UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
---------------------------------_________________________________
FORM 10-Q
(Mark One)
|X|X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2002
|_|FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission File Number: 0-21487
CARVER BANCORP, INC.
--------------------
(Exact name of registrant as specified in its charter)
DelawareDELAWARE 13-3904174
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
75 West 125th Street, New York, New YorkWEST 125TH STREET, NEW YORK, NEW YORK 10027
- ---------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 876-4747
--------------
Indicate by check mark|X| whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X|X No
|_|--- ---
Indicate by check mark|X| whether the registrant is an accelerated filer
(as defined in rule 12b-2 of the Exchange Act).
Yes |_| No |X|X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, par valueCOMMON STOCK, PAR VALUE $.01 2,296,3932,284,390
- ---------------------------- ---------
Class Outstanding at JanuaryOctober 31, 2003
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 2002September 30, 2003 (unaudited) and March 31, 2002.........................................12003......................................1
Consolidated Statements of Income for the Three Months and NineSix Months
Ended December 31,September 30, 2003 and 2002 and 2001 (unaudited).............................................2..........................................2
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income for the NineSix Months Ended December 31, 2002September 30, 2003 (unaudited).............3...........3
Consolidated Statements of Cash Flows for the NineSix Months
Ended December 31,September 30, 2003 and 2002 and 2001 (unaudited).............................................4..........................................4
Notes to Consolidated Financial Statements (unaudited)...................................5.................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................................................7Operations.......................................................................7
Item 3. Quantitative and Qualitative DisclosureDisclosures About Market Risk........................................18Risk.....................................21
Item 4. Controls and Procedures..........................................................................18Procedures........................................................................21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................18Proceedings..............................................................................21
Item 2. Changes in Securities and Use of Proceeds.......................................................19Proceeds......................................................22
Item 3. Defaults Upon Senior Securities.................................................................19Securities................................................................22
Item 4. Submission of Matters to a Vote of Security Holders.............................................19Holders............................................22
Item 5. Other Information...............................................................................19Information..............................................................................23
Item 6. Exhibits and Reports on Form 8-K................................................................19
SIGNATURES.......................................................................................................20
CERTIFICATIONS...................................................................................................21
EXHIBITS.........................................................................................................238-K...............................................................23
SIGNATURES.......................................................................................................25
EXHIBITS.........................................................................................................26
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATEDFINANCIAL STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
DecemberCARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, MARCH 31,
March 31,
2002 2002
------------ ---------2003 2003
--------------- -------------
ASSETS (Unaudited)
Cash and cash equivalents:
Cash and due from banks $ 13,05411,856 $ 13,75117,660
Federal Fundsfunds sold 11,400 21,100
--------- ---------9,000 5,500
--------------- -------------
Total cash and cash equivalents 24,454 34,851
--------- ---------20,856 23,160
--------------- -------------
Securities:
Available-for-sale, at fair value (including pledged as collateral of
$95,836$96,333 at December 31, 2002September 30, 2003 and $76,720$124,139 at March 31, 2002) 111,310 89,8212003) 102,650 129,055
Held-to-maturity, at amortized cost (including pledged as collateral of
$38,644$50,543 at December 31, 2002September 30, 2003 and $15,549$35,138 at March 31, 2002;2003; fair value
of $39,460$52,227 at December 31, 2002September 30, 2003 and $15,716$37,543 at March 31, 2002) 39,193 15,643
--------- ---------2003) 51,852 36,530
--------------- -------------
Total securities 150,503 105,464
--------- ---------154,502 165,585
--------------- -------------
Loans receivable:
Real estate mortgage loans 289,981 291,510316,555 294,710
Consumer and commercial business loans 2,221 2,3282,117 2,186
Allowance for loan losses (4,133) (4,128)
--------- ---------(4,113) (4,158)
--------------- -------------
Total loans receivable, net 288,069 289,710
--------- ---------314,559 292,738
--------------- -------------
Office properties and equipment, net 10,269 10,25110,469 10,193
Federal Home Loan Bank of New York ("FHLB-NY") stock, at cost 5,002 3,7635,602 5,440
Accrued interest receivable 2,763 2,8042,984 3,346
Identifiable intangible assets, net 231 39171 178
Other assets 3,098 3,072
--------- ---------12,885 9,205
--------------- -------------
Total assets $ 484,389521,928 $ 450,306
========= =========509,845
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 334,666361,220 $ 324,954347,164
Advances from the FHLB-NY and other borrowed money 100,297 75,65197,644 108,996
Other liabilities 9,568 12,959
--------- ---------7,956 12,612
--------------- -------------
Total liabilities 444,531 413,564
--------- ---------466,820 468,772
--------------- -------------
Guaranteed preferred beneficial interest in junior subordinated debentures 12,742 -
Stockholders' equity:
Preferred stock (par value $0.01 per share; 1,000,000
shares authorized; 100,000 issued and outstanding) 1 1
Common stock (par value $0.01 per share: 5,000,000 shares authorized;
2,316,358 shares issued; 2,295,7312,283,558 and 2,300,8692,296,960 shares outstanding at
December 31, 2002September 30, 2003 and March 31, 20022003, respectively) 23 23
Additional paid-in capital 23,776 23,75623,811 23,781
Retained earnings 15,755 13,194
Unallocated common stock held by employee stock ownership plan ("ESOP") (15) (152)18,898 16,712
Unamortized awards of common stock under management recognition plan ("MRP") (15) (58)(36) (4)
Treasury stock, at cost (20,627(32,800 shares at December 31, 2002September 30, 2003 and 15,48919,398
shares at March 31, 2002) (202) (138)2003) (412) (190)
Accumulated other comprehensive income 535 116
--------- ---------81 750
--------------- -------------
Total stockholders' equity 39,858 36,742
--------- ---------42,366 41,073
--------------- -------------
Total liabilities and stockholders' equity $ 484,389521,928 $ 450,306
========= =========509,845
=============== =============
See accompanying notes to consolidated financial statements.
1
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 20012003 2002
2001
---- ---- ---- ----------------- ----------- ----------- -----------
Interest Income: (1)
Loans $5,157 $5,801 $15,794 $ 16,946
Mortgage-backed5,061 $ 5,310 $ 9,927 $ 10,688
Total securities 1,132 678 2,995 1,975
Investment securities 409 635 1,198 1,9251,515 1,372 3,111 2,652
Federal funds sold 79 48 266 389
------ ------ ------- --------26 77 81 188
------------- ----------- ----------- -----------
Total interest income 6,777 7,162 20,253 21,235
------ ------ ------- --------6,602 6,759 13,119 13,528
------------- ----------- ----------- -----------
Interest expense:
Deposits 1,373 2,112 4,443 6,4221,133 1,469 2,405 3,071
Advances and other borrowed money 846 847 2,324 3,157
------ ------ ------- --------953 741 1,911 1,478
------------- ----------- ----------- -----------
Total interest expense 2,219 2,959 6,767 9,579
------ ------ ------- --------2,086 2,210 4,316 4,549
------------- ----------- ----------- -----------
Net interest income 4,558 4,203 13,486 11,6564,516 4,549 8,803 8,979
Provision for loan losses -- 225 -- 675
------ ------ ------- --------- - - -
------------- ----------- ----------- -----------
Net interest income after provision for loan losses 4,558 3,978 13,486 10,981
------ ------ ------- --------4,516 4,549 8,803 8,979
------------- ----------- ----------- -----------
Non-interest income: (1)
Depository fees and charges 483 406 1,344 1,136490 457 974 861
Loan fees and service charges 266 171 1,069 438492 257 1,137 804
Gain on sale of investments -- 1,399 -- 1,399
Income from sale of branches -- -- -- 987
Loss from sale of loans -- -- -- (101)securities 31 - 31 -
Other 561 2 1 7 13
------ ------ ------- --------572 4
------------- ----------- ----------- -----------
Total non-interest income 751 1,977 2,420 3,872
------ ------ ------- --------1,574 716 2,714 1,669
------------- ----------- ----------- -----------
Non-interest expense: (1)
Compensation and benefits 1,542 1,831 4,805 4,8521,798 1,589 3,603 3,263
Net occupancy expense 296 310 953 961343 320 667 656
Equipment 403 404 1,175 1,159399 354 781 772
Capital securities cost 23 - 23 -
Other 1,314 1,291 3,898 3,721
------ ------ ------- --------1,350 1,270 2,620 2,636
------------- ----------- ----------- -----------
Total non-interest expense 3,555 3,836 10,831 10,693
------ ------ ------- --------3,913 3,533 7,694 7,327
------------- ----------- ----------- -----------
Income before income taxes 1,754 2,119 5,075 4,1602,177 1,732 3,823 3,321
Income taxes 807 402 2,318 790
------ ------ ------- --------751 797 1,310 1,511
------------- ----------- ----------- -----------
Net income $ 947 $1,7171,426 $ 2,757935 $ 3,370
====== ====== ======= ========2,513 $ 1,810
============= =========== =========== ===========
Dividends applicable to preferred stock $ 49 $ 49 $ 14898 $ 148
------ ------ ------- --------98
------------- ----------- ----------- -----------
Net income available to common stockholders $ 898 $1,6681,377 $ 2,609886 $ 3,222
====== ====== ======= ========2,415 $ 1,712
============= =========== =========== ===========
Earnings per common share:
Basic $ 0.60 $ 0.39 $ 0.731.05 $ 1.14 $ 1.41
====== ====== ======= ========0.75
============= =========== =========== ===========
Diluted $ 0.380.55 $ 0.690.37 $ 1.090.98 $ 1.35
====== ====== ======= ========0.72
============= =========== =========== ===========
(1) Reclassifications have been made to prior year periods to conform with
current periods.
See accompanying notes to consolidated financial statements.
2
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK
PREFERRED COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED
STOCK STOCK CAPITAL EARNINGS --------- -----STOCK INCOME BY MRP
------------- ---------- --------------------- ----------- ------------ ----------------- -----------
Balance-March 31, 2002 $ 1 $ 23 $23,756 $ 13,1942003 $1 $23 $23,781 $16,712 ($190) $750 ($4)
Comprehensive income:
Net Income for the period
ended December 31, 2002 -- -- -- 2,757June 30, 2003 - - - 1,087 - - -
Change in net unrealized
gain on securities, net of
taxes -- -- -- --- - - - - (36) -
Dividends paid -- -- -- (196)
Treasury stock activity -- -- -- --
Allocation of ESOP stock -- -- 20 --- - - (213) - - -
Allocation of shares for MRP -- -- -- --
----- ------ ------- --------
Balance-December 31, 2002 $ 1 $ 23 $23,776 $ 15,755
===== ====== ======= ========
ACCUMULATED COMMON COMMON TOTAL
OTHER STOCK STOCK STOCK-
TREASURY COMPREHENSIVE ACQUIRED ACQUIRED HOLDERS'
STOCK INCOME BY ESOP BY MRP EQUITY
--------- - 22 - - - (36)
Treasury stock activity - - - - (233) - -
------------- -------- -------- --------
Balance-March 31, 2002---------- ------------- ----------- ------------ ----------------- -----------
Balance-June 30, 2003 $1 $23 $23,803 $17,586 ($138) $116423) $714 ($152) ($58) $ 36,74240)
------------- ---------- ------------- ----------- ------------ ----------------- -----------
Comprehensive income:
Net Income for the period
ended December 31, 2002 -- -- -- -- 2,757September 30, 2003 - - - 1,426 - - -
Change in net unrealized
gain on securities, net of
taxes -- 419 -- -- 419- - - - - (633) -
Dividends paid -- -- -- -- (196)
Treasury stock activity (64) -- -- -- (64)
Allocation of ESOP stock -- -- 137 -- 157- - - (114) - - -
Allocation of shares for MRP -- -- -- 43 43
----- ---- ----- ---- --------
Balance-December 31, 2002- - - - - - 4
Treasury stock activity - - 8 - 11 - -
------------- ---------- ------------- ----------- ------------ ----------------- -----------
Balance-September 30, 2003 $1 $23 $23,811 $18,898 ($202) $535412) $81 ($ 15) ($15) $ 39,858
===== ==== ===== ==== ========36)
============= ========== ============= =========== ============ ================= ===========
TOTAL
STOCK-
HOLDERS'
EQUITY
----------
Balance-March 31, 2003 $41,073
Comprehensive income:
Net Income for the period
ended June 30, 2003 $1,087
Change in net unrealized
gain on securities, net of
taxes ($36)
Dividends paid ($213)
Allocation of shares for MRP ($14)
Treasury stock activity ($233)
----------
Balance-June 30, 2003 $41,664
----------
Comprehensive income:
Net Income for the period
ended September 30, 2003 1,426
Change in net unrealized
gain on securities, net of
taxes (633)
Dividends paid (114)
Allocation of shares for MRP 4
Treasury stock activity 19
----------
Balance-September 30, 2003 $42,366
==========
See accompanying notes to consolidated financial statements.
3
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended December 31,
------------------------------CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED SEPTEMBER 30,
2003 2002 2001
---- ----
Cash flows from operating activities:
Net income $ 2,7572,513 $ 3,3701,810
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses -- 675- -
ESOP and MRP expense 213 12418 149
Depreciation and amortization expense 904 867570 652
Amortization of intangibles 160 159107 106
Other amortization (accretion) 618 (229)
Gain on sale of branches -- (987)
Gain on sale of securities -- (1,399)
Impairment of foreclosed real estate -- 20
Net gain on foreclosed real estate -- (77)2,349 632
Changes in assets and liabilities:
Decrease (Increase)(increase) in accrued interest receivable 41 (328)362 (155)
Increase in other assets (26) (399)
(Decrease) increase(4,238) (2)
Decrease in other liabilities (3,590) 2,103
Increase in accrued interest payable 240 --
-------- ---------(4,706) (2,707)
-------------- --------------
Net cash (used in) provided by operating activities 1,317 3,899
-------- ---------(3,025) 485
-------------- --------------
Cash flows from investing activities:
Purchases of securities:
Available-for-sale (64,786) (92,922)(36,925) (36,848)
Held-to-maturity (4,152) (34,035)(19,880) (4,167)
Proceeds from principal payments, maturities and calls of securities:
Available-for-sale 19,475 107,67537,442 10,182
Held-to-maturity 3,963 8,3364,452 2,307
Proceeds from sale of available-for-sale securities 23,871 -
Disbursements for loan originations (37,508) (46,200)(36,683) (30,079)
Loans purchased from third parties (34,591) (45,200)(38,751) (13,861)
Principal collections on loans 72,113 68,108
(Purchase) sale53,389 52,897
Purchase of FHLB-NY stock (1,239) 4(162) (690)
Proceeds from loans sold 1,913 --
Proceeds from sale of fixed assets -- 570
Proceeds from sale of other real estate owned -- 533- 1,493
Additions to premises and equipment (965) (1,166)
-------- ---------(846) (455)
-------------- --------------
Net cash used in by investing activities (45,777) (34,297)
-------- ---------(14,093) (19,221)
-------------- --------------
Cash flows from financing activities:
Net increase in deposits 9,712 63,029
Repayment of securities repurchase agreements -- (4,930)14,056 5,388
Advances from FHLB-NY and other borrowed money 40,300 291,34834,000 29,300
Repayment of FHLB-NY advances and other borrowed money (15,654) (313,317)(45,352) (15,603)
Issuance of trust preferred securities 12,740 -
Purchase of treasury stock (99) (99)
Cash paid to fund sale of deposits -- (15,802)(303) (74)
Dividends paid (196) (196)
-------- ---------(327) (98)
-------------- --------------
Net cash provided by financing activities 34,063 20,033
-------- ---------14,814 18,913
-------------- --------------
Net decrease(decrease) increase in cash and cash equivalents (10,397) (10,365)(2,304) 177
Cash and cash equivalents at beginning of the period 23,160 34,851
31,758
-------- ----------------------- --------------
Cash and cash equivalents at end of the period $ 24,45420,856 $ 21,393
======== =========35,028
============== ==============
Supplemental information:
Noncash Transfers-
Change in unrealized gain on valuation of held-to-maturityavailable-for-sale
investments, net $ 467 $ --($669) $483
============== ==============
Cash paid for-
Interest paid 6,538 10,1944,300 4,549
============== ==============
Income taxes paid 2,686 290
======== =========2,825 2,228
============== ==============
See accompanying notes to consolidated financial statements
4
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
accounting principles generally accepted in the United States of America
("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 ("SEC"). 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 unaudited
consolidated financial statements presented herein should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Holding Company's Annual Report on Form 10-K/A,10-K for the year ended March 31, 20022003
("2002 10-K/A"2003 10-K"). previously filed with the SEC. The consolidated results of
operations and other data for the nine-monththree-month period ended December 31, 2002September 30, 2003
are not necessarily indicative of results that may be expected for the entire
fiscal year ending March 31, 20032004 ("fiscal 2003"2004"). 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, Carver Statutory Trust I, Alhambra Holding Corp., aan inactive
Delaware corporation which is inactive, and the Bank's wholly owned subsidiaries, CFSB Realty
Corp. and, CFSB Credit Corp. and Carver Asset Corporation. The Holding Company and
its consolidated subsidiaries are referred to herein collectively as "Carver" or
the "Company." All significant inter-company accounts and transactions have been
eliminated in consolidation. We have no unconsolidated subsidiaries or
unconsolidated special purpose entities. Certain information and note
disclosures normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted pursuant to the rules and regulations
of the SEC. Certain reclassifications have been made to prior period amounts to
conform to the current period presentation.
(2) NET INCOME PER COMMON SHARE
Basic earnings per common share is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding. Diluted earnings per common share includesinclude any additional common
shares as if all potentially dilutive common shares were issued (e.g.,(for instance,
convertible preferred stock and stock options with an exercise price that is
less than the average market price of the common shares for the periods stated).
For the purpose of these calculations, unreleased ESOP shares are not considered
to be outstanding. For each of the nine-monththree-month periods ended December 31,September 30, 2003
and 2002,
and 2001, preferred dividends of $148,000$49,000 were deducted from net income to arrive
at the amount of net income available to common stockholders. Additionally, for
both the nine-monththree-month periods ended December 31,September 30, 2003 and 2002, and 2001, 208,333 shares
of common stock potentially issuable from the conversion of preferred stock and
24,06881,384 shares of common stock at December 31, 2002September 30, 2003 potentially issuable from
the exercise of stock options with an exercise price that is less than the
average market price of the common shares for the nine-monthsthree-months ended December 31, 2002September
30, 2003 were considered in determining the diluted net income per common share.
(3) STOCK OPTION PLAN
ACCOUNTING FOR STOCK BASED COMPENSATION
Since we have elected to apply the intrinsic value method, we are
required to disclose the pro-forma impact on net income and earnings per share
that the fair value-based method would have had if it were applied rather than
the intrinsic value method. Our policy with regards to stock-based compensation
has been to grant stock options and restricted stock awards after fiscal
year-end. Since stock options are typically awarded after fiscal year-end and
contain a nominal vesting period, no pro-forma compensation expense and its
5
related effect on net income and earnings per share has been reported herein.
Further disclosure is presented in Note 1 - "Summary of Significant Accounting
Policies -- Stock Based Compensation Plans" of our audited consolidated
financial statements in Carver's 2003 10-K.
(4) RECENT ACCOUNTING PRONOUNCEMENTS
Guarantor'sACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY: RESCISSION OF SFAS NO. 150
In November 2003, the FASB rescinded Statement of Financial Accounting
Standards ("SFAS") No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY." Issued in May 2003, SFAS 150
required issuers of certain financial instruments that fell within the scope of
SFAS No. 150, having characteristics of both liabilities and Disclosure Requirementsequity, to be
classified and measured as liabilities. SFAS No. 150 was effective for Guarantees, Including
Indirect Guaranteesfinancial
instruments entered into or modified after May 31, 2003, and otherwise was
effective at the beginning of Indebtnessthe first interim period beginning after June 15,
2003. The rescission of OthersSFAS No. 150 did not have a material impact on our
financial condition or results of operations.
AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," which amends and clarifies financial
accounting and reporting of derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 is generally effective for contracts entered into or modified after June
30, 2003, and for hedging relationships designated after June 30, 2003, and
should generally be applied prospectively. The provisions of SFAS No. 149 that
relate to SFAS No. 133 Implementation Issues that have been effective for fiscal
quarters that began prior to June 15, 2003, should continued to be applied in
accordance with their respective effective dates. In addition, the provisions of
SFAS No. 149 which relate to forward purchases or sales of when-issued
securities or other securities that do not yet exist, should be applied to both
existing contracts and new contracts entered into after June 30, 2003. The
adoption of SFAS No. 149 did not have a material impact on our financial
condition or results of operations.
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTNESS OF OTHERS
In November 2002, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtness of Others""GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTNESS OF
OTHERS" ("FIN 45"), which addresses the disclosure to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees. FIN 45 also requires the recognition of a liability by a guarantor
at the inception of certain guarantees.
FIN 45 requires the guarantor to recognize a liability for the
non-contingent component of the guarantee; this is the obligation to stand ready
to perform in the event that specified triggering events or conditions occur.
The initial measurement of this liability is the fair value of the guarantee at
inception. The recognition of the liability is required even if it is not
5
probable that payments will be required under the guarantee or if the guarantee
was issued with a premium payment or as part of a transaction with multiple
elements.
The Company will adopthas adopted the disclosure requirements of FIN 45 and will
apply the recognition and measurement provisions for all guarantees entered into
or modified after March 31, 2003. As of December 31, 2002September 30, 2003, the Company
maintainsmaintained one letter of credit in the amount of $1.9 million and therefore management does
not anticipate that themillion. The adoption of
this interpretation will have ahad no significant effect on the Company's earnings or
financial position.
Acquisitions of Certain Financial InstitutionsACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS
In October 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 147, "Acquisitions of Certain Financial Institutions."ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS."
SFAS No. 147 amends SFAS No. 72, "Accounting for Certain Acquisitions of Banking
or Thrift Institutions," SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", and FASB Interpretation No. 9, "Applying APB
Opinions Nos. 16 and 17 When a Savings and Loan Association or a Similar
Institution is Acquired in a Business Combination Accounted for by the Purchase
Method." SFAS No. 147 removes acquisitions of financial institutions, other than
transactions between two or more mutual enterprises, from the scope of SFAS No.
72 and FASB Interpretation No. 9. SFAS No. 147 also amends SFAS No. 144 to
include long-term customer-relationship intangible assets such as depositor- and
borrower-relationship intangible assets and credit cardholdercard holder
6
intangible assets. The provisions of SFAS No. 147 arebecame effective October 1,
2002. Management does
not anticipate that theThe adoption of this statement will have ahad no significant effect on the Company's
earnings or financial position.
Accounting for Costs Associated with Exit or Disposal ActivitiesACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities."ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES." The Statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by this standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal activity.
Previous accounting guidance was provided by Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 replaces EITF Issue No. 94-3. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. RescissionThe adoption of this statement had no significant effect on the
Company's earnings or financial position.
RESCISSION OF FASB Statements No.STATEMENTS NO. 4, 44, andAND 64, Amendment ofAMENDMENT OF FASB Statement No.STATEMENT NO.
13, and Technical CorrectionsAND TECHNICAL CORRECTIONS
In April 2002, the FASB issued SFAS No. 145, "Rescission of"RESCISSION OF FASB
Statements No.STATEMENTS NO. 4, 44, andAND 64, Amendment ofAMENDMENT OF FASB Statement No.STATEMENT NO. 13, and Technical
Corrections.AND TECHNICAL
CORRECTIONS." The Statement updates, clarifies and simplifies existing
accounting pronouncements. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains
and Losses from Extinguishment of Debt," which required all gains and losses
from extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," will now be used to classify those gains and
losses. SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements," amended SFAS No. 4 and is no longer necessary because SFAS No. 4
has been rescinded. SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to
require that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. This amendment is consistent with the FASB's goal
of requiring similar accounting treatment for transactions that have similar
economic effects. SFAS No. 145 also makes technical corrections to existing
pronouncements. While those corrections are not substantive in nature, in some
instances they may change accounting practice. The provisions of SFAS No. 145
are effective for fiscal years beginning after May 15, 2002. Early application
of SFAS No. 145 is encouraged. Management does not anticipate that theThe adoption of
this statement will have ahad no significant effect on the Company's earnings or financial
position.
Accounting for the Impairment or Disposal of Long-Lived Assets
6
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and resolves accounting and implementation issues related to previous
pronouncements. More specifically, it: (a) eliminates the allocation of goodwill
to long-lived assets to be tested for impairment; and (b) details both a
probability-weighted and primary asset approach to estimate cash flows in
testing for impairment of a long-lived asset. SFAS 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001.
Management does not anticipate that the adoption of this statement will have a
significant effect on the Company's earnings or financial position.
Accounting for Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. Management does not anticipate that the adoption of this statement
will have a significant effect on the Company's earnings or financial position.
Goodwill and Other Intangible Assets
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 addresses the initial recognition and measurement
of intangible assets acquired individually or with a group of other assets not
constituting a business combination. In accordance with the provisions of SFAS
142, all goodwill and identifiable intangible assets identified as having an
indefinite useful life, including those acquired before its effective date, will
no longer be amortized but will be assessed for impairment at least annually by
applying a fair-value based test as defined in the Statement. SFAS 142 requires
that acquired intangible assets having an estimated useful life be separately
recognized and amortized over their estimated useful lives. Intangible assets
that remain subject to amortization shall continue to be reviewed for impairment
in accordance with previous pronouncements.
Additionally, SFAS 142 requires that an initial impairment assessment on
all goodwill recognized in the consolidated financial statements be completed
within six months of the statement's adoption to determine if a transition
impairment charge needs to be recognized. Management has performed the initial
impairment assessment as of March 31, 2002 and determined that no impairment
charge is warranted. The consolidated balance sheets and consolidated statements
of income presented herein disclose the identifiable intangible assets that were
originally recognized separate from goodwill. Effective April 1, 2002, goodwill
will no longer be amortized; however, identifiable intangible assets will
continue to be amortized over the estimated useful lives. Amortization of
identifiable intangible assets is estimated to be $213,000 in fiscal 2003.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Explanatory NoteMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q contains forward-looking statements
as that term is defined in the Private Securities Litigation Reform Act of 1995.
In addition, senior management may make forward-looking statements verbally to
analysts, investors, the media and others. Such forward-looking statements may
be identified by the use of such words as "believe," "expect," "anticipate,"
"intend," "should," "could," "planned,"plan," "estimated,"estimate," "potential" and similar terms
and phrases.phrases, or future or conditional verbs such as "will," "would," "should,"
"could," or "may." Such forward-looking statements are subject to risks and
uncertainties, many of which are beyond our control, which could cause actual
results to differ materially from those currently anticipated due to a number of
factors. Factors which could result in material variations include, but are not
limited to, the Company's success in implementing its initiatives, including
expanding its product line, successfully opening new ATM centers and Bank
branches, successfully rebranding its image and achieving greater operating
efficiencies; changes in interest rates which could affect net
7
interest margins and net interest income; competitive factors which could affect
net interest income and non-interest income; general economic conditions which
could affect the volume of loan origination, deposit flows and real estate
values,values; changes in the quality and composition of the Bank's loan and investment
portfolios; changes in management's business strategy; the levels of
non-interest income and the amount of loan losses as well as other factors
discussed in documents filed by the Company with the SEC from time to time.
The Company
undertakesAny forward-looking statements made in this report or incorporated by
reference in this report are made as of the date of this report, and, except as
required by applicable law, we assume no obligation to update any suchthe
forward-looking statements at any
time.or to update the reasons why actual results could
differ from those projected in the forward-looking statements. You should
consider these risks and uncertainties in evaluating forward-looking statements
and you should not place undue reliance on these statements.
As used in this Form 10-Q, "we," "us" and "our" refer to Carver
Bancorp, Inc. and/orand its consolidated subsidiaries, depending onunless the context.
Critical Accounting Policies
7
context otherwise
requires.
CRITICAL ACCOUNTING POLICIES
Note 1 to our Audited Consolidated Financial Statements for the fiscal year ended March 31, 2002 ("fiscal 2002")2003
included in our 2002 10-K/A,2003 Form 10-K, as supplemented by this report, contains a
summary of our significant accounting policies. We believe our policies with
respect to the methodology for our determination of the allowance for loan
losses the valuation of mortgage
servicing rights and asset impairment judgments, including the recoverability of goodwill
and other than temporary declines in the value of our securities, involve a higherhigh
degree of complexity and require management to make difficult and subjective
judgments which often require assumptions or estimates about highly uncertain
matters. Changes in these judgments, assumptions or estimates could cause
reported results to differ materially. These critical policies and their
application are periodically reviewed with our Finance and Audit Committee and
our Board of Directors.
GeneralGENERAL
The Holding Company, a Delaware corporation, is the holding company for
Carver Federal, a federally chartered savings bank.bank, and, on a parent-only basis,
had minimal results of operations. The Holding Company is headquartered in New
York, New York. 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,Carver
Federal, which operates five full-service banking locations in the New York City
boroughs of Brooklyn, Queens and Manhattan.
ComparisonThe Company is dependent on dividends from the Bank, its own earnings,
capital raised and borrowings for sources of funds. The information below
reflects principally the financial condition and results of operations of the
Bank. The Bank's results of operations are primarily dependent on its net
interest income. The Bank also generates other income, such as fee income on
deposit and loan accounts and, to a lesser extent, debit card interchange
credit, and, depending on market conditions, net gains on sales of securities
and loans. The level of its expenses, such as salaries and benefits, occupancy
and equipment costs, other general and administrative expenses, net losses on
sales of securities and loans and income tax expense, further affects the Bank's
net income. This discussion and analysis should be read in conjunction with the
Consolidated Financial Condition at
DecemberStatements, the notes thereto and other financial
information included in the Company's 2003 Form 10-K.
COMPARISON OF FINANCIAL CONDITION AT
SEPTEMBER 30, 2003 AND MARCH 31, 2002 and March 31, 2002
Assets2003
ASSETS
Total assets increased by $34.1$12.1 million, or 7.6%2.4%, to $484.4$521.9 million at
December 31, 2002September 30, 2003 compared to $450.3$509.8 million at March 31, 2002.2003. The change was
primarily attributable to an increaseincreases of $45.0$21.8 million in securities partially
offset by a decrease of $10.4 million in cash and cash equivalents and $1.6
million in total loans receivable, net.
The balance in cash and cash equivalents for the nine-month period
decreased $10.4 million from that of March 31, 2002. This was due to the
utilization of excess liquid assets created by higher than expected mortgage
loan and mortgage-backed security repayments. The Bank invested its lower
yielding excess liquid assets in the origination and purchase of mortgage loans
and the purchase of mortgage-backed securities.
As of April 1, 2001, the Bank adopted SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") at which time it
transferred $45.7 million of mortgage-backed and investment securities from
held-to-maturity to available-for-sale. On November 30, 2002 the Bank
transferred $22.8 million of mortgage-backed securities from available-for-sale
to held-to-maturity as a result of managements intention to hold these
securities in portfolio until maturity. A related unrealized gain of $467,000 as
of December 31, 2002 continues to be reported as a separate component of
stockholders' equity and is amortized over the remaining lives of the securities
as an adjustment to yield.
Due to the lower interest rate environment, mortgage loan payoffs in
excess of new loans resulted in a decrease of $1.6$3.7 million in total
loans receivable, net, and other assets, respectively, partially offset by
8
decreases of $11.1 million and $2.3 million in total securities and total cash
and cash equivalents, respectively.
Total loans receivable, net, increased $21.8 million, or 7.5%, to
$314.6 from $292.7 million at March 31, 2003. The increase resulted from
mortgage loan originations and purchases exceeding loan repayments during the
first ninesix months of fiscal 2003. Loan repayments2004. During the six-month period ended September 30,
2003, loan purchases and originations were $72.1$38.8 million and $36.7 million,
respectively, offset in part by loan originationsrepayments of $37.5$53.4 million. The $75.5
million andin total loan purchases of $34.6 million during the nine-month period. Loan originations and purchases were concentratedfor the period was primarily
comprised of $26.7 million in multifamily and commercialloans, $22.2 million in one- to
four-family loans, $21.0 million in non-residential real estate mortgage loans
which accounted for $62.4and $5.1 million ofin construction loans. Management has evaluated yields and loan
quality in the $72.1 million
originatedcompetitive New York metropolitan area market and purchased during the period. The remaining originations of $9.7
million were for construction loans and one-has made
decisions in certain instances to four-family loans. The $45.0
million increase in investment securities primarily represents purchases of
$68.9 million partially offset by maturities of $11.0 million and principalpurchase mortgage-backed securities. It is
management's intent to continue to use proceeds from security repayments of $12.4 million that occurred during the first nine months of fiscal
2003.to fund
mortgage loan growth. Management will continue to evaluate the balance of
interest earning assets allocated to loan originations and purchases as well as
additional purchases of mortgage-backed securities while continuing to assess
yields and economic risk.
FHLB-NY stock increased $1.2Cash and cash equivalents for the six-month period decreased $2.3
million from March 31, 2003. The reduction was due to the Bank borrowing additional
funds from the FHLB-NY. The FHLB-NY requires the Bank to purchaseeffectively
managing its lower yielding excess liquid assets by investing in mortgage loans
and maintain
shares of its stock based on the Bank's outstanding borrowing balance.
Liabilities and Stockholders' Equity
8
Liabilities
At December 31, 2002, total liabilities increased by $31.0mortgage-backed securities.
Total securities decreased $11.1 million, or 7.5%6.7%, to $444.5$154.5 million
compared to $413.6from $165.6 million at March 31, 2002.2003 as repayments, maturities and sales
exceeded new security purchases. The decline is attributed to the low interest
rate environment, which in turn has accelerated mortgage refinancing and
prepayments of the Company's mortgage-backed securities. Principal repayments of
mortgage-backed securities of $24.9 million, maturities of investment securities
of $17.0 million and sales of $23.9 million were partially offset by new
purchases of $56.8 million.
Other assets increased $3.7 million, or 40.0%, to $12.9 million from
$9.2 million at March 31, 2003. The increase is primarily due to a receivable
booked in the quarter ended September 30, 2003 for $9.0 million relating to the
sale of investment securities that was received in October 2003, partially
offset by a $3.5 million reduction in mortgage loans in process and a decline in
the Bank's deferred tax asset of $1.6 million.
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
At September 30, 2003, total liabilities decreased by $2.0 million, or
0.4%, to $466.8 million compared to $468.8 million at March 31, 2003. The
decrease in liabilities primarily reflects an increasea decrease of $24.6$11.4 million in
advances from the Federal Home Loan Bank of New York ("FHLB-NY") and other
borrowed money and a decrease of $4.7 million in other liabilities partially
offset by deposit growth of $14.1 million.
The decrease of $11.4 million in advances from the FHLB-NY and other
borrowed money resulted from a repayment of maturing FHLB-NY borrowings using
cash flow from the repayment of mortgage loans and an increase of $9.7
million in deposits offset in part by amortgage-backed securities.
The decrease of $3.4 million in other liabilities.liabilities was primarily the result of a decline in the
liability for income taxes of $3.1 million as tax payments were remitted.
The $9.7$14.1 million increase in deposit balances is primarily
attributable to new relationships with corporate and not-for-profit entities
which contributed to increases of $6.8$9.9 million in certificates of deposit, $5.0 million of which was
an individual government deposit, $3.5NOW accounts, $5.2 million in
money market accounts and $956,000$1.4 million in NOW accountssavings and club accounts. The
increases in core deposits were partially offset by a decrease of $1.6$2.4 million
in regular savingscertificates of deposit accounts. Other factors contributing to deposit
growth include an emphasis on developing depository relationships with borrowers
and club accounts.
Stockholders' Equitythe use of special promotions to attract deposits. At September 30, 2003,
the Bank had five branches and one stand-alone 24/7 ATM center. We believe that
deposits will continue to grow with the addition of new branches and 24/7 ATM
centers coupled with our business development efforts.
9
On September 17, 2003, the Holding Company, through a subsidiary
business trust, Carver Statutory Trust I, issued 13,000 shares, liquidation
amount $1,000 per share, of floating rate capital securities. Gross proceeds
from the sale of these trust preferred securities were $13.0 million, and,
together with the proceeds from the sale of the trust's common securities, were
used to purchase approximately $13.4 million aggregate principal amount of the
Holding Company's floating rate junior subordinated debt securities due 2033.
The trust preferred securities are redeemable quarterly at the option of the
Company beginning on or after July 7, 2007 and have a mandatory redemption date
of September 17, 2033. Cash distributions on the trust preferred securities are
cumulative and payable at a floating rate per annum (reset quarterly) equal to
3.05% over 3-month LIBOR, with an initial rate of 4.19%. The Holding Company has
guaranteed the obligations of Carver Statutory Trust I to the trust's capital
security holders. The $12.7 million net proceeds of the issuance of trust
preferred securities were contributed to the Bank to enhance regulatory capital,
which will facilitate the Company's growth strategy.
STOCKHOLDERS' EQUITY
Total stockholders' equity increased $3.1$1.3 million, or 8.5%3.1%, to $39.9$42.4
million at December 31, 2002September 30, 2003 compared to $36.7$41.1 million at March 31, 2002.2003. The
increase in total stockholders' equity was primarily attributable to a $2.6 millionan increase
in retained earnings for the nine months ended December 31, 2002 and an
increaseyear-to-date of $419,000$2.2 million, partially offset by a
decrease of $669,000 in accumulated other comprehensive income resultingand a $222,000
decrease related to treasury stock. The $222,000 decrease related to treasury
stock is attributable to repurchases of the Company's stock, partially offset by
payments made from the recognitiontreasury stock for stock-based compensation plans.
Accumulated other comprehensive income decreased as a result of a reduction in
net unrealized gains, net of taxes, relating to certain investment and
mortgage-backed securities. Investment and mortgage-backed securities accounted
for as held-to-maturity are carried at cost while such securities designated as
available-for-sale are carried at market with an adjustment to stockholders'
equity, net of taxes.
During the second quarter ended September 30, 2002,2003, the Holding Company did
not purchase any additional shares of its common stock. To date, the Holding
Company has purchased 9,10029,100 shares of its common stock in open market
transactions at an average price of $11.01$13.84 per share as part of its repurchase
program announced on August 6, 2002. During the quarter ended December 31, 2002 the Company did not
purchase any additional shares of its common stock. The Holding Company intends to use
repurchased shares to fund its stock-based benefit and compensation plans and
for any other purpose the Board of Directors of the Holding Company deems
advisable in compliance with applicable law.
LiquidityASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is net interest income, which is
affected by changes in the level of interest rates, the relationship between
rates, the impact of interest rate fluctuation on asset prepayments, the level
and Capital Resourcescomposition of deposits and the credit quality of earning assets.
Management's asset/liability objectives are to maintain a strong, stable net
interest margin, to utilize its capital effectively without taking undue risks,
to maintain adequate liquidity and to manage its exposure to changes in interest
rates.
The Company's Asset/Liability and Interest Rate Risk Committee
("ALCO"), comprised of members of the Board of Directors, meets periodically
with senior management to evaluate the impact of changes in market interest
rates on assets and liabilities, net interest margin, capital and liquidity.
Risk assessments are governed by policies and limits established by senior
management that are reviewed and approved by ALCO and the entire Board of
Directors.
The economic environment continually presents uncertainties as to
future interest rate trends. ALCO regularly monitors the Company's cumulative
gap position, which is the difference between the sensitivity to rate changes on
our interest earning assets and interest bearing liabilities. In addition, the
Company utilizes a model that projects net interest income based on increasing
or decreasing interest rates, in order to respond effectively to changes in
interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Bank's ability to generate adequate cash
to meet financial obligations. The principal cash requirements of a financial
institution are to cover downward fluctuations
10
in deposit accounts and increases in its loan and investment portfolio. The
Company's primary sources of funds are deposits, borrowed funds and principal
and interest payments on loans, mortgage-backed securities and investment
securities. While maturities and scheduled amortization of loans,
mortgage-backed securities and investment securities are predictable sources of
funds, deposit flows and loan and mortgage-backed securities prepayments are
strongly influenced by changes in general interest rates, economic conditions
and competition.
During fiscal 2002,Other sources of liquidity include the Federal Open Market Committee reducedability to borrow under
repurchase agreements, FHLB-NY advances utilizing unpledged mortgage-backed
securities and certain mortgage loans, the federal funds rate on eight
separate occasions by a totalsale of 325 basis points, resulting in a lower interest
rate environment in fiscal 2002 compared toavailable-for-sale securities
and the fiscal year ended March 31,
2001. During the first six monthssale of fiscalloans. At September 30, 2003, the federal funds rate was
unchanged and inBank had the third quarter of fiscal 2003ability to borrow
from the federal funds rate was
reducedFHLB-NY an additional 50$39.0 million on a secured basis, points. The increase in loanutilizing
mortgage-related loans and securities repayments was primarily the result of the increase in mortgage loan refinancing
activity caused by this lower interest rate environment.as collateral.
The Consolidated Statements of Cash Flows present the change in cash
from operating, investing and financing activities. During the ninesix months ended
December 31, 2002,September 30, 2003, total cash and cash equivalents decreased by $10.4$2.3 million.
Net cash provided byused in operating activities during this period was $1.3$3.0 million,
primarily representing a decreasedecreases in other liabilities offset byand increases in other
assets, adjusted for the balances of depreciation and amortization expense and
other amortization or accretion and an increase in
accrued interest payable.amortization. Net cash used in investing activities was $45.8$14.1 million,
primarily representing the net proceeds frompurchase of securities, loan purchases and
originations offset in part by principal payments maturities and callsmaturities of securities,
sale of available-for-sale and held-to-maturitysecurities and principal collections on loans, offset in part by disbursements made for the
origination and purchase of loans and the purchase of securities.loans. Net
cash provided by financing activities was $34.1$14.8 million, primarily representing
a net increase in deposits and proceeds from the issuance of $24.6 milliontrust preferred
securities, partially offset by a decrease in advances from the FHLB-NY and an increase in
deposits of $9.7 million.FHLB-NY.
The Bank is required to maintain sufficient liquidity to ensure its
safe and sound operation. Management believes the Bank's short-term assets have
sufficient liquidity to cover loan demand, potential fluctuations in deposit
accounts and to meet other anticipated cash requirements. The Bank monitors its
liquidity utilizing guidelines that are contained in a policy developed by
management of the Bank and approved by the Bank's Board of Directors. 9
The Bank's
several liquidity measurements are evaluated on a frequent basis. The Bank was
in compliance with this policy as of December 31, 2002.September 30, 2003. The levels of the
Bank's short-term liquid assets are dependent on the Bank's operating, financing
and investing activities during any given period. The most significant liquidity
challenge the Bank faces is the variability in cash flows as a result of
mortgage refinance activity. As mortgage interest rates decline, customers'
refinance activities tend to accelerate, causing the cash flow from both the
mortgage loan portfolio and the mortgage-backed securities portfolio to
accelerate. When mortgage interest rates increase, the opposite effect tends to
occur. In addition, as mortgage interest rates decrease, customers generally
tend to prefer fixed rate mortgage loan products over variable rate products.
Since the Bank generally sells its fifteen-year15-year and thirty-year30-year fixed rate loan
production into the secondary mortgage market, the origination of such products
for sale does not significantly reduce the Bank's liquidity.
During the fiscal year ended March 31, 2002 ("fiscal 2002"), the
Federal Open Market Committee reduced the federal funds rate on eight separate
occasions by a total of 325 basis points, resulting in a lower interest rate
environment in fiscal 2002 compared to the fiscal year ended March 31, 2001.
During the fiscal year ended March 31, 2003 ("fiscal 2003"), the federal funds
rate was again lowered on three separate occasions a total of 125 basis points.
To date, during fiscal 2004 the federal funds rate has remained unchanged. The
increase in loan and securities repayments experienced by the Bank over the past
two fiscal years was primarily the result of the increase in mortgage loan
refinancing activity caused by this lower interest rate environment.
The Office of Thrift Supervision (the "OTS"), the Bank's primary
federal regulator, requires that the Bank meet minimum capital requirements.
Capital adequacy is one of the most important factors used to determine the
safety and soundness of individual banks and the banking system. At December 31, 2002,September
30, 2003, the Bank exceeded all regulatory minimum capital requirements and
qualified, under OTS regulations, as a well-capitalized institution. The table
below presents certain information relating to the Bank's capital compliance at
December 31, 2002.
REGULATORY CAPITAL
As of December 31, 2002September 30, 2003.
11
REGULATORY CAPITAL
AT SEPTEMBER 30, 2003
Amount % of Assets
------ -----------
Total capital (to risk-weighted assets):
Capital level $42,282 13.98%$59,337 17.83 %
Less requirement 24,20226,622 8.00
------- ----------------- -------------
Excess $18,080 5.98%
======= =====$32,715 9.83 %
============ =============
Tier 1 capital (to risk-weighted assets):
Capital level $38,496 12.72%$55,224 10.51 %
Less requirement 12,10121,022 4.00
------- ----------------- -------------
Excess $26,395 8.72%
======= =====$34,202 6.51 %
============ =============
Tier 1 Leverage capital (to adjusted total assets):
Capital level $38,496 7.96%$55,224 16.59 %
Less requirement 19,35313,311 4.00
------- ----------------- -------------
Excess $19,143 3.96%
======= =====$41,913 12.59 %
============ =============
AnalysisOn October 23, 2003, the Board of EarningsDirectors declared a quarterly
dividend of $0.05 per common share. The dividend will be payable on November 18,
2003 to stockholders of record at the close of business on November 3, 2003.
ANALYSIS OF EARNINGS
The Company's profitability is primarily dependent upon net interest
income, which mainly 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. Provisions for loan losses, non-interest
income, non-interest expense and income taxes further affect net income. 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.
The following tables set forth, for the periods indicated, certain
information relating to Carver's average interest-earning assets, average
interest-bearing liabilities, net interest income, interest rate spread and
interest rate margin. It reflects the average yield on assets and the average
cost of liabilities. Such yields and costs are derived by dividing annualized
income or expense by the average balances of assets or liabilities,
respectively, for the 10
periods shown. Average balances are derived from daily or
month-end balances as available. Management does not believe that the use of
average monthly balances instead of average daily balances 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.
1112
Three months ended December 31,
-------------------------------------------------------------------------------THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
2003 2002
2001
---------------------------------------- -------------------------------------------------------------------------------- --------------------------------------
Average Annualized Avg. Average Annualized Avg.
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- -------- ---------------- --------- ---------------------- ------------ --------------- ------------ ------------------------
(Dollars in thousands)
Loans receivable (1) $278,626 $5,157 7.40% $312,526 $5,801 7.42%$305,391 $5,061 6.58% $282,684 $5,310 7.45%
Investment securities (2) 36,881 409 4.43% 39,621 635 6.41%
Mortgage-backed securities 103,322 1,132 4.38% 49,274 678 5.50%172,311 1,515 3.49% 110,036 1,372 4.95%
Federal funds 22,598 79 1.39% 8,939 48 2.15%
-------- ------ ---- -------- ------ ----11,622 26 0.90% 17,871 77 1.72%
-------------- ------------ ------------ ----------
Total interest earning assets 441,427 6,777 6.14% 410,360 7,162 6.98%489,324 6,602 5.35% 410,591 6,759 6.53%
Non-interest earning assets 29,823 28,392
-------- --------31,459 31,429
-------------- ------------
Total assets $471,250 $438,752
======== ========$520,783 $442,020
============== ============
Liabilities and Equity
Deposits- ----------------------
Deposits:
NOW $ 17,019 $ 24 0.56% $ 17,051 $ 58 1.36%accounts $25,472 $23 0.36% $17,948 $33 0.73%
Savings and clubs 125,655 331 1.05% 123,120 513 1.67%club accounts 131,435 243 0.73% 127,002 373 1.17%
Money market accounts 16,357 45 1.10% 16,249 65 1.60%27,341 54 0.78% 15,660 46 1.17%
Certificates of deposit 157,972 973 2.46% 154,021 1,476 3.83%
-------- ------ ---- -------- ------ ----161,118 813 2.00% 152,330 1,017 2.65%
-------------- ------------ ------------ ----------
Total deposits 317,003 1,373 1.73% 310,441 2,112 2.72%345,366 1,133 1.30% 312,940 1,469 1.86%
Mortgagor's deposits 1,183 10 3.49% 2,506 1 0.16%
Borrowed money 90,763 846 3.73% 72,449 847 4.68%
-------- ------ ---- -------- ------ ----104,927 943 3.56% 67,904 740 4.32%
-------------- ------------ ------------ ----------
Total interest-bearing liabilities 407,766 2,219 2.18% 382,890 2,959 3.09%451,476 2,086 1.82% 383,350 2,210 2.29%
Non-interest-bearing DDA accounts 18,319 14,169
Other non-interest-bearing liabilities 25,052 21,356
-------- --------6,873 6,530
-------------- ------------
Total liabilities 432,818 404,246476,668 404,049
Guaranteed beneficial interest in junior
subordinated debentures 1,904
Stockholders' equity 38,432 34,507
-------- --------42,211 37,971
-------------- ------------
Total liabilities and stockholders'
equity $471,250 $438,752
======== ------ ======== ------$520,783 $442,020
============== ------------ ============ ----------
Net interest income $4,558 $4,203
====== ======$4,516 $4,549
============ ==========
Interest rate spread 3.96% 3.89%
==== ====3.53% 4.24%
=============== ==============
Net interest margin 4.13% 4.10%
==== ====3.66% 4.40%
=============== ==============
Ratio of average interest-earning assets to
deposits and interest-bearing liabilities 1.08x 1.07x
====== ================== ==========
(1) Includes non-accrual loans.
(2) Includes FHLB-NY stock.
1213
Nine months ended December 31,
-----------------------------------------------------------------------------SIX MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
2003 2002
2001--------------------------------------------- -------------------------------------- -----------------------------------
Average Annualized Avg. Average Annualized Avg.
Assets
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- ---------------------- ------------ --------------- ------- -------- --------------------------- ------------------------
(Dollars in thousands)
Loans receivable (1) $280,695 $15,794$300,782 $9,927 6.58% $284,092 $10,688 7.50% $296,745 $16,946 7.61%
Investment securities (2) 36,322 1,198 4.40% 39,190 1,925 6.55%
Mortgage-backed securities 82,216 2,995 4.86% 44,824 1,975 5.87%170,004 3,111 3.65% 105,318 2,652 5.02%
Federal funds 22,322 266 1.59% 14,952 389 3.47%
-------- ------- ---- -------- ------- ----15,289 81 1.07% 22,201 188 1.69%
-------------- ------------ ------------ ----------
Total interest-earninginterest earning assets 421,555 20,253 6.41% 395,711 21,235 7.16%
Non-interest-earning486,075 13,119 5.38% 411,611 13,528 6.55%
Non-interest earning assets 30,259 25,246
-------- --------30,227 30,422
-------------- ------------
Total assets $451,814 $420,957
======== ========$516,302 $442,033
============== ============
Liabilities and Equity
Deposits- ----------------------
Deposits:
NOW $18,213 $ 106 0.78% $16,690 $ 191 1.53%accounts $23,624 $48 0.41% $18,815 $81 0.86%
Savings and clubs 127,032 1,146 1.20% 126,595 1,848 1.95%club accounts 131,190 563 0.86% 127,724 816 1.27%
Money market accounts 15,607 140 1.20% 16,305 239 1.95%26,421 116 0.88% 15,224 96 1.26%
Certificates of deposit 154,122 3,051 2.64% 127,498 4,144 4.33%
-------- ------- ---- -------- ------- ----161,606 1,678 2.07% 152,187 2,078 2.72%
-------------- ------------ ------------ ----------
Total deposits 314,974 4,443 1.88% 287,088 6,422 2.98%342,841 2,405 1.40% 313,950 3,071 1.95%
Mortgagor's deposits 1,711 15 1.72% 2,506 2 0.16%
Borrowed money 74,360 2,324 4.17% 80,333 3,157 5.24%
-------- ------- ---- -------- ------- ----102,731 1,896 3.68% 66,107 1,476 4.45%
-------------- ------------ ------------ ----------
Total interest-bearing liabilities 389,334 6,767 2.32% 367,421 9,579 3.48%447,283 4,316 1.92% 382,563 4,549 2.37%
Non-interest-bearing DDA accounts 19,301 14,041
Other non-interest-bearing liabilities 24,573 19,838
-------- --------7,120 7,872
-------------- ------------
Total liabilities 413,907 387,259473,704 404,476
Guaranteed beneficial interest in
junior subordinated debentures 957
Stockholders' equity 37,907 33,698
-------- --------41,641 37,557
-------------- ------------
Total liabilities and stockholders'
equity $451,814 $420,957
======== ------- ======== -------$516,302 $442,033
============== ------------ ============ ----------
Net interest income $13,486 $11,656
======= =======$8,803 $8,979
============ ==========
Interest rate spread 4.09% 3.68%
==== ====3.46% 4.18%
=============== ==============
Net interest margin 4.27% 3.93%
==== ====3.61% 4.35%
=============== ==============
Ratio of average interest-earning
assets to deposits and interest-bearing liabilities.interest-
bearing liabilities 1.09x 1.08x
1.08x
======= =================== ==========
(1) Includes non-accrual loans.
(2) Includes FHLB-NY stock.
1314
Comparison of Operating ResultsCOMPARISON OF OPERATING RESULTS FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
OVERVIEW
Selected operating ratios for the Three Months Ended December 31,three months ended September 30, 2003
and 2002 and 2001
Generalare set forth in the table below. The following analysis discusses the
changes in components of operating results giving rise to net income.
THREE MONTHS ENDED
SELECTED OPERATING RATIOS: SEPTEMBER 30,
2003 2002
--------------- -------------
Return on average assets(1) 1.10 % 0.85 %
Return on average equity(1) 13.51 9.85
Interest rate spread(1) 3.53 4.24
Net interest margin(1) 3.66 4.40
Operating expenses to average assets(1) 3.01 3.20
Equity-to-assets 8.12 8.30
Efficiency ratio 64.25 67.10
Average interest-earning assets to
interest-bearing liabilities 1.08x 1.07x
(1) Annualized
NET INCOME
Net income for the three-month period ended December 31, 2002September 30, 2003 was $947,000$1.4
million compared to net income of $935,000 for the corresponding prior year
period. Net income available to common stockholders (after adjustment for
dividends payable on the Company's preferred stock) was $1.4 million, or $0.55
per diluted common share, compared to $886,000, or $0.37 per diluted common
share, for the corresponding prior year period. Net income available to common
stockholders increased $491,000 primarily due to an increase in non-interest
income of $858,000, partially offset by an increase in non-interest expense of
$357,000. Income for the three months ended September 30, 2003 includes a
recovery of $558,000 related to previously unrecognized income from prior fiscal
year periods from mortgage loans.
INTEREST INCOME
Interest income decreased by $157,000, or 2.3%, to $6.6 million for the
three months ended September 30, 2003 compared to $6.8 million in the prior year
period. Interest income decreased primarily as a result of the lower interest
rate environment compared to the prior year period. The change in total interest
income was attributable to a decrease of 118 basis points in the annualized
average yield on interest-earning assets to 5.35% for the three months ended
September 30, 2003 compared to 6.53% for the prior year period. This was
partially offset by an increase in the average balance of interest-earning
assets of $78.7 million, or 19.2%, to $489.3 million for the three months ended
September 30, 2003 compared to $410.6 million for the prior year period. Net
interest margin declined 74 basis points to 3.66% for the three months ended
September 30, 2003 compared to 4.40% for the prior year period resulting from
lower interest rates.
Interest income on loans decreased by $249,000 or 4.7%, to $5.1 million
for the three months ended September 30, 2003 compared to $5.3 million for the
prior year period. The change was primarily due to a decline in interest rates,
which resulted in decreased yields in the loan portfolio. The annualized average
yield on loans for the three months ended September 30, 2003 declined 87 basis
points to 6.58% compared to 7.45% for the prior year period. The decline in
interest income on loans was partially offset by an increase in average mortgage
loan balances of $22.7 million to $305.4 million compared to $282.7
15
million for the prior year period.
Interest income on total securities increased by $143,000, or 10.4%, to
$1.5 million for the three months ended September 30, 2003 compared to $1.4
million for the prior year period. The change was primarily due to an increase
of $62.3 million, or 56.6%, in the average balance of securities to $172.3
million compared to $110.0 million in the prior year period, partially offset by
a 146 basis point decrease in the annualized average yield on securities to
3.49% from 4.95% in the prior year period. The growth in the average balance of
securities, primarily mortgage-backed securities, reflects execution of our
balance sheet management strategy. Portfolio yields and interest income declined
as new purchases and the reinvestment of portfolio cash flows were at yields
significantly below existing portfolio yields. To mitigate interest rate risk,
we have purchased short duration securities that by their nature have lower
yields. Additionally, yields and income were impacted by prepayment activity,
which has shortened the anticipated life of mortgage-backed securities and
accelerated premium amortization.
Interest income on federal funds sold decreased by $51,000, or 66.2%,
to $26,000 for the three months ended September 30, 2003 compared to $77,000 for
the prior year period. The decline was primarily attributable to a decrease in
the average balance of federal funds of $6.2 million, or 35.0%, to $11.6 million
from $17.9 million in the prior year period. Also contributing to the decline in
interest income was a decrease of 82 basis points in the annualized yield on
federal funds sold, which was 0.90% for the three months ended September 30,
2003 compared to 1.72% in the prior year period due to lower short-term interest
rates.
INTEREST EXPENSE
Total interest expense decreased by $124,000, or 5.6%, to $2.1 million
for the three months ended September 30, 2003 compared to $2.2 million for the
prior year period. The change in interest expense is primarily due to the lower
interest rate environment cited above. The annualized average cost of
interest-bearing liabilities decreased 47 basis points to 1.82% from 2.29% for
the prior year period. The decrease in interest expense was partially offset by
an increase in the average balance of interest-bearing liabilities of $68.1
million, or 17.8%, to $451.5 million from $383.4 million during to the prior
year period.
Interest expense on deposits decreased $336,000, or 22.9%, to $1.1
million for the three months ended September 30, 2003 compared to $1.5 million
for the prior year period. The decrease in interest expense on deposits was due
primarily to a 56 basis point decline in the rate paid on deposits to 1.30%
compared to 1.86% for the prior year period, partially offset by a $32.4 million
increase in the average balance of interest-bearing deposits to $345.4 million
for the three months ended September 30, 2003 from $312.9 million for the prior
year period. Customer deposits have historically provided Carver with a
relatively low cost funding source from which its net interest income and net
interest margin have benefited. The Bank's success in growing core deposits,
thereby benefiting net interest income and net interest margin, has been
tempered by the sustained low interest rate environment.
Interest expense on advances and other borrowed money increased
$212,000, or 28.6%, to $953,000 for the three months ended September 30, 2003
compared to $741,000 for the prior year period. This was primarily due to an
increase of $37.0 million in the average balance of borrowed money to $104.9
million from $67.9 million for the corresponding prior year period, partially
offset by a decrease of 76 basis points in the cost of borrowings to 3.56% from
4.32% for the prior year period.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
Net interest income before the provision for loan losses was
substantially unchanged at $4.5 million for the three months ended September 30,
2003 compared to the prior year period. The Company's annualized average
interest rate spread decreased by 71 basis points to 3.53% for the three months
ended September 30, 2003 compared to 4.24% for the prior year period.
PROVISION FOR LOAN LOSSES AND ASSET QUALITY
16
The Company did not provide for additional loan loss reserves for the
three months ended September 30, 2003 or 2002 as the Company considers the
overall allowance for loan losses to be adequate. During the second quarter of
fiscal 2004, the Company recorded net loan charge-offs of $10,000 compared to
net recoveries of $40,000 for the prior year period. At September 30, 2003, the
Bank's allowance for loan losses was $4.1 million compared to $4.2 million at
March 31, 2003.
At September 30, 2003, non-performing assets totaled $2.9 million, or
0.91% of total loans, compared to $1.8 million, or 0.61% of total loans
receivable, at March 31, 2003. Non-performing assets include loans 90 days past
due, non-accrual loans and other real estate owned. Other real estate owned
consists of property acquired through foreclosure or deed in lieu of
foreclosure. The Bank had no foreclosed real estate as of September 30, 2003.
The increase of $1.1 million in non-performing loans is primarily attributable
to three loans that were 90 days past due at September 30, 2003. Future levels
of non-performing assets will be influenced by economic conditions, including
the impact of those conditions on our customers, interest rates and other
internal and external factors existing at the time.
The ratio of the allowance for loan losses to non-performing loans was
141.8% at September 30, 2003 compared to 230.7% at March 31, 2003. The ratio of
the allowance for loan losses to total loans was 1.29% at September 30, 2003
compared to 1.40% at March 31, 2003.
Management's judgment in determining the adequacy of the allowance for
loan losses is based on an evaluation of individual loans, the risk
characteristics and size of the loan portfolio, an assessment of current
economic and real estate market conditions, estimates of the current value of
underlying collateral, past loan loss experience, review of regulatory authority
examination reports and other relevant factors. Based on the process employed,
management believes that the allowance for loan losses is adequate under
prevailing economic conditions to absorb losses on existing loans that may
become uncollectible. 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, results of regulatory examinations
and other factors, both within and outside of management's control.
NON-INTEREST INCOME
Total non-interest income in the second quarter of fiscal 2004
increased $858,000, or 119.8%, to $1.6 million compared to $716,000 for the
prior year period. The increase was primarily attributable to a recovery of
$558,000 in mortgage income of which $411,000 related to the recognition of
previously unrecognized mortgage loan income from one problem loan that had been
held in escrow pending the resolution of certain mechanics' liens. The remaining
$147,000 resulted from the recognition of previously unrecognized prepaid
mortgage loan income. Further contributing to the increase in non-interest
income was an increase in loan fees and service charges of $235,000 and an
increase of $33,000 in depository fees and charges, which can be attributed to
increased ATM usage, growth in debit card income and the restructuring of
depository fees and charges during the second quarter of fiscal 2003. Loan fees
and service charges increased primarily as a result of recognition of higher
mortgage prepayment penalties due to refinancing activity. A gain on the sale of
securities of $31,000 was recognized as a result of the sale of certain
mortgage-backed securities in the second quarter of fiscal 2004. Non-interest
income represented 19.3% of revenue (interest income plus non-interest income)
for the second quarter of fiscal 2004 compared to 9.6% for the corresponding
prior year period.
NON-INTEREST EXPENSE
For the quarter ended September 30, 2003, total non-interest expense
increased $380,000, or 10.8%, to $3.9 million compared to $3.5 million for the
prior year period. The increase in non-interest expense was primarily due to a
rise in employee compensation and benefit expense resulting from salary
increases effective as of September 1, 2003, new hires at higher average
salaries, an increase in the costs to
17
provide employee benefits and the timing of accruals for employee bonus
expense. It is the Bank's policy that employee bonuses are expensed in each
quarter when the performance of the Bank indicates that they will likely be
earned by year-end. In fiscal 2003 the application of this policy resulted in
the majority of employee bonuses being both earned and expensed in the fourth
quarter, whereas in fiscal 2004, due to the performance of the Bank, more
employee bonuses have been expensed earlier in the year. Additionally, the
capital securities cost of $23,000 related to the issuance of the subordinated
debentures during the second quarter was minimal as the securities were issued
in mid-September.
INCOME TAX EXPENSE
For the three-month period ended September 30, 2002, the Company
accrued for Federal, New York State and New York City income tax expense at a
combined total tax rate of 45%. For the three-month period ended September 30,
2003, the Company decreased its tax rate following the establishment of Carver
Asset Corporation, the Bank's real estate investment trust.
For the three-month period ended September 30, 2003, income before
taxes increased $445,000, or 25.7%, to $2.2 million compared to $1.7 million for
the prior year period. Income tax expense decreased $46,000, or 5.8%, to
$751,000 compared to $797,000 for the prior year period.
COMPARISON OF OPERATING RESULTS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
OVERVIEW
Selected operating ratios for the six months ended September 30, 2003
and 2002 are set forth in the table below. The following analysis discusses the
changes in components of operating results giving rise to net income.
SIX MONTHS ENDED
SELECTED OPERATING RATIOS: SEPTEMBER 30,
2003 2002
--------------- -------------
Return on average assets(1) 0.97 % 0.82 %
Return on average equity(1) 12.07 9.64
Interest rate spread(1) 3.46 4.18
Net interest margin(1) 3.61 4.35
Operating expenses to average assets(1) 2.98 3.32
Equity-to-assets 8.12 8.30
Efficiency ratio 66.81 68.81
Average interest-earning assets to
interest-bearing liabilities 1.09x 1.08x
(1) Annualized
NET INCOME
The Company reported net income for the six-month period ended
September 30, 2003 of $2.5 million compared to net income of $1.8 million for
the corresponding prior year period. Net income available to common stockholders
(after adjustment for dividends payable on the Company's preferred stock) was
$898,000,$2.4 million, or $0.38$0.98 per diluted common share, compared to $1.7 million, or
$0.69$0.72 per diluted common share, for the corresponding prior year period. Income
for the six months ended September 30, 2003 includes a recovery of $558,000
related to previously unrecognized income from prior fiscal year periods from
mortgage loans. This recovery was recorded in other non-interest income. Net
income available to common stockholders declined $770,000increased $703,000 primarily due to a
$1.4rise in non-interest income of $1.0
18
million, gain on the salepartially offset by an increase in non-interest expense of investment
securities recognized in fiscal 2002, and the Company's fiscal 2003 obligation
to begin to accrue for federal taxes. For most of fiscal 2002, the Company
utilized a tax loss carryforward and therefore no federal taxes were applied to
earnings for the comparable prior year period.
Interest Income$344,000.
INTEREST INCOME
Interest income decreased by $385,000,$409,000, or 5.4%3.0%, to $6.8$13.1 million for
the threesix months ended December 31, 2002September 30, 2003 compared to $7.2$13.5 million in the
corresponding prior year period. InterestThe decrease in interest income decreased aswas due to a result of the
current
lower interest rate environment during the six-month period ended September 30,
2003 compared to the corresponding prior year period. The change in total
interest income was attributable to a decrease of 84117 basis points in the
annualized average yield on interest-earning assets to 6.14%5.38% for the threesix months
ended December 31, 2002September 30, 2003 compared to 6.98%6.55% for the corresponding prior year
period. This was partially offset by an increase in the average balance of
interest-earning assets of $31.1$74.5 million, or 7.6%18.1%, to $441.4$486.1 million for the
threesix months ended December 31, 2002September 30, 2003 compared with $410.4$411.6 million for the
corresponding prior year period.
Interest income on loans decreased by $644,000,$761,000, or 11.1%7.1%, to $5.2$9.9
million for the threesix months ended December 31, 2002September 30, 2003 compared to $5.8$10.7 million
for the corresponding prior year period. The changedecline in interest income was due
primarily to a decrease in the annualized average yield on mortgage loans to
6.58% compared to 7.50% for the six months ended September 30, 2002.
Additionally, the decrease in interest income was due to athe inclusion of an
acceleration in the recognition of deferred loan fees of $212,000 resulting from
higher than anticipated mortgage loan prepayments in the income of the prior
fiscal year. The decrease in interest income on loans was offset by an increase
in average mortgage loan balances of $33.9$16.7 million, or 10.8%5.9%, to $278.6$300.8 million
from $312.5for the six months ending September 30, 2003 compared to $284.1 million partially offset by an escalation infor the
recognition of
deferred loan fee income of $72,000 resulting from higher than expected mortgage
loan prepayments. Management does not expect this level of deferred loan fee
income to continue.corresponding prior year period.
Interest income on mortgage-backedtotal securities increased by $454,000,$459,000, or 67.0%17.3%, to
$1.1$3.1 million for the threesix months ended December 31, 2002September 30, 2003 compared to $678,000$2.7
million for the corresponding prior year period. The change was primarily due to
an increase in the average balance of mortgage-backedtotal securities of $54.0$64.7 million, or
109.7%61.4%, to $103.3$170.0 million for the six months ended September 30, 2003 compared to
$49.3$105.3 million infor the corresponding prior year period, partially offset by a
112 basis point decrease in the annualized average yield on mortgage-backed securities of 137
basis points to 4.38%3.65% from 5.50% in5.02% during the corresponding prior year period.
Interest income on investment securities decreased by $226,000, or 35.6%,
to $409,000 for the three months ended December 31, 2002 compared to $635,000
for the corresponding prior year period. Due to the decline in the interest rate
environment there was a 199 basis point decrease in the annualized average yield
to 4.42% for the three months ended December 31, 2002 compared to 6.41% for the
corresponding prior year period. Further contributing to the decrease in
interest income on investment securities was a decline in the average balance of
investment securities of $2.7 million, or 6.9%, to $36.9 million for the three
months ended December 31, 2002 compared to $39.6 million for the corresponding
prior yearsame period.
Interest income on federal funds sold increaseddecreased by $31,000,$107,000, or 64.6%56.9%,
to $79,000$81,000 for the threesix months ended December 31, 2002September 30, 2003 compared to $48,000$188,000 for
the corresponding prior year period. The increase was primarily attributable to an
increase in the average balance of federal funds of $13.7 million, or 152.8%, to
$22.6 million from $8.9 million for the corresponding prior year period. The
increase was partially offset by the annualized yield on federal funds sold
which declined 7662 basis points to 1.39%1.07% for the threesix months ended December 31,
2002September 30, 2003
compared to 2.15%1.69% for the corresponding prior year period due to a lower
short-term interest rate environment. Interest ExpenseIn addition, the average balance of
federal funds decreased $6.9 million, or 31.1%, to $15.3 million from $22.2
million for the corresponding prior year period.
INTEREST EXPENSE
Total interest expense decreased by $740,000,$233,000, or 25.0%5.1%, to $2.2$4.3 million
for the threesix months ended 14
December 31, 2002September 30, 2003 compared to $3.0$4.5 million for the
corresponding prior year period. The changereduction in interest expense is primarily
due to the lower interest rate environment cited above.partially offset by higher average
borrowings year over year to fund the growth of the balance sheet. The
annualized average cost of interest-bearing liabilities decreased 9145 basis
points to 2.18%1.92% from 3.09%2.37% for the corresponding prior year period. The decrease
in interest expensethe average cost of interest-bearing liabilities was partially offset by an
increase in the average balance of interest-bearing liabilities of $24.9$64.7
million, or 6.5%16.9%, to $407.8$447.3 million from $382.9$382.6 million compared to the
corresponding prior year period.
19
Interest expense on deposits decreased $739,000,$666,000, or 35.0%21.7%, to $1.4$2.4
million for the threesix months ended December 31, 2002September 30, 2003 compared to $2.1$3.1 million for
the corresponding prior year period. The decrease in interest expense on
deposits was due primarily to a 9955 basis point decline in the rate paid on
deposits to 1.73%1.40% for the threesix months ended December 31, 2002September 30, 2003 compared to 2.72%1.95%
for the corresponding prior year period. This was partially offset by a $6.6$28.9
million increase in the average balance of interest-bearing deposits to $317.0$342.8
million for the three months ended December 31, 2002 from $310.4$314.0 million for the corresponding prior year period.
Interest expense on advances and other borrowed money remained relatively
unchanged at $846,000,increased
$433,000, or 29.3%, to $1.9 million for the threesix months ended December 31, 2002September 30, 2003
compared to $847,000$1.5 million for the corresponding prior year period. This increase
in interest expense was primarily due to a decrease of 94 basis points in the cost of borrowings to 3.73% from 4.67% for
the corresponding prior year period partially offset by an $18.3$36.6 million, or 25.3%55.4%, increase in
the average balance of borrowed money to $90.8$102.7 million from $72.4 million.
Net Interest Income Before Provision$66.1 million for
Loan Lossesthe corresponding prior year period, partially offset by a decrease of 77 basis
points in the cost of borrowings to 3.68% from 4.45% for the corresponding prior
year period.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
Net interest income before the provision for loan losses increaseddecreased by
$355,000,$176,000, or 8.4%2.0%, to $4.6$8.8 million for the threesix months ended December 31, 2002September 30, 2003
compared to $4.2$9.0 million for the corresponding prior year period. Total interest
income decreased by $385,000 and$409,000 while total interest expense decreased by $740,000$233,000
for the threesix months ended December 31, 2002.September 30, 2003. The Company's annualized average
interest rate spread increaseddecreased by 772 basis points to 3.96%3.46% for the threesix months
ended December 31, 2002September 30, 2003 compared to 3.89%4.18% for the corresponding prior year
period.
Provision for Loan Losses and Asset QualityPROVISION FOR LOAN LOSSES AND ASSET QUALITY
The Company did not provide for additional loan loss reserveslosses for each
six-month period ended September 30, 2003 and 2002. Due to the three months ended December 31, 2002 compared to $225,000 forcredit quality of
the corresponding
prior year period. The provision for loan losses was not increased during the
three-monthportfolio at period asend, the Company considersbelieved the overall reserve fortotal loan lossesloss
allowance to be adequate at December 31, 2002 as explained below.adequate. During the third quarterfirst six months of fiscal 2003,2004, Carver
recorded net loan charge-offs of $39,000$45,000 to the allowance for loan losses
compared to $104,000net recoveries of $44,000 for the corresponding prior year period.
At December 31, 2002,September 30, 2003, the Bank's allowance for loan losses at $4.1 million
remained substantially
unchanged fromcompared to $4.2 million at March 31, 2002.30, 2003.
At December 31, 2002,September 30, 2003, non-performing loans totaled $2.3$2.9 million, or
0.81%0.91% of total loans, compared to $2.8non-performing loans of $1.8 million, or 0.96%0.61%
of total loans, at March 31, 2002, a decrease2003, an increase of $481,000$1.1 million or 17.0%61.0%. The
reductionincrease in non-performing loans improvedlowered the ratio of the allowance for loan
losses to non-performing loans to 176.1%141.8% at December 31, 2002September 30, 2003 compared to
146.0%230.7% at March 31, 2002.2003. The ratio of the allowance for loan losses to total
loans at September 30, 2003 was unchanged at 1.41%1.29% compared to 1.40% March 31, 2002.2003.
Management's judgment in determining the adequacy of the allowance for
loan losses is based on an evaluation of individual loans, the risk
characteristics and size of the loan portfolio, an assessment of current
economic and real estate market conditions, estimates of the current value of
underlying collateral, past loan loss experience, review of regulatory authority
examination reports and other relevant factors. Based on the process employed,
management believes that the allowance for loan losses is adequate under
prevailing economic conditions to absorb losses on existing loans that may
become uncollectible. 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 IncomeNON-INTEREST INCOME
Total non-interest income excluding a gain of $1.4increased $1.0 million, on the sale of
investment securities in the third quarter of fiscal 2002, increased $173,000,
or 29.9%62.6%, to $751,000 for the three-month period ended December 31, 2002
compared to $578,000 for the corresponding prior year period. The change was
primarily attributable to a net
15
increase in depository fee income of $77,000 and an increase in loan fees and
service charges of $95,000. The increase in depository fees can be attributed to
increased ATM fees and a restructuring of banking fees during the second quarter
of fiscal 2003. Loan fees and service charges increased as a result of the
recognition of higher mortgage prepayment penalties, including $71,000 received
from one loan during the quarter, and a restructuring of the Bank's loan fees in
the second quarter of fiscal 2003. Non-interest income represented 14.1% of
operating income (net interest income plus non-interest income, excluding any
non-recurring gain and loss) for the third quarter of fiscal 2003 compared with
12.1% for the corresponding prior year period.
Non-Interest Expense
Total non-interest expense decreased $281,000, or 7.3%, to $3.6$2.7
million for the quartersix-month period ended December 31, 2002September 30, 2003 compared to $3.8$1.7
million for the corresponding prior year period. The decrease was primarily attributable to a
declineincrease in compensationnon-interest
income resulted from increases in depository fees and benefits expense. Occupancycharges, loan fees and
20
service charges and other expenses
further contributed to the decline in non-interest expense, partially offset by
an increase in other non-interest expense consisting primarily of marketing and
advertising expenses. Compensation and employee benefits decreased $295,000 to
$1.5 million for the quarter ended December 31, 2002 compared to $1.8 million
for the corresponding prior year period. This decrease is primarily attributable
to compensation and benefits expenses recognized in the third quarter of fiscal
2002 for severance payments and annual compensation plans that to date have not
been incurred in this fiscal year partially offset by higher salary expenses.
Income Tax Expense
In comparison to the corresponding prior year period, the Company has
fully utilized its tax loss carryforward resulting from prior period losses and
is now accruing for federal taxes. For the three-month period ended December 31,
2002, estimated Federal, New York State and New York City income tax expense was
$807,000.
For the three-month period ended December 31, 2001, the Company applied a
federal tax loss carryforward resulting from prior period losses and therefore
no federal income taxes were payable for the period.income. The accrual for taxes of
$402,000 for the three-months ended December 31, 2001 represents an estimate of
New York State and New York City income taxes only.
Comparison of Operating Results for the
Nine Months Ended December 31, 2002 and 2001
General
The Company reported net income for the nine-month period ended December
31, 2002 of $2.8 million compared to net income of $3.4 million for the
corresponding prior year period. Net income available to common stockholders
(after adjustment for dividends payable on the Company's preferred stock) was
$2.6 million, or $1.09 per diluted common share, compared to $3.2 million, or
$1.35 per diluted common share, for the corresponding prior year period. Income
for the nine-months ended December 31, 2001 includes non-recurring non-interest
income of approximately $2.3 million which includes a gain of $1.4 million
recognized from the sale of investment securities, $987,000 realized on the sale
of deposits of the Bank's East New York branch offset in part by a loss of
$101,000 from the sale of the Bank's automobile loan portfolio. Additionally,
for most of fiscal 2002, the Company was able to utilize its tax loss
carryforward, which eliminated the Company's federal tax liability.
Interest Income
Interest income decreased by $982,000, or 4.6%, to $20.3 million for the
nine months ended December 31, 2002 compared to $21.2 million in the
corresponding prior year period. The decrease in interest income is due to a
lower interest rate environment during the nine-month period ended December 31,
2002 compared to the corresponding prior year period. The change in total
interest income was attributable to a decrease of 75 basis points in the
annualized average yield on interest-earning assets to 6.41% for the nine months
ended December 31, 2002 compared to 7.16% for the corresponding prior year
period. This was partially offset by an increase in the average balance of
interest-earning assets of $25.8 million, or 6.5%, to $421.6 million for the
nine months ended December 31, 2002 compared with $395.7 million for the
corresponding prior year period.
16
Interest income on loans decreased by $1.2 million, or 6.8%, to $15.8
million for the nine months ended December 31, 2002 compared to $16.9 million
for the corresponding prior year period. The change was due to a decline in
average mortgage loan balances of $16.1 million, or 5.4%, to $280.7 million for
the nine months ending December 31, 2002 compared to $296.7 million for the
corresponding prior year period. Adding to the decline in interest income was a
decrease in the annualized average yield on mortgage loans to 7.50% compared to
7.61% for the nine months ended December 31, 2001. The decrease in interest
income was partially offset by an acceleration in the recognition of deferred
loan fees of $284,000 resulting from higher than anticipated mortgage loan
prepayments.
Interest income on mortgage-backed securities increased by $1.0 million,
or 51.6%, to $3.0 million for the nine months ended December 31, 2002 compared
to $2.0 million for the corresponding prior year period. The change was
primarily due to an increase in the average balance of mortgage-backed
securities of $37.4 million, or 83.4%, to $82.2 million for the nine months
ended December 31, 2002 compared to $44.8 million for the corresponding prior
year period, partially offset by a decrease in the annualized average yield on
mortgage-backed securities of 101 basis points to 4.86% from 5.87% during the
same period.
Interest income on investment securities decreased by $727,000, or 37.8%,
to $1.2 million for the nine months ended December 31, 2002 compared to $1.9
million for the corresponding prior year period. The decline was primarily due
to a 215 basis point decrease in the annualized average yield to 4.40% for the
nine months ended December 31, 2002 compared to 6.55% for the corresponding
prior year period. In addition, the balance of average investment securities
decreased by $2.9 million, or 7.3%, to $36.3 million for the nine months ended
December 31, 2002 compared to $39.2 million for the corresponding prior year
period.
Interest income on federal funds sold decreased by $123,000, or 31.6%, to
$266,000 for the nine months ended December 31, 2002 compared to $389,000 for
the corresponding prior year period. The annualized yield on federal funds sold
declined 188 basis points to 1.59% for the nine months ended December 31, 2002
compared to 3.47% for the corresponding prior year period due to a lower
short-term interest rate environment. The decrease was partially offset by an
increase in the average balance of federal funds of $7.4 million, or 49.3%, to
$22.3 million from $15.0 million for the corresponding prior year period.
Interest Expense
Total interest expense decreased by $2.8 million, or 29.4%, to $6.8
million for the nine months ended December 31, 2002 compared to $9.6 million for
the corresponding prior year period. The change in interest expense is primarily
due to the lower interest rate environment cited above. The annualized average
cost of interest-bearing liabilities decreased 116 basis points to 2.32% from
3.48% for the corresponding prior year period. The decrease in interest expense
was partially offset by an increase in the average balance of interest-bearing
liabilities of $21.9 million, or 6.0%, to $389.3 million from $367.4 million
compared to the corresponding prior year period.
Interest expense on deposits decreased $2.0 million, or 30.8%, to $4.4
million for the nine months ended December 31, 2002 compared to $6.4 million for
the corresponding prior year period. The decrease in interest expense on
deposits was due primarily to a 110 basis point decline in the rate paid on
deposits to 1.88% for the nine months ended December 31, 2002 compared to 2.98%
for the corresponding prior year period. This was partially offset by a $27.9
million increase in the average balance of interest-bearing deposits to $315.0
million from $287.1 million for the corresponding prior year period.
Interest expense on advances and other borrowed money decreased $833,000,
or 26.4%, to $2.3 million for the nine months ended December 31, 2002 compared
to $3.2 million for the corresponding prior year period. This decrease in
interest expense was primarily due to a $6.0 million, or 7.4%, decline in the
average balance of borrowed money to $74.4 million from $80.3 million coupled
with a decrease of 107 basis points in the cost of borrowings to 4.17% from
5.24% for the corresponding prior year period.
Net Interest Income Before Provision for Loan Losses
Net interest income before the provision for loan losses increased by $1.8
million, or 15.7%, to $13.5 million for the nine months ended December 31, 2002
compared to $11.7 million for the corresponding prior year period. Total
interest income decreased by $982,000 while total interest expense decreased by
$2.8 million for the nine months ended December 31, 2002. The Company's
annualized average interest rate spread increased by 41
17
basis points to 4.09% for the nine months ended December 31, 2002 compared to
3.68% for the corresponding prior year period.
Provision for Loan Losses and Asset Quality
The Company did not provide for additional loan losses for the nine months
ended December 31, 2002, compared to $675,000 for the corresponding prior year
period. The provision for loan losses was not increased during the nine-month
period due to the current credit quality of the loan portfolio and an overall
reserve that the Company believes to be adequate at December 31, 2002 as
explained below. During the first nine months of fiscal 2003, Carver applied net
loan recoveries of $5,000 to the allowance for loan losses compared to net loan
charge-offs of $262,000 for the corresponding prior year period. At December 31,
2002, the Bank's allowance for loan losses at $4.1 million remained
substantially unchanged from March 31, 2002.
At December 31, 2002, non-performing loans totaled $2.3 million, or 0.81%
of total loans, compared to non-performing loans of $2.8 million, or 0.96% of
total loans, at March 31, 2002, a decrease of $481,000 or 17.0%. The reduction
in non-performing loans improved the ratio of the allowance for loan losses to
non-performing loans to 176.1% at December 31, 2002 compared to 146.0% at March
31, 2002. The ratio of the allowance for loan losses to total loans at December
31, 2002 was unchanged at 1.41% compared to March 31, 2001.
Management's judgment in determining the adequacy of the allowance for
loan losses is based on an evaluation of individual loans, the risk
characteristics and size of the loan portfolio, an assessment of current
economic and real estate market conditions, estimates of the current value of
underlying collateral, past loan loss experience, review of regulatory authority
examination reports and other relevant factors. Based on the process employed,
management believes that the allowance for loan losses is adequate under
prevailing economic conditions to absorb losses on existing loans that may
become uncollectible. 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
Total non-interest income decreased $1.5 million, or 37.5%, to $2.4
million for the nine-month period ended December 31, 2002 compared to $3.9
million for the corresponding prior year period. The change was primarily
attributable to a net decrease in non-recurring income of $2.3 million for the
nine-month period ended December 31, 2002, partially offset by a net increase in
depository and loan fees. The non-recurring income of $2.3 million for the nine
months ended December 31, 2001 represented a gain on the sale of investment
securities of $1.4 million, a gain of $987,000 on the sale of the Bank's East
New York branch offset in part by a loss of $101,000 on the sale of the Bank's
automobile loan portfolio.
Non-interest income, excluding non-recurring items, increased $833,000, or
52.5%, to $2.4 million for the nine-month period ended December 31, 2002
compared to $1.6 million for the corresponding prior year period, primarily
attributable to an increaseincreases in loan fees and
service charges that resulted from
the recognition of substantiallyas well as depository fees and charges were primarily due to
higher mortgage prepayment penalties, and
increases in loan origination, ATM and other depository fees as discussed in the
quarterly results. Mortgage prepayment penalty income was greater due to
significantly higher than usually experienced penalties of approximately
$361,000 received from three loans. Excluding the non-recurring gain and loss,
non-interest income represented 15.2% of operating income (net interest income
plus non-interest income, excluding the non-recurring gain and loss) for the
nine-month period ended December 31, 2002 compared with 12.6% forusage over the
corresponding prior year period.
Non-Interest Expenseperiod, growth in debit card income and a restructuring
of loan and depository fees and service charges which began in the second
quarter of fiscal 2003. Other non-interest income increased as a result of a
recovery of $558,000 of which $411,000 was related to the recognition of
previously unrecognized mortgage loan income from one problem loan that had been
held in escrow pending the resolution of certain mechanics' liens. The remaining
recovery of $147,000 was from previously unrecognized prepaid mortgage loan
income. In an effort to reposition the balance sheet, the Company sold
investment securities during the second quarter of fiscal 2004 that generated a
net gain on sale of securities of $31,000.
NON-INTEREST EXPENSE
Total non-interest expense increased $138,000,$367,000, or 1.3%5.0%, to $10.8$7.7 million
for the ninesix months ended December 31, 2002September 30, 2003 compared to $10.7$7.3 million for the
corresponding prior year period. The increase was primarily attributable to
other expenses, consisting primarily of consulting fees and marketing and
advertising expenses. Salaries andincreases in employee benefits decreased $47,000 to $4.8
million for the nine months ended December 31, 2002 compared to $4.9 million for
the corresponding period last year. The decrease in compensation and benefits is
primarily attributablebenefits. Employee compensation and
benefit expense was higher year over year by $340,000 as a result of salary
increases, new hires at higher average salaries, increased cost of benefit plans
and the timing of accruals for employee bonus expense. Additionally, the
capital securities cost of $23,000 related to the issuance of the subordinated
debentures during the period was minimal as the securities were issued in
mid-September. Other non-interest expense includes a $204,000 increase in
consulting expenses recognizedrelated to establishing the Bank's real estate investment
trust, offset by reductions in advertising expense of $124,000 and loan expenses
of $77,000.
INCOME TAX EXPENSE
For the third quarter of fiscal
2002 for severance payments and annual
18
compensation plans that to date have not been incurred in this fiscal year.
Marketing and advertising expenses increased by $78,000 to $579,000 for the
nine-monthsix-month period ended December 31,September 30, 2002, compared to $501,000 for the
corresponding prior year period. The increase in marketing and advertising
expenses is primarily attributable to the launch of the Company's new brand
image, as well as the introduction of its new online banking and debit card
products.
Income Tax Expense
In comparison to the prior year period, the Company has fully utilized its
tax loss carryforward resulting from prior period losses and is now accruingaccrued
for
federal taxes. For the nine-month period ended December 31, 2002, estimated Federal, New York State and New York City income tax expense was $2.3 million.at a combined
total tax rate of 45%. For the nine-monthsix-month period ended December 31, 2001,September 30, 2003, the
Company applied a
federal tax loss carryforward resulting from priordecreased its rate following the establishment of Carver Asset
Corporation.
For the six-month period losses and therefore
no federalended September 30, 2003, income before taxes
were payableincreased $502,000, or 15.1%, to $3.8 million compared to $3.3 million for the
prior year period. The accrual for taxes of
$790,000Income tax expense decreased $201,000, or 13.3%, to $1.3
million compared $1.5 million for the nine months ended December 31, 2001 represents an estimate of
New York State and New York City income taxes only.prior year period.
ITEM 3. Quantitative and Qualitative Disclosure About Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented
at March 31, 20022003 in Item 7 of the Company's 2002 10-K/A, as filed with the SEC.2003 10-K. The Company believes
that there have been no material changes in the Company's market risk at
December 31, 2002September 30, 2003 compared to March 31, 2002.2003.
ITEM 4. Controls and Procedures
Evaluation of disclosure controls and procedures.CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 ("Exchange Act") is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC. Within the 90 days prior to the dateAs of this report,September 30, 2003, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14.13a-15. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective and timely in alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
Changes in internal controls. The Company made21
There were no significant changes in itsour internal controlscontrol over financial reporting
that occurred during the period covered by this report that has materially
affected, or in other factors that could significantlyis reasonably likely to materially affect, these
controls subsequent to the date of the evaluation of those controls by the Chief
Executive Officer and Chief Financial Officer.our internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal ProceedingsLEGAL PROCEEDINGS
Disclosure regarding legal proceedings that the Company is a party to
is presented in Note 13 to our audited consolidated financial statementsConsolidated Financial Statements in Carver's 2002 10-K/A as filed with the SEC and Item 1 of Part II of Carver's
Form 10-Q for the quarterly period ended September 30, 2002.2003
10-K. Except as set forth below, there have been no material changes with regard
to such legal proceedings since the filing of the 2002 10-K/A and the Form 10-Q for the quarterly period
ended September 30, 2002.2003 10-K.
On or about December 28, 2000,April 29, 1999, plaintiff Thomas L. ClarkReginald St. Rose ("Clark"St. Rose"), thea
former President and CEO of Carver Federal employee, filed suit against Carver Federal
and certain individual defendants in the Supreme
Court of the State of New York, County of New York (the "Clark"St. Rose Action"), claiming that. In
his complaint, St. Rose alleged the defendants should
have been forcedfollowing causes of action relating to obtain approvala
January 12, 1999 agreement between the parties concerning St. Rose's separation
from the OTS to pay severance benefits that
Clark believed Carver owed him under an employment agreement. Clark sought
injunctive relief and asserted claims forFederal: (1) breach of contract, equitablecontract; (2) promissory estoppel, and estoppel by contract.(3)
fraudulent misrepresentation. On or about March 30, 2001,Carver Federal's motion, the defendants movedCourt dismissed
the fraudulent misrepresentation claim. St. Rose seeks damages in an amount not
less than $50,000 with respect to
dismiss the compliant in its entirety and, on
19
November 27, 2001, the court dismissed the breach of contract claimcause of action and
seeks undisclosed damages with respect to the promissory estoppel claim. Carver
Federal has not yet filed an answer to the remaining two claims because its time
to do so has been extended without date. Carver Federal has unasserted
counterclaims against St. Rose for, among other claims, payment of certain
financial obligations to Carver Federal, which obligations remain outstanding as
of the date of this Form 10-Q. Carver Federal and St. Rose have recently resumed
settlement discussions. If the parties do not reach a settlement, Carver Federal
intends to continue to defend the St. Rose Action vigorously.
Carver Federal is also a defendant in two actions brought by Ralph
Williams ("Williams I" and "Williams II") and an action brought by Janice
Pressley (the "Pressley Action") all of which arise out of events concerning the
Northeastern Conference Federal Credit Union ("Northeastern"), a federal credit
union that maintained accounts with Carver Federal and certain other banks in
the New York metropolitan area (the "Bank Defendants"). Plaintiff Williams is a
former member of the Board of Directors of Northeastern and plaintiff Pressley
is a former treasurer of Northeastern. Plaintiffs allege that the National
Credit Union Administration (the "NCUA") acted improperly when it placed
Northeastern into conservatorship and subsequent liquidation. In or about July
1998, Williams commenced Williams I in the United States District Court,
District of Columbia seeking to restrain the NCUA from executing on the
conservatorship order and an order directing the Bank Defendants to "restore
[their] accounts to their original status." The Bank Defendants were not served
with the pleadings in Williams I, and the Court entered judgment against them on
default. After the Bank Defendants learned of this case, they made a motion in
September 2001 to vacate the default judgment. That motion is still pending.
On or about November 22, 2000, Williams filed Williams II in the United
States District Court, District of Columbia, against the individual defendantsNCUA and the equitable estoppelBank
Defendants seeking damages in the amount of $1 million plus certain additional
unspecified amounts, and estoppelplaintiff Pressley filed the Pressley Action in the
same court against the same defendants seeking unspecified compensatory and
punitive damages. Williams seeks damages for the allegedly "unauthorized" or
"invalid" actions of the NCUA Board of Directors in taking control of
Northeastern as well as damages for discrimination and civil rights violations.
Pressley seeks damages based on identical allegations except that she also
alleges certain claims of employment discrimination.
The Bank Defendants filed a joint motion to dismiss Williams II, which
motion was granted by contract claims
against all defendants.the District Court. Williams filed a notice of appeal on
August 24, 2003. Pursuant to a scheduling order issued by the Court, Carver
Federal appealedfiled a Notice of Appearance, Certificate of Counsel and Disclosure
Statement. The Bank Defendants collectively filed a motion for summary
affirmance of the lower court's failureDistrict Court's decision on October 9, 2003. The scheduling
order required that Williams make certain submissions on or before September 24,
2003 in support of his appeal. Williams failed to do so and the Court issued an
order
22
directing Williams to show cause by November 7, 2003 why the appeal should not
be dismissed for want of prosecution. On November 7, 2003, Williams filed an
answer to the order to show cause and a motion for leave to file his submissions
late. The court has not yet ruled on that motion as of the date of filing of
this Form 10-Q.
The Bank Defendants also made a joint motion to dismiss the breachPressley
Action. In September 2001, the District Court granted that motion. Pressley
appealed the decision and the Court of contract claim against Carver Federal. On September 26,
2002,Appeals remanded the Appellate Divisioncase for a
clarification by the District Court of its order as to whether it was a final
order applicable to all of the Supremedefendants. The Court reversedof Appeals dismissed the
lower courtappeal in August 2003 and, granted Carver Federal's motionin October 2003 with the consent of Pressley's
counsel, the District Court dismissed Pressley's case against the Bank
Defendants and has entered an order to that effect, resolving the Pressley
Action in its entirety.
On September 30, 2002,In or about November 2001, Monique Barrow, a Noticeformer branch teller,
filed an action against Carver Federal in the United States District Court for
the Southern District of EntryNew York alleging that Carver Federal's termination of
her employment constituted a violation of the Appellate Division's decision was filedfederal Family and Medical Leave
Act and each of the New York State and City Human Rights Laws. Ms. Barrow seeks
back pay, front pay and benefits with the courtinterest in an amount not less than $5
million, and on
October 30, 2002 judgment was enteredpunitive, liquidated and other compensatory damages in favor ofan amount
not less than $10 million. On August 5, 2003, Carver Federal filed a motion for
summary judgment to dismiss the complaint in its entirety. It is fully
submitted, and Carver Federal awaits the individual defendants dismissing the Clark Action as to all defendants. Clark
cannot appeal the Appellate Division's decision or the judgment as of right.
Clark's time to move for permission to appeal has run.Court's decision.
ITEM 2. Changes in Securities and Use of ProceedsCHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. Defaults Upon Senior SecuritiesDEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SubmissionSUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Holding Company held its Annual Meeting on September 22, 2003 for
the fiscal year ended March 31, 2003.
The purpose of Mattersthe Annual Meeting was to a Votevote on the following
proposals:
1. the election of Security Holders
None.two directors for terms of three years each;
2. the ratification of the appointment of KPMG, LLP as
independent auditors of the Holding Company for the fiscal
year ended March 31, 2004; and
3. the approval of an amendment to the Carver Bancorp, Inc
Management Recognition Plan.
The results of voting were as follows:
Proposal 1: Election of Directors:
Holding Company Nominees
Robert Holland, Jr. For 2,163,382
Withheld 153,855
Frederick O. Terrell For 2,163,357
Withheld 153,880
Proposal 2: Ratification of Appointment of Independent For 2,216,277
23
Auditors
Withheld 99,374
Abstain 1,586
Proposal 3 Ratification of Amendment to the Carver Bancorp For 2,095,003
Management Recognition Plan Withheld 220,323
Abstain 1,911
In addition to the nominees elected at the Annual Meeting, the
following persons' terms of office as directors continued after the Annual
Meeting: David L. Hinds, Pazel G. Jackson, Jr., Carol Baldwin Moody, Edward B.
Ruggiero, Deborah C. Wright and Strauss Zelnick.
ITEM 5. Other InformationOTHER INFORMATION
None.
ITEM 6. ExhibitsEXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are submitted with this report:
Exhibit 4.1 Guarantee Agreement by and between Carver
Bancorp, Inc. and U.S. Bank National
Association, dated as of September 17, 2003.
Exhibit 4.2 Amended and Restated Declaration of Trust by
and among, U.S. Bank National Association,
as Institutional Trustee, Carver Bancorp,
Inc. as Sponsor and Linda Dunn, William Gray
and Deborah Wright as Administrators, dated
as of September 17, 2003.
Exhibit 4.3 Indenture, dated as of September 17, 2003,
between Carver Bancorp, Inc., as Issuer and
U.S. Bank National Association, as Trustee.
Exhibit 11. Computation of Net Income Per Share.
Exhibit 31.1 Certification of Chief Executive Officer.
Exhibit 31.2 Certification of Chief Financial Officer.
Exhibit 32.1(*) Written Statement of Chief Executive Officer
furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350.
Exhibit 32.2(*) Written Statement of Chief Financial Officer
furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350.
* Pursuant to SEC rules, this exhibit will not be deemed filed for purposes
of Section 18 of the Exchange Act or be otherwise subject to the liability
of that section.
(b) Current Reports on Form 8-K.
We furnished the following Current Reports on Form 8-K (a) Exhibits.
Exhibit 11. Net income per share.
(b) Reportsduring the quarter ended
September 30, 2003:
1. Current report on Form 8-K.
None.
208-K, dated September 17, 2003, an
announcement of private placement of $13 million in Trust
Preferred Securities.
24
2. Current report on Form 8-K/A, dated August 18, 2003, which
includes information being filed pursuant to Item 12 but was
filed under Item 9, an announcement of amendment to the
Company's financial results for the first quarter ended June
30, 2003.
3. Current report on Form 8-K, dated July 23, 2003, which
includes information being filed pursuant to Item 12 but was
filed under Item 9, an announcement of the Company's financial
results for the first quarter ended June 30, 2003.
25
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: FebruaryNovember 14, 2003 /s/ Deborah C. Wright
----------------------------------------------------------------------------
Deborah C. Wright
President and Chief Executive Officer
Date: FebruaryNovember 14, 2003 /s/ William C. Gray
----------------------------------------------------------------------------
William C. Gray
Senior Vice President
and Chief Financial Officer
21
CERTIFICATIONS
I, Deborah C. Wright, President and Chief Executive Officer of Carver Bancorp,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Carver Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003 /s/ Deborah C. Wright
----------------- -----------------------
Deborah C. Wright
President and
Chief Executive Officer
22
CERTIFICATIONS
I, William C. Gray, Senior Vice President and Chief Financial Officer of Carver
Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Carver Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003 /s/ William C. Gray
----------------- -------------------------
William C. Gray
Senior Vice President and
Chief Financial Officer
2326