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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-21487
CARVER BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3904174
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
75 West 125th Street, New York, New York 10027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 876-4747
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share American Stock Exchange
(Title of Class) (Name of Each Exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
As of May 31, 2002, there were 2,316,358 shares of common stock of the
registrant outstanding. The aggregate market value of the Registrant's common
stock held by non-affiliates (based on the closing sales price of $12.25 per
share of the registrant's common stock on May 31, 2002) was approximately $28.4
million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the annual meeting of
stockholders for the fiscal year ended March 31, 2002 (the "Proxy Statement")
are incorporated by reference into Part III.
CARVER BANCORP, INC.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1. Business..................................................... 1
Item 2. Properties................................................... 28
Item 3. Legal Proceedings............................................ 28
Item 4. Submission of Matters to a Vote of Security Holders.......... 30
Part II
Item 5. Market for Carver Bancorp, Inc. Common
Equity and Related Stockholder Matters..................... 31
Item 6. Selected Financial Data...................................... 32
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk... 43
Item 8. Financial Statements and Supplementary Data.................. 44
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 44
Part III
Item 10. Directors and Executive Officers of Carver Bancorp, Inc...... 44
Item 11. Executive Compensation....................................... 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 44
Item 13. Certain Relationships and Related Transactions............... 44
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................... 44
SIGNATURES ............................................................ 45
CONSOLIDATED FINANCIAL STATEMENTS OF CARVER
BANCORP INC. AND SUBSIDIARIES............................ F-1
EXHIBIT INDEX.......................................................... E-1
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, and may be identified by the use of such words as "believe," "expect,"
"anticipate," "should," "planned," "estimated" and "potential." These
forward-looking statements consist of estimates with respect to the financial
condition, results of operations and business of the Company (as defined below)
that are subject to various factors which could cause actual results to differ
materially from these estimates. These factors include, without limitation, the
Company's success in implementing its initiatives, including expanding its
product line, achieving greater operating efficiencies and successfully opening
its new branch, changes in general, economic and market, legislative and
regulatory conditions, the development of an adverse interest rate environment
that adversely affects the interest rate spread or other income anticipated from
the Company's operations and investments, the ability of the Company to
originate and purchase loans with attractive terms and acceptable credit
quality, the ability of the Company to realize cost efficiencies and the
economic effects of the September 11, 2001 terrorist attacks. The Company
assumes no obligation to update the forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements.
PART I
ITEM 1. BUSINESS
GENERAL
Carver Bancorp, Inc.
Carver Bancorp, Inc., a Delaware corporation (the "Holding Company"), is
the holding company for Carver Federal Savings Bank, a federally chartered
savings bank (the "Bank" or "Carver Federal"). Collectively, the Holding Company
and the Bank are referred to herein as the "Company" or "Carver." On October 17,
1996, the Bank completed its reorganization into a holding company structure
(the "Reorganization") and became a wholly owned subsidiary of the Holding
Company. Pursuant to an Agreement and Plan of Reorganization, dated May 21,
1996, each share of the Bank's outstanding common stock was exchanged for one
share of common stock of the Holding Company. 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.
The Holding Company's executive offices are located at the home office of
the Bank at 75 West 125th Street, New York, New York 10027. The Holding
Company's telephone number is (212) 876-4747.
Carver Federal Savings Bank
The Bank was chartered in 1948 and began operations in 1949 as Carver
Federal Savings and Loan Association, a federally chartered mutual savings and
loan association, at which time the Bank obtained federal deposit insurance and
became a member of the Federal Home Loan Bank (the "FHLB") of New York. The Bank
converted to a federal savings bank in 1986 and changed its name at that time to
Carver Federal Savings Bank. On October 24, 1994, the Bank converted from mutual
to stock form and issued 2,314,275 shares of its common stock at a price of $10
per share.
Carver Federal was founded as an African-American operated institution to
provide residents of under-served communities with the ability to invest their
savings and obtain credit. Carver Federal's principal business consists of
attracting deposit accounts through its branch offices and investing those funds
in mortgage loans and other investments permitted to federal savings banks.
Based on asset size as of March 31, 2002, Carver Federal is the largest
African-American operated financial institution in the United States.
Recent Terrorist Attack on the World Trade Center
On September 11, 2001, a terrorist attack destroyed the World Trade Center
towers and several other buildings in the New York City financial district.
While the Bank does not have significant real estate loans in the New York City
financial district, the overall effects of the terrorist attack and the
resultant disruption of business may adversely impact our business. This adverse
impact may be realized in the form of problem loans or deposit outflows
resulting from reductions in customer income levels. At this time we cannot
estimate the impact, if any, that this event will have on Carver's results of
operations and business.
1
LENDING ACTIVITIES
General. Carver Federal's principal lending activity is the origination of
mortgage loans for the purpose of purchasing or refinancing one- to four-family
residential, multifamily residential, and commercial properties. Carver Federal
also originates or participates in loans for the construction or renovation of
commercial property and residential housing developments and occasionally
originates permanent financing upon completion. In addition, Carver Federal
originates home equity loans and consumer loans secured by deposits.
Carver Federal originates one- to four-family mortgage loans to service
its retail customers. Carver continued to engage in first-mortgage loan
purchases during the fiscal year ended March 31, 2002 ("fiscal 2002"), which
accounted for 41.2% of loan additions. Loan purchases are used to complement
retail originations. Gross loans receivable increased by $9.1 million, or 3.2%,
to $297.5 million at March 31, 2002, compared to $288.4 million at March 31,
2001. Carver Federal's net loan portfolio as a percentage of total assets
decreased to 64.3% at March 31, 2002, compared to 66.8% at March 31, 2001.
Loan Portfolio Composition. One- to four-family mortgage loans decreased
by $35.0 million, or 22.2%, to $122.8 million at March 31, 2002, compared to
$157.8 million at March 31, 2001. During fiscal 2002, multifamily real estate
loans increased by $35.0 million, or 41.8%, to $118.6 million at March 31, 2002,
compared to $83.6 million at March 31, 2001. One- to four-family mortgage loans
totaled $122.8 million, or 41.3% of Carver Federal's total gross loan portfolio,
multifamily loans totaled $118.6 million, or 39.9% of total gross loans,
non-residential real estate loans (including church loans) totaled $40.1
million, or 13.5% of total gross loans, and construction loans totaled $13.7
million, or 4.6% of total gross loans. Consumer (credit card loans, personal
loans, automobile loans, home equity loans and home improvement loans) and
business loans totaled $2.3 million, or 0.8% of total gross loans.
Non-residential real estate loans (including church loans) increased by $4.0
million, or 11.0%, to $40.1 million at March 31, 2002, compared to $36.1 million
at March 31, 2001. Construction loans increased by $6.6 million, or 92.6%, to
$13.7 million at March 31, 2002, compared to $7.1 million at March 31, 2001.
Consumer and business loans decreased by $1.5 million, or 38.4%, to $2.3 million
at March 31, 2002, compared to $3.8 million at March 31, 2001. The decrease in
consumer and business loans reflect the Bank's continued de-emphasis of consumer
lending resulting from its decision during the fiscal year ended March 31, 1999
("fiscal 1999") to discontinue the origination of unsecured consumer loans.
Premiums on loans are paid when the effective yield on the loans being
purchased is greater than the current market rate for comparable loans. These
premiums are amortized as the loan is repaid. It is possible that in a declining
interest rate environment the rate or speed at which loans repay may increase
which may have the effect of accelerating the amortization of the premium and
therefore reduce the effective yield of the loan. Premium on loans increased by
$201,000, or 28.5%, to $906,000 at March 31, 2002, compared to $705,000 at March
31, 2001 primarily reflecting increased premiums paid on loans purchased, which
was offset, in part, by the repayment of loans purchased at a premium.
Loans in process increased by $2.6 million, or 207.5%, to $3.9 million at
March 31, 2002, compared to $1.3 million at March 31, 2001. Allowance for loan
losses increased by $577,000, or 16.2%, to $4.1 million at March 31, 2002,
compared to $3.6 million at March 31, 2001, reflecting a revision in the
allowance schedule. See "Asset Quality--Asset Classification and Allowance for
Losses."
The following table sets forth selected data relating to the composition
of Carver Federal's loan portfolio by type of loan at the dates indicated.
2
At March 31,
------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
(Dollars in thousands)
Real estate loans:
One- to four-family $ 122,814 41.28% $ 157,767 54.71% $ 152,458 55.54% $ 181,320 65.39% $ 188,761 66.85%
Multifamily 118,589 39.86 83,620 29.00 86,184 31.40 52,366 18.89 49,289 17.46
Non-residential 40,101 13.48 36,113 12.52 22,721 8.28 23,093 8.33 12,789 4.53
Construction 13,678 4.60 7,101 2.46 6,393 2.33 11,047 3.98 15,993 5.66
Consumer and business (1) 2,328 0.78 3,781 1.31 6,725 2.45 9,450 3.41 15,536 5.50
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total gross loans 297,510 100.00% 288,382 100.00% 274,481 100.00% 277,276 100.00% 282,368 100.00%
====== ====== ====== ====== ======
Add:
Premium on loans 906 705 582 1,014 1,555
Less:
Loans in process (2) (3,936) (1,280) (1,062) (2,636) (4,752)
Deferred fees and loan
discounts (1,238) (819) (918) (1,110) (1,080)
Allowance for loan losses (4,128) (3,551) (2,935) (4,020) (3,137)
--------- --------- --------- --------- ---------
Net loan portfolio $ 289,114 $ 283,437 $ 270,148 $ 270,524 $ 274,954
========= ========= ========= ========= =========
(1) Includes automobile loans, personal loans, credit card loans, home equity,
home improvement loans and business loans.
(2) Represents undisbursed portion of of outstanding construction loans.
One- to Four-Family Residential Lending. Traditionally, Carver Federal's
lending activity has been the origination of loans secured by first mortgages on
existing one- to four-family residences in Carver Federal's market area. During
fiscal 2002, the Bank continued its practice of purchasing portfolios of first
mortgage loans on existing one- to four-family residences to augment
originations.
Carver Federal originates and purchases one- to four-family residential
mortgage loans in amounts that range between $35,000 and $750,000. Approximately
72% of Carver Federal's one-to four-family residential mortgage loans at March
31, 2002 had adjustable rates and approximately 28% had fixed rates.
Carver Federal's one- to four-family residential mortgage loans are
generally for terms of 30 years, amortized on a monthly basis, with principal
and interest due each month. Residential mortgage loans often remain outstanding
for significantly shorter periods than their contractual terms. These loans
customarily contain "due-on-sale" clauses that permit the Bank to accelerate
repayment of a loan upon transfer of ownership of the mortgaged property. Also,
borrowers may refinance or prepay one- to four-family residential loans at their
option without penalty.
The Bank's lending policies generally limit the maximum loan-to-value
ratio ("LTV") on one- to four-family residential mortgage loans secured by
owner-occupied properties to 95% of the lesser of the appraised value or
purchase price, with private mortgage insurance required on loans with LTV
ratios in excess of 80%. Under a special loan program, consisting of loans
originated and sold to the State of New York Mortgage Agency ("SONYMA") or
General Motors Acceptance Corporation ("GMAC") secured by single-family homes
purchased by first time home buyers, the LTV ratio may go to 97%.
Carver Federal's fixed-rate, one- to four-family residential mortgage
loans are underwritten in accordance with applicable guidelines and requirements
for sale to the Federal National Mortgage Association ("Fannie Mae") or SONYMA
in the secondary market. From time to time the Bank has sold such loans to
Fannie Mae and to SONYMA. The Bank also originates, to a limited extent, loans
underwritten according to Federal Home Loan Mortgage Corporation ("FHLMC")
standards. Loans are sold with limited recourse on a servicing retained basis to
Fannie Mae and on a servicing released basis to SONYMA and GMAC. Carver Federal
uses several sub-servicing firms to service mortgage loans, whether held in
portfolio or sold with the servicing retained. At March 31, 2002, the Bank,
through its sub-servicers, was servicing $2.9 million of loans for Fannie Mae
and FHLMC.
Carver Federal offers one-year, three-year, five/one-year and
five/three-year adjustable-rate one- to four-family residential mortgage loans.
These loans are retained in Carver's portfolio and are not sold on the secondary
market. They are indexed to the weekly average rate on the one-year, three-year
and five-year U.S. Treasury securities, respectively, adjusted to a constant
maturity (usually one year), plus a margin of 275 basis points. The rates at
which interest accrues on these loans are adjustable every one or three years,
generally with limitations on adjustments of two percentage points per
adjustment period and six percentage points over the life of the one-year
adjustable-rate mortgage and five percentage points over the life of a
three-year adjustable-rate mortgage.
3
The retention of adjustable-rate loans in Carver Federal's portfolio helps
reduce the Bank's exposure to increases in prevailing market interest rates.
However, there are unquantifiable credit risks resulting from potential
increases in costs to borrowers in the event of upward repricing of
adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers. Although adjustable-rate loans allow
the Bank to increase the sensitivity of its interest-earning assets to changes
in interest rates, the extent of this interest rate sensitivity is limited by
periodic and lifetime interest rate adjustment limitations. Accordingly, there
can be no assurance that yields on the Bank's adjustable-rate loans will fully
adjust to compensate for increases in the Bank's cost of funds. Adjustable-rate
loans increase the Bank's exposure to decreases in prevailing market interest
rates, although decreases in the Bank's cost of funds would tend to offset this
effect.
Multifamily Real Estate Lending. At March 31, 2002, multi-family loans
totaled $118.6 million, or 39.9% of Carver Federal's gross loan portfolio. The
largest of these loans outstanding was a $1.8 million loan secured by a 72 unit,
multifamily apartment building located in Brooklyn, New York. This loan was
performing at March 31, 2002. The Bank intends to continue to emphasize its
multifamily mortgage loan program, which has enabled the Bank to expand its
presence in the multifamily lending market in the New York City area. Carver
Federal offers competitive rates with flexible terms which make the product
attractive to borrowers. Multifamily property lending entails additional risks
compared to one- to four-family residential lending. For example, such loans are
dependent on the successful operation of the real estate project and can be
significantly impacted by supply and demand conditions in the market for
multifamily residential units.
Carver Federal's multifamily product guidelines generally require that the
maximum LTV not exceed 75% while "cash out" refinances are limited to 65% LTV
based on the appraised value. The Bank generally requires a debt coverage ratio
("DCR") of at least 1.3, which requires the properties to generate cash flow
after expenses and allowances in excess of the principal and interest payment.
Currently, with certain restrictions the Bank limits its maximum amount for an
individual loan to $2.0 million pursuant to an Office of Thrift Supervision
("OTS") limitation. See "Regulation and Supervision--Federal Banking
Regulation--Loans to One Borrower Limitations". The regulatory maximum for loans
to one borrower is $5.5 million without this limitation. Carver Federal
originates multi-family mortgage loans, the predominance of which are adjustable
rate loans that generally amortize on the basis of a 15-, 20-, 25- or 30-year
period but require a balloon payment after the first five years, or the borrower
may have an option to extend the loan for two additional five-year periods. The
Bank, on a case-by-case basis, originates ten-year fixed rate loans.
To help ensure continued collateral protection and asset quality for the
term of multi-family real estate loans, Carver Federal employs (with the
assistance of an independent consulting firm) a risk-rating system. Under the
risk-rating system, all multi-family real estate loans with balances over
$250,000 are risk rated. Separate multi-family real estate loan portfolio
reviews are performed annually resulting in written management summary reports.
Non-residential Real Estate Lending. At March 31, 2002, non-residential
real estate mortgage loans (including loans to churches) totaled $40.1 million,
or 13.5% of the gross loan portfolio. Carver Federal originates non-residential
real estate first mortgage loans in its market area. At March 31, 2002, the
largest non-residential loan outstanding was a $3.9 million loan secured by a
retail/office building located in New York, New York. This loan was performing
at March 31, 2002. Carver Federal's non-residential real estate lending activity
consists predominantly of loans for the purpose of purchasing or refinancing
office, retail and church buildings in its market area. Non-residential real
estate lending entails additional risks compared with one- to four-family
residential lending. For example, such loans typically involve large loan
balances to single borrowers or groups of related borrowers, and the payment
experience on such loans typically is dependent on the successful operation of
the real estate project. Carver Federal's maximum LTV on non-residential real
estate mortgage loans is 75%, and "cash out" refinances are limited to 65% LTV
based on the appraised value. The Bank generally requires a DCR of at least 1.3.
Assignment of rents of all tenants leases in the subject property is a Bank
requirement.
To help ensure continued collateral protection and asset quality for the
term of the non-residential real estate loans, Carver Federal employs (with the
assistance of an independent consulting firm) a risk-rating system. Under the
risk-rating system, all non-residential real estate loans with balances over
$250,000 are risk rated. Independent third party non-residential loan portfolio
reviews are performed at least annually resulting in written management summary
reports.
4
Historically, Carver Federal has been a New York City area leader in the
origination of loans to churches. At March 31, 2002, loans to churches totaled
$8.0 million, or 2.7% of the Bank's gross loan portfolio. These loans generally
have five-, seven- or ten-year terms with 15-, 20- or 25-year amortization
periods and a balloon payment due at the end of the term, and generally have no
greater than a 60% LTV ratio. At March 31, 2002, the largest permanent church
loan was a $1.6 million loan secured by a building located in New York, New
York. This loan was performing at March 31, 2002. The Bank provides construction
financing for churches and generally provides permanent financing upon
completion. Under the Bank's current loan policy, the maximum loan amount for
such lending is $1.0 million, but larger loan amounts are considered on a
case-by-case basis. There are currently 17 church loans in the portfolio.
Loans secured by real estate owned by religious organizations generally
are larger and involve greater risks than one- to four-family residential
mortgage loans. Because payments on loans secured by such properties are often
dependent on voluntary contributions by members of the church's congregation,
repayment of such loans may be subject to a greater extent to adverse conditions
in the economy. The Bank seeks to minimize these risks in a variety of ways,
including reviewing the church's financial condition, limiting the size of such
loans and establishing the quality of the collateral securing such loans. The
Bank determines the appropriate amount and type of security for such loans based
in part upon the governance structure of the particular organization, the length
of time the church has been established in the community and a cash flow
analysis of the church to determine its ability to service the proposed loan.
Carver Federal will obtain a first mortgage on the underlying real property and
usually requires personal guarantees of key members of the congregation and/or
key person life insurance on the pastor of the congregation and may also require
the church to obtain key person life insurance on specific members of the
church's leadership. Asset quality in the church loan category has been
exceptional throughout Carver Federal's history. Management believes that Carver
Federal remains a leading lender to churches in its market area.
Construction Lending. The Bank originates construction loans for the new
construction and renovation of churches, multi-family buildings, residential
developments, community service facilities and affordable housing programs.
Carver Federal also offers construction loans to qualified individuals and
developers for new construction and renovation of one- to four-family residences
in the Bank's market area. The Bank's construction loans generally have
adjustable interest rates and are underwritten in accordance with the same
standards as the Bank's mortgage loans on existing properties. The loans provide
for disbursement in stages as construction is completed. Construction terms are
usually from 12 to 24 months, during which period the borrower is required to
make monthly payments of accrued interest on the outstanding loan balance.
Borrowers must satisfy all credit requirements that apply to the Bank's
permanent mortgage loan financing for the subject property. Carver Federal has
established additional criteria for construction loans to include an engineer's
review on all construction budgets in excess of $500,000 and appropriate
interest reserves for loans in excess of $250,000.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value that is insufficient to assure full repayment. The
ability of a developer to sell developed lots or completed dwelling units will
depend on, among other things, demand, pricing, availability of comparable
properties and economic conditions. The Bank has sought to minimize this risk by
limiting construction lending to qualified borrowers in the Bank's market areas,
limiting the aggregate amount of outstanding construction loans and imposing a
stricter LTV ratio requirement than that required for one- to four-family
mortgage loans.
At March 31, 2002, the Bank had $13.7 million (including $3.9 million of
committed but undisbursed funds) in construction loans outstanding, comprising
4.6% of the Bank's total gross loan portfolio. At March 31, 2002, the largest
construction loan was on a retail building for $2.0 million located in New York,
New York. At March 31, 2002, this loan was performing.
Consumer and Business Loans. At March 31, 2002, the Bank had approximately
$2.3 million in consumer and business loans, or 0.8% of the Bank's gross loan
portfolio. The secured loans in this portfolio were either secured by deposits
at the Bank, homes or automobiles. At March 31, 2002, $500,000, or 21.7% of all
consumer and business loans, were secured and $1.8 million, or 78.3%, were
unsecured.
5
Consumer loans generally involve more risk than first mortgage loans. Loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These loans may also give rise to claims and defenses by
a borrower against Carver Federal and a borrower may be able to assert claims
and defenses against Carver Federal which it has against the seller of the
underlying collateral. In addition, with respect to defaulted automobile loans,
repossessed collateral may not provide an adequate source of repayment of the
outstanding loan balance as a result of damage, loss or depreciation, and the
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In underwriting consumer loans, Carver Federal
considers the borrower's credit history, an analysis of the borrower's income,
expenses and ability to repay the loan and the value of the collateral. See
"Asset Quality--Non-performing Assets."
At March 31, 2002, the Bank had $275,000 in unsecured business loans.
During the fourth quarter of fiscal 1999, the Bank discontinued the origination
of unsecured commercial business loans. The Bank continues to make a limited
number of commercial business loans that are secured in full by passbook and/or
certificate of deposit accounts.
Loan Processing. Carver Federal's loan originations are derived from a
number of sources, including referrals by realtors, builders, depositors,
borrowers and mortgage brokers, as well as walk-in customers. Loans are
originated by the Bank's personnel who receive a salary. Loan application forms
are available at each of the Bank's offices. All applications are forwarded to
the Lending Department located in the main office.
Carver Federal has established underwriting standards for multi-family and
non-residential real estate. A non-residential real estate loan application is
completed for all multi-family and non-residential properties which the Bank
finances. Prior to loan approval, the property is inspected by a non-residential
loan officer, who will prepare a property inspection report. As part of the loan
approval process, consideration is given to the appraisal, location,
accessibility, stability of neighborhood, environmental assessment, personal
credit history of the applicant(s) and the financial capacity of the
applicant(s).
Upon receipt of a completed loan application from a prospective borrower,
a credit report and verifications are ordered to verify specific information
relating to the loan applicant's income and credit standing. It is the Bank's
policy to obtain an appraisal of the real estate intended to secure a proposed
mortgage loan from an independent fee appraiser approved by the Bank.
It is Carver Federal's policy to record a lien on the real estate securing
the loan and to obtain a title insurance policy which insures that the property
is free of prior encumbrances. Borrowers must also obtain hazard insurance
policies prior to closing and, when the property is in a flood plain as
designated by the Department of Housing and Urban Development, paid flood
insurance policies must be obtained. Most borrowers are also required to advance
funds on a monthly basis, together with each payment of principal and interest,
to a mortgage escrow account from which the Bank makes disbursements for items
such as real estate taxes and hazard insurance.
Loan Approval. Except for loans in excess of $1.5 million, mortgage loan
approval authority has been delegated by the Bank's Board of Directors ("Board")
to the Bank's Management Loan Committee, which consists of certain members of
executive management, and to the Bank's Asset Liability and Interest Rate Risk
Committee. All one- to four-family mortgage loans that conform to Fannie Mae
standards and limits may be approved by the Residential Mortgage Loan
Underwriter. Loans above $1.5 million must be approved by the full Board.
Loans to One Borrower. Under the loans-to-one-borrower limits of the OTS,
with certain limited exceptions, loans and extensions of credit to a single or
related group of borrowers outstanding at one time generally may not exceed 15%
of the unimpaired capital and surplus of a savings bank. See "Regulation and
Supervision-Federal Banking Regulation-Loans to One Borrower Limitations." At
March 31, 2002, the maximum loan under this test would be $5.5 million. The Bank
currently limits its maximum loans to one borrower to $2.0 million without prior
OTS approval pursuant to OTS restriction. At March 31, 2002 there were four loan
relationships that exceeded $2.0 million and none that exceed the $5.5 million
limit. All of the loans are performing.
Loan Sales. Originations of one- to four-family real estate loans are
generally made on properties located within the New York City metropolitan area,
although Carver Federal does occasionally fund loans secured by property in
other areas. All such loans, however, satisfy the Bank's underwriting criteria
regardless of location. The Bank continues to offer one- to four-family
fixed-rate mortgage loans in response to consumer demand but requires that such
loans satisfy
6
guidelines of either Fannie Mae or SONYMA to ensure subsequent sale in the
secondary market as required to manage interest rate risk exposure.
Loan Purchases. Carver Federal purchased a total of $45.2 million of
mortgage loans consisting of performing multi-family and cooperative
adjustable-rate mortgage loans to supplement its origination of one- to
four-family first mortgage loans during fiscal 2002. This represented 41.2% of
Carver Federal's net addition to its loan production at March 31, 2002. The Bank
purchases loans in order to increase interest income and to manage its interest
rate risk. The Bank continues to shift its loan production emphasis to take
advantage of the higher yields and better interest rate risk characteristics
available on multi-family and non-residential real estate mortgage loans as well
as to increase its participation in multi-family and non-residential real estate
mortgage loans with New York area lenders. Loans purchased in fiscal 2002
increased $14.3 million, or 46.3%, from loan purchases of $30.9 million during
the fiscal year ended March 31, 2001 ("fiscal 2001").
The following table sets forth certain information with respect to Carver
Federal's loan originations, purchases and sales during the periods indicated.
Year Ended March 31,
----------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- --------------------
Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Loans originated:
One- to four-family $ 4,144 3.78% $ 2,274 3.70% $ 2,082 3.07%
Multifamily 27,225 24.80 15,747 25.70 319 0.47
Non-residential 25,583 23.31 12,182 19.88 988 1.46
Construction 8,910 8.12 -- 0.00 1,000 1.47
Consumer and business (1) 53 0.05 320 0.52 232 0.34
--------- --------- --------- --------- --------- ---------
Total loans originated 65,915 60.06 30,523 49.80 4,621 6.81
Loans purchased (2) 45,203 41.18 30,922 50.46 63,282 93.19
Loans sold (3) (1,361) (1.24) (160) (0.26) -- --
--------- --------- --------- --------- --------- ---------
Net additions to loan portfolio $ 109,757 100.00% $ 61,285 100.00% $ 67,903 100.00%
========= ========= ========= ========= ========= =========
(1) Comprised of auto, credit card, personal and home equity.
(2) Comprised primarily of one- to four-family and multi-family mortgage
loans.
(3) Comprise primarily of one- to four-family mortgage loans and student
loans.
Loan originations increased $35.4 million in fiscal 2002 to $65.9 million,
compared to $30.5 million in fiscal 2001 as a result of a continued focus in
lending.
Loans purchased by the Bank entail certain risks not necessarily
associated with loans the Bank originates. The Bank's purchased loans are
generally acquired without recourse and in accordance with the Bank's
underwriting criteria for originations. In addition, purchased loans have a
variety of terms, including maturities, interest rate caps and indices for
adjustment of interest rates that may differ from those offered at the time by
the Bank in connection with the loans the Bank originates. Finally, the market
areas in which the properties that secure the purchased loans are located are
subject to economic and real estate market conditions that may significantly
differ from those experienced in Carver Federal's market area. There can be no
assurance that economic conditions in these out-of-state areas will not
deteriorate in the future, resulting in increased loan delinquencies and loan
losses among the loans secured by property in these areas.
In an effort to reduce these risks, with its existing personnel and
through the use of a quality control/loan review firm, the Bank has sought to
ensure that purchased loans satisfy the Bank's underwriting standards and do not
otherwise have a higher risk of collection or loss than loans originated by the
Bank. A Lending Department officer monitors the inspection and confirms the
review of each purchased loan. Carver Federal also requires appropriate
documentation and further seeks to reduce its risk by requiring, in each
buy/sell agreement, a series of warranties and representations as to the
underwriting standards and the enforceability of the related legal documents.
These warranties and representations remain in effect for the life of the loan.
Any misrepresentation must be cured within ninety (90) days of discovery or
trigger certain repurchase provisions in the buy/sell agreement.
Interest Rates and Loan Fees. Interest rates charged by Carver Federal on
mortgage loans are primarily determined by competitive loan rates offered in its
market area and minimum yield requirements for loans purchased by Fannie Mae and
SONYMA. Mortgage loan rates reflect factors such as prevailing market interest
rate levels, the supply
7
of money available to the savings industry and the demand for such loans. These
factors are in turn affected by general economic conditions, the monetary
policies of the federal government, including the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"), the general supply of
money in the economy, tax policies and governmental budget matters.
Carver Federal charges fees in connection with loan commitments and
originations, rate lock-ins, loan modifications, late payments and changes of
property ownership and for miscellaneous services related to its loans. Loan
origination fees are calculated as a percentage of the loan principal. The Bank
typically receives fees of between zero and one point (one point being
equivalent to 1% of the principal amount of the loan) in connection with the
origination of fixed-rate and adjustable-rate residential mortgage loans. The
loan origination fee, net of certain direct loan origination expenses, is
deferred and accreted into income over the contractual life of the loan using
the interest method. If a loan is prepaid, refinanced or sold, all remaining
deferred fees with respect to such loan are taken into income at such time.
In addition to the foregoing fees, Carver Federal receives fees for
servicing loans for others, which in turn generally are sub-serviced for Carver
Federal by a third party servicer. Servicing activities include the collection
and processing of mortgage payments, accounting for loan repayment funds and
paying real estate taxes, hazard insurance and other loan-related expenses out
of escrowed funds. Income from these activities varies from period to period
with the volume and type of loans originated, sold and purchased, which in turn
is dependent on prevailing market interest rates and their effect on the demand
for loans in the Bank's market area.
Loan Maturity Schedule. The following table sets forth information at
March 31, 2002 regarding the dollar amount of loans maturing in Carver Federal's
portfolio, including scheduled repayments of principal, based on contractual
terms to maturity. Demand loans, loans having no schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year or less. The
table below does not include any estimate of prepayments, which significantly
shorten the average life of all mortgage loans and may cause Carver Federal's
actual repayment experience to differ significantly from that shown below.
Due During the Year Ending March 31,
------------------------------------
Due three Due five Due ten Due after
to five to ten to twenty twenty
2003 2004 2005 years years years years Total
-------- -------- -------- --------- -------- --------- --------- --------
(In thousands)
Real estate loans:
One- to four-family $ 25 $ 11 $ 21 $ 214 $ 9,083 $ 11,075 $102,385 $122,814
Multi-family 653 -- 132 25,162 43,937 26,354 22,351 118,589
Non-residential 2,810 -- -- 8,506 18,067 6,404 4,314 40,101
Construction 13,678 -- -- -- -- -- -- 13,678
Consumer and business loans 219 -- -- 2,109 -- -- -- 2,328
-------- -------- -------- -------- -------- --------- -------- --------
Total $ 17,385 $ 11 $ 153 $ 35,991 $ 71,087 $ 43,833 $129,050 $297,510
======== ======== ======== ======== ======== ======== ======== ========
The following table sets forth amounts in each loan category at March 31,
2002 that are contractually due after March 31, 2003, and whether such loans
have fixed rates or adjustable interest rates. Scheduled contractual principal
repayments of loans do not necessarily reflect the actual lives of such assets.
The average life of long-term loans is substantially less than their contractual
terms due to prepayments. In addition, due-on-sale clauses in mortgage loans
generally give Carver Federal the right to declare a conventional loan due and
payable in the event, among other things, that a borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and tends to decrease
when current mortgage loan market rates are substantially lower than rates on
existing mortgage loans.
8
Due After March 31, 2003
------------------------------------------
Fixed Adjustable Total
---------- ---------- ----------
(In thousands)
Real estate loans:
One- to four-family $ 34,357 $ 88,432 $ 122,789
Multifamily 86,906 31,030 117,936
Non-residential 25,956 11,335 37,291
Consumer and business 151 1,958 2,109
---------- ---------- ----------
Total $ 147,370 $ 132,755 $ 280,125
========== ========== ==========
ASSET QUALITY
General. One of the Bank's key operating objectives has been and continues
to be to maintain a high level of asset quality. Through a variety of
strategies, including, but not limited to, borrower workout arrangements and
marketing of foreclosed properties, the Bank has been proactive in addressing
problem and non-performing assets which, in turn, has helped to build the
strength of the Bank's financial condition. Such strategies, as well as the
Bank's concentration on one- to four-family and multifamily mortgage lending,
the maintenance of sound credit standards for new loan originations and a strong
real estate market, have resulted in the Bank maintaining a low level of
non-performing assets.
The underlying credit quality of the Bank's loan portfolio is dependent
primarily on each borrower's ability to continue to make required loan payments
and, in the event a borrower is unable to continue to do so, the value of the
collateral should be adequate to secure the loan. A borrower's ability to pay
typically is dependent primarily on employment and other sources of income
which, in turn, is impacted by general economic conditions, although other
factors, such as unanticipated expenditures or changes in the financial markets
may also impact the borrower's ability to pay. Collateral values, particularly
real estate values, are also impacted by a variety of factors, including general
economic conditions, demographics, maintenance and collection or foreclosure
delays.
Non-performing Assets. When a borrower fails to make a payment on a
mortgage loan, immediate steps are taken by Carver Federal's sub-servicers to
have the delinquency cured and the loan restored to current status. With respect
to mortgage loans, once the payment grace period has expired (in most instances
15 days after the due date), a late notice is mailed to the borrower within two
business days and a late charge is imposed if applicable. If payment is not
promptly received, the borrower is contacted by telephone and efforts are made
to formulate an affirmative plan to cure the delinquency. Additional calls are
made by the 20th and 25th day of the delinquency. If a mortgage loan becomes 30
days delinquent, a letter is mailed to the borrower requesting payment by a
specified date. If a mortgage loan becomes 60 days delinquent, Carver Federal
seeks to make personal contact with the borrower and also has the property
inspected. If a mortgage becomes 90 days delinquent, a letter is sent to the
borrower demanding payment by a certain date and indicating that a foreclosure
suit will be filed if the deadline is not met. If payment is still not made,
management may pursue foreclosure or other appropriate action.
When a borrower fails to make a payment on a consumer loan, steps are
taken by Carver Federal's loan department to have the delinquency cured and the
loan restored to current status. With the exception of automobile loans, once
the payment grace period has expired (10 days after the due date), a late notice
is mailed to the borrower immediately and a late charge is imposed if
applicable. If payment is not promptly received, the borrower is contacted by
telephone, and efforts are made to formulate an affirmative plan to cure the
delinquency. If a consumer loan becomes 30 days delinquent, a letter is mailed
to the borrower requesting payment by a specified date. If the loan becomes 60
days delinquent, the account is given to an independent collection agency to
follow up with the collection of the account. If the loan becomes 90 days
delinquent, a final warning letter is sent to the borrower and any co-borrower.
If the loan remains delinquent, it is reviewed for charge-off. The Bank's
collection efforts generally continue after the loan is charged off.
9
The following table sets forth information with respect to Carver
Federal's non-performing assets at the dates indicated. Loans generally are
placed on non-accrual status when they become 90 days delinquent.
At March 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a non-accrual basis (1):
Real estate:
One- to four-family $ 756 $ 947 $ 966 $ 392 $1,134
Multifamily 253 978 870 1,051 258
Non-residential 1,754 565 -- -- --
Construction 23 23 122 560 3,089
Consumer and business 37 6 168 414 1,087
------ ------ ------ ------ ------
Total non-accrual loans 2,823 2,519 2,126 2,417 5,568
------ ------ ------ ------ ------
Accruing loans contractually past due 90 days or more:
Real estate:
One- to four-family -- -- -- 568 1,049
Multifamily -- -- -- 804 --
Construction -- -- -- 530 --
Consumer and business -- -- -- 183 226
------ ------ ------ ------ ------
Total accruing 90-day past due loans -- -- -- 2,085 1,275
------ ------ ------ ------ ------
Total of non-accrual and accruing 90-day past due loans 2,823 2,519 2,126 4,502 6,843
------ ------ ------ ------ ------
Other non-performing assets (2):
Real estate:
One- to four-family -- -- 127 185 82
Multi-family -- 27 27 -- --
Non-residential -- 449 768 -- --
Consumer and business -- -- 16 99 --
------ ------ ------ ------ ------
Total other non-performing assets -- 476 938 284 82
------ ------ ------ ------ ------
Total non-performing assets (3) $2,823 $2,995 $3,064 $4,786 $6,925
====== ====== ====== ====== ======
Non-performing loans to total loans 0.96% 0.88% 0.79% 1.66% 2.47%
Non-performing assets to total assets 0.63% 0.71% 0.73% 1.15% 1.58%
Troubled debt restructuring (4):
Real estate:
Multifamily and commercial $ -- $ -- $ -- $ -- $ 807
====== ====== ====== ====== ======
(1) Non-accrual status denotes any loan where the delinquency exceeds 90 days
past due and in the opinion of management the collection of additional
interest is doubtful. After a careful review of individual loan history
and related collateral by management, the loan may be designated as an
accruing loan that is contractually past due 90 days or more or if in the
opinion of management the collection of additional interest is doubtful
the loan will remain in non-accrual status. Payments received on a
non-accrual loan are either applied to the outstanding principal balance
or recorded as interest income, depending on assessment of the ability to
collect on the loan. During the year ended March 31, 2002, gross interest
income of $288,000 would have been recorded on loans accounted for on a
non-accrual basis at the end of the year if the loans had been current
throughout the year. Instead, there was no interest on such loans included
in income during the period.
(2) Other non-performing assets represent property acquired by the Bank in
settlement of loans (i.e., through foreclosure or repossession or as an
in-substance foreclosure). These assets are recorded at the lower of their
fair value or the unpaid principal balance plus unpaid accrued interest of
the related loans.
(3) Total non-performing assets consist of non-accrual loans, accruing loans
90 days or more past due and property acquired in settlement of loans.
(4) Troubled debt restructurings, as defined under Statement of Financial
Accounting Standards ("SFAS") No. 15, are loans where the creditor has,
for economic or legal reasons, granted concessions to the debtor that the
creditor would not otherwise consider.
At March 31, 2002, total non-performing assets decreased by $172,000, or
5.7%, to $2.8 million, compared to $3.0 million at March 31, 2001.
10
Loans accounted for on a non-accrual basis increased $304,000, or 12.1%,
to $2.8 million at March 31, 2002, compared to $2.5 million at March 31, 2001.
The increase primarily reflects an increase in non-performing non-residential
real estate loans partially offset by decreases in non-performing one- to
four-family and multifamily real estate loans.
There were no accruing loans contractually past due 90 days or more at
March 31, 2002 and March 31, 2001, reflecting the continued practice adopted by
the Bank during fiscal 2000 to either write off or place on non-accrual status
all loans contractually past due 90 days or more.
There were no other non-performing assets at March 31, 2002, compared to
$476,000 at March 31, 2001. The decrease reflects the sale of real estate
acquired in settlement of loans.
Asset Classification and Allowances for Losses. Federal regulations and
the Bank's policies require the classification of assets on the basis of quality
on a regular basis. An asset is classified as "substandard" if it is determined
to be inadequately protected by the current net worth and paying capacity of the
obligor or the current value of the collateral pledged, if any. An asset is
classified as "doubtful" if full collection is highly questionable or
improbable. An asset is classified as "loss" if it is considered uncollectible,
even if a partial recovery could be expected in the future. The regulations also
provide for a "special mention" designation, described as assets that do not
currently expose a savings institution to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. Assets classified as substandard or
doubtful require a savings institution to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, a savings institution
must either establish specific allowances for loan losses in the amount of the
portion of the asset classified loss, or charge off such amount. Federal
examiners may disagree with a savings institution's classifications. If a
savings institution does not agree with an examiner's classification of an
asset, it may appeal this determination to the OTS Regional Director.
At March 31, 2002, Carver Federal had $2.8 million of loans classified as
substandard which represented 0.6% of the Bank's total assets and 7.7% of the
Bank's tangible regulatory capital at March 31, 2002. There were no loans
classified as doubtful or loss at March 31, 2002.
The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan losses and
lease losses. The policy statement provides guidance for financial institutions
on both the responsibilities of management for the assessment and establishment
of adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the ability to collect the
portfolio in a reasonable manner; and, that management has established
acceptable allowance evaluation processes that meet the objectives set forth in
the policy statement. Although management believes that adequate specific and
general loan loss allowances have been established, actual losses are dependent
upon future events and, as such, further additions to the level of specific and
general loan loss allowances may become necessary. Federal examiners may
disagree with the savings institution as to the appropriate level of the
institution's allowance for loan losses. While management believes Carver
Federal has established its existing loss allowances in accordance with
generally accepted accounting principles, there can be no assurance that
regulators, in reviewing Carver Federal"s assets, will not require Carver
Federal to increase its loss allowance, thereby negatively affecting Carver
Federal's reported financial condition and results of operations.
Carver Federal's methodology for establishing the allowance for loan
losses takes into consideration probable losses that have been identified in
connection with specific loans as well as losses that have not been identified
but can be expected to occur. Further, management reviews the ratio of
allowances to total loans (including projected growth) and recommends
adjustments to the level of allowances accordingly. The Internal Asset Quality
Review Committee conducts quarterly reviews of the Bank's loans and evaluates
the need to establish general and specific allowances on the basis of this
review. In addition, management actively monitors Carver Federal's asset quality
and charges off loans and properties acquired in settlement of loans against the
allowances for losses on loans and such properties when appropriate and provides
specific loss reserves when necessary. Although management believes it uses the
best information available to make determinations with respect to the allowances
for losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.
11
Carver Federal's Internal Asset Quality Review Committee reviews its
assets on a quarterly basis to determine whether any assets require
classification or re-classification. The Bank has a centralized loan servicing
structure that relies upon outside servicers, each of which generates a monthly
report of delinquent loans. The Board has designated the Internal Asset Quality
Review Committee to perform quarterly reviews of the Bank's asset quality, and
their report is submitted to the Board for review. The Asset Liability and
Interest Rate Risk Committee, a committee of the Board of Directors, establishes
policy relating to internal classification of loans and also provides input to
the Internal Asset Quality Review Committee in its review of classified assets.
In originating loans, Carver Federal recognizes that credit losses will occur
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. It is management's policy to maintain a general
allowance for loan losses based on, among other things, regular reviews of
delinquencies and loan portfolio quality, character and size, the Bank's and the
industry's historical and projected loss experience and current and forecasted
economic conditions. In addition, considerable uncertainty exists as to the
future improvement or deterioration of the real estate markets in various
states, or of their ultimate impact on Carver Federal as a result of its
purchased loans in such states. See "Lending Activities-Loan Purchases." Carver
Federal increases its allowance for loan losses by charging provisions for
possible losses against the Bank's income. General allowances are established by
the Board on at least a quarterly basis based on an assessment of risk in the
Bank's loans, taking into consideration the composition and quality of the
portfolio, delinquency trends, current charge-off and loss experience, the state
of the real estate market and economic conditions generally. Specific allowances
are provided for individual loans, or portions of loans, when ultimate
collection is considered improbable by management based on the current payment
status of the loan and the fair value or net realizable value of the security
for the loan.
At the date of foreclosure or other repossession or at the date the Bank
determines a property is an impaired property, the Bank transfers the property
to real estate acquired in settlement of loans at the lower of cost or fair
value, less estimated selling costs. Fair value is defined as the amount in cash
or cash-equivalent value of other consideration that a real estate parcel would
yield in a current sale between a willing buyer and a willing seller. Any amount
of cost in excess of fair value is charged-off against the allowance for loan
losses. Carver Federal records an allowance for estimated selling costs of the
property immediately after foreclosure. Subsequent to acquisition, the property
is periodically evaluated by management and an allowance is established if the
estimated fair value of the property, less estimated costs to sell, declines.
If, upon ultimate disposition of the property, net sales proceeds exceed the net
carrying value of the property, a gain on sale of real estate is recorded. At
March 31, 2002, the Bank had no real estate acquired in settlement of loans. See
Note 1 of Notes to Consolidated Financial Statements.
12
The following table sets forth an analysis of Carver Federal's allowance
for loan losses for the periods indicated.
Year Ended March 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of period $3,551 $2,935 $4,020 $3,138 $2,246
------ ------ ------ ------ ------
Loans charged off:
Real estate:
One- to four-family -- 252 138 -- --
Non-residential -- 194 171 -- --
Consumer and business 500 931 2,260 3,229 367
------ ------ ------ ------ ------
Total charge-offs 500 1,377 2,569 3,229 367
------ ------ ------ ------ ------
Recoveries:
Construction -- -- -- 45 --
One- to four-family 3 -- 31 -- --
Multifamily -- -- 40 -- --
Non-residential -- -- 22 -- --
Consumer and business 174 200 292 37 --
------ ------ ------ ------ ------
Total recoveries 177 200 385 82 --
------ ------ ------ ------ ------
Net loans charged off 323 1,177 2,184 3,147 367
Provision for losses 900 1,793 1,099 4,029 1,259
------ ------ ------ ------ ------
Balance at end of period $4,128 $3,551 $2,935 $4,020 $3,138
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans
outstanding 0.11% 0.42% 0.84% 1.17% 0.15%
Ratio of allowance to total loans 1.41% 1.24% 1.07% 1.48% 1.11%
Ratio of allowance to non-performing assets (1) 146.23% 118.56% 95.79% 85.60% 45.30%
(1) Non-performing assets consist of non-accrual loans, accruing loans 90 days
or more past due and property acquired in settlement of loans.
The following table allocates the allowance for loan losses by asset
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
At March 31,
------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------- ------------------- ------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------- ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Loans:
Real estate
One- to four-family $ 429 41.28% $1,198 54.71% $1,050 55.54% $ 957 65.39% $1,691 66.85%
Multifamily 1,468 39.86 748 29.00 764 31.40 902 18.89 400 17.46
Non-residential 729 13.48 353 12.52 202 8.28 251 8.33 111 4.53
Construction 76 4.60 290 2.46 272 2.33 424 3.98 340 5.66
Consumer and business 377 0.78 962 1.31 647 2.45 1,486 3.41 596 5.50
Unallocated 1,049 -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total allowance for loan
losses $4,128 100.00% $3,551 100.00% $2,935 100.00% $4,020 100.00% $3,138 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
13
Investment Activities
General. The Bank utilizes mortgage-backed and other investment securities
in virtually all aspects of its asset/liability management strategy. In making
investment decisions, the Board considers, among other things, the Bank's yield
and interest rate objectives, its interest rate and credit risk position and its
liquidity and cash flow.
The Bank must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. The Bank's liquidity policy requires that
cash flow projections are regularly reviewed and updated to assure that adequate
liquidity is maintained.
Generally, the investment policy of the Bank is to invest funds among
categories of investments and maturities based upon the Bank's asset/liability
management policies, investment quality, loan and deposit volume, liquidity
needs and performance objectives. SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, requires that securities be
classified into three categories: trading, held-to-maturity, and
available-for-sale. Securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and are reported at fair value with unrealized gains and losses included in
earnings. Debt securities for which the Bank has the positive intent and ability
to hold to maturity are classified as held-to-maturity and reported at amortized
cost. All other securities not classified as trading or held-to-maturity are
classified as available-for-sale and reported at fair value with unrealized
gains and losses included, on an after-tax basis, in a separate component of
stockholders' equity. At March 31, 2002, the Bank had no securities classified
as trading. At March 31, 2002, $89.8 million, or 85.1% of the Bank's
mortgage-backed and other investment securities, was classified as
available-for-sale. The remaining $15.6 million, or 14.9%, was classified as
held-to-maturity.
Mortgage-Backed Securities. The Bank has invested in mortgage-backed
securities in order to supplement loan production and achieve its
asset/liability management goals. At March 31, 2002, mortgage-backed securities
constituted 14.7% of total assets, as compared to 10.1% of total assets at March
31, 2001. Carver Federal maintains a significant portfolio of mortgage-backed
securities in the form of Government National Mortgage Association ("GNMA")
pass-through certificates, Fannie Mae and FHLMC participation certificates and
collateralized mortgage obligations ("CMOs"). GNMA pass-through certificates are
guaranteed as to the payment of principal and interest by the full faith and
credit of the U.S. Government while Fannie Mae and FHLMC certificates are each
guaranteed by their respective agencies as to principal and interest.
Mortgage-backed securities generally entitle Carver Federal to receive a pro
rata portion of the cash flows from an identified pool of mortgages. CMOs are
securities issued by special purpose entities generally collateralized by pools
of mortgage-backed securities. The cash flows from such pools are segmented and
paid in accordance with a predetermined priority to various classes of
securities issued by the entity. Carver Federal's CMOs are primarily
adjustable-rate CMOs issued by the Resolution Trust Corporation ("RTC"). Carver
Federal also has invested in pools of loans guaranteed as to principal and
interest by the Small Business Administration ("SBA").
Although mortgage-backed securities generally yield from 60 to 100 basis
points less than whole loans, they present substantially lower credit risk and
are more liquid than individual mortgage loans and may be used to collateralize
obligations of the Bank. Because Carver Federal receives regular payments of
principal and interest from its mortgage-backed securities, these investments
provide more consistent cash flows than investments in other debt securities
which generally only pay principal at maturity. Mortgage-backed securities also
help the Bank meet certain definitional tests for favorable treatment under
federal banking and tax laws. See "Regulation and Supervision--Federal Banking
Regulation--QTL Test" and "Federal and State Taxation."
The Bank seeks to avoid interest rate risk by investing in adjustable-rate
mortgage-backed securities which at March 31, 2002 constituted $52.3 million, or
79.1% of the mortgage-backed securities portfolio. Mortgage-backed securities,
however, expose Carver Federal to certain unique risks. In a declining rate
environment, accelerated prepayments of loans underlying these securities expose
Carver Federal to the risk that it will be unable to obtain comparable yields
upon reinvestment of the proceeds. In the event the mortgage-backed security has
been funded with an interest-bearing liability with a maturity comparable to the
original estimated life of the mortgage-backed security, the Bank's interest
rate spread could be adversely affected. Conversely, in a rising interest rate
environment, the Bank may experience a lower than estimated rate of repayment on
the underlying mortgages, effectively extending the estimated life of the
mortgage-backed security and exposing the Bank to the risk that it may be
required to fund the asset with a liability bearing a higher rate of interest.
14
The following table sets forth the carrying value of Carver Federal's
mortgage-backed securities at the dates indicated. At the beginning of fiscal
2002 the Bank transferred $45.7 million of mortgage-backed securities from
held-to-maturity to available-for-sale.
At March 31,
--------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Available-for-Sale:
GNMA $ 10,584 $ -- $ --
Fannie Mae 11,451 -- --
FHLMC 28,249 -- --
CMO 136 -- --
-------- -------- --------
Total available-for-sale 50,420 -- --
Held-to-Maturity:
GNMA 3,448 5,774 6,516
Fannie Mae 5,607 21,633 26,222
FHLMC 6,149 14,672 18,780
SBA 439 594 760
CMO -- 193 1,951
-------- -------- --------
Total held to maturity 15,643 42,866 54,229
-------- -------- --------
Total mortgage-backed securities $ 66,063 $ 42,866 $ 54,229
======== ======== ========
The following table sets forth the scheduled maturities, carrying values
and fair values for Carver Federal's mortgage-backed securities at March 31,
2002. Expected maturities will differ from contractual maturities due to
scheduled repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. The following table does not
take into consideration the effects of scheduled repayments or the effects of
possible prepayments.
Carrying Fair
Value Value
--------- ---------
(In thousands)
Available-for-sale:
One through five years $ 237 $ 247
Five through ten years 2,568 2,670
After ten years 47,137 47,503
--------- ---------
$ 49,942 $ 50,420
========= =========
Held-to-maturity:
One through five years $ -- $ --
Five through ten years 513 526
After ten years 15,130 15,190
--------- ---------
$ 15,643 $ 15,716
========= =========
Other Investment Securities. In addition to mortgage-backed securities,
the Bank also invests in high-quality assets (primarily government and agency
obligations) with short and intermediate terms (typically seven years or less)
to maturity. Carver Federal is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB, certificates
of deposit in federally insured institutions, certain bankers' acceptances and
federal funds. The Bank may also invest, subject to certain limitations, in
commercial paper having one of the two highest investment ratings of a
nationally recognized credit rating agency, and certain other types of corporate
debt securities and mutual funds.
15
The following table sets forth the carrying value of Carver Federal's
other securities available-for-sale and held-to- maturity at the date indicated.
At March 31,
-----------------------------
2002 2001 2000
------- ------- -------
(In thousands)
U.S. Government and Agency securities:
Available-for-sale $39,401 $19,926 $24,952
Held-to-maturity -- 24,996 24,996
------- ------- -------
Total other securities $39,401 $44,922 $49,948
======= ======= =======
The following table sets forth the scheduled maturities, carrying values
and fair values for Carver Federal's investments at March 31, 2002.
Carrying Fair
Value Value
---------- ----------
(In thousands)
Available-for-sale:
One year or less $ 15,018 $ 15,018
One through five years 24,645 24,383
---------- ----------
$ 39,663 $ 39,401
========== ==========
Other Earning Assets. Federal regulations require the Bank to maintain an
investment in FHLB stock and a sufficient amount of liquid assets which may be
invested in cash and specified securities. For additional information, see
"Regulation and Supervision-- Federal Banking Regulation--Liquidity."
The following table sets forth the carrying value of Carver Federal's
investment in FHLB stock and liquid assets at the dates indicated.
At March 31,
------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
FHLB stock $ 3,763 $ 5,755 $ 5,755
Federal funds sold 21,100 23,700 11,300
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of Carver Federal's funds for
lending and other investment purposes. In addition to deposits, Carver Federal
derives funds from loan principal repayments, interest payments and maturing
investments. Loan repayments and interest payments are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by prevailing market interest rates and money market conditions. Borrowed money
may be used to supplement the Bank's available funds, and from time to time the
Bank has borrowed funds from the FHLB and through repurchase agreements.
Deposits. Carver Federal attracts deposits principally from within its
market area by offering a variety of deposit instruments, including passbook and
statement accounts and certificates of deposit, which range in term from 91 days
to seven years. Deposit terms vary, principally on the basis of the minimum
balance required, the length of time the funds must remain on deposit and the
interest rate. Carver Federal also offers Individual Retirement Accounts. Carver
Federal's policies are designed primarily to attract deposits from local
residents through the Bank's branch network rather than from outside the Bank's
market area. Carver Federal also holds deposits from various governmental
agencies or authorities and corporations. Although the Board has authorized
accepting brokered deposits, it has been the Bank's practice not to obtain these
types of deposits, however, it may be considered as a source of funds if deemed
necessary.
16
The Bank's interest rates, maturities, service fees and withdrawal penalties on
deposits are established by management on a periodic basis. Management
determines deposit interest rates and maturities based on the Bank's funds
acquisition and liquidity requirements, the rates paid by the Bank's
competitors, the Bank's growth goals and applicable regulatory restrictions and
requirements.
During fiscal 2002, the Bank sold its branch located in East New York. As
a result of this sale the Bank transferred approximately $16.4 million of
deposits to the purchaser, City National Bank of New Jersey. During fiscal 2001,
the Bank sold its branches located in Roosevelt and Chelsea, New York. The total
amount of deposits transferred as a result of these sales was $8.4 and $14.1
million, respectively.
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by Carver Federal between the dates
indicated. Included in the net increase (decrease) in deposits before interest
credited is the amount of deposits sold during the year ended March 31, 2002 and
2001 of $16.4 and $22.5 million, respectively.
Year Ended March 31,
--------- --------- ---------
2002 2001 2000
--------- --------- ---------
(Dollars in thousands)
Deposits at beginning of period $ 279,424 $ 281,941 $ 276,999
Net increase (decrease) before interest credited 37,403 (10,973) (3,670)
Interest credited 8,127 8,456 8,612
--------- --------- ---------
Deposits at end of period $ 324,954 $ 279,424 $ 281,941
========= ========= =========
Net increase (decrease) during the year:
Amount $ 45,530 $ (2,517) $ 4,942
========= ========= =========
Percent 16.3% -0.9% 1.8%
========= ========= =========
The following table sets forth the distribution of the Bank's deposit
accounts and the related weighted average interest rates at the dates indicated.
At March 31,
---------------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ------------------------------- -------------------------------
Percent of Weighted Percent Weighted Percent Weighted
Total Average of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
-------- ---------- -------- -------- --------- -------- -------- -------- --------
(Dollars in thousands)
Non-interest-bearing demand $ 13,463 4.1% --% $ 11,409 4.1% --% $ 12,337 4.4% --%
NOW accounts 18,095 5.6 1.24 14,757 5.3 1.71 18,873 6.7 1.66
Savings and club 126,779 39.0 1.71 132,645 47.5 2.32 145,277 51.5 2.51
Money Market savings account 15,232 4.7 1.78 15,718 5.6 2.62 19,418 6.9 3.25
Certificates of deposit 151,385 46.6 2.73 104,895 37.5 4.55 86,036 30.5 4.70
-------- ------ -------- -------- -------- -------- -------- -------- --------
Total $324,954 100.0% 2.18% $279,424 100.0% 3.04% $281,941 100.0% 3.06%
======== ====== ======== ======== ======== ========
17
The following table sets forth the amount and maturities of time
deposits in specified weighted average interest rate categories at March 31,
2002.
At March 31, 2002 Total at
Period to Maturity March 31,
--------------------------------------------------------------------------- -----------------------
Less Than After Percent
One Year 1-2 Years 2-3 Years 3 Years Total of Total 2001 2000
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
1%-1.99% $ 22,138 $ -- $ -- $ -- $ 22,138 14.6% $ -- $ --
2%-3.99% 58,390 26,638 10,495 -- 95,523 63.1 752 5,129
4%-5.99% -- -- -- 33,724 33,724 22.3 104,143 80,907
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 80,528 $ 26,638 $ 10,495 $ 33,724 $ 151,385 100.0% $ 104,895 $ 86,036
========== ========== ========== ========== ========== ========== ========== ==========
Carver Federal's certificates of deposit of $100,000 or more were $90.6
million as of March 31, 2002.
Borrowed Money. Savings deposits historically have been the primary source
of funds for Carver Federal's lending, investment and general operating
activities. Carver Federal is authorized, however, to use advances and
securities sold under agreement to repurchase ("Repos") from the FHLB and
approved primary dealers to supplement its supply of funds and to meet deposit
withdrawal requirements. The FHLB functions as a central bank providing credit
for savings institutions and certain other member financial institutions. As a
member of the FHLB system, Carver Federal is required to own stock in the FHLB
and is authorized to apply for advances. Advances are made pursuant to several
different programs, each of which has its own interest rate and range of
maturities. Advances from the FHLB are secured by Carver Federal's stock in the
FHLB and a blanket pledge of Carver Federal's mortgage loan and mortgage-backed
securities portfolios.
One of the elements of Carver Federal's investment strategy is to leverage
the balance sheet by increasing liabilities with FHLB advances and Repos and
investing borrowed funds primarily in adjustable-rate mortgage loans. The Bank
seeks to match as closely as possible the term of borrowed money with the
repricing cycle of the mortgage loans on the balance sheet. At March 31, 2002,
Carver Federal had outstanding $75.3 million in FHLB advances and no Repos.
The following table sets forth certain information regarding Carver
Federal's borrowed money at the dates and for the periods indicated:
At or for the Year Ended
March 31,
------------------------
2002 2001
-------- --------
(Dollars in thousands)
Amounts outstanding at the end of period:
FHLB advances $ 75,262 $100,299
Repos -- 4,930
Weighted average rate paid at period end:
FHLB advances 4.18% 5.84%
Repos --% 6.70%
Maximum amount of borrowing outstanding at any month end:
FHLB advances $100,094 $102,314
Repos 14,930 31,337
Approximate average amounts outstanding for period:
FHLB advances $ 76,141 $ 80,591
Repos 2,888 17,165
Approximate weighted average rate paid during period:
FHLB advances 5.50% 5.72%
Repos 5.91% 5.99%
18
Subsidiary Activities
The Holding Company is the parent of two wholly owned subsidiaries, Carver
Federal and Alhambra.
On March 8, 1995, the Bank formed CFSB Realty Corp. as a wholly owned
subsidiary to hold real estate acquired through foreclosure pending eventual
disposition. At March 31, 2002, this subsidiary had $221,000 in total capital
and net operating income of $63,000. At March 31, 2002 there was no real estate
owned pending disposition. The Bank also owns CFSB Credit Corp., currently an
inactive subsidiary originally formed to undertake the Bank's credit card
issuance.
Market Area and Competition
The Bank's primary market area for deposits consists of the areas served
by its five branches, and the Bank considers its lending market to include
Bronx, Kings, Manhattan, Queens and Richmond counties, together comprising New
York City, and lower Westchester County, New York. See "Item 2 - Properties."
Although Carver Federal's branches are located in areas that have been
historically underserved by other financial institutions, Carver Federal is
facing increasing competition for deposits and residential mortgage lending in
its immediate market areas. Management believes that this competition has become
more intense as a result of an increased examination emphasis by federal banking
regulators on financial institutions' fulfillment of their responsibilities
under the Community Reinvestment Act ("CRA") and the improving economic
conditions in its market area. The Bank's competition for loans comes
principally from mortgage banking companies, commercial banks, savings banks and
savings and loan associations. The Bank's most direct competition for deposits
comes from commercial banks, savings banks, savings and loan associations and
credit unions. Competition for deposits also comes from money market mutual
funds and other corporate and government securities funds as well as from other
financial intermediaries such as brokerage firms and insurance companies. Many
of Carver Federal's competitors have substantially greater resources than Carver
Federal and offer a wider array of financial services and products than Carver
Federal. At times, these larger financial institutions may offer below market
interest rates on mortgage loans and above market interest rates for deposits.
These pricing concessions combined with competitors' larger presence in the New
York market add to the challenges Carver Federal faces in expanding its current
market share. The Bank believes that it can compete with these institutions by
offering a competitive range of services as well as through personalized
attention and community commitment.
Employees
As of March 31, 2002, Carver had 100.5 full-time equivalent employees,
none of whom was represented by a collective bargaining agreement. The Bank
considers its employees relations to be satisfactory.
REGULATION AND SUPERVISION
General
The Bank is subject to extensive regulation, examination, and supervision
by its primary regulator, the OTS. The Bank's deposit accounts are insured up to
applicable limits by the FDIC, and it is a member of the FHLB. The Bank must
file reports with the OTS concerning its activities and financial condition, and
it must obtain regulatory approvals prior to entering into certain transactions,
such as mergers with, or acquisitions of, other depository institutions. The
Holding Company, as a savings association holding company, is subject to
regulation, examination, and supervision by the OTS and is required to file
certain reports with, and otherwise comply with, the rules and regulations of
the OTS and of the Securities and Exchange Commission (the "SEC") under the
federal securities laws. Any change in such laws and regulations whether by the
OTS, the FDIC or through legislation could have a material adverse impact on the
Bank and the Holding Company and their operations and stockholders.
On November 12, 1999, landmark financial services legislation, titled the
Gramm-Leach-Bliley Act ("Gramm-Leach") became law. Gramm-Leach repeals
historical restrictions, and eliminates many federal and state law barriers to,
affiliations among banks and securities firms, insurance companies and other
financial service providers.
19
Federal Banking Regulation
Activity Powers. The Bank derives its lending and investment powers from
the Home Owner's Loan Act, as amended ("HOLA"), and the regulations of the OTS.
Under these laws and regulations, the Bank may invest in mortgage loans secured
by residential and commercial real estate, commercial and consumer loans,
certain types of debt securities, and certain other assets. The Bank may also
establish service corporations that may engage in activities not otherwise
permissible for the Bank, including certain real estate equity investments and
securities and insurance brokerage. The Bank's authority to invest in certain
types of loans or other investments is limited by federal law.
Loans to One Borrower Limitations. The Bank is generally subject to the
same limits on loans to one borrower as a national bank. With specified
exceptions, the Bank's total loans or extension of credit to a single borrower
or group of related borrowers may not exceed 15% of the Bank's unimpaired
capital and surplus, which does not include accumulated other comprehensive
income. The Bank may lend additional amounts up to 10% of its unimpaired capital
and surplus if the loans or extensions of credit are fully secured by readily
marketable collateral. At March 31, 2002, the Bank's limit on loans to one
borrower based on its unimpaired capital and surplus was $5.5 million. Following
a field visit that concluded on December 2, 1998, because of their review of the
potential negative impact of possible write-offs that might have impacted
capital levels at that time, the Bank was directed by the OTS to abstain from
originating new loans that individually or in the aggregate exceed $2.0 million
to one borrower or group of related borrowers without prior approval from the
OTS. The Bank plans to seek revision of this limitation. The Bank currently
complies with applicable loans to one borrower limitations.
QTL Test. Under federal law, the Bank must comply with a qualified thrift
lender ("QTL") test. Under the QTL test, the Bank is required to maintain at
least 65% of its "portfolio assets" in certain "qualified thrift investments" in
at least nine months of the most recent twelve-month period. "Portfolio assets"
means, in general, an association's total assets less the sum of (a) specified
liquid assets up to 20% of total assets, (b) goodwill and other intangible
assets and (c) the value of property used to conduct the Bank's business.
"Qualified thrift investments" includes various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities, and consumer loans. At
March 31, 2002, the Bank maintained approximately 76.0% of its portfolio assets
in qualified thrift investments. The Bank had also met the QTL test in each of
the prior 12 months and was, therefore, a qualified thrift lender.
If the Bank fails the QTL test, it must either operate under certain
restrictions on its activities or convert to a bank charter.
Capital Requirements. OTS regulations require the Bank to meet three
minimum capital standards:
(1) a tangible capital ratio requirement of 1.5% of total assets, as
adjusted under OTS regulations;
(2) a leverage ratio requirement of 8% of core capital to such adjusted
total assets; and
(3) a risk-based capital ratio requirement of 8% of core and
supplementary capital to total risk-weighted assets.
The minimum leverage capital ratio for any other depository institution
that does not have a composite rating of 1 will be 4%, unless a higher leverage
capital ratio is warranted by the particular circumstances or risk profile of
the depository institution. In determining compliance with the risk based
capital requirement, the Bank must compute its risk-weighted assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the U.S. government or
its agencies to 100% for consumer and commercial loans, as assigned by the OTS
capital regulation based on the risks that the OTS believes are inherent in the
type of asset.
Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain mortgage
servicing rights) and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank.
Core capital is defined similarly to tangible capital, but core capital
also includes certain qualifying supervisory goodwill and certain purchased
credit card relationships. Supplementary capital includes cumulative and other
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses. In
addition, up to 45% of unrealized gains on available-for-sale equity securities
with a readily determinable fair value may be included in supplementary capital.
The allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.
20
At March 31, 2002, the Bank met each of its capital requirements.
Limitation on Capital Distributions. The OTS imposes various restrictions
or requirements on the Bank's ability to make capital distributions, including
cash dividends. A savings institution that is the subsidiary of a savings and
loan holding company, such as the Bank, must file an application or a notice
with the OTS at least 30 days before making a capital distribution. The Bank
must file an application for prior approval if the total amount of its capital
distributions, including the proposed distribution, for the applicable calendar
year would exceed an amount equal to the Bank's net income for that year plus
the Bank's retained net income for the previous two years. In other cases, as a
savings association subsidiary of a savings and loan holding company, the Bank
will have to file a notice.
The OTS may disapprove of a notice or application if:
o the Bank would be undercapitalized following the distribution;
o the proposed capital distribution raises safety and soundness
concerns; or
o the capital distribution would violate a prohibition contained in
any statute, regulation or agreement.
Liquidity. The Bank maintains liquidity levels to meet operational needs.
In the normal course of business, the levels of liquid assets during any given
period are dependent on operating, investing and financing activities. Cash and
due from banks, federal funds sold and repurchase agreements with maturities of
three months or less are the Bank's most liquid assets. The Bank maintains a
liquidity policy that sets minimum requirements to maintain sufficient liquidity
to ensure its safe and sound operation. At March 31, 2002, the Bank's liquidity
ratio was 7.99% of liquid assets to total assets which is in excess of minimum
requirements.
Branching. Subject to certain limitations, federal law permits federally
chartered savings associations to establish branches in any state of the United
States. The authority for a federal savings association to establish an
interstate branch network would facilitate a geographic diversification of the
association's activities. This authority under federal law and OTS regulations
preempts any state law purporting to regulate branching by federal savings
associations.
Community Reinvestment. Under the CRA, as implemented by OTS regulations,
the Bank has a continuing and affirmative obligation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for the
Bank nor does it limit the Bank's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of the Bank, to assess the Bank's record of meeting the credit needs
of its community and to take such record into account in its evaluation of
certain applications by the Bank. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA
rating in its most recent examination conducted in 2001.
CRA regulations rate an institution based on its actual performance in
meeting community needs. In particular, the system focuses on three tests:
o a lending test, to evaluate the institution's record of making
loans in its assessment areas;
o an investment test, to evaluate the institution's record of
investing in community development projects, affordable housing and
programs benefiting low or moderate income individuals and
businesses; and
o a service test, to evaluate the institution's delivery of services
through its branches, ATMs and other offices.
Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by OTS regulations and by Sections
23A and 23B of the Federal Reserve Act ("FRA"). In general, these transactions
must be on terms which are as favorable to the Bank as comparable transactions
with non-affiliates. Additionally, certain types of these transactions are
restricted to an aggregate percentage of the Bank's capital. Collateral in
specified amounts must usually be provided by affiliates in order to receive
loans from the Bank. In addition, OTS regulations prohibit a savings association
from lending to any of its affiliates that is engaged in activities that are not
permissible for bank holding companies and from purchasing the securities of any
affiliate other than a subsidiary.
The Bank's authority to extend credit to its directors, executive
officers, and 10% shareholders, as well as to
21
entities controlled by such persons, is currently governed by the requirements
of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve
Board. Among other things, these provisions require that extensions of credit to
insiders (a) be made on terms that are substantially the same as, and follow
credit underwriting procedures that are not less stringent than, those
prevailing for comparable transactions with unaffiliated persons and that do not
involve more than the normal risk of repayment or present other unfavorable
features and (b) not exceed certain limitations on the amount of credit extended
to such persons, individually and in the aggregate, which limits are based, in
part, on the amount of the Bank's capital. In addition, extensions of credit in
excess of certain limits must be approved by the Bank's board of directors.
Enforcement. The OTS has primary enforcement responsibility over the Bank.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease and desist orders and to remove directors
and officers. In general, these enforcement actions may be initiated in response
to violations of laws and regulations and unsafe or unsound practices.
Standards for Safety and Soundness. The OTS has adopted guidelines
prescribing safety and soundness standards. The guidelines establish general
standards relating to internal controls and information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, asset quality, earnings, and compensation, fees and benefits. In
general, the guidelines require, among other things, appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. In addition, OTS regulations authorize, but do not require, the OTS
to order an institution that has been given notice that it is not satisfying
these safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan
or fails in any material respect to implement an accepted compliance plan, the
OTS must issue an order directing action to correct the deficiency and may issue
an order directing other actions of the types to which an undercapitalized
association is subject under the "prompt corrective action" provisions of
federal law. If an institution fails to comply with such an order, the OTS may
seek to enforce such order in judicial proceedings and to impose civil money
penalties.
Prompt Corrective Action Regulations. Under the OTS prompt corrective
action regulations, the OTS is authorized and, in some cases, required to take
supervisory actions against undercapitalized savings associations. For this
purpose, a savings association would be placed in one of the following four
categories based on the association's regulatory capital:
o well-capitalized;
o adequately capitalized;
o undercapitalized; or
o critically undercapitalized.
As of March 31, 2002, the Bank was considered well-capitalized by the OTS.
When appropriate, the OTS can require corrective action by a savings association
holding company under the "prompt corrective action" provisions of federal law.
Insurance of Deposit Accounts. The Bank is a member of the Savings
Association Insurance Fund ("SAIF") of the FDIC, and the Bank pays its deposit
insurance assessments to the SAIF of the FDIC. The FDIC also maintains another
insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures the
deposits of banks and state chartered savings banks. Under federal law, the FDIC
established a risk based assessment system for determining the deposit insurance
assessments to be paid by insured depository institutions. Under the assessment
system, the FDIC assigns an institution to one of three capital categories based
on the institution's financial information as of the quarter ending three months
before the beginning of the assessment period. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Under the regulation, there are nine assessment risk classifications
(i.e., combinations of capital groups and supervisory subgroups) to which
different assessment rates are applied. Assessment rates currently range from
0.0% of deposits for an institution in the highest category (i.e.,
well-capitalized and financially sound, with no more than a few minor
weaknesses) to 0.27% of deposits for an institution in the lowest category
(i.e., undercapitalized and substantial supervisory concern). The FDIC is
authorized to raise the assessment rates as necessary to maintain the required
reserve ratio of the deposit insurance fund to 1.25%.
In addition, all FDIC insured institutions are required to pay assessments
to the FDIC at an annual rate of approximately .0212% of insured deposits to
fund interest payments on the bonds issued by the Financing Corporation, an
agency of the federal government established to recapitalize the predecessor to
the SAIF. These assessments will continue until the Financing Corporation bonds
mature in 2017.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York ("FHLB-NY"), which is
22
one of the regional FHLBs composing the FHLB System. Each FHLB provides a
central credit facility primarily for its member institutions. The Bank is
required to acquire and hold shares of capital stock in the FHLB-NY in an amount
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations, but
not less than $500 or 5% of its outstanding advances from the FHLB. The Bank was
in compliance with this requirement with an investment in the capital stock of
the FHLB at March 31, 2002 of $3.8 million. Any advances from a FHLB must be
secured by specified types of collateral, and all long term advances may be
obtained only for the purpose of providing funds for residential housing
finance.
FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. If dividends were reduced, or
interest on future FHLB advances increased, the Bank's net interest income would
be adversely affected.
Under Gramm-Leach, membership in the FHLB system is now voluntary for all
fede