charged with
enhancing the Bank's control over expenses. Ms. Peterson comes to Carver
from Deutsche Bank.
- Daphne E. Heslop, Senior Vice President and Chief Auditor, is charged
with enhancing the Bank's management by reinforcing a rigorous control
environment. Ms. Heslop joins Carver from Roosevelt Savings Bank.
- Judith Taylor, formerly of Chemical Bank and The Resolution Trust
Corporation, has been selected as Acting Senior Vice President and Chief
of Retail Banking. She brings over 30 years of experience to Carver and
is charged with strengthening branch operations and improving customer
service. Her permanent replacement is expected to be identified by
year-end.
The Company also announced that searches are underway for other members
of the Bank's senior management team, including Chief Financial Officer and
General Counsel.
DIRECT STOCK PURCHASE PLAN
On October 20, 1999, the Holding Company filed a registration statement
on Form S-2 with the SEC for the purpose of registering shares to be sold under
the Holding Company's Shares Program, whereby customers, employees, investors
and members of the communities served by Carver Federal may invest in the
Holding Company's Common Stock without going through a broker. The program is
structured to offer Carver shares through a plan administrator, which will
execute orders by purchasing the Company's shares in the open market. If shares
are not available in the open market the plan administrator may purchase shares
form the Holding Company.
5
<PAGE> 8
FINANCIAL CONDITION
ASSETS
Total assets decreased by $3.3 million, or 0.78% to $413.2 million at
September 30, 1999, compared to $416.5 million at March 31, 1999. The decrease
in total assets primarily reflects decreases in loans receivable net,
mortgage-backed securities ("MBSs") held to maturity and cash and cash
equivalents, offset in part by an increase in investment securities held to
maturity ("HTM").
Total cash and cash equivalents decreased by $1.4 million, or 6.54% to
$19.9 million at September 30, 1999, compared to $21.3 million at March 31,
1999.
Investment securities HTM were $25.0 million at September 30, 1999,
whereas at March 31, 1999 the Company did not carry any investment securities as
HTM. The increase in investment securities HTM reflects the reinvestment of
principal and interest received during the first quarter on MBSs and loans
receivable. At September 30, 1999, securities held as available for sale ("AFS")
totaled $29.8 million compared to $29.9 million at March 31, 1999.
MBSs HTM decreased by $8.1 million, or 12.24% to $58.4 million at
September 30, 1999, compared to $66.6 million at March 31, 1999. The decrease in
MBSs HTM primarily reflects principal repayments. Loans receivable net decreased
by $17.8 million, or 6.59% to $252.7 million at September 30, 1999, compared to
$270.5 at March 31, 1999. The decrease in loans receivable net primarily
reflects increased loan prepayments. The prepayments primarily reflect the
refinancing of loans due to lower market interest rates. During the second
quarter, the Company purchased approximately $22.5 million in multi-family loans
secured by properties located in the New York Metropolitan area to augment loan
originations and began to rebuild its loan department. During the second
quarter, the Company started the rebuilding process by hiring a new chief
lending officer. The Company expects to enhance origination, processing,
underwriting, and loan portfolio management capabilities to complete the
rebuilding process. The Company also expects to continue the purchase of loans
during the rebuilding period.
LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits increased by $2.0 million, or 0.73% to $279.0 million at
September 30, 1999, compared to $277.0 million at March 31, 1999. The increase
in total deposits was primarily attributable to increases of: $1.4 million in
NOW accounts, $795,000 in certificates of deposit, and $837,000 in regular
savings and club accounts, offset in part by a decrease of $1.1 million in money
market accounts. These increases primarily reflect interest credited. The
Company plans to modernize its retail banking services by introducing telephone
banking and gathering more detailed information regarding its customer base in
order to improve customer service. The Company believes that these steps will
strengthen its deposit gathering capabilities.
Total borrowings decreased by $4.1 million, or 4.02% to $97.9 million at
September 30, 1999, compared to $102.0 million at March 31, 1999. The decrease
in total borrowings primarily reflects a decrease in reverse repurchase
agreements ("repos") of $4.0 million, or 11.32% to $31.3 million. The decrease
reflects the Company's ability to fund loan originations and loan purchases with
repayments on MBSs and loans receivable together with the increase in deposits.
Stockholders' equity increased by $1.1 million, or 3.64% to $32.3 million
at September 30, 1999, compared to $31.2 million at March 31, 1999. The increase
in stockholders' equity primarily reflects an increase in retained earnings for
the six month period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits and principal and
interest payments on loans, MBSs and investment securities. While maturities and
scheduled amortization of loans, MBSs and investment securities are predictable
sources of funds, deposit flows and loans and prepayments on MBSs are strongly
influenced by changes in general interest rates, economic conditions and
competition.
For the six month period ended September 30, 1999 the primary investment
activity of the Company is the purchase of loans and the purchase of investment
securities and mortgage-backed securities. During the six month period ended
September 30, 1999, the Company purchased approximately $22.5 million of
mortgage loans and
6
<PAGE> 9
$25.0 million of investment securities. During the six month period ended
September 30, 1999, the Company sold no investment securities, mortgage loans or
MBSs.
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 September 30, 1999, the
Company's cash and cash equivalents totaled $19.9 million compared to $21.3
million at March 31, 1999. This reduction in cash and cash equivalents is not
expected to have a material impact on our operations.
The Office of Thrift Supervision, the Bank's primary federal regulator,
requires that the Bank meet minimum tangible, core and risk-based capital
requirements. As of September 30, 1999, the Bank exceeded all fully phased-in
regulatory capital requirements. The table below presents certain information
relating to the Bank's capital compliance at September 30, 1999 and March 31,
1999.
The Office of Thrift Supervision (the "OTS") requires that the Bank meet
minimum tangible, leverage (core) and risk-based capital requirements. As of
September 30, 1999, the Bank exceeded all of its regulatory capital
requirements. The Bank's required, actual and excess capital levels as of
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Amount % of Assets
----------------- -------------------
(dollars in thousands)
Tangible capital:
<S> <C> <C>
Capital level............................ $ 27,446 6.67%
Less requirement......................... 6,170 1.50
--------- -------
Excess................................... $ 21,276 5.17%
========= ======
Core capital:
Capital level............................ $ 27,480 6.68%
Less requirement......................... 16,452 4.00
--------- -------
Excess................................... $ 11,028 2.68%
========= =====
Risk-based capital:
Capital level............................ $ 29,850 15.19%
Less requirement......................... 15,710 8.00
--------- -------
Excess................................... $ 14,140 7.19%
========= ======
</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.
During the three and six month periods ended September 30, 1999 the
Company placed primary emphasis on its whole loan portfolio through the purchase
of whole loans. It is expected that the Company's future earnings will be
derived primarily from direct lending and purchase activities rather than
investing in securities.
The following tables set 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
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
7
<PAGE> 10
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.
8
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------------
1999
-----------------------------------------------------------
Average Quarterly Annualized
Balance Interest Avg. Yield/Cost
------------------ ------------------ -------------------
(Dollars in thousands)
<S> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS
Loans (1)................................... $ 249,412 $ 4,678 7.50%
Investment securities (2)................... 65,644 910 5.55
Mortgage-backed securities.................. 60,088 921 6.13
Other interest earning assets............... 9,600 185 7.71
------------ ------------ ----
Total interest earning assets............ 384,744 $ 6,694 6.96%
------------
Non-interest earning assets................. 33,255
------------
Total Assets............................. $ 417,999
============
LIABILITIES
INTEREST BEARING LIABILITIES
Deposits
DDA......................................... $ 11,702 $ - -%
NOW......................................... 16,603 76 1.83
Savings and clubs........................... 145,762 919 2.52
Money market accounts....................... 20,646 158 3.06
Certificates of deposit..................... 86,396 1,022 4.73
------------ ------------ ----
Total Deposits........................... 281,109 2,175 3.09
Borrowed money................................. 99,969 1,388 5.55
------------ ------------ ----
Total interest-bearing liabilities............. 381,078 3,563 3.74%
------------
Non-interest-bearing liabilities............... 4,605
------------
Total liabilities.............................. 385,683
Stockholders' equity........................... 32,316
------------
Total liabilities and stockholders' equity..... $ 417,999
============
Net interest income............................ $ 3,131
============
Interest rate spread........................... 3.22%
====
Net interest margin............................ 3.60%
====
Ratio of average interest earning assets to
interest-bearing liabilities................... 101.0x
=====
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------------
1998
-----------------------------------------------------------
Average Quarterly Annualized
Balance Interest Avg. Yield/Cost
------------------ ------------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS
Loans (1)................................... $ 268,317 $ 5,205 7.76%
Investment securities (2)................... 24,895 329 5.29
Mortgage-backed securities.................. 83,373 1,339 6.42
Other interest earning assets............... 6,425 128 7.97
------------ ------------ ----
Total interest earning assets............ 383,010 $ 7,001 7.31%
------------
Non-interest earning assets................. 35,589
------------
Total Assets............................. $ 418,599
============
LIABILITIES
INTEREST BEARING LIABILITIES
Deposits
DDA......................................... $ 10,693 $ - -%
NOW......................................... 17,556 73 1.66
Savings and clubs........................... 145,917 885 2.43
Money market accounts....................... 22,332 171 3.06
Certificates of deposit..................... 76,768 941 4.90
------------ ------------ ----
Total Deposits........................... 273,266 2,070 3.03
Borrowed money................................. 102,140 1,562 6.12
------------ ------------ ----
Total interest-bearing liabilities............. 375,406 3,632 3.87%
------------
Non-interest-bearing liabilities............... 7,150
------------
Total liabilities.............................. 382,556
Stockholders' equity........................... 36,043
------------
Total liabilities and stockholders' equity..... $ 418,599
============
Net interest income............................ $ 3,369
============
Interest rate spread........................... 3.44%
====
Net interest margin............................ 3.52%
====
Ratio of average interest earning assets to
interest-bearing liabilities................... 100.1x
=====
</TABLE>
----------
(1) Includes non-accrual loans.
(2) Includes FHLB stock and fair value of investments available for sale of
$29.8 million at September 30, 1999.
9
<PAGE> 12
<TABLE>
<CAPTION>
Six Months Ended September 30,
-----------------------------------------------------------
1999
-----------------------------------------------------------
Average Annualized
Balance Interest Yield/Cost
------------------ ------------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS
Loans (1)................................... $ 255,246 $ 9,739 7.63%
Investment securities (2)................... 58,769 1,591 5.41
Mortgage-backed securities.................. 62,148 1,902 6.12
Other interest earning assets............... 10,613 327 6.16
------------ ------------ ----
Total interest earning assets............ 386,776 $ 13,559 7.01%
------------
Non-interest earning assets................. 32,050
------------
Total Assets............................. $ 418,826
============
LIABILITIES
INTEREST BEARING LIABILITIES:
Deposits
DDA......................................... $ 11,688 $ - -%
NOW......................................... 16,753 154 1.84
Savings and clubs........................... 146,285 1,844 2.52
Money market accounts....................... 21,123 318 3.01
Certificates of deposit..................... 86,180 2,037 4.73
------------ ------------ ----
Total Deposits........................... 282,029 4,353 3.09
Borrowed money................................. 100,995 2,791 5.53
------------ ------------ ----
Total interest-bearing liabilities............. 383,024 7,144 3.73%
------------
Non-interest-bearing liabilities............... 3,825
------------
Total liabilities.............................. 386,849
Stockholders' equity........................... 31,977
------------
Total liabilities and stockholders' equity..... $ 418,826
============
Net interest income............................ $ 6,415
============
Interest rate spread........................... 3.28%
====
Net interest margin............................ 3.32%
====
Ratio of average interest earning assets to
interest-bearing liabilities................ 101.0x
======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended September 30,
---------------------------------------------------------
1998
---------------------------------------------------------
Average Annualized
Balance Interest Yield/Cost
------------------ ------------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS
Loans (1)................................... $ 270,919 $ 10,559 7.79%
Investment securities (2)................... 16,709 495 5.92
Mortgage-backed securities.................. 97,691 3,185 6.50
Other interest earning assets............... 9,943 346 6.96
------------ ------------ ----
Total interest earning assets............ 395,532 $ 14,585 7.37%
------------
Non-interest earning assets................. 31,510
------------
Total Assets............................. $ 427,042
============
LIABILITIES
INTEREST BEARING LIABILITIES:
Deposits
DDA......................................... $ 10,706 $ - -%
NOW......................................... 18,149 160 1.76
Savings and clubs........................... 146,092 1,811 2.48
Money market accounts....................... 22,021 323 2.93
Certificates of deposit..................... 81,604 1,918 4.70
------------ ------------ ----
Total Deposits........................... 278,572 4,212 3.02
Borrowed money................................. 106,540 3,307 6.21
------------ ------------ ----
Total interest-bearing liabilities............. 385,112 7,519 3.90%
------------
Non-interest-bearing liabilities............... 6,049
------------
Total liabilities.............................. 391,161
Stockholders' equity........................... 35,881
------------
Total liabilities and stockholders' equity..... $ 427,042
============
Net interest income............................ $ 7,056
============
Interest rate spread........................... 3.47%
====
Net interest margin............................ 3.57%
====
Ratio of average interest earning assets to
interest-bearing liabilities................ 101.1x
======
</TABLE>
----------
(1) Includes non-accrual loans.
(2) Includes FHLB stock and fair value of investments available for sale of
$29.8 million at September 30, 1999.
10
<PAGE> 13
COMPARISON OF OPERATING RESULTS FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
GENERAL
The Company reported net income for the three month period ended
September 30, 1999 of $259,000 compared to net income of $193,000, for the same
period last year. Net income reflects a tax loss carry forward benefit.
Excluding the effect of the tax benefit, the Company had a net income of
$138,000. The increase in net income primarily reflects decreases in
non-interest expense, the provision for loan losses and income taxes, offset in
part by decreases in net interest income and non-interest income.
INTEREST INCOME
Interest income decreased by $307,000, or 4.38% to $6.7 million for the
three month period ended September 30, 1999 compared to $7.0 million for the
same period last year. The decrease in interest income primarily reflects a 35
basis point decrease in the average yield on interest-earning assets to 6.96%
compared to 7.31% for the same period last year, offset in part by a $1.7
million increase in the average balance of interest earning assets to $384.7
million. The decrease in the average yield for three month period is primarily
attributable to a shift in assets from loans and MBSs to lower yielding
investment securities and lower market interest rates.
Interest income on loans receivable net decreased by $527,000, or 10.13%
to $4.7 million for the three month period ended September 30, 1999 compared to
$5.2 million for the same period last year. The decrease in interest income on
loans receivable net primarily reflects an $18.9 million, or 7.05% decrease in
the average balance of loans receivable net to $249.4 million for the three
month period ended September 30, 1999 compared to $268.3 million for the same
period last year coupled with a 26 basis point decrease in the average yield on
the loan portfolio to 7.50%. The decrease in the average balance of the loan
portfolio primarily reflects an increase in loan prepayments and to a lesser
extent, a decrease in loan originations. The decrease in the average yield on
loans receivable net primarily reflects the prepayment of higher yielding loans
and lower market interest rates.
Interest income on MBSs decreased $417,000, or 31.15%, to $922,000 for
three month period ended September 30, 1999 compared to $1.3 million for the
same period last year. The decrease in interest income on MBSs primarily
reflects a decrease of approximately $23.3 million or 27.93% in the average
balance of mortgage-backed securities to $60.1 million compared to $83.4 million
for the same period last year coupled with a 29 basis point decrease in the
average yield to 6.13%. The decrease in the average balance of MBSs primarily
reflects a shift during the second quarter of fiscal 1999 of approximately $24.0
million from MBSs to loans and to a lesser extent principal repayments on MBSs.
Interest income on investment securities increased by $581,000, or
176.31%, to $910,000 for the three month period ended September 30, 1999
compared to $329,000 for the same period last year. The increase in interest
income on investment securities consisting of short and intermediate term agency
securities primarily reflects a $40.7 million or 163.68% increase in the average
balance of such securities to $65.6 million for the three month period ended
September 30, 1999 compared to $24.9 million for the same period last year
coupled with a 26 basis point increase in the average yield to 5.55%. The
increase in the average balance of investment securities reflects an investment
of approximately $25.0 million of loan repayments into intermediate term
securities during the first quarter of fiscal year 2000. The increase in the
average yield on investment securities primarily reflects the higher yield
earned by shifting assets from short term securities to intermediate term
securities.
Interest income on other interest-earning assets decreased by $57,000, or
44.53%, to $185,000 for the three month period ended September 30, 1999 compared
to $128,000 for the same period last year. The increase in interest income on
other interest earning assets primarily reflects a $3.2 million or 49.42%
decrease in the average balance of such securities to $9.6 million for the three
month period ended September 30, 1999 compared to $6.4 million for the same
period last year, offset in part by a 26 basis point decrease the average yield
to 7.71%. The increase in the average balance of other interest earning assets
primarily reflects an increase in short term investments held during the second
quarter of fiscal 2000. The decrease in the average yield on other interest
earning assets primarily reflects a decrease in the yield on short term
investments.
11
<PAGE> 14
INTEREST EXPENSE
Interest expense decreased by $70,000, or 1.94% to $3.6 million for the
three month period ended September 30, 1999 compared to $3.6 million for the
same period last year. The decrease in interest expense primarily reflects a 13
basis point decrease in the average cost of interest-bearing liabilities to
3.74% for the three month period ended September 30, 1999 compared to 3.87% for
the same period, offset in part by a $5.7 million increase in the average
balance of interest bearing liabilities to $381.1 million.
Interest expense on deposits increased by $104,000 or 5.04% to $2.2
million for the three month period ended September 30, 1999 compared to $2.1
million for the same period last year. The increase in the cost of deposits
primarily reflects $7.8 million increase in the average balance of deposits to
$281.1 million compared to $273.3 million for the same period last year coupled
with a 6 basis point increase in the cost of deposits to 3.09%. The increase in
the cost of deposits also reflects an increase of $9.6 million or 12.54% to
$86.4 million in the average balance of certificates of deposits, which
typically are higher in cost relative to other deposit types and a 9 basis point
increase in the average cost of savings and club accounts to 2.52%. The increase
in the cost of savings and club accounts reflects a decrease in interest
forfeited by account holders of these deposits.
Interest expense on borrowings decreased by $175,000 or 11.18% to $1.4
million for the three month period ended September 30, 1999 compared to $1.6
million for the same period last year. The decrease primarily reflects a 57
basis point decrease in the average cost of borrowings to 5.55% compared to
6.12% for the same period last year coupled with a $2.2 million decrease in the
average balance of borrowings to $100.0 million. The decrease in the average
balance of borrowings primarily reflects the Company's ability to fund
investments and loan purchases with deposits and principal and interest
receipts. The decrease in the cost of borrowings primarily reflects the
replacement of higher cost borrowings with lower cost borrowings during fiscal
year 1999.
NET INTEREST INCOME BEFORE PROVISIONS FOR LOAN LOSSES
Net interest income decreased $236,000 or 7.01%, to $3.1 million for the
three month period ended September 30, 1999 compared to $3.4 million for the
three month period ended September 30, 1998. The decrease in net interest income
is primarily attributable to a decrease in the average yield of average interest
earning assets, offset in part by a decrease in the average cost of average
interest bearing liabilities.
The Company's interest rate spread decreased by 22 basis points to 3.22%
for the three month period ended September 30, 1999 compared to 3.44% for the
three month period ended September 30, 1998. The Company's net interest margin
decreased by 26 basis points to 3.26% for the three month period ended September
30, 1999 compared to 3.52% for the same period last year. The decrease in
interest rate spread and net interest margin primarily reflects a 35 basis point
decrease in the average yield on interest earning assets to 6.96%, offset in
part by a 13 basis point decrease in the average cost of interest bearing
liabilities to 3.74%. The decrease in interest rate spread and net interest
margin is primarily attributable to a decrease in the average yield on loans,
MBSs and other interest earning assets, offset in part by a decrease in the cost
of borrowed money. The Company's ratio of average interest-earning assets to
average interest-bearing liabilities was 101.0x for the three month period ended
September 30, 1999 compared to 100.1x for the same period last year.
PROVISION FOR LOAN LOSSES
The Company provided $230,000 for loan losses for the three month period
ended September 30, 1999, compared to $300,000 for the same period last year.
The decrease in the provision for loan losses for the three month period ended
September 30, 1999 reflects a decrease in non-performing assets. During the
second quarter, the Bank charged off approximately $268,000 in previously
reserved non-performing consumer loans and $392,000 in previously reserved
uncollected interest. At September 30, 1999, non-performing loans totaled $4.1
million, or 1.63% of total loans compared to $4.4 million or 1.77% at June 30,
1999. At September 30, 1999, the Bank's allowance for loan losses was $3.6
million compared to $3.8 million at June 30, 1999, resulting in a ratio of
allowance to non-performing loans of 82.26% at September 30, 1999 compared to
85.63% at June 30, 1999 and a ratio of allowances for loan losses to total loans
of 1.41% and 1.50%, respectively.
12
<PAGE> 15
Management believes that the allowance for loan losses is adequate. While
management estimates loan losses using the best available information, no
assurance can be made that future adjustments to the allowance will not be
necessary based on changes in economic and real estate market conditions,
further information obtained regarding known problem loans, identification of
additional problem loans, and other factors, both within and outside of
management's control.
NON-INTEREST INCOME
Non-interest income decreased $60,000 or 10.42% to $513,000 for the three
month period ended September 30, 1999 compared to $572,000 for the same period
last year. The decrease in non-interest income primarily reflects a $54,000 or
89.39% decreases in loan origination fees. The decrease in loan origination fees
primarily reflects a decrease in loan originations for the three month period.
NON-INTEREST EXPENSE
Non-interest expense decreased by $182,000, or 5.45% to $3.2 million for
the three month period ended September 30, 1999 compared to $3.3 million for the
same period last year. The decrease in non-interest expense primarily reflects
decreases of $183,000 or 13.44% in salaries and employee benefits expense,
$15,000 or 37.59% in advertising expense, $56,000 or 17.35% in equipment expense
and $67,000 or 4.96% in other variable expenses. Other expenses for the three
month period ended September 30, 1998 reflected a one time charge of $250,000
incurred in connection with the settlement of litigation.
INCOME TAX EXPENSE
In connection with a loss from operations incurred during the three month
period ended December 31, 1998, the Company has reflected a tax benefit
reflecting the carry forward of the loss for the income taxes paid. The Company
utilized a net operating loss deduction to offset income tax expense for the
three month period ended September 30, 1999 compared to an expense of $110,000
for the three month period ended September 30, 1998. The Company's effective tax
rate for the three month period ended September 30, 1999 was 0.0% compared to
36.32% for the three month period ended September 30, 1998.
COMPARISON OF OPERATING RESULTS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
GENERAL
The Company reported net income for the six month period ended September
30, 1999 of $1.0 million compared to a net income of $511,000, for the same
period last year. Net income reflects a tax loss carry forward benefit.
Excluding the effect of the tax benefit, the Company had net income of $553,000.
The increase in net income primarily reflects decreases in non-interest expense,
provision for loan losses, and income taxes, offset in part by decreases in net
interest income and non-interest income.
INTEREST INCOME
Interest income decreased by $1.0 million, or 7.04% to $13.6 million for
the six month period ended September 30, 1999 compared to $14.6 million for the
six month period ended September 30, 1998. The decrease in interest income for
the six month period ended September 30, 1999 primarily reflects a 36 basis
point decrease in the average yield of interest earning assets to 7.01% compared
to 7.37% for the same period last year and an $8.8 million or 2.21% decrease in
the average balance of interest earning assets to $386.8 million compared to
$395.5 million. The decrease in the average yield for six month period is
primarily attributable to a shift in assets from loans and MBSs to lower
yielding investment securities.
Interest income on loans receivable net decreased by $821,000 or 7.78% to
$9.7 million for the six month period ended September 30, 1999 compared to $10.6
million for the same period last year. The decrease in interest income on loans
receivable net primarily reflects a $15.7 million or 5.78% decrease in the
average balance of loan
13
<PAGE> 16
receivables to $255.2 million for the six month period ended September 30, 1999
compared to $270.9 million for the same period last year, coupled with a
decrease of 16 basis points in the average yield on the loan portfolio. The
decrease in the average balances of the loan portfolio primarily reflects the
impact of increased loan prepayments and to a lesser extent, a decrease in loan
originations. The decrease in the average yield primarily reflects prepayment of
higher yielding loans and lower market interest rates.
Interest income on MBSs decreased $1.3 million, or 40.26%, to $1.9
million for the six month period ended September 30, 1999 compared to $3.2
million for the same period last year. The decrease in interest income on MBSs
primarily reflects a decrease of $35.8 million or 36.56% in the average balance
of mortgage-backed securities to $62.1 million for the six month period ended
September 30, 1999 compared to $98.0 million for the same period last year
coupled with a decrease of 38 basis points in the average yield on MBSs to 6.12%
compared to 6.50%. The decrease in the average balance of MBSs reflects in
significant part the shift of approximately $24.0 million from MBSs to loans and
to a lesser extent principal repayments on MBSs.
Interest income on investment securities increased by $1.1 million or
221.16%, to $1.6 million for the six month period ended September 30, 1999
compared to $495,000 for the same period last year. The increase in interest
income on investment securities consisting of short term and intermediate term
agency securities primarily reflects a $42.0 million or 251.72% increase in the
average balance of investment securities to $58.8 million for the six month
period ended September 30, 1999 compared to $16.7 million for the same period
last year, offset in part by a 51 basis point decrease in the average yield. The
increase in the average balance of investment securities reflects an investment
of approximately $25.0 million of loan repayments into intermediate term
securities during the first quarter of fiscal year 2000. The decrease in the
average yield primarily reflects lower market interest rates.
Interest income on other interest-earning assets decreased by $19,000 or
5.42%, to $327,000 for the six month period ended September 30, 1999 compared to
$346,000 for the same period last year. The decrease in interest income on other
interest earning assets primarily reflects an 80 basis point decrease in the
average yield to 6.16%. The decrease in the average yield primarily reflects
lower market interest rates.
INTEREST EXPENSE
Interest expense decreased by $377,000, or 5.01% to $7.1 million for the
six month period ended September 30, 1999 compared to $7.5 million for the same
period last year. The decrease in interest expense primarily reflects a 17 basis
point decrease in the cost of interest bearing liabilities to 3.73% coupled with
a $2.1 million decrease in the average balance of interest bearing liabilities
to $383.0 million.
Interest expense on deposits increased by $140,000 or 3.33% to $4.4
million for the six month period ended September 30, 1999 compared to $4.2
million for the same period last year. The increase in interest expense on
deposits primarily reflects a 7 basis point increase in the average cost of
interest-bearing liabilities to 3.09% coupled with a $3.5 million or 1.24%
increase in the average balance of deposits to $282.0 million.
Interest expense on borrowings decreased by $517,000 or 15.63% to $2.8
million for the six month period ended September 30, 1999 compared to $3.3
million. The decrease in interest expense in borrowings primarily reflects a 68
basis point decrease in the average cost of borrowings to 5.53% coupled with a
$5.5 million or 5.20% decrease in the average balance of borrowings to $101.0
million. The decrease in the average balance of borrowings primarily reflects
the Company's ability to fund investments and loans with deposits and principal
and interest receipts. The decrease in the cost of borrowings primarily reflects
the replacement of higher cost borrowings with lower cost borrowings during
fiscal year 1999.
NET INTEREST INCOME BEFORE PROVISIONS FOR LOAN LOSSES
Net interest income before provision for loan losses decreased by
$649,000, or 9.19% to $6.4 million for the six month period ended September 30,
1999 compared to $7.1 million for the same period last year.
The Company's interest rate spread decreased by 19 basis points to 3.28%
for the six month period ended September 30, 1999 compared to 3.47% for the six
month period ended September 30, 1998. The Company's net interest margin
decreased by 25 basis points to 3.32% for the six month period ended September
30, 1999 compared
14
<PAGE> 17
to 3.57% for the same period last year. The decrease in interest rate spread and
net interest margin primarily reflects a 36 basis point decrease in the average
yield on interest earning assets to 7.01%, offset in part by a decrease of 17
basis points in the average cost on interest bearing liabilities to 3.73%.
The decrease in interest rate spread and net interest margin is primarily
attributable to a decrease in the average yield on loans, MBSs and other
interest earning assets, offset in part by a decrease in the average cost of
borrowed money. The Company's ratio of average interest-earning assets to
average interest-bearing liabilities was 101.0x for the six month period ended
September 30, 1999 compared to 101.1x for the same period last year.
PROVISION FOR LOAN LOSSES
The Company provided $380,000 for loan losses for the six month period
ended September 30, 1999, compared to $750,000 for the same period last year.
The Company establishes provisions for loan losses, which are charged to
operations, in order to maintain the allowance for loan losses at a level which
is deemed to be appropriate based upon an assessment of prior loss experience,
the Bank's underwriting standards regulatory guidelines, industry standards,
past due loans, economic conditions, the volume and type of loans in the Bank's
portfolio, a significant amount of which are purchased and are collateralized by
properties located outside of the Bank's market area, and other factors related
to the collectibility of the Bank's loan portfolio. The provision for loan
losses for the six month period ended September 30, 1998 reflected increased
non-performing mortgage and consumer loans consisting of automobile loans,
credit card receivables, along with unsecured and secured personal loans. The
Bank no longer makes unsecured personal loans or automobile loans. The decrease
in the provision for loan losses for the six month period reflects a decrease in
non-performing assets. At September 30, 1998, non-performing loans totaled $9.65
million or 3.69% of total loans. During the six month period, the Bank charged
off approximately $578,000 in previously reserved non-performing consumer loans
and $392,000 in previously reserved uncollected interest. At September 30, 1999,
non-performing loans totaled $4.1 million or 1.63% of total loans compared to
$4.8 million, or 1.66% at March 31, 1999. At September 30, 1999, the Bank's
allowance for loan losses was $3.6 million compared to $4.0 million at March 31,
1999, resulting in a ratio of allowance to non-performing loans of 86.26% at
September 30, 1999 compared to 85.60% at March 31, 1999, and a ratio of
allowances for loan losses to total loans of 1.41% and 1.48%, respectively.
Management believes that the allowance for loan losses is adequate. While
management estimates loan losses using the best available information, no
assurance can be made that future adjustments to the allowance will not be
necessary based on changes in economic and real estate market conditions,
further information obtained regarding known problem loans, identification of
additional problem loans, and other factors, both within and outside of
management's control.
NON-INTEREST INCOME
Non-interest income decreased by $159,000 or 13.88% to $988,000 for the
six month period ended September 30, 1999 compared to $1.1 million for the same
income period last year. The decrease in non-interest income reflects a decrease
of $92,000 or 84.19% to $17,000 in loan origination fees and a decrease of
$67,000 or 6.49% to $971,000 in other income. The decrease in loan origination
fees primarily reflects a decrease in loan originations during the six month
period. The decrease in other income primarily reflects a decrease in prepayment
fees reflecting the prepayment of mortgage loans which did not contain
prepayment penalties.
NON-INTEREST EXPENSES
Non-interest expense decreased by approximately $628,000, or 9.51% to
$6.0 million for the six month period ended September 30, 1999 compared to $6.6
million for the same period last year. The decrease in non-interest expense
primarily reflects decreases of $119,000 or 4.58% in salaries and employee
benefits expense, $21,000 or 44.89% in advertising expense, $106,000 or 53.72%
in equipment expense and $584,000 or 22.12% in other variable expenses, offset
in part by a $71,000 or 11.89% increase in occupancy expense. Other expenses for
the three month period ended September 30, 1998 reflected a one time charge of
$250,000 incurred in connection with the settlement of litigation.
15
<PAGE> 18
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 tax benefit
reflecting the carry forward of the loss for the income taxes paid. The Company
utilized a net operating loss deduction to offset income tax expense for the six
month period ended September 30, 1999 compared to an expense of $346,000 for the
six month period ended September 30, 1998. The Company's effective tax rate for
the six month period ended September 30, 1999 was 0.0% compared to 40.34% for
the six month period ended September 30, 1998.
THE YEAR 2000 ISSUE
The "Year 2000 Issue" centers on the inability of some 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 may recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Company and its operations may be
significantly and adversely affected by the Year 2000 Issue due to the nature of
financial information. Software, hardware, and equipment both within and outside
the Company's direct control and with which the Company electronically or
operationally interfaces (e.g. including, but not limited to, 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. As a
result, many calculations which rely on date field information, such as
interest, payment due dates and other operating functions, may generate results
which could be significantly misstated, and the Company could experience an
inability for a temporary, but unknown duration, to process transactions, send
invoices or engage in similar normal business activities. In addition, under
certain circumstances, failure to adequately address the Year 2000 Issue 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 Issue could result in a material adverse impact on the Company's products,
services and competitive condition and therefore, its results of operations and
could be deemed to imperil the safety and soundness of the Bank. There has been
litigation filed against corporations regarding the Year 2000 Issue and their
compliance efforts the law in this area will likely continue to develop well
into the new millennium. Should the Company experience a Year 2000 failure,
exposure of the Company could be significant and material. Legislation has been
introduced in several jurisdictions regarding the Year 2000 Issue. However, no
assurance can be given that legislation will be enacted in jurisdictions where
the Company does business that will have the effect of limiting any potential
liability.
The OTS, the Company's primary federal bank regulatory agency, along with
the other federal bank regulatory agencies has published substantive guidance on
the Year 2000 Issue and had included Year 2000 compliance as a substantive area
of examination for both regularly scheduled and special examinations. These
publications, in addition to providing guidance as to examination criteria, have
outlined requirements for creation and implementation of a compliance plan and
target dates for testing and implementation of corrective action, as discussed
below. As a result of the oversight by and authority vested in the federal bank
regulatory agencies, a financial institution that does not become Year 2000
compliant could become subject to administrative remedies similar to those
imposed on financial institutions otherwise found not to be operating in a safe
and sound manner, including remedies available under prompt corrective action
regulation.
The Company has developed and is implementing a Year 2000 Project Plan
(the "Plan") to address the Year 2000 Issue and its effects on the Company. The
Plan includes five components which address issues involving awareness,
assessment, renovation, validation and implementation. The Company has completed
the awareness, assessment and renovation phases of the Plan. During the
awareness, assessment and renovation phases of the Plan, the Company inventoried
all material information systems and reviewed them for Year 2000 readiness.
Among the systems reviewed were computer hardware and systems software,
applications software and communications hardware and software as well as
embedded or automated devices. As noted below, this review included both
internal systems and those of third party vendors which provide systems such as
retail deposit processing, loan origination processing, loan servicing and
general ledger and accounting systems and software. Following awareness and
assessment, the Company then renovated or replaced the systems that may have
posed a Year 2000
16
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related problem. Following renovation, the functionality of new systems were
validated. At March 31, 1999, the validation phase and the implementation phase
were complete, and the testing, contingency planning and the customer awareness
program was completed by August 6, 1999.
The Company believes that it is in compliance with federal banking
regulatory guidelines, completing testing of its mission critical systems prior
to September 1, 1998 and its customer systems prior to September 30, 1998. The
Company has met federal banking regulatory guidelines stating that the Company
must substantially complete testing of core mission critical internal systems by
December 31, 1998. The Company completed testing of both internally and
externally supplied systems by August 6, 1999. The Company has arranged to
establish end-to-end Year 2000 tests with its business partners allowing the
Company an additional opportunity to test and stress such systems.
As part of the Plan, the Company has had formal communications with all
of its significant suppliers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues and has been following the progress of those vendors with their Year 2000
compliance status. The Company presently believes that with modifications to
existing software and conversions to new software and hardware where necessary,
the Year 2000 Issue will be mitigated without causing a material adverse impact
on the operations of the Company. At this time, the Company believes that all of
its hardware and software systems are Year 2000 compliant, tested and
operational.
Despite its best efforts to ensure Year 2000 compliance, it is possible
that one or more of the Company's internal or external systems may fail to
operate. At this time, while the Company believes that its systems are Year 2000
compliant, the probability of such likelihood cannot be determined. As a result,
the Company expects to formulate contingency plans for its mission critical
systems where possible. These systems included retail deposit processing, check
clearing and wire transfer capabilities, loan origination processing, loan
servicing, investment monitoring and accounting, general ledger and accounting
systems and payroll processing. The Company maintains a disaster recovery
program designed to deal with similar failures on an ongoing basis. All business
units have completed their update and review of their existing recovery plans in
addition to developing contingency plans to address the possible failure of one
or more mission critical systems. These plans will be vigorously tested during
the next 60 to 90 days.
The Company has reviewed its customer base to determine whether they pose
significant Year 2000 risks. The Company's customer base consists primarily of
individuals who utilize the Company's services for personal, household or
consumer uses. Individually such customers are not likely to pose significant
Year 2000 risks directly. It is not possible at this time to gauge the indirect
risks which could be faced if the employers of such customers encounter
unresolved Year 2000 issues.
Monitoring and managing the Year 2000 Project Plan 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 for Year 2000 compliance, and costs for developing and
implementing contingency plans for critical systems which fail. Indirect costs
will principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing and developing and implementing any necessary
contingency plans. Both direct and indirect costs of addressing the Year 2000
Issue will be charged to earnings as incurred. Such costs have not been material
to date. The Company does not believe that such costs will have a material
effect on results of operations, although there can be no assurance that such
costs would not become material in the future.
IMPACT OF NEW BANKING LEGISLATION
New legislation intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies and other financial service providers was signed into
law on November 12, 1999. Generally, this legislation (i) repeals the historical
restrictions and eliminates many federal and state law barriers to affiliations
among banks and securities firms, insurance companies and other financial
service providers, (ii) provides a uniform framework for the activities of
banks, savings institutions and their holding companies, (iii) broadens the
activities that may be conducted by national banks and banking subsidiaries of
bank holding companies, (iv) provides an enhanced framework for protecting the
privacy of consumer information, (v) adopts a number of provisions related to
the capitalization,
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membership, corporate governance and other measures designed to modernize the
Federal Home Loan Bank System, (vi) modifies the laws governing the
implementation of the Community Retirement Act and (vii) addresses a variety of
other legal and regulatory issues affecting both day-to-day operations and
long-term activities of financial institutions, including the functional
regulation of bank securities activities.
In particular, this legislation limits the activities that new unitary
savings and loan association holding companies may engage in. Unitary savings
and loan holding companies that are "grandfathered," i.e., unitary savings and
loan holding companies pursuant to applications filed with the OTS before May 4,
1999, will retain their authority under current law to engage in nonfinancial
activities. All other unitary savings and loan holding companies are limited to
financially related activities permissible for bank holding companies, as
defined under the new law. In addition, this legislation prohibits non-financial
companies from acquiring savings and loan association holding companies.
Bank holding companies will be permitted to engage in a wider variety of
financial activities than are permitted under the current law, particularly with
respect to insurance and securities activities. In addition, in a change from
the current law, bank holding companies will be in a position to be owned,
controlled or acquired by any company engaged in financially related activities.
We do not believe that this legislation will have a material adverse
affect on our operations in the near term. However, to the extent that the
legislation permits banks, securities firms and insurance companies to
affiliate, the financial services industry may experience further consolidation.
This could result in a growing number of larger financial institutions that
offer a wider variety of financial services than the Company currently offers
and that can aggressively compete in the markets the Company currently serves.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented at
March 31, 1999 in Item 7A to the Company's Annual Report of Form 10-K, filed
with the Securities and Exchange Commission ("SEC") on June 29, 1999, as amended
on Form 10-K/A filed with the SEC, on July 29, 1999. The Company believes that
there have been no material changes in the Company's market risk at September
30, 1999 compared to March 31, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, Carver Federal is a party to various legal proceedings
incident to its business. At March 31, 1999, except as set forth below, there
were no legal proceedings to which the Bank or its subsidiaries was a party, or
to which any of their property was subject, which were expected by management to
result in a material loss.
Currently, the Bank is defending actions brought by three unrelated
individuals who are alleging that the Bank and others were responsible for the
injuries they suffered during the construction of the Bank's headquarters
building in 1995. The three actions were previously described in the Company's
Form 10-Q for the period ended June 30, 1999. The Bank believes that each of
these cases is without merit. An insurance company has accepted the defense and
indemnification of all three claims on behalf of the Bank.
In addition, on November 9, 1999, a shareholder of the Company, BBC
Capital Markets, Inc., filed a suit in the Court of Chancery of Delaware against
the Holding Company to require the Holding Company to hold an annual meeting of
stockholders. The action is encaptioned BBC Capital Markets, Inc. v. Carver
Bancorp, Inc. The Holding Company has scheduled the stockholders meeting for
Thursday, February 24, 2000. The Company believes that this case is without
merit and intends to vigorously defend its interests.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
ANNUAL MEETING
The Company announced that the annual meeting for the fiscal year ended
March 31, 2000 will be held on February 24, 2000 (the "Annual Meeting"). The
record date for the Annual Meeting will be January 11, 2000.
PROPOSALS FOR THE ANNUAL MEETING
Any stockholder wishing to have a proposal considered for inclusion in
the Company's proxy statement and form of proxy relating to the Annual Meeting
of Stockholders must, in addition to other applicable requirements, set forth
such proposal in writing and file it with the Corporate Secretary of the Company
on or before November 24, 1999.
NOTICE OF BUSINESS TO BE CONDUCTED AT ANNUAL MEETING
The Bylaws of the Company provide an advance notice procedure for a
stockholder to properly bring business before an annual meeting or to nominate
any person for election to the Company's Board of Directors. The stockholder
must be a stockholder of record and have given timely notice thereof in writing
to the Secretary of the Company. To be timely, with respect to an annual meeting
of stockholders, a stockholder's notice must be delivered to or received by the
Secretary not later ninety (90) days in advance of the annual meeting since such
meeting is to be held on or after the anniversary of the previous year's annual
meeting. A stockholder's notice to the Corporate Secretary shall set forth such
information as required by the Bylaws of the Company. Nothing in this paragraph
shall be deemed to require the Company to include in its proxy statement and
proxy card relating to an annual meeting any shareholder proposal or nomination
which does not meet all of the requirements for inclusion established by the SEC
in effect at the time such proposal or nomination is received. Se above,
"Proposals for the Annual Meeting."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 11. Net income per share.
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
None
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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.
Date: July 14, 2000 /s/ Deborah C. Wright
--------------------------------------
Deborah C. Wright
President and Chief Executive Officer
Date: July 14, 2000 /s/ James Boyle
--------------------------------------
James Boyle
Chief Financial Officer
