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Carver Bancorp 10-K 2010 Table of Contents
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
For the fiscal year ended March 31, 2010
OR
For the transition period from to
Commission File Number: 1-13007
CARVER BANCORP, INC.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (718) 230-2900
Securities Registered Pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. o Yes þ No
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. þ Yes o No
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files).
o Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§ 229.405 of this chapter) 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
As of June 28, 2010, there were 2,474,719 shares of common stock of the Registrant
outstanding. The aggregate market value of the Registrant’s common stock held by non-affiliates,
as of September 30, 2009 (based on the closing sales price of $6.15 per share of the registrant’s
common stock on September 30, 2009) was approximately $15,219,522
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of registrant’s proxy statement for the Annual Meeting of stockholders for the
fiscal year ended March 31, 2010 are incorporated by reference into Part III of this Form 10-K.
CARVER BANCORP, INC.
2010 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
Table of Contents
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 which may be identified by the
use of such words as “may,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate,”
“predict,” “continue,” and “potential” or the negative of these terms or other comparable
terminology. Examples of forward-looking statements include, but are not limited to, estimates
with respect to the Company’s financial condition, results of operations and business that are
subject to various factors which could cause actual results to differ materially from these
estimates. These factors include but are not limited to the following:
Any or all of the Company’s forward-looking statements in this Annual Report on Form 10-K and
in any other public statements that the Company or management makes may turn out to be wrong. They
can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. The
forward-looking statements contained in this Annual Report on Form 10-K are made as of the date of
this Annual Report on Form 10-K, and the Company assumes no obligation to, and expressly disclaims
any obligation to, update these forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking statements or to update the
reasons why actual results could differ from those projected in the forward-looking statements,
except as legally required. For a discussion of additional factors that could adversely affect the
Company’s future performance, see “Item 1A — Risk Factors” and “Item 7 — Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”
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Table of Contents
PART I
As used in this Annual Report on Form 10-K, the word “Company” is used to refer to Carver
Bancorp Inc. and its consolidated subsidiaries, including Carver Federal Savings Bank (“Carver
Federal”).
OVERVIEW
Carver Bancorp, Inc., a Delaware corporation (the “Holding Company”, the “Company” or
“Carver”), is the holding company for Carver Federal Savings Bank (“Carver Federal” or the
“Bank”), a federally chartered savings bank, and, on a parent-only basis, had minimal results of
operations. The Holding Company is headquartered in New York, New York. 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, Carver Federal.
Carver Federal was founded in 1948 to serve African-American communities whose residents,
businesses and institutions had limited access to mainstream financial services. The Bank remains
headquartered in Harlem, and predominantly all its nine branches and eleven stand-alone 24/7 ATM
Centers are located in low- to moderate-income neighborhoods. Many of these historically
underserved communities have experienced unprecedented growth and diversification of incomes,
ethnicity and economic opportunity, after decades of public and private investment.
Today, Carver Federal is the largest African-American operated bank in the United States.
The Bank remains dedicated to expanding wealth enhancing opportunities in the communities it
serves by increasing access to capital and other financial services for consumers, businesses and
non-profit organizations, including faith-based institutions. A measure of its progress in
achieving this goal includes the Bank’s “Outstanding” rating, awarded by the Office of Thrift
Supervision following its most recent Community Reinvestment Act (“CRA”) examination in 2009. The
examination report noted that 76.1% of Carver’s community development lending and 55.4% of
Carver’s Home-Owners Mortgage Disclosure Act (“HMDA”) reportable loan originations were within
low- to moderate-income geographies, which far exceeded peer institutions. The Bank had
approximately $805 million in assets as of March 31, 2010 and employed approximately 140
employees as of May 31, 2010.
Carver Federal engages in a wide range of consumer and commercial banking services. Carver
Federal provides deposit products including demand, savings and time deposits for consumers,
businesses, and governmental and quasi-governmental agencies in its local market area within New
York City. In addition to deposit products, Carver Federal offers a number of other consumer and
commercial banking products and services, including debit cards, online banking including online
bill pay, and telephone banking.
Carver Federal offers loan products covering a variety of asset classes, including
commercial, multi-family and residential mortgages, construction loans and business loans. The
Bank finances mortgage and loan products through deposits or borrowings. Funds not used to
originate mortgages and loans are invested primarily in U.S. government agency securities and
mortgage-backed securities.
The Bank’s primary market area for deposits consists of the areas served by its nine
branches in the Brooklyn, Manhattan and Queens boroughs of New York City. The neighborhoods in
which the Bank’s branches are located have historically been low- to moderate-income areas.
However, the shortage of housing in New York City, combined with population shifts from the
suburbs into the city, has helped stimulate significant real estate and commercial development in
the Bank’s market area, which has supported the Bank’s strategy to provide commercial banking
products.
The Bank’s primary lending market includes Bronx, Kings, New York and Queens counties in New
York City, and lower Westchester County, New York. Although the Bank’s branches are primarily
located in areas that were historically underserved by other financial institutions, the Bank
faces significant competition for deposits and mortgage lending in its market areas. Management
believes that this competition has become more intense as a result of increased examination
emphasis by federal banking regulators on financial institutions’ fulfillment of their
responsibilities under the CRA. Carver Federal’s market area has a high density of financial
institutions, many of which have greater financial resources, name recognition and market presence, and
all of which are competitors to varying degrees. The Bank’s competition for loans comes
principally from mortgage banking companies, commercial banks, and savings institutions. The
Bank’s most direct competition for deposits comes from commercial banks, savings institutions and
credit unions. Competition for deposits also comes from money market mutual funds, corporate and
government securities funds, and financial intermediaries such as brokerage firms and insurance
companies. Many of the Bank’s competitors have substantially greater resources and offer a wider
array of financial services and products. 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 the Bank faces in expanding its current market share and growing its near-term
profitability.
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Carver Federal’s 60 year history in its market area, its community involvement and
relationships, targeted products and services and personal service consistent with community
banking, help the Bank compete with other competitors that have entered its market.
The Bank formalized its many community focused investments on August 18, 2005, by forming
Carver Community Development Corporation (“CCDC”). CCDC oversees the Bank’s participation in
local economic development and other community-based initiatives, including financial literacy
activities. CCDC is now coordinating the Bank’s development of an innovative approach to reach
the unbanked customer market in Carver Federal’s communities. Importantly, CCDC spearheads the
Bank’s applications for grants and other resources to help fund these important community
activities. In this connection, Carver Federal has successfully competed with large regional and
global financial institutions in a number of competitions for government grants and other awards.
In June 2006, Carver Federal was selected by the United States Department of Treasury (“US
Treasury”) to receive an award of $59 million in New Markets Tax Credits, (“NMTC”). In May 2009,
Carver Federal won another NMTC award in the amount of $65 million. The NMTC award is used to
stimulate economic development in low- to moderate-income communities. The NMTC award enables
the Bank to invest with community and development partners in economic development projects with
attractive terms including, in some cases, below market interest rates, which may have the effect
of attracting capital to underserved communities and facilitating revitalization of the
community, pursuant to the goals of the NMTC program. The NMTC award provides a credit to Carver
Federal against Federal income taxes when the Bank makes qualified investments. In addition to
the tax credit awards previously recognized, the Company expects to receive additional NMTC tax
benefits of approximately $7.8 million from the June 2006 award over approximately the next four
years. The Company’s ability to realize the benefit of the tax credits is dependent upon the
Company generating sufficient taxable income. As of March 31, 2010, Carver Federal has
transferred rights to investors to $31 million of new market tax credits from the May 2009 award
and has entered into an agreement with an additional third party investor which is intended to
result in future transactions to transfer another $24 million. See item 7 below and the
footnotes to the financial statements for additional details on the NMTC activities.
GENERAL
Carver Bancorp, Inc.
The Company is the holding company for Carver Federal and its other active direct
subsidiary, Carver Statutory Trust I (the “Trust”), a Delaware trust.
The Trust was formed in 2003 for the purpose of issuing $13.0 million aggregate liquidation
amount of floating rate Capital Securities due September 17, 2033 (“Capital Securities”) and $0.4
million of common securities (which are the only voting securities of Carver Statutory Trust I),
which are 100% owned by Carver Bancorp, Inc., and using the proceeds to acquire Junior
Subordinated Debentures issued by Carver Bancorp, Inc. Carver Bancorp, Inc. has fully and
unconditionally guaranteed the Capital Securities along with all obligations of Carver Statutory
Trust I under the trust agreement relating to the Capital Securities. The Trust is not
consolidated with Carver Bancorp, Inc. for financial reporting purposes in accordance with the
Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) regarding the
consolidation of variable interest entities (formerly FIN 46(R)).
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Table of Contents
On October 24, 1994, Carver Federal converted from mutual to stock form and issued 2,314,275
shares of
its common stock at a price of $10 per share. 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.
On April 5, 2006, the Company entered into a definitive merger agreement to acquire
Community Capital Bank (“CCB”), a Brooklyn-based community bank, in a cash transaction valued at
$11.1 million, or $40.00 per CCB share. On September 29, 2006, the Bank acquired CCB, with
approximately $165.4 million in assets and two branches. The Bank incurred an additional $0.9
million in transaction costs related to the acquisition. The acquisition of CCB and its
award-winning small business lending platform has expanded the Company’s ability to capitalize on
substantial growth in the small business market. The Company continues to evaluate acquisition
opportunities as part of its strategic objective for long-term growth.
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 (718) 230-2900.
Carver Federal Savings Bank
Carver Federal 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 it
obtained federal deposit insurance and became a member of the Federal Home Loan Bank of New York
(the “FHLB-NY”). Carver Federal was founded as an African- and Caribbean-American operated
institution to provide residents of underserved communities the ability to invest their savings
and obtain credit. Carver Federal Savings and Loan Association converted to a federal savings
bank in 1986 and changed its name at that time to Carver Federal Savings Bank. None of the
Bank’s employees are a member of a collective bargaining agreement, and the Bank considers its
relations with employees to be satisfactory.
On March 8, 1995, Carver Federal formed CFSB Realty Corp. as a wholly-owned subsidiary to
hold real estate acquired through foreclosure pending eventual disposition. At March 31, 2010,
this subsidiary had $0.8 million in total assets and a minimal net operating loss. During the
fourth quarter of the fiscal year ended March 31, 2003, Carver Federal formed Carver Asset
Corporation (“CAC”), a wholly-owned subsidiary which qualifies as a real estate investment trust
(“REIT”) pursuant to the Internal Revenue Code of 1986, as amended. This subsidiary may, among
other things, be utilized by Carver Federal to raise capital in the future. As of March 31,
2010, CAC owned mortgage loans carried at approximately $90.0 million and total assets of $126.5
million. On August 18, 2005, Carver Federal formed CCDC, a wholly-owned community development
entity, to facilitate and develop innovative approaches to financial literacy, address the needs
of the unbanked and participate in local economic development and other community-based
activities. As part of its operations, CCDC monitors the portfolio of investments related to
NMTC awards and makes application for additional awards.
Available Information
The Company makes available on or through its internet website, http://www.carverbank.com, its
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of The Securities
Exchange Act. Such reports are available free of charge and as soon as reasonably practicable
after the Company electronically files such material with, or furnishes it to, the Securities and
Exchange Commission (“SEC”). The public may read and copy any materials the Company files with the
SEC at the SEC’s Public Reference Room at 100 F Street N.E. Washington D.C. 20549. Information may
be obtained on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an internet site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC, including the Company,
at http://www.sec.gov.
In addition, certain other basic corporate documents, including the Company’s Corporate
Governance Principles, Code of Ethics, Code of Ethics for Senior Financial Officers and the
charters of the Company’s Finance and Audit Committee, Compensation Committee and
Nominating/Corporate Governance Committee and the date of the Company’s annual meeting are posted
on the Company’s website. Printed copies of these documents are also
available free of charge to any stockholder who requests them. Stockholders seeking
additional information should contact the Corporate Secretary’s office by mail at 75 West 125th
Street, New York, New York 10027 or by e-mail at corporatesecretary@carverbank.com. The
information on the Company’s website is not part of this annual report.
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Lending Activities
General. Carver Federal’s loan portfolio consists primarily of mortgage loans originated by
the Bank’s lending teams and secured by commercial real estate, multi-family and one-to-four family
residential property and construction loans. Substantially all of the Bank’s mortgage loans are
secured by properties located within the Bank’s market area. From time-to-time, the Bank may
purchase loans from other financial institutions to achieve loan growth objectives. Loans
purchased comply with the Bank’s underwriting standards.
In recent years, Carver Federal has focused on the origination of commercial real estate loans
and multi-family residential loans. These loans generally have higher yields and shorter
maturities than one-to-four family residential properties, and include prepayment penalties that
the Bank collects if the loans pay in full prior to the contractual maturity. The Bank’s increased
emphasis on commercial real estate and multi-family residential mortgage loans has increased the
overall level of credit risk inherent in the Bank’s loan portfolio. The greater risk associated
with commercial real estate and multi-family residential loans has required the Bank to increase
its provisions for loan losses and could require the Bank to maintain an allowance for loan losses
as a percentage of total loans in excess of the allowance currently maintained. Carver Federal
continually reviews the composition of its mortgage loan portfolio and underwriting standards to
manage the risk in the portfolio.
During fiscal 2009, the Bank began to deemphasize the origination of new construction loans
and in fiscal 2010, temporarily ceased the origination of new construction loans, allowing the
outstanding balance of the construction loan portfolio to decline. As security for repayment, the
Bank obtains a first lien position on the underlying collateral, and generally obtains personal
guarantees. Construction loans also generally have a term of two years or less. Construction
loans involve a greater degree of risk than other loans because, among other things, the
underwriting of such loans is based on an estimated value of the developed property, which can be
difficult to ascertain in light of uncertainties inherent in such estimations. In addition,
construction lending entails the risk that the project may not be completed due to cost overruns or
changes in market conditions. The greater risk associated with construction loans has required the
Bank to increase its provision for loan losses, and could require the Bank to maintain an allowance
for loan losses as a percentage of total loans in excess of the allowance the Bank currently
maintains. To help mitigate risk, Carver Federal has originated
construction loans principally through
the Community Preservation Corporation (“CPC”). These loans are targeted toward affordable housing
or rental dwelling units that tend to have lower risk profiles compared to other construction loans
(discussed below). Historically, Carver Federal has not incurred any losses in its construction
loan portfolio although in fiscal 2010, the downturn in the economy has led to some losses and
higher loan delinquencies in this portfolio.
Carver Federal’s business banking unit was formed in 2006 with the acquisition of CCB, a
commercial bank, to focus on loans to businesses located within the Bank’s market area. These
loans are generally personally guaranteed by the business owners, and may be secured by the assets
of the business. The interest rate on these loans is generally an adjustable rate based on a
published index, usually the prime rate. These loans, while providing the Bank a higher rate of
return, also present a higher level of risk. The greater risk associated with business loans could
require the Bank to increase its provision for loan losses, and to maintain an allowance for loan
losses as a percentage of total loans in excess of the allowance currently maintained. To date,
Carver Federal has incurred some losses in the business loan portfolio, which are mainly related to
loans acquired through the CCB acquisition.
Loan Portfolio Composition. Total loans receivable increased by $9.5 million, or 1.4%, to
$672.7 million at March 31, 2010 compared to $663.2 million at March 31, 2009. Carver Federal’s
total loans receivable as a percentage of total assets decreased to 83.5% at March 31, 2010
compared to 83.8% at March 31, 2009. Non-residential real estate loans, which includes commercial
real estate, totaled $259.6 million, or 38.6% of total loans receivable; multi-family loans totaled
$141.7 million, or 21.1% of total loans receivable; construction loans (net of committed but
undisbursed funds), totaled $111.3 million, or 16.5% of total loans receivable; one-to-four family
mortgage loans totaled $90.1 million, or 13.4% of total loans receivable; business loans totaled
$68.5 million, or 10.2% of total loans receivable; and consumer loans (credit card loans, personal
loans, and home improvement
loans) totaled $1.4 million, or 0.2% of total loans receivable.
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Table of Contents
The following is a summary of loans receivable, net of allowance for loan losses at March 31
(dollars in thousands):
Non-residential Real Estate Lending. Non-residential real estate lending consists
predominantly of originating loans for the purpose of purchasing or refinancing office, mixed-use
(properties used for both commercial and residential purposes but predominantly commercial), retail
and church buildings in the Bank’s market area. Mixed use loans are secured by properties which
are intended for both residential and business use and are classified as commercial real estate.
Non-residential real estate lending entails additional risks compared with one to four family
residential and multi-family 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 commercial property.
In making non-residential real estate loans, the Bank primarily considers the ability of the
net operating income generated by the real estate to support the debt service, the financial
resources, income level and managerial expertise of the borrower, the marketability of the property
and the Bank’s lending experience with the borrower. Carver Federal’s maximum loan-to-value
(“LTV”) ratio on non-residential real estate mortgage loans is generally 75% based on the appraised
value of the mortgaged property. The Bank generally requires a Debt Service Coverage Ratio
(“DSCR”) of at least 1.25 on non-residential real estate loans. The Bank also requires the
assignment of rents of all tenants’ leases in the mortgaged property and personal guarantees may be
obtained for additional security from these borrowers.
At March 31, 2010, non-residential real estate mortgage loans totaled $259.6 million, or 38.6%
of the total loan portfolio. This balance reflects a year-over-year decrease of $7.0 million, or
2.5% (adjusted for a $7 million reclassification made between commercial business loans and
commercial non-residential mortgage loans for regulatory reporting purposes). The decrease in
originations in fiscal 2010 is the result of the Company’s efforts to reduce its exposure to this
segment of the New York and New Jersey real estate market. Also, under the current economic
environment, the Bank is focused on ensuring careful commercial real estate valuations and loan
underwriting. As of March 31, 2010, Carver Federal is not currently originating new commercial
real estate loans.
The Bank offers adjustable rate mortgage (“ARM”) loans with interest rate adjustment periods
of one to five years and generally for terms of up to 15 years and amortization schedules up to
thirty years. Interest rates on ARM loans currently offered by the Bank are adjusted at the
beginning of each adjustment period are generally based upon a fixed spread above the FHLB-NY
corresponding Regular Advance Rate. From time to time, the Bank
may originate ARM loans at an initial rate lower than the index as a result of a discount on
the spread for the initial adjustment period. Commercial adjustable-rate mortgage loans generally
are not subject to limitations on interest rate increases either on an adjustment period or
aggregate basis over the life of the loan.
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Historically, Carver Federal has been a New York City metropolitan area leader in the
origination of loans to churches. At March 31, 2010, loans to churches totaled $48.5 million, or
7.2% 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, a balloon payment due at the end of the term
and generally have no greater than a 70% LTV ratio. The Bank has also provided construction
financing for churches and generally provides permanent financing upon completion of construction.
There are currently 63 church loans in the Bank’s loan portfolio.
Loans secured by real estate owned by faith-based 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 organization’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 to determine the church’s ability to service the proposed loan. Carver Federal will
obtain a first mortgage on the underlying real property and often requires personal guarantees of
key members of the congregation and/or key person life insurance on the pastor. The Bank may also
require the church to obtain key person life insurance on specific members of the church’s
leadership. While asset quality in the church loan category historically has been one of the
strongest asset classes, recent economic conditions have produced some delinquencies in this
portfolio. Management believes that Carver Federal will remain a leading lender to churches in its
market area, however, Carver will continue to conduct disciplined underwriting and maintain focused
portfolio management.
Multi-family Real Estate Lending. Traditionally, Carver Federal originates and purchases
multi-family loans. Multi-family property lending entails additional risks compared to one-to-four
family residential lending. For example, such loans are dependent on the successful operation of
such buildings and can be significantly impacted by supply and demand conditions in the market for
multi-family residential units. Carver Federal’s multi-family loan portfolio increased $10.4
million in fiscal 2010 (adjusted for a $51 million reclassification made between multi-family loans
and construction and commercial non-residential mortgage loans for regulatory reporting purposes),
or 13.0% to $141.7 million, or 21.1%, of Carver Federal’s total loan portfolio at March 31, 2010.
In making multi-family loans, the Bank primarily considers the property’s ability to generate
net operating income sufficient to support the debt service, the financial resources, income level
and managerial expertise of the borrower, the marketability of the property and the Bank’s lending
experience with the borrower. Carver Federal’s multi-family product guidelines generally require
that the maximum LTV not exceed 75% based on the appraised value of the mortgaged property on all
such loans. The Bank generally requires a debt service coverage ratio of at least 1.20 on
multi-family loans, which requires the properties to generate cash flow after expenses and
allowances in excess of the principal and interest payment. Carver Federal originates and
purchases multi-family loans, which are predominantly adjustable rate loans that generally amortize
on the basis of a 15-, 20-, 25- or 30-year period and 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 occasionally originates fixed rate loans with greater than five year terms.
Personal guarantees may be obtained for additional security from these borrowers.
To help ensure continued collateral protection and asset quality for the term of multi-family
real estate loans, Carver Federal employs a risk-rating system for its loans. All commercial
loans, including multi-family real estate loans, are risk-rated internally at the time of
origination. In addition, to evaluate changes in the credit profile of the borrower and the
underlying collateral, an independent consulting firm reviews and prepares a written report for a
sample of multi-family real estate loan relationships. On a quarterly basis, i) all new/renewed
loans greater than $1,000,000, ii) a sampling of loans $100,000 to $999,999, and iii) all
criticized and classified loans are reviewed. In addition, on an annual basis, all loans greater
than $1,000,000 and a sampling of loans $100,000 to
$999,999 are reviewed. Summary reports documenting the loan reviews are then reviewed by
management for changes in the credit profile of individual borrowers and the portfolio as a whole.
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Construction Lending. The Bank originates or participates in construction loans for new
construction and renovation of multi-family buildings, residential developments, community service
facilities, churches, and affordable housing programs. 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. Participation in construction loans may be at various stages of
funding. Construction terms are usually from 12 to 24 months. The construction loan interest is
capitalized as part of the overall project cost and is funded monthly from the loan proceeds.
Borrowers must satisfy all credit requirements that apply to the Bank’s permanent mortgage loan
financing for the mortgaged property. Carver Federal has additional criteria for construction
loans to include an engineer’s plan and cost review on all construction budgets with 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 and occupied real estate. Risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the mortgaged 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 project 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 of such loan. The ability of a developer to sell completed dwelling units will
depend on, among other things, demand, pricing, availability of comparable properties and economic
conditions. During fiscal 2009, the Bank 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. During fiscal 2010, the Bank temporarily ceased new
construction lending.
At March 31, 2010, the Bank had $111.3 million (net of $16.3 million of committed but
undisbursed funds) in construction loans outstanding, comprising 16.5% of the Bank’s gross loan
portfolio. The balance at March 31, 2010 reflects a $33.0 million, or 22.8%, decrease over fiscal
2009, consistent with the Bank’s current objective of deemphasizing construction loans and letting
the remaining principal balances amortize down. Virtually all of the construction loans currently
in Carver’s loan portfolio comprise participations in loans originated by peer lenders in New York
City. The preponderance of these loans, 79.9%, are underwritten and serviced by the Community
Preservation Corporation (“CPC”), a nationally recognized non-profit corporation whose mission is
to create affordable housing through new construction and renovation of existing buildings. CPC is
sponsored by more than 70 commercial banks, savings institutions and insurance companies. Since its
founding in 1974, CPC has been responsible for providing over $7 billion in private and public
capital to create approximately 140,000 affordable homes in low and moderate income communities, in
New York City, New Jersey and Connecticut.
Consistent with other sponsoring lenders, Carver participates in a portion of an individual
CPC-originated loan by purchasing up to 90% of the total loan commitment to a developer. CPC is
Carver’s agent in servicing the loans on a daily basis, including overseeing construction and
collecting payments. However Carver’s lending team independently underwrites each participation and
loans are approved pursuant to Carver’s Loan Policy and underwriting guidelines. Carver’s lending
team monitors progress in construction and other benchmarks via written reports and meetings with
CPC staff, which are supplemented by site visits and direct communications with borrowers.
CPC-sponsored developments provide affordable homes for purchase or rental. Loans for rental
developments, when complete, are generally sold to the New York City Pension Fund. Of Carver’s
portfolio of CPC loans, comprised of 27 loans in the amount of $90.3 million, 30% are for rental
developments and 70% are for sale. Most CPC homes are priced to target families at 120% of the
median income in New York City, which is approximately $77,400. This segment of the home buying
market is very deep and typically resilient, given the expense of New York City living and the pent
up demand of families living in public housing and other affordable rental housing, to purchase
their first home.
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In the last two years, economic conditions have severely tested this previously successful
model. Delinquency in the CPC loan portfolio in which Carver participates has increased
significantly. At March 31, 2010, the largest contributor to Carver’s delinquencies was the CPC
portfolio, representing 61% of total construction delinquencies and 50% of the non-performing
portfolio. The delinquency rate is 17.5% of the outstanding balance of the CPC-originated loans.
The most significant factors leading to this delinquency was the federal government’s decision
to remove Fannie Mae and Freddie Mac from the secondary market, for more than two years. As a
result, loans for developments for which construction was complete could not be paid off because
end loans, or mortgages for buyers, were non-existent. Second, the lengthy period in which
developers managed the dearth of mortgage loans, severely strained their finances, as they are
typically smaller, local developers. Third, the loss of employment in the New York metropolitan
area reduced confidence and demand in the home buying population.
Despite these severe conditions, in the past six months the Bank has begun to see sales
activity increase. The emergence of the FHA has slowly opened up a portion of the secondary market.
As a result, in fiscal 2010, 12 loans in the amount of $7.0 million paid off, based on sales
activity. While construction lending is inherently more risky than 1-4 family loans, we are
cautiously optimistic that this asset class, focused on deep pent up demand in Carver’s
marketplace, will rebound.
Our strategy to manage this portfolio has been threefold. First, we temporarily ceased
additional construction lending in fiscal 2009. Since the beginning of fiscal 2009, the
construction loan portfolio has been reduced by $27.2 million or 19.7%, through pay offs and other
resolutions. Second, we worked with CPC to develop an end loan product to provide mortgage
financing for purchasers, if secondary market conditions do not rebound sufficiently. Third we are
aggressive participants, along with CPC, in the servicing of each loan.
While predicting when market conditions will return to some semblance of normality is
difficult, we currently believe that delinquencies in this portfolio will be elevated for at least
three additional quarters.
One-to-four Family Residential Lending. Historically, Carver Federal emphasized the
origination and purchase of first mortgage loans secured by one-to-four family properties that
serve as the primary residence of the owner. To a much lesser degree, the Bank has made loans to
investors that are secured by non-owner occupied one-to-four family properties, although this
practice has been discontinued. In the past the Bank has also purchased one-to-four family loans,
$316 thousand was purchased in fiscal 2010 compared to no such loans purchased in fiscal 2009. In
October 2008, the Bank entered into an arrangement with a third party to originate and underwrite
one-to-four family loans for the Bank using Fannie Mae, Freddie Mac or FHA underwriting guidelines.
Carver Federal offers both fixed-rate and adjustable-rate residential mortgage loans with
maturities of up to 30 years and a general maximum loan amount of $1.4 million. Approximately 86%
of the one-to-four family residential mortgage loans maturing in greater than one year at March 31,
2010 were adjustable rate and approximately 14% were fixed-rate. One-to-four family residential
real estate loans decreased $15.6 million to $90.1 million, or 13.4%, of the gross loan portfolio
at March 31, 2010 compared to March 31, 2009. During fiscal 2009 the Bank decreased its emphasis
on one-to-four family lending due to more favorable pricing on multi-family residential and
commercial real estate lending.
The Bank’s lending policies generally limit the maximum loan-to-value (“LTV”) ratio 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 certain special loan programs, Carver Federal may
originate and sell loans secured by single-family homes purchased by first time home buyers where
the LTV ratio may be up to 96.5%.
Carver Federal’s fixed-rate, one-to-four family residential mortgage loans are underwritten in
accordance with applicable secondary market underwriting guidelines and requirements for sale.
From time to time the Bank has sold such loans to the Federal National Mortgage Association
(“FNMA”), the State of New York Mortgage Agency (“SONYMA”) and other third parties. Loans are
generally sold with limited recourse on a servicing retained basis except to SONYMA where the sale
is made with servicing released. Carver Federal uses several servicing firms to sub-service
mortgage loans, whether held in portfolio or sold with the servicing retained. At March 31, 2010,
the Bank, through its sub-servicers, serviced $45.9 million in loans for FNMA and $6.1 million for
other third parties.
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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 generally retained in Carver
Federal’s portfolio although they may be sold in the secondary market. They are indexed to the
weekly average rate on one-year, three-year and five-year U.S. Treasury or Federal Home Loan Bank
(“FHLB”) securities, respectively, adjusted to a constant maturity (usually one year), plus a
margin. The rates at which interest accrues on these loans are adjustable every one, three or five
years, generally with limitations on adjustments of two percentage points per adjustment period and
six percentage points over the life of a one-year adjustable-rate mortgage and four percentage
points over the life of three-year and five-year adjustable-rate mortgages.
The retention of adjustable-rate loans in Carver Federal’s portfolio helps reduce Carver
Federal’s exposure to increases in prevailing market interest rates. However, there are
credit risks resulting from potential increases in costs to borrowers in the event
of upward re-pricing 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.
In the past, the Bank originated a limited amount of subprime loans; however, such lending has
been discontinued. At March 31, 2010, the Bank had $8.7 million in subprime loans, or 1.3%, of its
total loan portfolio of which $0.4 million are non-performing loans.
Business Loans. Carver Federal’s small business lending portfolio increased by $11.0 million
to $68.5 million, or 10.2%, of the Bank’s gross loan portfolio in Fiscal 2010. Carver Federal
provides revolving credit and term loan facilities to small businesses with annual sales of
approximately $1 million to $25 million in manufacturing, services and wholesale segments.
Business loans are typically personally guaranteed by the owners, and may also be secured by
additional collateral, including real estate, equipment and inventory. Included in commercial
business loans are loans made to owners of New York City taxi medallions. These loans, which
totaled $13.4 million at March 31, 2010, are secured through first liens on the taxi medallions.
Carver Federal originates taxi medallion loans in an amount up to 80% of the value of the taxi
medallion.
Consumer and other Loans. At March 31, 2010, the Bank had $1.4 million in consumer and other
loans, or 0.2%, of the Bank’s gross loan portfolio. At March 31, 2010, $1.2 million, or 92%, of
the Bank’s consumer loans were unsecured loans, consisting of consumer loans, other than loans
secured by savings deposits, and $0.1 million or 8%, were secured by savings deposits.
Consumer loans generally involve more risk than first mortgage loans. Collection of a
delinquent loan is dependent on the borrower’s continuing financial stability, and thus is 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 underwriting unsecured consumer loans other than secured credit cards, 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. The underwriting for secured credit
cards only takes into consideration the value of the underlying collateral. See “—Asset
Quality—Non-performing Assets.”
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 and telephone customers. Loans are originated by the Bank’s personnel who receive a base
salary, commissions and other incentive compensation. Real estate, business and unsecured loan
applications are forwarded to the Bank’s Lending Department for underwriting pursuant to standards
established in Carver Federal’s loan policy. The underwriting
and loan processing for residential one-to-four family loans are performed by an outsourced
third party loan originator using lending standards established by the Bank.
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A commercial 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 loan officer. As part of the loan approval process, consideration is given to an
independent appraisal, location, accessibility, stability of the neighborhood, environmental
assessment, personal credit history of the applicant(s) and the financial capacity of the
applicant(s). Business loan applications are completed for all business loans. Most business
loans are secured by real estate, personal guarantees, and/or guarantees by the United States Small
Business Association (“SBA”) or Uniform Commercial Code (“UCC”) filings. The loan approval process
considers the credit history of the applicant, collateral, cash flow and purpose and stability of
the business.
Upon receipt of a completed loan application from a prospective borrower, a credit report and
other verifications are ordered to confirm 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 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 that 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.
Written confirmation of the guarantee for SBA loans and evidence of the UCC filing is also
required.
Loan Approval. Except for real estate and business loans in excess of $6.0 million and $3.0
million, respectively, mortgage and business loan approval authority has been delegated by the
Bank’s Board to the Board’s Asset Liability and Interest Rate Risk Committee. The Asset Liability
and Interest Rate Risk Committee has delegated to the Bank’s Management Loan Committee, which
consists of certain members of executive management, loan approval authority for loans up to and
including $3.0 million for real estate loans, $2.0 million for business loans secured by real
estate and $1.0 million for all other business loans. Any loan that represents an exception to the
Bank’s lending policies must be ratified by the next higher approval authority. Real estate and
business loans above $6.0 million and $3.0 million, respectively, must be approved by the full
Board. Purchased loans are subject to the same approval process as originated loans. One-to-four
family mortgage loans that conform to FNMA standards and limits may be approved by the outsourced
third party loan originator.
Loans-to-One-Borrower. Under the loans-to-one-borrower limits of the Office of Thrift
Supervision (“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, 2010, the maximum
loans-to-one-borrower under this test would be $11.3 million and the Bank had no relationships that
exceeded this limit.
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 occasionally
funds 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
applicable secondary market guidelines of FNMA, SONYMA or other third-party purchaser to provide
the opportunity for subsequent sale in the secondary market as desired to manage interest rate risk
exposure.
Loan Originations and Purchases. Loan originations, including loans originated for sale, were
$108.4 million in fiscal 2010 compared to $151.4 million in fiscal 2009. In prior years, the Bank
increased its loan production of non-residential commercial real estate and multi-family lending,
including those in construction, to take advantage of higher yields and better interest rate risk
characteristics. However, due to the downturn in the real estate market and the economy in
general, the Bank has curtailed non-owner occupied commercial real estate and construction lending
given the additional risks associated with these products. The Bank purchased $10.8 million in
loans during fiscal 2010 compared to no loans purchased for fiscal 2009 and $29.7 million for
fiscal 2008.
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The following table sets forth certain information with respect to Carver Federal’s loan
originations and advances, purchases and sales for the fiscal years ended March 31, (in thousands):
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, with certain
exceptions related to the seller’s compliance with representations and warranties, 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 that time by the Bank. The Bank initially
seeks to purchase loans in its market area, however, the Bank may purchase loans secured by
property secured outside its market area to meet its financial objectives. The market areas in
which the properties that secure the purchased loans are located may differ from Carver Federal’s
market area and may be 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 markets 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 risks, 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 review of each loan is conducted prior to purchase, and the Bank
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 90 days of discovery
or trigger certain repurchase provisions in the buy/sell agreement.
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Loan Maturity Schedule. The following table sets forth information at March 31, 2010
regarding the 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. Construction loans generally have terms from 12 to 24 months and when coupled with the
significant decline in originations over the past two years, the majority of the construction loan
portfolio has a maturity of one year or less. Management believes such
loans are well collateralized. 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 (in
thousands):
The following table sets forth as of March 31, 2010, amounts in each loan category that are
contractually due after March 31, 2011 and whether such loans have fixed 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 higher than rates on existing mortgage loans and tends to decrease when current mortgage
loan market rates are lower than rates on existing mortgage loans (in thousands):
Asset Quality
General. One of the Bank’s key operating objectives continues to be to maintain a high level
of asset quality. Through a variety of strategies, including, but not limited to, monitoring loan
delinquencies and borrower workout arrangements, the Bank has been proactive in addressing problem
loans and non-performing assets. The maintenance of conservative credit standards for loan
originations has resulted in the Bank historically having lower net charge-offs of loans than other
comparable financial institutions.
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 adequacy of the value of the collateral securing the loan. For
non-owner occupied non-residential real estate and multi-family loans, the borrower’s ability to
pay typically is dependent on rental income, which can be impacted by vacancies and general market
conditions. For one-to-four family loans, a borrowers’ ability to pay typically is dependent
primarily on employment and other sources of income. For owner occupied non-residential real
estate, a borrower’s ability to pay typically is dependent primarily on the success of the
borrower’s business. For all of the Bank’s loans, a borrower’s ability to pay is also impacted by
general economic and other factors, such as unanticipated expenditures or changes in the financial
markets. 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.
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Non-performing Assets. Non-performing assets consist of non-accrual loans
and property acquired in settlement of loans, including foreclosure. When a
borrower fails to make a payment on a loan, the Bank and/or its loan servicers takes prompt steps
to have the delinquency cured and the loan restored to current status. This includes a series of
actions such as phone calls, letters, customer visits and, if necessary, legal action. In the
event the loan has a guarantee, the Bank may seek to recover on the guarantee, including, where
applicable, from the Small Business Administration (“SBA”). Loans that remain delinquent are
reviewed for reserve provisions and charge-off. The Bank’s collection efforts continue after the
loan is charged off, except when a determination is made that collection efforts have been
exhausted or are not productive.
The Bank may from time to time agree to modify the contractual terms of a borrower’s loan. In
cases where such modifications represent a concession to a borrower experiencing financial
difficulty, the modification is considered a troubled debt restructuring (“TDR”). Loans modified
in a troubled debt restructuring are placed on non-accrual status until the Bank determines that
future collection of principal and interest is reasonably assured, which generally requires that
the borrower demonstrate a period of performance according to the restructured terms for a minimum
of six months. At March 31, 2010, loans classified as a troubled debt restructuring totaled $15.2
million.
The following table sets forth information with respect to Carver Federal’s non-performing assets,
which includes non-accrual loans and property acquired in settlement of loans as of March 31, (dollars in thousands):
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At
March 31, 2010, total non-performing assets increased by
$21.4 million to $47.6 million,
compared to $26.2 million at March 31, 2009. Non-accrual loans consist of 21 one- to four- family
loans, 9 multi-family loans, 5 non-residential real estate loans, 5 construction loans, 4 consumer
and 33 small business and SBA loans. The increase in delinquent loans from the prior year is
primarily the result of deterioration in economic conditions and resultant impact on borrower’s
ability to meet the terms of their loans. Management believes that there will likely be losses on
certain delinquent loans, but that the amount of losses will be reduced by the values of the
properties securing these delinquent loans and the Bank’s loan loss reserves. Other real estate
owned of $0.1 million reflects two properties foreclosed upon.
Although we believe that substantially all risk elements at March 31,
2010 have been disclosed, it is possible that for a variety of
reasons, including economic conditions, certain borrowers may be
unable to comply with the contractual repayment terms on certain real
estate and commercial loans. As part of the analysis of the loan
portfolio, management determined that there were approximately $29.2
million in potential problem loans at March 31, 2010 which were not
classified as non-accrual loans in the non-performing asset table
above. Potential problem loans are defined as performing loans for
which management has doubts as to the ability of such borrowers to
comply with the present loan repayment terms and which may result in
a non-performing loan.
Asset Classification and Allowances for Losses. Federal regulations and the Bank’s policies
require the classification of assets on the basis of credit quality on a quarterly basis. An asset
is classified as “substandard” if it is non-performing and/or 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 un-collectible,
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 result in a higher level of allowances for loan losses recorded in
accordance with Accounting Standards Codification (“ASC”) subtopic 450-20 “Loss Contingencies”. If
an asset or portion thereof is classified as a loss, a savings institution must either establish
specific allowances for loan losses pursuant to loan impairment guidance in ASC subtopic 310-10-35
in the amount of the portion of the asset classified as a 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.
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 (ALLL). 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 analyze all significant factors that affect the ability to
collect the portfolio in a reasonable manner and that management establish acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement. Management is
responsible for determining the adequacy of the allowance for loan losses and the periodic
provisioning for estimated losses included in the consolidated financial statements. The
evaluation process is undertaken on a quarterly basis, but may increase in frequency should
conditions arise that would require management’s prompt attention, such as business combinations
and opportunities to dispose of non-performing and marginally performing loans by bulk sale or any
development which may indicate an adverse trend. 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 a 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 the ALLL policy,
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. For additional information regarding
Carver Federal’s ALLL policy, refer to Note 2 of Notes to Consolidated Financial Statements,
“Summary of Significant Accounting Policies.”
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The Board has designated the Internal Asset Review Committee of management on a quarterly
basis to perform a review of the Bank’s asset quality, establish general and specific allowances,
determine loan classifications and submit their report to the Board for review. 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 and recommends adjustments to the level of allowances accordingly. 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 from the
economic conditions in the assumptions used in making the initial determinations, or if
circumstances pertaining to individual loans change, or new information pertaining to individual
loans or the loan portfolio is identified. The Bank has a centralized loan servicing structure
that relies upon outside servicers, each of which generates a monthly report of delinquent loans.
The Asset Liability and Interest Rate Risk Committees of the Board establish policy relating to
internal classification of loans and also provides input to the Internal Asset 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 market. See “—Lending Activities—Loan Purchases and
Originations.” Carver Federal increases its allowance for loan losses by charging provisions for
possible losses against the Bank’s income. General allowances are established by management 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. A loan is deemed impaired
when it is probable the Bank will be unable to collect both principal and interest due according to
the contractual terms of the loan agreement. Loans the Bank individually classifies as impaired
include multi-family mortgage loans, commercial real estate loans, construction loans and business
loans which have been classified by the Bank’s credit review officer as substandard, doubtful or
loss for which it is probable that principal and interest will not be collected in accordance with
the loan’s contractual terms, and certain loans modified in a troubled debt restructuring A
valuation allowance for collateral dependent loans is established when the current estimated fair
value of the property that collateralizes the impaired loan, if any, is less than the recorded
investment in the loan. A valuation allowance for cash flow dependent loans is established when
based upon a discounted cash flow analysis, impairment is demonstrated.
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
taking possession of the property, management periodically evaluates the property 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, providing the Bank did not provide the
loan.
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The following table sets forth an analysis of Carver Federal’s allowance for loan losses for
the years ended March 31 (dollars in thousands):
The following table allocates the allowance for loan losses by asset category at March 31
(dollars in thousands):
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.
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Investment Activities
General. The Bank utilizes mortgage-backed and other investment securities in its
asset/liability management strategy. In making investment decisions, the Bank considers, among
other things, its yield and interest rate objectives, its interest rate and credit risk position
and its liquidity and cash flow.
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 and collateral requirements, liquidity needs and performance
objectives. ASC subtopic 320-942 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, 2010, the Bank had no securities classified as trading. At March 31, 2010, $43.1
million, or 77.7% of the Bank’s mortgage-backed and other investment securities, was classified as
available-for-sale. The remaining $12.3 million, or 22.3%, was classified as held-to-maturity.
Mortgage-Backed Securities. The Bank has invested in mortgage-backed securities to help
achieve its asset/liability management goals and collateral needs. Although mortgage-backed
securities generally yield less than whole loans, they present substantially lower credit risk, 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—Qualified
Thrift Lender Test” and “—Federal and State Taxation.”
At March 31, 2010, mortgage-backed securities constituted 6.6% of total assets, as compared to
9.4% of total assets at March 31, 2009. Carver Federal maintains a portfolio of mortgage-backed
securities in the form of Government National Mortgage Association (“GNMA”) pass-through
certificates, Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corp
(“FHLMC”) participation certificates. GNMA pass-through certificates are guaranteed as to the
payment of principal and interest by the full faith and credit of the United States Government
while FNMA 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. 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 has also invested in pools of loans guaranteed as to
principal and interest by the Small Business Administration (“SBA”).
The Bank seeks to manage interest rate risk by investing in adjustable-rate mortgage-backed
securities, which at March 31, 2010, constituted $13.4 million, or 25.0%, 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 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. For additional information regarding
Carver Federal’s mortgage-backed securities portfolio and its maturities refer to Note 4 of Notes
to Consolidated Financial Statements, “Securities.”
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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-NY, 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 (See Note 4 of Notes to Consolidated Financial Statements).
Other Earning Assets. Federal regulations require the Bank to maintain an investment in
FHLB-NY 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.”
Securities Impairment. The Bank’s available-for-sale securities portfolio is carried at
estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated
other comprehensive income/loss in stockholders’ equity. Securities that the Bank has the positive
intent and ability to hold to maturity are classified as held-to-maturity and are carried at
amortized cost. The fair values of securities in portfolio are based on published or securities
dealers’ market values and are affected by changes in interest rates. The Bank quarterly reviews
and evaluates the securities portfolio to determine if the decline in the fair value of any
security below its cost basis is other-than-temporary. The Bank generally views changes in fair
value caused by changes in interest rates as temporary, which is consistent with its experience.
In April 2009, the FASB issued guidance that changes the amount of an other-than-temporary
impairment that is recognized in earnings when there are non-credit losses on a debt security which
management does not intend to sell, and for which it is more-likely-than-not that the entity will
not be required to sell the security prior to the recovery of the non-credit impairment. In those
situations, the portion of the total impairment that is attributable to the credit loss would be
recognized in earnings, and the remaining difference between the debt security’s amortized cost
basis and its fair value would be included in other comprehensive income. This guidance also
requires additional disclosures about investments in an unrealized loss position and the
methodology and significant inputs used in determining the recognition of other-than-temporary
impairment. At March 31, 2009, the Bank held a private-label mortgage-backed security which was
determined to be other than temporarily impaired in the amount of $52 thousand. The Bank continues
to hold this security but has deemed there to be no further other than temporary impairment. At
March 31, 2010, the Bank does not have any other securities that may be classified as having other
than temporary impairment in its investment portfolio.
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, loan and investment interest payments, maturing investments and fee income. Loan and
mortgage-backed securities repayments and interest payments are a relatively stable source of
funds, while deposit inflows and outflows are significantly influenced by prevailing market
interest rates, pricing of deposits, competition and general economic conditions. Borrowed money
may be used to supplement the Bank’s available funds, and from time to time the Bank borrows funds
from the FHLB-NY and has borrowed funds through repurchase agreements and trust preferred debt
securities.
Deposits. Carver Federal attracts deposits from consumers, businesses, non-profit
organizations and public entities through its nine branches 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 five 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 and
businesses through the Bank’s branches. Carver Federal also holds deposits from various
governmental agencies or authorities and corporations.
The Bank’s branches on 116th Street and 145th Street in Harlem and its
Jamaica branches operate in New York State designated Banking Development Districts (“BDD”), which
allows Carver Federal to participate in BDD-related activities, including acquiring New York City
and New York State deposits. As of March 31, 2010, Carver Federal held $95 million in BDD
deposits. BDD deposits are used by various municipal agencies to
encourage banking operations in low- to moderate-income areas.
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The Bank also has $92.5 million of reciprocal deposits acquired through its participation in
the Certificate of Deposit Account Registry Service (“CDARS”). The CDARS network arranges for
placement of Carver Federal’s customer funds into certificate of deposit accounts issued by other
CDARS member banks in increments of less than the individual FDIC insurance limit amount to ensure
that both principal and interest are eligible for full FDIC deposit insurance. This allows the
Bank to maintain its customer relationship while still providing its customers with FDIC insurance
for the full amount of their deposits, up to $50 million per customer. In exchange, Carver Federal
receives from other member banks their customer’s deposits in like amounts. Depositors are allowed
to withdraw funds, with a penalty, from these accounts. Carver Federal may, but has not at this
time elected to, participate in the program by making or receiving deposits without making or
receiving a reciprocal deposit. Prior to the Emergency Economic Stabilization Act of 2008 (“ESSA”)
the FDIC deposit insurance limit was $100,000. As result of ESSA, this limit was increased to
$250,000 through December 31, 2013.
Deposit interest rates, maturities, service fees and withdrawal penalties on deposits are
established based on the Bank’s funds acquisition and liquidity requirements, the rates paid by the
Bank’s competitors, current market rates, the Bank’s growth goals and applicable regulatory
restrictions and requirements. For additional information regarding the Bank’s deposit accounts
and the related weighted average interest rates paid; and amount and maturities of certificates of
deposit in specified weighted average interest rate categories refer to Note 8 of Notes to
Consolidated Financial Statements, “Deposits.”
Borrowed Money. While deposits are the primary source of funds for Carver Federal’s lending,
investment and general operating activities, Carver Federal is authorized to use advances from the
FHLB-NY and securities sold under agreements to repurchase (“Repos”) from approved primary dealers
to supplement its supply of funds and to meet deposit withdrawal requirements. The FHLB-NY
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-NY 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-NY are secured by Carver Federal’s stock in the FHLB-NY and a pledge of Carver Federal’s
mortgage loan and mortgage-backed and agency securities portfolios. The Bank takes into
consideration the term of borrowed money with the re-pricing cycle of the mortgage loans on the
balance sheet. At March 31, 2010, Carver had $69.1 million in FHLB-NY advances and $30.0 million
in Repos.
On September 17, 2003, Carver Statutory Trust I issued 13,000 shares, liquidation amount
$1,000 per share, of floating rate capital securities. Gross proceeds from the sale of these trust
preferred debt securities were $13.0 million and, together with the proceeds from the sale of the
trust’s common securities, were used to purchase approximately $13.4 million aggregate principal
amount of the Holding Company’s floating rate junior subordinated debt securities due 2033. The
trust preferred debt securities are redeemable quarterly at the option of the Company beginning on
or after September 17, 2008 and have a mandatory redemption date of September 17, 2033. Cash
distributions on the trust preferred debt securities are cumulative and payable at a floating rate
per annum (reset quarterly) equal to 3.05% over 3-month LIBOR, with a rate at March 31, 2010 of
3.31%.
On
September 30, 2009, the Bank raised $5.0 million in a private placement of subordinated debt
maturing December 30, 2018. The maximum contractual interest rate for the debt is 12.00% per
annum, however, for the first seven years, and so long as Carver maintains its certification as a
Community Development Entity (“CDE”) and remains in compliance with all of the NMTC requirements,
the interest rate shall be reduced by 500 basis points to 7.00% per annum. This subordinated debt
has been approved by the OTS to qualify as Tier II capital for the Bank’s regulatory capital
calculations.
These subordinated debt securities amounted to $18.4 million at March 31, 2010 and are
included in other borrowed money on the consolidated statement of financial condition. For
additional information regarding the Company’s advances from the FHLB-NY and other borrowed money
refer to Note 9 of Notes to Consolidated Financial Statements, “Borrowed Money.”
On October 30, 2009, the Bank raised $14.1 million in a private placement of Senior Notes
bearing a coupon of 1.69% per annum, maturing on October 31, 2011. This debt is guaranteed under
the Federal Deposit
Insurance Corporation’s (the “FDIC”) Temporary Liquidity Guarantee Program (TLGP). For this
guarantee, the Bank is assessed a fee by the FDIC in the amount of 125 basis points. These
proceeds were used to increase the Bank’s liquidity position and for general corporate purposes.
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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 Federal
Deposit Insurance Corporation (“FDIC”) under the Deposit Insurance Fund (“DIF”), and 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
unitary savings and loan 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 SEC under the federal securities laws. The OTS and the FDIC
periodically perform safety and soundness examinations of the Bank and the Holding Company and test
compliance with various regulatory requirements. The OTS has primary enforcement responsibility
over federally chartered savings banks and has substantial discretion to impose enforcement action
on an institution that fails to comply with applicable regulatory requirements, particularly with
respect to its capital requirements. In addition, the FDIC has the authority to recommend to the
Director of the OTS that enforcement action be taken with respect to a particular federally
chartered savings bank and, if action is not taken by the Director, the FDIC has authority to take
such action under certain circumstances.
This regulation and supervision establishes a comprehensive framework to regulate and control
the activities in which an institution can engage and is intended primarily for the protection of
the insurance fund and depositors. This structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. 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.
The description of statutory provisions and regulations applicable to federally chartered
savings banks and their holding companies and of tax matters set forth in this document does not
purport to be a complete description of all such statutes and regulations and their effects on the
Bank and the Holding Company.
Recent Government Actions
The Emergency Economic Stabilization Act of 2008 (“EESA”), was signed into law on October 3,
2008 and authorizes the U.S. Department of the Treasury (“Treasury”) to establish the Troubled
Asset Relief Program (“TARP”) to purchase certain troubled assets from financial institutions,
including banks and thrifts. Under the TARP, the Treasury may purchase residential and commercial
mortgages, and securities, obligations or other instruments based on such mortgages, originated or
issued on or before March 14, 2008 that the Secretary of the Treasury determines promotes market
stability, as well as any other financial instrument that the Treasury, after consultation with the
Chairman of the Board of Governors of the Federal Reserve System, or FRB, determines the purchase
of which is necessary to promote market stability. In the case of a publicly-traded financial
institution that sells troubled assets into the TARP, the Treasury must receive a warrant giving
the Treasury the right to receive nonvoting common stock or preferred stock in such financial
institution, or voting stock with respect to which the Treasury agrees not to exercise voting
power, subject to certain de minimis exceptions. In addition, all financial institutions that sell
troubled assets to the TARP and meet certain conditions will also be subject to certain executive
compensation restrictions, which differ depending on how the troubled assets are acquired under the
TARP.
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On October 14, 2008, the Treasury announced that it will purchase equity stakes in a wide
variety of banks and thrifts. Under this program, known as the Troubled Asset Relief Program
Capital Purchase Program (the “TARP CPP”), the Treasury made $250 billion of capital available
(from the $700 billion authorized by the EESA) to U.S. financial institutions in the form of
preferred stock. In conjunction with the purchase of preferred stock, the Treasury
will receive warrants to purchase common stock with an aggregate market price equal to 15% of
the preferred investment. Participating financial institutions will be required to adopt the
Treasury’s standards for executive compensation and corporate governance for the period during
which the Treasury holds equity issued under the TARP CPP. On January 20, 2009, the Company
announced that it completed the sale of $18.98 million in preferred stock to the Treasury in
connection with Carver’s participation in the TARP CPP. Importantly, Carver is exempt from the
requirement to issue a warrant to the Treasury to purchase shares of common stock, as the Bank is a
certified Community Development Financial Institution (“CDFI”), conducting most of its depository
and lending activities in disadvantaged communities. Therefore, the investment did not dilute
common stockholders. As a participant in TARP CPP, the Company is subject to certain obligations
currently in effect, such as compensation restrictions, a luxury expenditure policy, the
requirement the Company include a “say on pay” proposal in the proxy statement and certain
certifications. The Company is also subject to additional restrictions or obligations as may be
imposed under TARP CPP for as long as the Company participates in TARP CPP.
The Treasury announced in February 2010 the implementation of the Community Development
Capital Initiative (“CDCI”). This new capital program will invest lower-cost capital in Community
Development Financial Institutions that lend to small businesses in the country’s most economically
depressed communities. CDFI banks and thrifts are eligible to receive investments of capital with
an initial dividend rate of 2 percent, compared to the 5 percent rate offered under the CPP. CDFIs
may apply to receive capital up to 5 percent of risk-weighted assets. To encourage repayment while
recognizing the unique circumstances facing CDFIs, the dividend rate will increase to 9 percent
after eight years, compared to five years under CPP. Carver has applied to exchange its $18.98
million of CCP funds with CDCI capital. Carver’s application is currently under review by the U.S.
Treasury and if approved would decrease dividend payments by $0.6 million per annum. Carver
believes it would be eligible to participate in this CDFI program.
In addition to establishing the TARP, the EESA also requires that the Secretary of the
Treasury establish a program that will guarantee the principal of, and interest on, troubled assets
originated or issued prior to March 14, 2008 to help restore liquidity and stability to the
financial system known as the Temporary Liquidity Guaranty Program (“TLGP”). The Secretary of the
Treasury will establish premiums for financial institutions that participate in this program and
may provide for variations in such rates in accordance with the credit risk associated with the
particular troubled asset being guaranteed.
Federal Banking Regulation
Activity Powers. The Bank derives its lending and investment powers from the Home
Owners’ Loan Act (“HOLA”), as amended, 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. These investment powers are subject to various limitations, including
(1) a prohibition against the acquisition of any corporate debt security that is not rated in one
of the four highest rating categories, (2) a limit of 400% of an association’s capital on the
aggregate amount of loans secured by non-residential real estate property, (3) a limit of 20% of an
association’s assets on commercial loans, with the amount of commercial loans in excess of 10% of
assets being limited to small business loans, (4) a limit of 35% of an association’s assets on the
aggregate amount of consumer loans and acquisitions of certain debt securities, (5) a limit of 5%
of assets on non-conforming loans (loans in excess of the specific limitations of HOLA), and (6) a
limit of the greater of 5% of assets or an association’s capital on certain construction loans made
for the purpose of financing what is or is expected to become residential property.
On October 4, 2006, the OTS and other federal bank regulatory authorities published the
Interagency Guidance on Nontraditional Mortgage Product Risks, or the Guidance. The Guidance
describes sound practices for managing risk, as well as marketing, originating and servicing
nontraditional mortgage products, which include, among other things, interest-only loans. The
Guidance sets forth supervisory expectations with respect to loan terms and underwriting standards,
portfolio and risk management practices and consumer protection. For example, the Guidance
indicates that originating interest-only loans with reduced documentation is considered a layering
of risk
and that institutions are expected to demonstrate mitigating factors to support their
underwriting decision and the borrower’s repayment capacity. Specifically, the Guidance indicates
that a lender should be able to readily document income and a lender may accept a borrower’s
statement as to the borrower’s income without obtaining verification only if there are mitigating
factors that clearly minimize the need for direct verification of repayment capacity.
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On December 14, 2006, the OTS published guidance entitled “Concentrations in Commercial Real
Estate Lending, Sound Risk Management Practices,” or the CRE Guidance, to address concentrations
of commercial real estate loans in savings associations. The CRE Guidance reinforces and enhances
the OTS’ existing regulations and guidelines for real estate lending and loan portfolio
management, but does not establish specific commercial real estate lending limits. The Bank has
evaluated the CRE Guidance to determine its compliance and, as necessary, modified its risk
management practices, underwriting guidelines and consumer protection standards. See “Lending
Activities and Asset Quality” in Item 1, “Business” for discussions of Carver Federal’s loan
product offerings and related underwriting standards.
On June 29, 2007, the OTS and other federal bank regulatory agencies issued a final Statement
on Subprime Mortgage Lending, or the Statement, to address the growing concerns facing the subprime
mortgage market, particularly with respect to rapidly rising subprime default rates that may
indicate borrowers do not have the ability to repay adjustable rate subprime loans originated by
financial institutions. In particular, the agencies expressed concern in the Statement that
current underwriting practices do not take into account that many subprime borrowers are not
prepared for “payment shock” and that the current subprime lending practices compound risk for
financial institutions. The Statement describes the prudent safety and soundness and consumer
protection standards that financial institutions should follow to ensure borrowers obtain loans
that they can afford to repay. These standards include a fully indexed, fully amortized
qualification for borrowers and cautions on risk-layering features, including an expectation that
stated income and reduced documentation should be accepted only if there are documented mitigating
factors that clearly minimize the need for verification of a borrower’s repayment capacity.
Consumer protection standards include clear and balanced product disclosures to customers and
limits on prepayment penalties that allow for a reasonable period of time, typically at least 60
days, for borrowers to refinance prior to the expiration of the initial fixed interest rate period
without penalty. The Statement also reinforces the April 17, 2007 Interagency Statement on Working
with Mortgage Borrowers, in which the federal bank regulatory agencies encouraged institutions to
work constructively with residential borrowers who are financially unable or reasonably expected to
be unable to meet their contractual payment obligations on their home loans. In addition, the
Statement referenced expanded guidance issued by the agencies by press release dated January 31,
2001. According to the expanded guidance, subprime loans are loans to borrowers which display one
or more characteristics of reduced payment capacity. Five specific criteria, which are not
intended to be exhaustive and are not meant to define specific parameters for all subprime
borrowers and may not match all markets or institutions’ specific subprime definitions, are set
forth, including having a FICO credit score of 660 or below at the time of origination. Within the
Bank’s loan portfolio, there are loans to borrowers who had FICO scores of 660 or below at the time
of origination. However, as a portfolio lender, the Bank reviews all data contained in borrower
credit reports and does not base underwriting decisions solely on FICO scores. The Bank believes
the aforementioned loans, when made, were amply collateralized and otherwise conformed to the
Bank’s prime lending standards. These loans are not a material component of the one-to-four family
mortgage loan portfolio.
Carver Federal has evaluated the Guidance, the CRE Guidance and the Statement to determine
compliance and, as necessary, modified risk management practices, underwriting guidelines and
consumer protection standards. See “Lending Activities — One-to-Four Family Mortgage Lending and
Multi-family and Commercial Real Estate Lending” for a discussion of the Bank’s loan product
offerings and related underwriting standards and “Asset Quality” in Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for information regarding
the Bank’s interest-only and reduced documentation loan portfolio composition.
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 unimpaired surplus, which does not include accumulated other
comprehensive income. The Bank may lend additional amounts up to 10% of its unimpaired capital and
unimpaired surplus if the loans or extensions of credit are fully secured by readily marketable
collateral. The Bank currently complies with applicable loans to one borrower limitations. At
March 31, 2010, the Bank’s limit on loans to one borrower based on its unimpaired capital and
surplus was $11.3
million.
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Qualified Thrift Lender Test. Under HOLA, the Bank must comply with a Qualified Thrift
Lender (“QTL”) test. Under this test, the Bank is required to maintain at least 65% of its
“portfolio assets” in certain “qualified thrift investments” on a monthly basis 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” include 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. If the Bank fails the QTL test, it must either operate
under certain restrictions on its activities or convert from a thrift charter to a bank charter.
In addition, if the Bank does not re-qualify under the QTL test within three years after failing
the test, the Bank would be prohibited from engaging in any activity not permissible for a national
bank and would have to repay any outstanding advances from the FHLB-NY as promptly as possible. At
March 31, 2010, the Bank maintained approximately 70.0% 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.
Capital Requirements. The OTS capital regulations require federally chartered savings
associations to meet three minimum capital ratios: a 1.5% tangible capital ratio, a 4% leverage
(core) capital ratio and an 8% total risk-based capital ratio. In assessing an institution’s
capital adequacy, the OTS takes into consideration not only these numeric factors but also
qualitative factors as well, and has the authority to establish higher capital requirements for
individual institutions where necessary. Carver Federal, as a matter of prudent management,
targets as its goal the maintenance of capital ratios which exceed these minimum requirements and
that are consistent with Carver Federal’s risk profile. At March 31, 2010, Carver Federal exceeded
each of its capital requirements with a tangible capital ratio of 7.86%, leverage capital ratio of
7.88% and total risk-based capital ratio of 11.71%.
The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, requires that the OTS
and other federal banking agencies revise their risk-based capital standards, with appropriate
transition rules, to ensure that they take into account IRR concentration of risk and the risks of
non-traditional activities. The OTS regulations do not include a specific IRR component of the
risk-based capital requirement. However, the OTS monitors the IRR of individual institutions
through a variety of means, including an analysis of the change in net portfolio value, or NPV.
NPV is defined as the net present value of the expected future cash flows of an entity’s assets and
liabilities and, therefore, hypothetically represents the value of an institution’s net worth. The
OTS has also used this NPV analysis as part of its evaluation of certain applications or notices
submitted by thrift institutions. In addition, OTS Thrift Bulletin 13a provides guidance on the
management of IRR and the responsibility of boards of directors in that area. The OTS, through its
general oversight of the safety and soundness of savings associations, retains the right to impose
minimum capital requirements on individual institutions to the extent the institution is not in
compliance with certain written guidelines established by the OTS regarding NPV analysis. The OTS
has not imposed any such requirements on Carver Federal.
Prompt Corrective Action Regulations. Under the prompt corrective action regulations,
the OTS is authorized and, in some cases, required to take supervisory actions against
undercapitalized savings banks. For this purpose, a savings bank would be placed in one of the
following five categories based on the bank’s regulatory capital: well-capitalized; adequately
capitalized; undercapitalized; significantly undercapitalized; or critically undercapitalized.
The severity of the action authorized or required to be taken under the prompt corrective
action regulations increases as a bank’s capital decreases within the three undercapitalized
categories. All banks are prohibited from paying dividends or other capital distributions or
paying management fees to any controlling person if, following such distribution, the bank would be
undercapitalized. Generally, a capital restoration plan must be filed with the OTS within 45 days
of the date a bank receives notice that it is “undercapitalized,” “significantly undercapitalized”
or “critically undercapitalized.” In addition, various mandatory supervisory actions become
immediately applicable to the institution, including restrictions on growth of assets and other
forms of expansion. Under the OTS regulations, generally, a federally chartered savings bank is
treated as well capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1
risk-based capital ratio is 6% or greater, and its leverage ratio is 5% or greater, and it is not
subject to any order or directive by the OTS to meet a specific capital level. When appropriate,
the OTS can require corrective action by a savings association holding company under the “prompt
corrective action” provisions
of federal law. At March 31, 2010, the Bank was considered well-capitalized by the OTS.
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Bank Regulatory Matters. In February 2009, the Holding Company and Bank agreed with
the Office of Thrift Supervision to take certain actions related to its operations and regulatory
compliance. The agreement provides that the Bank will take certain actions including adoption of
an enhanced loan concentration policy, which includes reducing the level of commercial real estate
loans relative to capital, limiting the level of brokered deposits and enhancing Bank Secrecy Act
(“BSA”) compliance. The Holding Company and Bank believes that they will be able to satisfy the
terms of the agreement and have already implemented aggressive steps to address these matters.
Limitation on Capital Distributions. The OTS imposes various restrictions on a bank’s
ability to make capital distributions, including cash dividends, payments to repurchase or
otherwise acquire its shares and other distributions charged against capital. A savings
institution that is the subsidiary of a savings and loan holding company, such as the Bank, must
file a notice with the OTS at least 30 days before making a capital distribution. However, the
Bank must file an application for prior approval if the total amount of its capital distributions
(including each proposed distribution), for the applicable calendar year would exceed the Bank’s
net income for that year plus the Bank’s retained net income for the previous two years.
The Bank may not pay dividends to the Holding Company if, after paying those dividends, the
Bank would fail to meet the required minimum levels under risk-based capital guidelines and the
minimum leverage and tangible capital ratio requirements or the OTS notified the Bank that it was
in need of more than normal supervision.
The Bank is prohibited from making capital distributions if:
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 to maintain sufficient liquidity to ensure its safe and sound
operations.
Branching. Subject to certain limitations, federal law permits the Bank to establish
branches in any state of the United States. The authority for the Bank to establish an interstate
branch network would facilitate a geographic diversification of the Bank’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 CRA, as amended, 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. 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.
CRA does, however, require 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.
In particular, the system focuses on three tests:
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CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank
received an “Outstanding” CRA rating in its most recent examination conducted in 2009.
Regulations require that Carver Federal publicly disclose certain agreements that are in
fulfillment of CRA. The Holding Company has no such agreements in place at this time.
Transactions with Related Parties. The Bank’s authority to engage in transactions
with its “affiliates” and insiders is limited by OTS regulations and by Sections 23A, 23B, 22(g)
and 22(h) 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 to receive loans
from the Bank. In addition, OTS regulations prohibit a savings bank 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 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 FRB. 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.
At March 31, 2010, there were no loans to officers or directors.
The FRB has confirmed its previous interpretations of Sections 23A and 23B of the FRA with
Regulation W. The OTS has also conformed its regulations to agree with Regulation W. Regulation W
made various changes to existing law regarding Sections 23A and 23B, including expanding the
definition of what constitutes an “affiliate” subject to Sections 23A and 23B and exempting certain
subsidiaries of state-chartered banks from the restrictions of Sections 23A and 23B.
The OTS regulations provide for additional restrictions imposed on savings associations under
Section 11 of HOLA, including provisions prohibiting a savings association from making a loan to an
affiliate that is engaged in non-bank holding company activities and provisions prohibiting a
savings association from purchasing or investing in securities issued by an affiliate that is not a
subsidiary. The OTS regulations also include certain specific exemptions from these prohibitions.
The FRB and the OTS expect each depository institution that is subject to Sections 23A and 23B to
implement policies and procedures to ensure compliance with Regulation W and the OTS regulation.
These regulations have had no material adverse effect on the Bank’s business.
Section 402 of the Sarbanes-Oxley Act prohibits the extension of personal loans to directors
and executive officers of issuers (as defined in the Sarbanes-Oxley Act). The prohibition,
however, does not apply to mortgages advanced by an insured depository institution, such as the
Bank, that is subject to the insider lending restrictions of Section 22(h) of the FRA.
Assessment. The OTS charges assessments to recover the cost of examining savings
associations and their affiliates. These assessments are based on three components: the size of
the association, on which the basic assessment is based; the association’s supervisory condition,
which results in an additional assessment based on a percentage of the basic assessment for any
savings institution with a composite rating of 3, 4, or 5 in its most recent safety and soundness
examination; and the complexity of the association’s operations, which results in an additional
assessment based on a percentage of the basic assessment for any savings association that managed
over $1 billion in trust assets, serviced for others loans aggregating more than $1 billion, or had
certain off-balance sheet assets aggregating more than $1 billion. Effective July 1, 2004, the OTS
adopted a final rule replacing examination fees for savings and loan holding companies with
semi-annual assessments. For fiscal 2010, Carver paid $0.2 million in
OTS assessments.
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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, 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.
Insurance of Deposit Accounts
The FDIC merged the Savings Association Insurance Fund and the Bank Insurance Fund to create
the Depositors Insurance Fund (“DIF”) on March 31, 2006. The Bank is a member of the DIF and pays
its deposit insurance assessments to the DIF.
Effective January 1, 2007, the FDIC established a new risk-based assessment system for
determining the deposit insurance assessments to be paid by insured depository institutions. Under
this new assessment system, the FDIC assigns an institution to one of four risk categories, with
the first category having two sub-categories, based on
the institution’s most recent supervisory ratings and capital ratios. Base assessment rates range
from two to four basis points for Risk Category I institutions and are seven basis points for Risk
Category II institutions, twenty-five basis points for Risk Category III institutions and forty
basis points for Risk Category IV institutions. For institutions within Risk Category I,
assessment rates generally depend upon a combination of CAMELS (capital adequacy, asset quality,
management, earnings, liquidity, sensitivity to market risk) component ratings and financial
ratios, or for large institutions with long-term debt issuer ratings, assessment rates depend on a
combination of long-term debt issuer ratings and CAMELS component ratings. The FDIC has the
flexibility to adjust rates, without further notice-and-comment rulemaking, provided that no such
adjustment can be greater than three basis points from one quarter to the next, that adjustments
cannot result in rates more than three basis points above or below the base rates, and that rates
cannot be negative.
On November 12, 2009, the FDIC issued a final rule that required insured depository
institutions to prepay, on December 30, 2009, their estimated quarterly risk-based assessments for
the fourth quarter of 2009 and for all of 2010, 2011 and 2012, together with their quarterly
risk-based assessment for the third quarter 2009. The Bank prepaid $3.7 million, of which
approximately $3.4 million was recorded as a prepaid asset as of December 31, 2009.
Insurance of deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations
or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation that might lead to
termination of deposit insurance.
As of March 31, 2010, the Bank had an assessment rate of twenty-two basis points and the
Bank’s expense for FDIC insurance payments totaled $1.7 million in fiscal 2010. The FDIC has
authority to further increase insurance assessments and therefore Management cannot predict what
insurance assessment rates will be in the
future. A significant increase in insurance premiums may have an adverse effect on the
operating expenses and results of operations of the Bank.
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On October 3, 2008, in response to the financial crises affecting the banking system and
financial markets, the FDIC announced a temporary increase in deposit insurance from $100,000 to
$250,000 per depositor through December 31, 2009. Due to the continued difficult economic
conditions, this increase in deposit insurance per depositor was extended through December 31,
2013.
On November 21, 2008, the FDIC adopted the Temporary Liquidity Guarantee Program, or TLGP,
pursuant to its authority to prevent “systemic risk” in the
U.S. banking system. The TLGP was
announced by the FDIC on October 14, 2008 as an initiative to counter the system-wide crisis in the
nation’s financial sector. Under the TLGP the FDIC will (1) guarantee, through the earlier of
maturity or June 30, 2012, certain newly issued senior unsecured debt issued by participating
institutions on or after October 14, 2008, and before June 30, 2009 under the Debt Guarantee
Program and (2) fully insure non-interest bearing transaction deposit accounts held at
participating FDIC-insured institutions, through December 31, 2009 under the Transaction Account
Guarantee Program (“TAG”).
Eligible institutions were covered under the TLGP at no cost for the first 30 days.
Institutions that did not want to continue to participate in one or both parts of the TLGP were
required to notify the FDIC of their election to opt out on or before December 5, 2008.
Institutions that did not opt out are subject to a fee of up to 100 basis points per annum based on
the amount of senior unsecured debt issued under the Debt Guarantee Program. Under the Transaction
Account Guarantee Program, a 10 basis point surcharge was be added to the institution’s current
insurance assessment, quarterly, for balances in non-interest bearing transaction accounts that
exceed the existing deposit insurance limit of $250,000. The TLGP was due to expire in June of
2009; however, on February 10, 2009 the FDIC announced its intention to extend the TLGP through
October 2009 for an additional premium.
On October 30, 2009, the Bank raised $14.1 million in a private placement of Senior Notes
bearing a coupon of 1.69% per annum, maturing on October 31, 2011. This debt is guaranteed under
the TLGP. For this guarantee, the Bank is assessed a fee by the FDIC in the amount of 125 basis
points. These proceeds were used to increase the Bank’s liquidity position and for general
corporate purposes.
On April 13, 2010, the FDIC provided under an Interim Final Rule a one-time opportunity to opt
out of the TAG program effective July 1, 2010. Carver Federal Savings Bank exercised this
opportunity and opted out. Carver Federal will continue to participate in the debt guarantee
component of the TLGP.
For further discussion of the FDIC’s restoration plan and proposal, see Item 1A, “Risk
Factors.”
Anti-Money Laundering and Customer Identification
The Bank is subject to OTS regulations implementing the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT
Act”). The USA PATRIOT Act gives the federal government new powers to address terrorist threats
through enhanced domestic security measures, expanded surveillance powers, increased information
sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank
Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information
sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of
Title III impose affirmative obligations on a broad range of financial institutions, including
banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under
the United States Commodity Exchange Act of 1936, as amended.
Title III of the USA PATRIOT Act and the related OTS regulations impose the following
requirements with respect to financial institutions:
In addition, bank regulators are directed to consider a holding company’s effectiveness in
combating money laundering when ruling on FRA and Bank Merger Act applications.
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Federal Home Loan Bank System
The Bank is a member of the FHLB-NY, which is one of the twelve regional banks composing the
FHLB System. Each regional bank provides a central credit facility primarily for its member
institutions. The Bank, as a FHLB-NY member, is required to acquire and hold shares of capital
stock in the FHLB-NY in an amount equal to the greater of (i) 1% of the aggregate principal amount
of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the
beginning of each year, and (ii) 5% (or such greater fraction as established by the FHLB-NY) of its
outstanding advances from the FHLB-NY. The Bank was in compliance with this requirement with an
investment in the capital stock of the FHLB-NY at March 31, 2010 of $4.1 million. Any advances
from the FHLB-NY 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.
FHLB-NY is 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 FHLB-NY can pay as dividends to its members and could also result in the FHLB-NY imposing a
higher rate of interest on advances to its members. If dividends were reduced, or interest on
future FHLB-NY advances increased, the Bank’s net interest income would be adversely affected.
Dividends from FHLB-NY to the Bank amounted to $0.3 million, $0.1 million and $0.2 million for
fiscal years 2010, 2009 and 2008, respectively. The dividend rate paid on FHLB-NY stock at March
31, 2010 was 4.25%.
Under the Gramm-Leach-Bliley Act, as amended (“GLB”), which, among other things, 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, membership
in the FHLB system is now voluntary for all federally-chartered savings banks such as the Bank.
GLB also replaces the existing redeemable stock structure of the FHLB system with a capital
structure that requires each FHLB to meet a leverage limit and a risk-based permanent capital
requirement. Two classes of stock are authorized: Class A (redeemable on six months notice) and
Class B (redeemable on five years notice). Pursuant to regulations promulgated by the Federal
Housing Finance Board, as required by GLB, the FHLB has adopted a capital plan that will change the
foregoing minimum stock ownership requirements for FHLB stock. Under the new capital plan, each
member of the FHLB will have to maintain a minimum investment in FHLB capital stock in an amount
equal to the sum of (1) the greater of $1,000 or 0.20% of the member’s mortgage-related assets and
(2) 4.50% of the dollar amount of any outstanding advances under such member’s Advances, Collateral
Pledge and Security Agreement with the FHLB-NY.
Federal Reserve System
FRB regulations require federally chartered savings associations to maintain
non-interest-earning cash reserves against their transaction accounts (primarily NOW and demand
deposit accounts). A reserve of 3% is to be maintained against aggregate transaction accounts
between $10.7 million and $44.5 million (subject to adjustment by the FRB) plus a reserve of 10%
(subject to adjustment by the FRB between 8% and 14%) against that portion of total transaction
accounts in excess of $44.5 million. The first $10.7 million of otherwise reservable balances
(subject to adjustment by the FRB) is exempt from the reserve requirements. The Bank is in
compliance with the
foregoing requirements. Since required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as
defined by the FRB, the effect of this reserve requirement is to reduce Carver Federal’s
interest-earning assets. FHLB System members are also authorized to borrow from the Federal
Reserve “discount window,” but FRB regulations require institutions to exhaust all FHLB sources
before borrowing from a Federal Reserve Bank.
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Pursuant to the EESA, the FRB announced on October 6, 2008, that the Federal Reserve Banks
will begin to pay interest on depository institutions’ required and excess reserve balances.
Paying interest on required reserve balances should essentially eliminate the opportunity cost of
holding required reserves, promoting efficiency in the banking sector. The interest rate paid on
required reserve balances is currently the average target federal funds rate over the reserve
maintenance period. The rate on excess balances will be set equal to the lowest target federal
funds rate in effect during the reserve maintenance period. The payment of interest on excess
reserves will permit the Federal Reserve to expand its balance sheet as necessary to provide the
liquidity necessary to support financial stability.
Privacy Protection
Carver Federal is subject to OTS regulations implementing the privacy protection provisions of
GLB. These regulations require the Bank to disclose its privacy policy, including identifying with
whom it shares “nonpublic personal information,” to customers at the time of establishing the
customer relationship and annually thereafter. The regulations also require the Bank to provide
its customers with initial and annual notices that accurately reflect its privacy policies and
practices. In addition, to the extent its sharing of such information is not exempted, the Bank is
required to provide its customers with the ability to “opt-out” of having the Bank share their
nonpublic personal information with unaffiliated third parties before they can disclose such
information, subject to certain exceptions.
The Bank is subject to regulatory guidelines establishing standards for safeguarding customer
information. These regulations implement certain provisions of GLB. The guidelines describe the
agencies’ expectations for the creation, implementation and maintenance of an information security
program, which would include administrative, technical and physical safeguards appropriate to the
size and complexity of the institution and the nature and scope of its activities. The standards
set forth in the guidelines are intended to insure the security and confidentiality of customer
records and information, protect against any anticipated threats or hazards to the security or
integrity of such records and protect against unauthorized access to or use of such records or
information that could result in substantial harm or inconvenience to any customer. The Bank has a
policy to comply with the foregoing guidelines.
Holding Company Regulation.
The Holding Company is a savings and loan holding company regulated by the OTS. As such, the
Holding Company is registered with and is subject to OTS examination and supervision, as well as
certain reporting requirements. In addition, the OTS has enforcement authority over the Holding
Company and its subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the financial safety, soundness or
stability of a subsidiary savings institution. Unlike bank holding companies, federal savings and
loan holding companies are not subject to any regulatory capital requirements or to supervision by
the FRB.
GLB restricts the powers of new unitary savings and loan holding companies. Unitary savings
and loan holding companies that are “grandfathered,” i.e., unitary savings and loan holding
companies in existence or with applications filed with the OTS on or before May 4, 1999, such as
the Holding Company, retain their authority under the prior law. All other unitary savings and
loan holding companies are limited to financially related activities permissible for bank holding
companies, as defined under GLB. GLB also prohibits non-financial companies from acquiring
grandfathered unitary savings and loan holding companies.
Restrictions Applicable to All Savings and Loan Holding Companies. Federal law
prohibits a savings and loan holding company, including the Holding Company, directly or
indirectly, from acquiring:
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A savings and loan holding company may not acquire as a separate subsidiary an insured
institution that has a principal office outside of the state where the principal office of its
subsidiary institution is located, except:
The HOLA prohibits a savings and loan holding company (directly or indirectly, or through one
or more subsidiaries) from acquiring another savings association or holding company thereof without
prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of
a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company
engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of
a depository institution that is not federally insured. In evaluating applications by holding
companies to acquire savings associations, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the community and
competitive factors.
Federal Securities Laws
The Holding Company is subject to the periodic reporting, proxy solicitation, tender offer,
insider trading restrictions and other requirements under the Securities Exchange Act of 1934, as
amended (“Exchange Act”).
Delaware Corporation Law
The Holding Company is incorporated under the laws of the State of Delaware. Thus, it is
subject to regulation by the State of Delaware and the rights of its shareholders are governed by
the General Corporation Law of the State of Delaware.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Holding Company and the Bank currently file consolidated federal income
tax returns, report their income for tax return purposes on the basis of a taxable-year ending
March 31st, using the accrual method of accounting and are subject to federal income taxation in
the same manner as other corporations with some exceptions, including in particular the Bank’s tax
reserve for bad debts discussed below. The following discussion of tax matters is intended only as
a summary and does not purport to be a comprehensive description of the tax rules applicable to the
Bank or the Holding Company.
Bad Debt Reserves. Prior to fiscal 2004, the Bank met the requirement as a “small
bank” (one with assets having an adjusted tax basis of $500 million or less) and was permitted to
maintain a reserve for bad debts, and to make, within specified formula limits, annual additions to
the reserve which are deductible for purposes of
computing the Bank’s taxable income. Since fiscal year 2004, the Bank has not been considered
to be a small bank because its total assets have exceeded $500 million. (See Income Taxes Note 10
of Notes to the Consolidated Financial Statements.)
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Distributions. To the extent that the Bank makes “non-dividend distributions” to
shareholders, such distributions will be considered to result in distributions from the Bank’s
“base year reserve,” i.e., its reserve as of March 31, 1988, to the extent thereof and then from
its supplemental reserve for losses on loans, and an amount based on the amount distributed will be
included in the Bank’s taxable income. Non-dividend distributions include distributions in excess
of the Bank’s current and accumulated earnings and profits, distributions in redemption of stock
and distributions in partial or complete liquidation. However, dividends paid out of the Bank’s
current or accumulated earnings and profits, as calculated for federal income tax purposes, will
not constitute non-dividend distributions and, therefore, will not be included in the Bank’s
taxable income.
The amount of additional taxable income created from a non-dividend distribution is an amount
that, when reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, approximately one and one-half times the non-dividend distribution would be
includable in gross income for federal income tax purposes, assuming a 34% federal corporate income
tax rate.
Dividends Received Deduction and Other Matters. The Holding Company may exclude from
its income 100% of dividends received from the Bank as a member of the same affiliated group of
corporations. The corporate dividends received deduction is generally 70% in the case of dividends
received from unaffiliated corporations with which the Holding Company and the Bank will not file a
consolidated tax return, except that if the Holding Company or the Bank owns more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted.
State and Local Taxation
State of New York. The Bank and the Holding Company are subject to New York State
franchise tax on their entire net income or one of several alternative bases, whichever results in
the highest tax. “Entire net income” means federal taxable income with adjustments. If, however,
the application of an alternative minimum tax (based on taxable assets allocated to New York,
“alternative” net income, or a flat minimum fee) results in a greater tax, an alternative minimum
tax will be imposed. The Company was subject to the alternative minimum tax based upon assets for
New York State for fiscal 2009. In addition, New York State imposes a tax surcharge of 17.0% of the
New York State Franchise Tax, calculated using an annual franchise tax rate of 9.0% (which
represents the 2000 annual franchise tax rate), allocable to business activities carried on in the
Metropolitan Commuter Transportation District. These taxes apply to the Holding Company, Carver
Federal and certain of Carver’s subsidiaries. The Bank and the Holding Company file combined
returns and are subject to taxation in the same manner as other corporations with some exceptions,
including the Bank’s deductions for additions to its reserve for bad debts.
For fiscal 2010, the New York State franchise tax rate based upon entire net income was 8.63%
(including the Metropolitan Commuter Transportation District Surcharge) of net income. In general,
the Holding Company is not required to pay New York State tax on dividends and interest received
from the Bank or on gains realized on the sale of Bank stock. Sixty percent of dividend income,
and gains and losses from subsidiary capital are excluded from New York State entire net income.
Distributions to Carver Federal received from CAC are eligible for the New York State dividends
received deduction. However, the Holding Company was subject to a franchise tax rate of 3.51%
(including the Metropolitan Commuter Transportation District Surcharge) for fiscal 2010 based upon
alternative entire net income. For this purpose, alternative entire net income is determined by
adding back 60% of dividend income, and gains and losses from subsidiary capital to New York State
entire net income.
New York State has enacted legislation that enabled the Bank to avoid the recapture of the New
York State tax bad debt reserves that otherwise would have occurred as a result of the changes in
federal law and to continue to utilize either the federal method or a method based on a percentage
of its taxable income for computing additions to its bad debt reserve.
New York City. The Bank and the Holding Company are also subject to a similarly
calculated New York City banking corporation tax of 9% on income allocated to New York City. In
this connection, legislation was
enacted regarding the use and treatment of tax bad debt reserves that is substantially similar
to the New York State legislation described above. The Bank and the Holding Company also are
subject to New York City banking corporation tax of 3% on alternative entire net income allocated
to New York City. In addition, the Bank and the Holding Company were subject to the alternative
minimum tax for New York City (which is similar to the New York State alternative minimum tax) for
fiscal 2009.
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Delaware Taxation. As a Delaware holding company not earning income in Delaware, the
Holding Company is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual franchise tax to the State of Delaware.
EXECUTIVE OFFICERS OF THE HOLDING COMPANY
The name, position, term of office as officer and period during which he or she has served as
an officer is provided below for each executive officer of the Holding Company as of June 25, 2010.
Each of the persons listed below is an executive officer of the Holding Company and the Bank,
holding the same office in each.
Deborah C. Wright, age 52, is Chairman, President and Chief Executive Officer of Carver and
Carver Federal. The Board of Directors elected her to the post of Chairman in February 2005. Ms.
Wright has held the titles President & CEO since June 1, 1999. Prior to joining Carver in June
1999, Ms. Wright was President and Chief Executive Officer of the Upper Manhattan Empowerment Zone
Development Corporation, a position she had held from May 1996 through May 1999. She previously
served as Commissioner of the Department of Housing Preservation and Development under Mayor
Rudolph W. Giuliani from January 1994 through March 1996. Prior to that appointment, Mayor David
N. Dinkins appointed Ms. Wright to the New York City Housing Authority Board, which manages New
York City’s 189,000 public housing units. Ms. Wright serves on the boards of Kraft Foods Inc.,
Time Warner Inc., The Partnership for New York City, the Children’s Defense Fund and Sesame
Workshop. She is a member of the Board of Managers of the Memorial Sloan-Kettering Cancer Center.
Ms. Wright earned A.B., J.D. and M.B.A. degrees from Harvard University.
Chris McFadden, age 46, is Executive Vice President and Chief Financial Officer of Carver
Federal Savings Bank. Prior to joining Carver in September 2009, Ms. McFadden was Chief Financial
Officer and Chief Administrative Officer of Popular North America. Prior to joining Banco Popular
in 2000, Ms. McFadden held senior financial management positions at Hudson United Bancorp in New
Jersey and Sovereign Bank in Pennsylvania. Ms. McFadden previously served on the Board of
Directors of the Banco Popular Foundation, the New York Advisory Board for Youth About Business and
the New York Chapter of Operation Hope. Ms. McFadden is a certified Lean and Six Sigma
practitioner. She received her MBA from St. Joseph’s University in Philadelphia, PA, with a
concentration in Finance and earned her B.S. in Accounting from Albright College, Reading, PA.
Mark A. Ricca, age 53, is Executive Vice President, Chief Risk Officer and General Counsel.
Mr. Ricca joined Carver in November 2008. Prior to joining Carver, Mr. Ricca held several positions
at New York Community Bancorp, Inc. and its principle subsidiary, New York Community Bank,
beginning in 2000 and finishing in 2007 as its Executive Vice President, General Counsel and
Assistant to the Chief Operating Officer, after which Mr. Ricca served as a legal consultant and
lectured for Learning Dynamics, Inc. Prior to New York Community Bank, Mr. Ricca held various
positions at Haven Bancorp, Inc., and its principal subsidiary, CFS Bank, as Senior Vice President,
Residential and Consumer Lending, Corporate Secretary, General Counsel and Chief Compliance Officer
and was a partner in the law firm of Ricca & Donnelly. Mr. Ricca holds a B.A. degree in economics
from the University of Notre Dame, a J.D. cum laude, Law Review and Jurisprudence Award from St.
Johns University, School of law, and an LL.M. from New York University, School of Law.
James H. Bason, age 55, is Senior Vice President and Chief Lending Officer. He joined Carver
in March 2003. Previously Mr. Bason was Vice President and Real Estate Loan Officer at The Bank of
New York where he had been employed since 1991 when The Bank of New York acquired Barclays Bank
(where he had been employed since 1986). At The Bank of New York, Mr. Bason was responsible for
developing and maintaining relationships with developers, builders, real estate investors and
brokers to provide construction and permanent real estate financing. At Barclays, Mr. Bason began
his career in residential lending and eventually became the bank’s CRA
officer. Mr. Bason earned a B.S. in Business Administration from the State University of New
York at Oswego.
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Blondel A. Pinnock, age 42, is Senior Vice President, Carver Federal and President of CCDC.
Ms. Pinnock joined Carver in April 2008. Prior to joining Carver, Ms. Pinnock was Senior Vice
President at Bank of America where she was a community development lender and business development
officer. Ms. Pinnock has over ten years of experience in financing the development of residential
and commercial real estate projects located within low and moderate income neighborhoods throughout
New York City and outlying areas. Prior to Bank of America, Ms. Pinnock worked as counsel and
deputy director for the New York City’s Housing, Preservation and Development Department’s Tax
Incentives Unit, where she assisted in the implementation of the City’s real estate tax programs
for low, moderate and market rate projects. She earned a B. A. from Columbia College and a J. D.
from Hofstra University School of Law.
Margaret D. Roberts, age 59, is Senior Vice President and Chief Human Resources Officer. Ms.
Roberts joined Carver in November 1999 as Senior Vice President and Chief Administrative Officer.
Previously she was at Deutsche Bank where she had served as a Compensation Planning Consultant in
Corporate Human Resources. Prior to that, Ms. Roberts was a Vice President and Senior Human
Resources Generalist for Citibank Global Asset Management. Ms. Roberts also has 10 years of
systems and technology experience in various positions held at JP Morgan and Chase Manhattan Bank.
Ms. Roberts earned a B.P.S. degree from Pace University, an M.B.A. from Columbia University as a
Citicorp Fellow, and has been designated a Certified Compensation Professional (CCP) by the
WorldatWork Society of Certified Professionals and a Senior Professional in Human Resources (SPHR)
by the Human Resources Certification Institute.
John Spencer, age 44, is Senior Vice President and Chief Retail Officer. Mr. Spencer joined
Carver in February 2009 after 22 years at JPMorgan Chase where he held management positions in
Retail Sales/Customer Service, Audit, and Operations Management. Additionally, he served as a
Branch Administration Executive for the bank’s Retail Division, supporting a network with 700
branches, and over $50 billion in deposits. Mr. Spencer is a graduate of the JPMorgan Chase
management-training program and earned a B.A. in Banking and Finance from Pace University.
David Toner, age 48, is Senior Vice President and Controller. Prior to joining Carver in
December 2009, Mr. Toner spent more than 20 years with Citigroup (Citi) in various financial
control positions in the United States and Europe, including serving as Chief Financial Officer of
Citi’s Community Development business from 2004 through 2007. Prior to joining Citigroup in 1987,
Mr. Toner held various audit positions with Deloitte & Touche (formerly Deloitte, Haskins & Sells).
Mr. Toner is a certified public accountant. He received his M.B.A. in Finance, with a concentration
in International Business, from the Stern School of Business at New York University and his B.S. in
Accounting, summa cum laude, from the Haub School of Business at Saint Joseph’s University. He is a
member of the Board of Visitors (advisory board) for the Haub School of Business and a member of
the New York Alumni Council for Saint Joseph’s University.
James Carter, age 59, is Senior Vice President of Operations. Mr. Carter joined Carver in
August 2008 from TD Bank in New York where he served as Senior Vice President of Banking Services
for nine years. Prior to that, Mr. Carter served four years as Vice President of Retail Operations
for Home Federal Savings Bank in New York and 20 years as Vice President and Senior Savings Officer
at Columbia Federal Savings Bank in New York. Mr. Carter earned a B.S. in Business Administration
and an MBA in Financial Management from Iona College in New Rochelle, NY. In May 2010, Mr. Carter
resigned his position with the Holding Company and the Bank.
Risk is an inherent part of Carver’s business and activities. The following is a summary of
risk factors relevant to the Company’s operations which should be carefully reviewed. These risk
factors do not necessarily appear in the order of importance.
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The prolonged negative effect of the recession and weak economic recovery will adversely affect our
financial performance
The severe recession and weak economic recovery has resulted in continued uncertainty in
the financial and credit markets in general. There is also continued concern about the possibility
of another economic downturn. The Federal Reserve, in an attempt to stimulate the overall economy,
has, among other things, kept interest rates low through its targeted federal funds rate and
purchased mortgage-backed securities. If the Federal Reserve increases the federal funds rate,
overall interest rates will likely rise which may negatively impact the housing markets and the
U.S. economic recovery. A prolonged weakness in the economy generally, and in the financial
services industry in particular, could continue to negatively affect our operations by causing a
deterioration of our loan portfolio and an increase in our provision for loan losses which would
adversely affect our ability to originate loans. The occurrence of any of these events could have
an adverse impact on the Company’s financial performance.
Carver’s results of operations are affected by economic conditions in the New York
metropolitan area.
At March 31, 2010, a majority of the Bank’s lending portfolio was concentrated in the New York
metropolitan area. As a result of this geographic concentration, Carver’s results of operations
are largely dependent on economic conditions in this area. Decreases in real estate values could
adversely affect the value of property used as collateral for loans to its borrowers. Adverse
changes in the economy caused by inflation, recession, unemployment or other factors beyond the
Bank’s control may also have a negative effect on the ability of borrowers to make timely mortgage
or business loan payments, which would have an adverse impact on earnings. Consequently,
deterioration in economic conditions in the New York metropolitan area could have a material
adverse impact on the quality of the Bank’s loan portfolio, which could result in increased
delinquencies, decreased interest income results as well as an adverse impact on loan loss
experience with probable increased allowance for loan losses. Such deterioration also could
adversely impact the demand for products and services, and, accordingly, further negatively affect
results of operations.
The Bank is operating in a challenging and uncertain economic environment, both nationally and
locally. Financial institutions continue to be affected by sharp declines in the real estate
market and constrained financial markets. Continued declines in real estate values, home sales
volumes and financial stress on borrowers as a result of the ongoing economic recession, including
job losses, could have an adverse effect on the Bank’s borrowers or their customers, which could
adversely affect the Bank’s financial condition and results of operations. In addition, decreases
in real estate values could adversely affect the value of property used as collateral for loans.
However, no assurance can be given that the original appraised values are reflective of current
market conditions as the Bank has experienced declines in real estate values in all markets in
which it lends.
The Bank has experienced increases in loan delinquencies and charge-offs in fiscal 2010. The
Bank’s non-performing loans, which are comprised primarily of construction and mortgage loans,
increased $21.8 million to $47.6 million, or 7.10% of total loans, at March 31, 2010, from $25.7
million, or 4.01% of total loans, at March 31, 2009. The Bank’s net loan charge-offs totaled $2.9
million for fiscal 2010 compared to $0.5 million for fiscal 2009. The Bank’s provision for loan
losses totaled $7.8 million for fiscal 2010 compared to $2.7 million for fiscal 2009. As a
residential lender, Carver Federal is particularly vulnerable to the impact of a severe job loss
recession. Significant increases in job losses and unemployment will have a negative impact on the
financial condition of residential borrowers and their ability to remain current on their mortgage
loans. A continuation or further deterioration in national and local economic conditions,
including an accelerating pace of job losses, particularly in the New York metropolitan area, could
have a material adverse impact on the quality of The Bank’s loan portfolio, which could result in
further increases in loan delinquencies, causing a decrease in The Bank’s interest income as well
as an adverse impact on The Bank’s loan loss experience, causing an increase in The Bank’s
allowance for loan losses and related provision and a decrease in net income. Such deterioration
could also adversely impact the demand for The Bank’s products and services, and, accordingly, The
Bank’s results of operations.
No assurance can be given that these conditions will improve or will not worsen or that such
conditions will not result in a decrease in the Bank’s interest income or an adverse impact on loan
losses.
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Our business may be adversely affected by current conditions in the financial markets, the real
estate market and economic conditions generally
Beginning in the latter half of 2007 and continuing into 2010, negative developments in the
capital markets resulted in uncertainty and instability in the financial markets, and an economic
downturn. The housing market
declined, resulting in decreasing home prices and increasing delinquencies and foreclosures.
The credit performance of residential and commercial real estate, construction and land loans
resulted in significant write-downs of asset values by financial institutions, including
government-sponsored entities and major commercial and investment banks. The declines in the
performance and value of mortgage assets encompassed all mortgage and real estate asset types,
leveraged bank loans and nearly all other asset classes, including equity securities. These
write-downs have caused many financial institutions to seek additional capital or to merge with
larger and stronger institutions. Some financial institutions have failed. Continued, and
potentially increased, volatility, instability and weakness could affect our ability to sell
investment securities and other financial assets, which in turn could adversely affect our
liquidity and financial position. This instability also could affect the prices at which we could
make any such sales, which could adversely affect our earnings and financial condition.
Concerns over the stability of the financial markets and the economy have resulted in
decreased lending by some financial institutions to their customers and to each other. This
tightening of credit has led to increased loan delinquencies, lack of customer confidence,
increased market volatility and a widespread reduction in general business activity. Competition
among depository institutions for deposits has increased significantly, and access to deposits or
borrowed funds has decreased for many institutions. It has also become more difficult to assess the
creditworthiness of customers and to estimate the losses inherent in our loan portfolio.
Current conditions, including high unemployment, weak corporate performance, soft real estate
markets, and the decline of home sales and property values, could negatively affect the volume of
loan originations and prepayments, the value of the real estate securing our mortgage loans, and
borrowers’ ability to repay loan obligations, all of which could adversely impact our earnings and
financial condition. Business activity across a wide range of industries and regions is greatly
reduced, and local governments and many companies are in serious difficulty due to the lack of
consumer spending and the lack of liquidity in the credit markets. A worsening of current
conditions would likely adversely affect our business and results of operations, as well as those
of our customers. As a result, we may experience increased foreclosures, delinquencies and customer
bankruptcies, as well as more restricted access to funds.
The soundness of other financial institutions could negatively affect us.
Our ability to engage in routine funding transactions could be adversely affected by the
actions and commercial soundness of other financial institutions. Financial services institutions
are interrelated as a result of trading, clearing, counterparty, or other relationships. As a
result, defaults by, or even rumors or questions about, one or more financial services
institutions, or the financial services industry generally, have led to market-wide liquidity
problems and could lead to losses or defaults by us or by other institutions. Many of these
transactions expose us to credit risk in the event of default of our counterparty or client. In
addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon
or is liquidated at prices not sufficient to recover the full amount of the financial instrument
exposure due us. There is no assurance that any such losses would not materially and adversely
affect our results of operations.
The allowance for loan losses could be insufficient to cover Carver’s actual loan losses.
We make various assumptions and judgments about the collectability of our loan portfolio,
including the creditworthiness of our borrowers and the value of the real estate and other assets
serving as collateral for the repayment of many of our loans. In determining the amount of the
allowance for loan losses, we review our loans and our loss and delinquency experience, and we
evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may
not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our
allowance. Material additions to the allowance would materially decrease net income.
In addition, the OTS periodically reviews the allowance for loan losses and may require us to
increase our provision for loan losses or recognize further loan charge-offs. A material increase
in the allowance for loan losses or loan charge-offs as required by the regulatory authorities
would have a material adverse effect on the Company’s financial condition and results of
operations.
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Carver’s concentration in multifamily loans, commercial real estate loans, and construction loans
could, in a deteriorating economic climate, expose the Company to increased lending risks and
related loan losses
Carver’s current business strategy is to decrease the Bank’s exposure to non-owner
occupied commercial real estate loans and construction loans. Execution of this strategy will
involve the Company temporarily ceasing new originations of these types of loan products, which
often have a higher interest rate than other types of loans, including residential lending. As a
result, our ability to generate sufficient net interest margin is lessened which would have a
material adverse effect on the Company’s financial condition and results of operations.
Changes in interest rate environment may negatively affect Carver’s net income, mortgage loan
originations and valuation of available-for-sale securities.
The Company’s earnings depend largely on the relationship between the yield on
interest-earning assets, primarily mortgage, construction and business loans and mortgage-backed
securities, and the cost of deposits and borrowings. This relationship, known as the interest rate
spread, is subject to fluctuation and is affected by economic and competitive factors which
influence market interest rates, the volume and mix of interest-earning assets and interest-bearing
liabilities, and the level of non-performing assets. Fluctuations in market interest rates affect
customer demand for products and services. Carver is subject to interest rate risk to the degree
that its interest-bearing liabilities reprice or mature more slowly or more rapidly or on a
different basis than its interest-earning assets.
In addition, the actual amount of time before mortgage, construction and business loans and
mortgage-backed securities are repaid can be significantly impacted by changes in mortgage
prepayment rates and prevailing market interest rates. Mortgage prepayment rates will vary due to
a number of factors, including the regional economy in the area where the underlying mortgages were
originated, seasonal factors, demographic variables and the ability to assume the underlying
mortgages. However, the major factors affecting prepayment rates are prevailing interest rates,
related loan refinancing opportunities and competition.
The Company’s objective is to fund its liquidity needs primarily through lower costing deposit
growth. However, from time to time Carver Federal borrows from the FHLB-NY. More recently, the
cost of deposits and borrowings have become significantly higher with the rising interest rate
environment, which has negatively impacted net interest income.
Interest rates do and will continue to fluctuate. The Federal Open Market Committee, or FOMC,
reduced the federal funds rate by 100 basis points during the second half of 2007 and then an
additional 400+ basis points during 2008 bringing the target rate to 0.00% to 0.25%. The Bank
cannot predict future FOMC or FRB actions or other factors that will cause rates to change. No
assurance can be given that further changes in interest rates or further increases in mortgage loan
prepayments will not have a negative impact on net interest income, net interest rate spread or net
interest margin.
The estimated fair value of the Company’s available-for-sale securities portfolio may increase
or decrease depending on changes in interest rates. Carver Federal’s securities portfolio is
comprised primarily of adjustable rate securities. There has been an improvement in valuation of
the Bank’s available for sale securities because interest rates have declined in fiscal 2010.
Strong competition within the Bank’s market areas could adversely affect profits and slow growth
The New York metropolitan area has a high density of financial institutions, of which many are
significantly larger than Carver Federal and with greater financial resources. Additionally,
various large out-of-state financial institutions may continue to enter the New York metropolitan
area market. All are considered competitors to varying degrees.
Carver Federal faces intense competition both in making loans and attracting deposits.
Competition for loans, both locally and in the aggregate, comes principally from mortgage banking
companies, commercial banks, savings banks and savings and loan associations. Most direct
competition for deposits comes from commercial banks, savings banks, savings and loan associations
and credit unions. The Bank also faces competition for deposits 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. Market area competition is a factor
in pricing the Bank’s loans and deposits, which could reduce net interest income. Competition
also makes it more challenging to effectively grow loan and deposit balances. The Company’s
profitability depends upon its continued ability to successfully compete in its market areas.
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The Bank operates in a highly regulated industry, which limits the manner and scope of business
activities.
Carver Federal is subject to extensive supervision, regulation and examination by the OTS, the
FDIC, and, to a lesser extent, by the New York State Banking Department. As a result, the Bank is
limited in the manner in which the Bank conducts its business, undertake new investments and
activities and obtain financing. This regulatory structure is designed primarily for the protection
of the deposit insurance funds and depositors, and not to benefit the Holding Company’s
stockholders. This regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination policies, including
policies with respect to capital levels, the timing and amount of dividend payments, the
classification of assets and the establishment of adequate loan loss reserves for regulatory
purposes. In addition, the Bank must comply with significant anti-money laundering and
anti-terrorism laws. Government agencies have substantial discretion to impose significant monetary
penalties on institutions which fail to comply with these laws.
On October 4, 2006, the OTS and other federal bank regulatory authorities published the
Interagency Guidance on Nontraditional Mortgage Product Risk, or the Guidance. In general, the
Guidance applies to all residential mortgage loan products that allow borrowers to defer repayment
of principal or interest. The Guidance describes sound practices for managing risk, as well as
marketing, originating and servicing nontraditional mortgage products, which include, among other
things, interest-only loans. The Guidance sets forth supervisory expectations with respect to loan
terms and underwriting standards, portfolio and risk management practices and consumer protection.
For example, the Guidance indicates that originating interest-only loans with reduced documentation
is considered a layering of risk and that institutions are expected to demonstrate mitigating
factors to support their underwriting decision and the borrower’s repayment capacity. Specifically,
the Guidance indicates that a lender may accept a borrower’s statement as to the borrower’s income
without obtaining verification only if there are mitigating factors that clearly minimize the need
for direct verification of repayment capacity and that, for many borrowers, institutions should be
able to readily document income.
The Bank has evaluated the Guidance for compliance, risk management practices and underwriting
guidelines as they relate to originations and purchases of the subject loans, or practices relating
to communications with consumers. The Guidance has no impact on the Company’s loan origination
and purchase volumes or the Company’s underwriting procedures currently or in future periods.
Controls and procedures may fail or be circumvented, which may result in a material adverse effect
on the Company’s business
Management regularly reviews and updates the Company’s internal controls, disclosure controls and
procedures, and corporate governance policies and procedures. Any system of controls, however well
designed and operated, is based in part on certain assumptions and can provide only reasonable, not
absolute, assurances that the objectives of the system are met. Any failure or circumvention of
the controls and procedures or failure to comply with regulations related to controls and
procedures could have a material adverse effect on Carver’s business, results of operations and
financial condition.
Changes in laws, government regulation and monetary policy may have a material effect on results of
operations
Financial institution regulation has been the subject of significant legislation and may be
the subject of further significant legislation in the future, none of which is in the Company’s
control. Significant new laws or changes in, or repeals of, existing laws, including with respect
to federal and state taxation, may cause results of operations to differ materially. In addition,
cost of compliance could adversely affect Carver’s ability to operate profitably. Further, federal
monetary policy significantly affects credit conditions for Carver Federal, particularly as
implemented through the Federal Reserve System. A material change in any of these conditions could
have a material impact on Carver Federal, and therefore on the Company’s results of operations.
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On October 3, 2008, President Bush signed the EESA into law in response to the financial
crises affecting the banking system and financial markets. Pursuant to the EESA, the US Treasury
has the authority to, among other things, purchase up to $700 billion of troubled assets (including
mortgages, mortgage-backed securities and certain other financial instruments) from financial
institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.
On October 14, 2008, the US Treasury, the FRB and the FDIC issued a joint statement announcing
additional steps aimed at stabilizing the financial markets. First, the US Treasury announced the
TARP CPP, a $250 billion voluntary capital purchase program available to qualifying financial
institutions that sell preferred shares to the US Treasury (to be funded from the $700 billion
authorized for troubled asset purchases.) Second, the FDIC announced that its Board of Directors,
under the authority to prevent “systemic risk” in the U.S. banking system, approved the TLGP, which
is intended to strengthen confidence and encourage liquidity in the banking system by permitting
the FDIC to (1) guarantee certain newly issued senior unsecured debt issued by participating
institutions under the Debt Guarantee Program and (2) fully insure non-interest bearing transaction
deposit accounts held at participating FDIC-insured institutions, regardless of dollar amount,
under the Transaction Account Guarantee Program. Third, to further increase access to funding for
businesses in all sectors of the economy, the FRB announced further details of its Commercial Paper
Funding Facility, or CPFF, which provides a broad backstop for the commercial paper market. The
Company currently participates in the TARP CPP.
There can be no assurance, however, as to the actual impact that the foregoing or any other
governmental program will have on the financial markets. The failure of any such program or the
U.S. government to stabilize the financial markets and a continuation or worsening of current
financial market conditions and the national and regional economy is expected to materially and
adversely affect the Company’s business, financial condition, results of operations, access to
credit and the trading price of the Holding Company’s common stock.
Pursuant to Carver’s participation in the TARP CPP, the Company entered into certain
agreements with the Treasury that limit the Company’s activities in a number of ways and that give
the Treasury the ability to impose additional restrictions as it determines. For example, the
Company’s ability to declare or pay dividends on any of Carver’s shares is restricted.
Specifically, the Company is not able to declare dividends payments on common, junior preferred or
pari passu preferred shares if it is in arrears on the dividends on the senior preferred shares
issued to the Treasury. Further, the Company is not permitted to increase dividends on common
stock without the Treasury’s approval until the third anniversary of the investment unless the
senior preferred stock issued to the Treasury has been redeemed or transferred. In addition, the
Company’s ability to repurchase shares of common stock is prohibited without the Treasury’s prior
consent until the third anniversary of the investment or until the senior preferred stock issued to
the Treasury has been redeemed or transferred. Further, common, junior preferred or pari passu
preferred shares may not be repurchased if the Company is in arrears on the dividends on the senior
preferred shares issued to the Treasury.
In addition, the Company must also adopt the Treasury’s standards for executive compensation
and corporate governance for the period during which the Treasury holds equity issued under this
program. These standards would generally apply to the Company’s CEO, CFO and the three next most
highly compensated officers (“Senior Executive”). The standards include (1) ensuring that
incentive compensation for Senior Executives does not encourage unnecessary and excessive risks
that threaten the value of the financial institution; (2) required claw back of any bonus or
incentive compensation paid to a Senior Executive based on statements of earnings, gains or other
criteria that are later proven to be materially inaccurate; (3) prohibition on making golden
parachute payments to Senior Executives; and (4) agreement not to deduct for tax purposes executive
compensation in excess of $500,000 for each Senior Executive. In particular, the change to the
deductibility limit on executive compensation would likely increase slightly the overall cost of
the Company’s compensation programs.
Management expects to face increased regulation and supervision of the banking industry as a
result of the existing financial crisis, and there will be additional requirements and conditions
imposed on the Company to the extent that it participates in any of the programs established or to
be established by the Treasury or by the federal bank regulatory agencies. Such additional
regulation and supervision may increase the Company’s costs and limit the Company’s ability to
pursue business opportunities.
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Future Federal Deposit Insurance Corporation assessments will hurt our earnings
In May 2009, the Federal Deposit Insurance Corporation adopted a final rule imposing a special
assessment on all insured institutions due to recent bank and savings association failures. The
emergency assessment amounts to 5 basis points of total assets minus Tier 1 Capital as of June 30,
2009. We recorded an expense of $0.4 Million during the quarter ended June 30, 2009, to reflect the
special assessment. The assessment was collected on September 30, 2009 and was recorded against
earnings for the quarter ended June 30, 2009. The special assessment negatively impacted the
Company’s earnings for the year ended March 31, 2010, as compared to the year ended March 31, 2009,
as a result of this special assessment. In November 2009, the FDIC issued a rule that required all
insured depository institutions, with limited exceptions, to prepay their estimated quarterly
risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC
also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011.
Any additional emergency special assessment imposed by the FDIC will likely negatively impact the
Company’s earnings.
The Company is subject to certain risks with respect to liquidity
“Liquidity” refers to the Company’s ability to generate sufficient cash flows to support
operations and to fulfill obligations, including commitments to originate loans, to repay wholesale
borrowings, and to satisfy the withdrawal of deposits by customers.
The Company’s primary sources of liquidity are the cash flows generated through the repayment
of loans and securities, cash flows from the sale of loans and securities, deposits gathered
organically through the Bank’s branch network, from socially motivated depositors, city and state
agencies and deposit brokers; and borrowed funds, primarily in the form of wholesale borrowings
from the FHLB-NY. In addition, and depending on current market conditions, the Company has the
ability to access the capital markets from time to time.
Deposit flows, calls of investment securities and wholesale borrowings, and prepayments of
loans and mortgage-related securities are strongly influenced by such external factors as the
direction of interest rates, whether actual or perceived; local and national economic conditions;
and competition for deposits and loans in the markets the Bank serves. Furthermore, changes to the
FHLB-NY’s underwriting guidelines for wholesale borrowings may limit or restrict the Bank’s ability
to borrow, and could therefore have a significant adverse impact on liquidity.
A decline in available funding could adversely impact the Bank’s ability to originate loans,
invest in securities, and meet expenses, or to fulfill such obligations as repaying borrowings or
meeting deposit withdrawal demands.
The Bank’s ability to pay dividends or lend funds to the Holding Company is subject to regulatory
limitations which may prevent the Holding Company from making future dividend payments or principal
and interest payments on its debt obligation
Carver is a unitary savings and loan association holding company regulated by the OTS and
almost all of its operating assets are owned by Carver Federal. Carver relies primarily on
dividends from the Bank to pay cash dividends to its stockholders, to engage in share repurchase
programs and to pay principal and interest on its trust preferred debt obligation. The OTS
regulates all capital distributions by the Bank to the Company, including dividend payments. As
the subsidiary of a savings and loan association holding company, Carver Federal must file a notice
or an application (depending on the proposed dividend amount) with the OTS prior to each capital
distribution. The OTS will disallow any proposed dividend that would result in failure to meet the
OTS’ minimum capital requirements. Based on Carver Federal’s current financial condition, it is
not expected that this provision will have any impact on the Company’s receipt of dividends from
the Bank although it is possible. Payment of dividends by Carver Federal also may be restricted at
any time, at the discretion of the OTS, if it deems the payment to constitute an unsafe or unsound
banking practice.
Pursuant to Carver’s participation in the TARP CPP, the Company entered into certain
agreements with the Treasury that limit the Company’s activities in a number of ways and that give
the Treasury the ability to impose additional restrictions as it determines. For example, the
Company’s ability to declare or pay dividends on any of the Holding Company’s shares is restricted.
Specifically, the Company is not able to declare dividends payments on common, junior preferred or
pari passu preferred shares if it is in arrears on the dividends on the senior preferred shares
issued to the Treasury. Further, the Company is not permitted to increase dividends on common
stock without the Treasury’s approval until the third anniversary of the investment unless the
senior preferred stock issued to the Treasury has been redeemed or transferred. In addition, the
Company’s ability to repurchase shares of common stock is prohibited without the Treasury’s prior
consent until the third anniversary of the investment or until the senior preferred stock issued to
the Treasury has been redeemed or transferred. Further, common, junior preferred or pari passu
preferred shares may not be repurchased if the Company is in arrears on the dividends on the senior
preferred shares issued to the Treasury.
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Carver may not be able to utilize its income tax benefits
The Company’s ability to utilize the deferred tax asset generated by New Markets Tax Credit
income tax benefits as well as other deferred tax assets depends on its ability to meet the NMTC
compliance requirements and its ability to generate sufficient taxable income from operations to
generate taxable income in the future. Since the Bank has not generated sufficient taxable income
to utilize tax credits as they were earned, a deferred tax asset has been recorded in the Company’s
financial statements. For additional information regarding Carver’s NMTC, refer to Item 7, “New
Markets Tax Credit Award.”
The future recognition of Carver’s deferred tax asset is highly dependent upon Carver’s
ability to generate sufficient taxable income. A valuation allowance is required to be maintained
for any deferred tax assets that we estimate are more likely than not to be unrealizable, based on
available evidence at the time the estimate is made. In assessing Carver’s need for a valuation
allowance, we rely upon estimates of future taxable income. Although we use the best available
information to estimate future taxable income, underlying estimates and assumptions can change over
time as a result of unanticipated events or circumstances influencing our projections. Valuation
allowances related to deferred tax assets can be affected by changes to tax laws, statutory tax
rates, and future taxable income levels. In the event that we were to determine that we would not
be able to realize all or a portion of our net deferred tax assets in the future, we would reduce
such amounts through a charge to income tax expense in the period in which that determination was
made. Conversely, if we were to determine that we would be able to realize our deferred tax assets
in the future in excess of the net carrying amounts, we would decrease the recorded valuation
allowance through a decrease in income tax expense in the period in which that determination was
made.
Carver faces system failure risks and security risks.
The computer systems and network infrastructure the Company and its third party service
providers use could be vulnerable to unforeseen problems. Fire, power loss or other failures may
effect Carver’s computer equipment and other technology, or that of the Company’s third party
service providers. Also, the Company’s computer systems and network infrastructure could be
damaged by “hacking” and “identity theft” which could adversely affect the results of Carver’s
operations, or that of the Company’s third party service providers.
The Company’s business could suffer if it fails to retain skilled people
The Company’s success depends on its ability to attract and retain key employees reflecting
current market opportunities and challenges. Competition for the best people is intense, and the
Company’s size and limited resources may present additional challenges in being able to retain the
best possible employees, which could adversely affect the results of operations.
A natural disaster could harm Carver’s business.
Natural disasters could harm the Company’s operations directly through interference with
communications, as well as through the destruction of facilities and financial information systems.
Such disasters may also have an impact on collateral underlying the Bank’s loans. The Company may
face higher insurance costs in the event of such disasters.
Not Applicable.
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The Bank currently conducts its business through two administrative offices and nine branches
(including the 125th Street branch) and eleven separate ATM locations. During fiscal 2010
the Bank opened a new branch at 833 Flatbush Avenue in Brooklyn, NY
relocated its Bedford-Stayvesant branch from 1281 Fulton to
Restoration Plaza, 1392 Fulton Street, Brooklyn, NY and closed its
Sunset Park branch located at 140
58th
Street Brooklyn, NY. The following table
sets forth certain information regarding Carver Federal’s offices and other material properties at
March 31, 2010. The Bank believes that such facilities are suitable and adequate for its
operational needs.
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From time to time, Carver Federal is a party to various legal proceedings incident to its
business. Certain claims, suits, complaints and investigations (collectively “proceeding”)
involving Carver Federal, arising in the ordinary course of business, have been filed or are
pending. The Company is unable at this time to determine the ultimate outcome of each proceeding,
but believes, after discussions with legal counsel representing Carver Federal in these
proceedings, that it has meritorious defenses to each proceeding and Carver Federal is taking
appropriate measures to defend its interests.
During the quarter ended March 31, 2010, no matters were submitted to a vote of the Company’s
security holders through the solicitation of proxies or otherwise.
PART II
The Holding Company’s common stock has been listed on the NASDAQ Global Market under the
symbol “CARV” since July 10, 2008. Previously, the Company’s stock was listed on the American
Stock Exchange under the symbol “CNY.” As of June 28, 2010, there were 2,474,719 shares of common
stock outstanding, held by 909 stockholders of record. The following table shows the high and low
per share sales prices of the common stock and the dividends declared for the quarters indicated.
Each quarter the Board meets to determine the dividend amount per share to be declared.
On July 14, 2010, the Company’s Board of Directors declared a $0.025 cash dividend to shareholders
for the fourth quarter of fiscal 2010. The decision to reduce the fourth quarter dividend to $0.025
per share from the $0.10 per share paid in the previous three quarters of fiscal 2010 was made in
order to preserve capital during this challenging economic environment. Any future decision to
change the quarterly cash dividend will be based on, among other things, the dividend payout ratio
compared to industry peers coupled with the Bank’s strategy to retain capital in the current
economic environment. As in the past, the Company’s Board of Directors reviews the payment of
dividends quarterly and plans to continue to maintain a regular quarterly dividend in the future,
dependent upon earnings, financial condition and other factors.
Under OTS regulations, the Bank will not be permitted to pay dividends to the Holding Company
on its capital stock if its regulatory capital would be reduced below applicable regulatory capital
requirements or if its stockholders’ equity would be reduced below the amount required to be
maintained for the liquidation account, which was established in connection with the Bank’s
conversion to stock form. The OTS capital distribution regulations applicable to savings
institutions (such as the Bank) that meet their regulatory capital requirements permit, after not
less than 30 days prior notice to the OTS, capital distributions during a calendar year that do not
exceed the Bank’s net income for that year plus its retained net income for the prior two years.
Since the Bank incurred a net loss in fiscal 2009, prior approval of the OTS is required for any
capital distribution to the Holding Company. For information concerning the Bank’s liquidation
account, see Note 12 of the Notes to the Consolidated Financial Statements.
Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the
payment of dividends to its stockholders, although the source of such dividends is dependent,
primarily, upon capital
distributions from the Bank. The Holding Company is subject to the requirements of Delaware
law, which generally limit dividends to an amount equal to the excess of the net assets of the
Company (the amount by which total assets exceed total liabilities) over its statutory capital, or
if there is no such excess, to its net profits for the current and/or immediately preceding fiscal
year.
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On August 6, 2002 the Holding Company announced a stock repurchase program to repurchase up to
231,635 shares of its outstanding common stock. As of March 31, 2010, 49,972 shares of its common
stock have been repurchased in open market transactions at an average price of $13.75 per share.
The Holding Company intends to use repurchased shares to fund its stock-based benefit and
compensation plans and for any other purpose the Board deems advisable in compliance with
applicable law. No shares were repurchased during fiscal 2010. As a result of the Company’s
participation in the TARP CPP, the U.S. Treasury’s prior approval is required to make further
repurchases.
(1) The Management Recognition Plan (“MRP”) which provides for automatic grants of restricted
stock to certain employees and non-employee directors as of the date the plan became effective in
June of 1995. Additionally, the MRP makes provision for added discretionary grants of restricted
stock to those employees so selected by the Compensation Committee of the Board, which administers
the plan. There are no shares available for grant under the MRP.
(2) The Incentive Compensation Plan (“ICP”) provides for grants of cash bonuses, restricted
stock and stock options to the employees selected by the Compensation Committee. Carver terminated
this plan in 2006 and there are no grants outstanding under it.
(3) The 1995 Stock Option Plan provides for automatic option grants to certain employees and
directors as of the date the plan became effective in September of 1995, and like the MRP, also
makes provision for added discretionary option grants to those employees so selected by the
Compensation Committee. The 1995 Stock Option Plan expired in 2005; however, options are still
outstanding under this plan.
(4) The 2006 Stock Incentive Plan became effective in September of 2006 and provides for
discretionary option grants, stock appreciation rights and restricted stock to those employees and
directors so selected by the Compensation Committee.
Additional information regarding Carver’s equity compensation plans is incorporated by
reference from the section entitled “Securities Authorized for Issuance Under Equity Compensation
Plans” in the Proxy Statement (as defined below in Item 10).
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The following selected consolidated financial and other data is as of and for the years ended
March 31 and is derived in part from, and should be read in conjunction with the Company’s
consolidated financial statements and related notes (dollars in thousands):
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The following discussion and analysis should be read in conjunction with the Company’s
Consolidated Financial Statements and Notes to Consolidated Financial Statements presented
elsewhere in this report. The Company’s results of operations are significantly affected by
general economic and competitive conditions, particularly changes in market interest rates,
government policies, changes in accounting standards and actions of regulatory agencies.
Executive Summary
The following overview should be read in conjunction with the Company’s Management’s Discussion and
Analysis of Financial condition and results of Operation in its entirety.
The financial services industry continues to face unprecedented challenges in the face of the
current national and global economic crisis. The global and U.S. economies are experiencing
significantly reduced business activity as a result of among other factors, disruptions in the
financial system. Dramatic declines in the housing market coupled with high unemployment rates,
have resulted in significant write-downs of asset values by financial institutions, including
government-sponsored entities and major commercial and investment banks. These write-downs,
initially of mortgage-backed securities spread to credit default swaps and other derivative
securities, and caused many financial institutions to seek additional capital; to merge with larger
and stronger institutions; and, in some cases, to fail. The Company is fortunate that while it has
been adversely affected by the weaker economic and financial market conditions, the markets it
serves have been impacted to a lesser extent than many areas around the country.
In response to the financial crises affecting the banking system and financial markets, there
have been several recent announcements of Federal programs designed to purchase assets from,
provide equity capital to, and guarantee the liquidity of the industry.
On January 20, 2009, the Company announced that it completed the sale of $19 million in
preferred stock to the Treasury in connection with Carver’s participation in the TARP CPP.
Importantly, Carver is exempt from the requirement to issue a warrant to the Treasury to purchase
shares of common stock, as the Bank is a certified Community Development Financial Institution
(“CDFI”), conducting most of its depository and lending activities in disadvantaged communities.
Therefore the investment will not dilute current common stock stockholders. Carver issued 18,980
shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, with a liquidation preference
of $1,000 per share. The preferred stock investment represents approximately 3 percent of Carver’s
risk weighted assets as of March 31, 2010. The Bank’s capital ratios exceed minimum regulatory
capital requirements. The Treasury investment substantially increased the Bank’s capital ratios
producing a tangible capital ratio of 7.86%; core capital ratio of 7.88%; and risk-based capital
ratio of 11.71%. The Bank used the funds from TARP CPP to increase its securities and loan
portfolios.
As part of President Obama’s ongoing commitment to improving access to credit for small
businesses, the U.S. Department of the Treasury announced in February 2010 the Community
Development Capital Initiative. This new TARP program will invest lower-cost capital in Community
Development Financial Institutions that lend to small businesses in the country’s hardest-hit
communities. CDFI banks and thrifts are eligible to receive investments of capital with an initial
dividend rate of 2 percent, compared to the 5 percent rate offered under the CPP. CDFIs may apply
to receive capital up to 5 percent of risk-weighted assets. To encourage repayment while
recognizing the unique circumstances facing CDFIs, the dividend rate will increase to 9 percent
after eight years, compared to five years under CPP. Carver has applied to exchange its $18.98
million of CCP TARP funds to this new CDCI which would decrease dividend payments by $0.6 million
per annum. Carver believes it would be eligible to participate in this CDFI program.
Fiscal 2010 was another challenging year for Carver as it reported a net loss of $1.0 million
as compared to a net loss of $7.0 million in fiscal 2009. The lower net loss for fiscal 2010
reflects an improved net interest margin and higher fee revenue resulting primarily from Carver’s
New Market Tax Credit (NMTC) transactions, offset by an increase in provision for loan losses.
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The increased provision for loan losses recorded during fiscal 2010 reflects the increase in
and composition of loan delinquencies, non-performing loans, net loan charge-offs and overall loan
portfolio, as well as evaluation of the continued deterioration of the housing and real estate
markets and increasing weakness in the overall economy, particularly the accelerating pace of job
losses. At March 31, 2010 non-performing loans represent 7.10%
of total loans as compared to 4.01%
at March 31, 2009.
Net interest income was $4.0 million higher than the prior year with a net interest margin
increase of 37 basis points to 3.92%. During fiscal 2010 overall interest rates declined, however
the Bank was able to take advantage of its favorable asset/liability position by matching the
reduction in the yield on its interest-earning assets with a reduction in its costs of
interest-bearing deposits. As interest rates declined, the bank has benefited from the repricing of
CD maturities and borrowings at significantly lower rates of interest more than offsetting the
effect of the decline in the yields on loans and securities.
The business climate continues to present significant challenges. Carver Federal expects a
notable decline in loan balances in fiscal 2011 as economic conditions continue to strain small
business community and regulatory limitation on Bank’s exposure to commercial real estate reduces
the Company’s ability to pursue opportunities for new lending. The Bank expects to reduce the risk
in its loan portfolio, given the very challenging credit environment, by curtailing the origination
of construction loans for the time being, and refocusing on small business and non-profit lending,
which have historically produced lower loss ratios, even during difficult economic times. The Bank
expects deposit growth in fiscal 2011, particularly as the intense competition for core community
deposits which the Bank experienced in prior years has abated. Carver Federal intends to continue
to focus on cost control. In fiscal 2009, the Bank took very difficult steps including eliminating
20% of its workforce, closing a branch and outsourcing the residential loan division. In fiscal
year 2010 the Bank focused on additional efficiencies, targeting vendor consolidation. However,
industry-wide increases in FDIC insurance premiums coupled with higher regulatory costs have had a
negative impact on fiscal 2010 earnings. With respect to asset quality, continued weakness in the
local real estate market exacerbated by a severe downturn in the economy has and will continue to
present challenges for all financial institutions operating in the New York metropolitan area in
the year ahead. Continued unemployment coupled with depressed real estate values may put increased
pressure on the loan portfolio which may result in higher delinquencies and non-performing loans in
fiscal 2011.
New Markets Tax Credit Award
In June 2006, Carver Federal was selected by the U.S. Department of Treasury, in a highly
competitive process, to receive an award of $59 million in New Markets Tax Credits. The NMTC
award is used to stimulate economic development in low- to moderate-income communities. The NMTC
award enables the Bank to invest with community and development partners in economic development
projects with attractive terms including, in some cases, below market interest rates, which may
have the effect of attracting capital to underserved communities and facilitating the
revitalization of the community, pursuant to the goals of the NMTC program. The NMTC award
provides a credit to Carver Federal against Federal income taxes when the Bank makes qualified
investments. The credits are allocated over seven years from the time of the qualified
investment.
Recognition of the Bank’s $59.0 million NMTC award began in December 2006 when the Bank
invested $29.5 million, one-half of its $59 million award. In December 2008, the Bank invested
an additional $10.5 million and transferred rights to $19.2 million to an investor in a NMTC
project. The Bank’s NMTC allocation was fully invested as of December 31, 2008. During the
seven year period, assuming the Bank meets compliance requirements, the Bank will receive 39% of
the $40.0 million invested award amount in tax benefits (5% over each of the first three years,
and 6% over each of the next four years). The Company expects to receive the remaining NMTC tax
benefits of approximately $7.8 million from its $40.0 million investment over the next four
years.
In May 2009, the Bank received an additional award of $65 million in NMTC. In December 2009,
the Bank transferred rights to an investor in a NMTC project totaling $10.5 million and recognized
a gain on the transfer of rights of $0.4 million. The Bank and CCDC have involvements with special
purpose entities that were created to facilitate the ultimate investment made by the investor.
Specifically, the Bank has funded, on a secured basis, $7.7 million of the investor’s $10.5 million
investment in the NMTC project. In addition, CCDC has retained a 0.01% interest in another entity
created to facilitate the investment with the investor owning the remaining 99.99%. CCDC
also provides certain administrative services to these special purpose entities. The Bank has
determined that its and CCDC’s involvement with these special purpose entities does not expose it
to the majority of expected loss or residual returns and therefore it is not the primary
beneficiary of these entities.
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In March 2010, the Bank transferred rights to investors in NMTC projects totaling $44.5
million and recognized a gain on the transfer of rights of $0.4 million. The Bank and CCDC have
involvements with special purpose entities that were created to facilitate the ultimate investments
to be made by the investor. The Bank also recorded deferred income of $0.6 million related to the
transfer that is expected to be recognized into income in future periods after the ultimate
investments are made. In addition, CCDC has retained a 0.01% interest in three other entities
created to facilitate the investments with the investor owning the remaining 99.99%. CCDC also
provides certain administrative services to these special purpose entities. The Bank has
determined that its and CCDC’s involvement with these special purpose entities does not expose it
to the majority of expected loss or residual returns and therefore it is not the primary
beneficiary of these entities.
Critical Accounting Policies
Various elements of accounting policies, by their nature, are inherently subject to estimation
techniques, valuation assumptions and other subjective assessments. Carver’s policy with respect
to the methodologies used to determine the allowance for loan and lease losses and assessment of
the recoverability of the deferred tax asset are the most critical accounting policies. These
policies is important to the presentation of Carver’s financial condition and results of
operations, and it involves a higher degree of complexity and requires management to make difficult
and subjective judgments, which often require assumptions or estimates about highly uncertain
matters. The use of different judgments, assumptions and estimates could result in material
differences in the Company’s results of operations or financial condition.
See Note 2 of the Notes to Consolidated Financial Statements for a description of the
Company’s summary of significant accounting policies, including those related to allowance for loan
losses, and an explanation of the methods and assumptions underlying their application.
Deferred Tax Asset
The determination of whether deferred tax assets will be realizable is predicated on estimates of future taxable income. Such estimates are subject
to management’s judgment. A valuation reserve is established when management is unable to conclude that it is more likely than not that
it will realize deferred tax assets based on the nature and timing of these items.
Allowance for Loan and Lease Losses
The adequacy of the Bank’s ALLL is determined by the Bank, in consideration of the Interagency
Policy Statement on the Allowance for Loan and Lease Losses (the “Interagency Policy Statement”)
released by the Office of Thrift Supervision on December 13, 2006 and in accordance with Accounting
Standards Codification (“ASC”) Topic 450 (formerly known as Statement of Financial Account
Standards (“SFAS”) No. 5, Accounting for Contingencies) and ASC Topic 310 (formerly known as SFAS
No. 114, Accounting by Creditors for Impairment of a Loan). The ALLL reflects management’s
evaluation of the loans presenting identified loss potential, as well as the
risk inherent in various components of the portfolio. There is a great amount of judgment
applied to developing the ALLL. As such, there can never be assurance that the ALLL provision
accurately reflects the actual loss potential embedded in a loan portfolio. Further, an increase
in the size of the portfolio or any of its components could necessitate an increase in the ALLL
even though there may not be a decline in credit quality or an increase in potential problem loans.
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Compliance with the Interagency Policy Statement includes management’s review of the Bank’s
loan portfolio, including the identification and review of individual problem situations that may
affect a borrower’s ability to repay. In addition, management reviews the overall portfolio
quality through an analysis of delinquency and non-performing loan data, estimates of the value of
underlying collateral, current charge-offs and other factors that may affect the portfolio,
including a review of regulatory examinations, an assessment of current and expected economic
conditions and changes in the size and composition of the loan portfolio are all taken into
consideration.
The Bank maintains a general reserve allowance in accordance with ASC Topic 450 that is
comprised of two principal components: (1) a general reserve allowance for performing loans and (2)
an allocation of a general reserve allowance for certain Criticized and Classified loans. The Bank
believes that the loan review of Criticized and Classified loans provides a more accurate general
reserve provision.
The Bank also maintains a specific reserve allowance for Criticized and Classified loans that
are reviewed for impairment in accordance with ASC Topic 310 guidelines and deemed to be impaired.
In accordance with the Interagency and GAAP guidance, the Bank maintains a general allowance
for performing loans based upon a review of 10 different factors. The first factor utilized is
actual historical loss experience by major loan category expressed as a percentage of performing
loans. As the loss experience for a particular loan category increases or decreases, the level of
reserves required for that particular loan category also increases or decreases. Because actual
loss experience may not adequately predict the level of losses inherent in a portfolio, the Bank
reviews nine qualitative factors (policy & procedures, economy, nature & volume, management, loan
review, collateral value, concentrations and external forces) to determine if reserves should be
increased based upon any of those factors.
All non-performing loans and certain delinquent loans, as identified through the ALLL review
process, are evaluated individually for potential losses in accordance with Interagency and GAAP
guidance and consistent with the Bank’s ALLL policy and methodology. The individuals evaluating
the loans include the Chief Risk Officer, Chief Lending Officer, Credit Officer, Workout Officer,
Loan Officers and consultants. The conclusions reached as a result of the evaluation process are
submitted to management and Board of Directors committees for their review and approval.
Management believes that this review provides a better assessment of the possible losses imbedded
in this portion of the portfolio. The resulting reserves under this review still constitute a
general allowance that has been allocated to the loans reviewed in this section and may be utilized
in accordance with ASC Topic 450.
ASC Topic 310 is the primary basis for valuing the impairments of specific loans whose
collectability has been called into question. The amount assigned to this aspect of the ALLL is
the individually determined (i.e., loan by loan) portion. The standard requires the use of one of
three approved methods to estimate the amount to be reserved for such credits. The three methods
are as follows: i) the present value of expected future cash flows discounted at the loan’s
effective interest rate, ii) the loan’s observable market price, or iii) the fair value of the
collateral if the loan is collateral dependent.
For loans individually evaluated for impairment under ASC Topic 310, the institution may
choose the appropriate measurement basis, except for an impaired collateral-dependent loan. This
guidance requires impairment of a collateral dependent loan to be measured using the fair value of
collateral method.
Criticized and Classified loans with at risk balances of $1,000,000 or more are identified and
reviewed for individual evaluation for impairment in accordance with ASC Topic 310. If it is
determined that it is probable the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement, the loan is impaired. If the loan is determined to be not
impaired, it is then grouped with the other loans to be individually
evaluated for potential losses. The impaired loans are then evaluated to determine the
measure of impairment amount based on one of the three measurement methods noted above. If it is
determined that there is an impairment amount, the Bank then determines whether the impairment
amount is permanent (that is a confirmed loss), in which case the impairment is charged off, or if
it is other than permanent, in which case the Bank establishes a specific valuation reserve that is
included in the total ALLL. However, in accordance with GAAP guidance, if there is no impairment
amount, no reserve is established for the loan.
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The Company has historically been primarily a commercial real estate (“CRE”) and multi-family
mortgage lender, with a significant portion of its loan portfolio secured by buildings in the New
York City metropolitan area. Payments on multi-family and CRE loans generally depend on the income
produced by the underlying properties which, in turn, depends on their successful operation and
management. Accordingly, the ability of the Company’s borrowers to repay these loans may be
impacted by adverse conditions in the local real estate market and the local economy. While the
Company generally requires that such loans be qualified on the basis of the collateral property’s
current cash flows, appraised value, and debt service coverage ratio, among other factors, there
can be no assurance that the Bank’s underwriting policies will protect the Bank from credit-related
losses or delinquencies.
The Company seeks to minimize the risks involved in commercial small business lending by
underwriting such loans on the basis of the cash flows produced by the business; by requiring that
such loans be collateralized by various business assets, including inventory, equipment, and
accounts receivable, among others; and by requiring personal guarantees. However, the capacity of
a borrower to repay a commercial small business loan is substantially dependent on the degree to
which his or her business is successful. In addition, the collateral underlying such loans may
depreciate over time, may not be conducive to appraisal, or may fluctuate in value, based upon the
business’ results.
Although the New York City metropolitan area fared better in fiscal 2010 than many other parts
of the country, the Bank’s marketplace was nonetheless impacted by the widespread economic decline.
The ability of the Bank’s borrowers to repay their loans, and the value of the collateral securing
such loans, could be adversely impacted by further significant changes in local economic
conditions, such as a decline in real estate values or a rise in unemployment. This, in turn,
could not only result in the Company experiencing an increase in charge-offs and/or non-performing
assets, but could also necessitate an increase in the provision for loan losses. These events
would have an adverse impact on the Company’s results of operations and capital, if they were they
to occur.
Asset/Liability Management
The Company’s primary earnings source is net interest income, which is affected by changes in
the level of interest rates, the relationship between the rates on interest-earning assets and
interest-bearing liabilities, the impact of interest rate fluctuations on asset prepayments, the
level and composition of deposits and the credit quality of earning assets. Management’s
asset/liability objectives are to maintain a strong, stable net interest margin, to utilize its
capital effectively without taking undue risks, to maintain adequate liquidity and to manage its
exposure to changes in interest rates.
The economic environment is uncertain regarding future interest rate trends. Management
monitors the Company’s cumulative gap position, which is the difference between the sensitivity to
rate changes on the Company’s interest-earning assets and interest-bearing liabilities. In
addition, the Company uses various tools to monitor and manage interest rate risk, such as a model
that projects net interest income based on increasing or decreasing interest rates.
Stock Repurchase Program
Refer to “ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.”
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Discussion of Market Risk—Interest Rate Sensitivity Analysis
As a financial institution, the Bank’s primary component of market risk is interest rate
volatility. Fluctuations in interest rates will ultimately impact both the level of income and
expense recorded on a large portion of the Bank’s assets and liabilities, and the market value of
all interest-earning assets, other than those which are short term in maturity. Since virtually
all of the Company’s interest-bearing assets and liabilities are held by the Bank, most of the
Company’s interest rate risk exposure is retained by the Bank. As a result, all significant
interest rate risk management procedures are performed at the Bank. Based upon the Bank’s nature
of operations, the Bank is not subject to foreign currency exchange or commodity price risk. The
Bank does not own any trading assets.
Carver Federal seeks to manage its interest rate risk by monitoring and controlling the
variation in repricing intervals between its assets and liabilities. To a lesser extent, Carver
Federal also monitors its interest rate sensitivity by analyzing the estimated changes in market
value of its assets and liabilities assuming various interest rate scenarios. As discussed more
fully below, there are a variety of factors that influence the repricing characteristics of any
given asset or liability.
The matching of assets and liabilities may be analyzed by examining the extent to which such
assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest
rate sensitivity gap. An asset or liability is said to be interest rate sensitive within a
specific period if it will mature or reprice within that period. The interest rate sensitivity gap
is defined as the difference between the amount of interest-earning assets maturing or repricing
within a specific period of time and the amount of interest-bearing liabilities maturing or
repricing within that same time period. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive liabilities and is considered
negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of falling interest rates, a negative gap could
result in an increase in net interest income, while a positive gap could adversely affect net
interest income. Conversely, during a period of rising interest rates a negative gap could
adversely affect net interest income, while a positive gap could result in an increase in net
interest income. As illustrated below, Carver Federal had a negative one-year gap equal to -10.74%
of total rate sensitive assets at March 31, 2010. As a result, Carver Federal’s net interest
income may be negatively affected by rising interest rates and may be positively affected by
falling interest rates.
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The following table sets forth information regarding the projected maturities, prepayments and
repricing of the major rate-sensitive asset and liability categories of Carver Federal as of March
31, 2010. Maturity repricing dates have been projected by applying estimated prepayment rates
based on the current rate environment. The information presented in the following table is derived
in part from data incorporated in “Schedule CMR: Consolidated Maturity and Rate,” which is part of
the Bank’s quarterly reports filed with the OTS. The repricing and other assumptions are not
necessarily representative of the Bank’s actual results. Classifications of items in the table
below are different from those presented in other tables and the financial statements and
accompanying notes included herein and do not reflect non-performing loans (dollars in thousands):
The table above assumes that fixed maturity deposits are not withdrawn prior to maturity
and that transaction accounts will decay as disclosed in the table above.
Certain shortcomings are inherent in the method of analysis presented in the table above.
Although certain assets and liabilities may have similar maturities or periods of repricing, they
may react in different degrees to changes in the market interest rates. The interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in market interest
rates, while rates on other types of assets and liabilities may lag behind changes in market
interest rates. Certain assets, such as adjustable-rate mortgages, generally have features that
restrict changes in interest rates on a short-term basis and over the life of the asset. In the
event of a change in interest rates, prepayments and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Additionally, credit risk may increase
as many borrowers may experience an inability to service their debt in the event of a rise in
interest rate. Virtually all of the adjustable-rate loans in Carver Federal’s portfolio contain
conditions that restrict the periodic change in interest rate.
Net Portfolio Value (“NPV”) Analysis. As part of its efforts to maximize net interest income
while managing risks associated with changing interest rates, management also uses the NPV
methodology. NPV is the present value of expected net cash flows from existing assets less the
present value of expected cash flows from existing liabilities plus the present value of net
expected cash inflows from existing financial derivatives and off-balance-sheet contracts.
Under this methodology, interest rate risk exposure is assessed by reviewing the estimated
changes in NPV that would hypothetically occur if interest rates rapidly rise or fall along the
yield curve. Projected values of NPV at both higher and lower regulatory defined rate scenarios
are compared to base case values (no change in rates) to determine the sensitivity to changing
interest rates.
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Presented below, as of March 31, 2010, is an analysis of the Bank’s interest rate risk as
measured by changes in NPV for instantaneous and sustained parallel shifts of 50 basis points and
100 basis points plus or minus changes in market interest rates and a sustained parallel shift of
plus 200 basis points and 300 basis points change in market interest rates. Such limits have been
established with consideration of the impact of various rate changes and the Bank’s current capital
position. The Bank considers its level of interest rate risk for fiscal 2010, as measured by
changes in NPV, to be “minimal”. The information set forth below relates solely to the Bank;
however, because virtually all of the Company’s interest rate risk exposure lies at the Bank level,
management believes the table below also similarly reflects an analysis of the Company’s interest
rate risk (dollars in thousands):
Certain shortcomings are inherent in the methodology used in the above interest rate risk
measurements. Modeling changes in NPV require the making of certain assumptions, which may or may
not reflect the manner in which actual yields and costs respond to changes in market interest
rates. In this regard, the NPV table presented assumes that the composition of Carver Federal’s
interest sensitive assets and liabilities existing at the beginning of a period remains constant
over the period being measured and also assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV table provides an indication of
Carver Federal’s interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of changes in market interest
rates on Carver Federal’s net interest income and may differ from actual results.
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Average Balance, Interest and Average Yields and Rates
The following table sets forth certain information relating to Carver Federal’s average
interest-earning assets and average interest-bearing liabilities and related yields for the years
ended March 31, 2010, 2009, and 2008. The table also presents information for the fiscal years
indicated with respect to the difference between the weighted average yield earned on
interest-earning assets and the weighted average rate paid on interest-bearing liabilities, or
“interest rate spread,” which savings institutions have traditionally used as an indicator of
profitability. Another indicator of an institution’s profitability is its “net interest margin,”
which is its net interest income divided by the average balance of interest-earning assets. Net
interest income is affected by the interest rate spread and by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate
or exceed interest-bearing liabilities, any positive interest rate spread will generate net
interest income (dollars in thousands):
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Rate/Volume Analysis
The following table sets forth information regarding the extent to which changes in interest
rates and changes in volume of interest related assets and liabilities have affected Carver
Federal’s interest income and expense during the fiscal years ended March 31, 2010, 2009, and 2008
(in thousands) For each category of interest-earning assets and interest-bearing liabilities,
information is provided for changes attributable to: (1) changes in volume (changes in volume
multiplied by prior rate); (2) changes in rate (change in rate multiplied by old volume). Changes
in rate/volume variance are allocated proportionately between changes in rate and changes in
volume.
Comparison of Financial Condition at March 31, 2010 and 2009
Assets
At March 31, 2010, total assets increased $14.0 million, or 1.8%, to $805.5 million compared to
$791.4 million at March 31, 2009. Cash and cash equivalents increased $25.0 million, total loans
receivable, net increased $3.0 million, other assets increased $4.6 million, and the deferred tax
asset increased $4.1 million. These increases were partially offset by a decrease in investment
securities of $19.4 million and a decrease in office properties and equipment of $3.2 million.
Cash and cash equivalents increased $25.0 million, or 187.4%, to $38.3 million at March 31, 2010,
compared to $13.3 million at March 31, 2009. This increase was driven by a $29.3 million increase
in cash and due from banks, partially offset by a $4.3 million decrease in money market
investments. The Company took steps in the third and fourth quarters of fiscal 2010 to improve its
liquidity position through its $14.1 million participation in the FDIC’s TLGP, a successful deposit
campaign focused on increasing the Bank’s core deposit base and rightsizing the Company’s loan to
deposit ratio, investing in shorter duration liquid investments and reducing the Bank’s outstanding
borrowings from the Federal Home Loan Bank of New York. The Company expects to maintain excess
liquidity until more unconstrained access to funding returns to the markets. By maintaining this
extra liquidity on our balance sheet during the fourth quarter of fiscal 2010, the Company chose to
forgo $0.1 million in potential revenue.
Total securities decreased $19.4 million, or 25.9%, to $55.4 million at March 31, 2010, compared to
$74.8 million at March 31, 2009, reflecting a decrease of $16.9 million in available-for-sale
securities and a $2.5 million decrease in held-to-maturity securities. Cash flows generated from
the Bank’s securities portfolio were not immediately reinvested in the fourth quarter of fiscal
2010 in an effort to maintain flexibility as we waited for the higher than normal volatility in the
securities markets to dissipate.
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Total loans increased $7.8 million, or 1.2%, to $670.0 million at March 31, 2010, compared to
$662.2 million at March 31, 2009. The increase was primarily the result of an increase in
commercial business loans of $17 million, offset by a decrease in real estate mortgage loans
(including loans held for sale) of $8 million (adjusted for a $7 million reclassification made
between commercial business loans and commercial non-residential mortgage loans for regulatory
reporting purposes). Construction loans decreased $33 million as we ceased originations of new
construction loans given both the extended downturn in the local real estate markets and our
efforts to reduce our risk in this market segment. One-to-four family residential mortgage loans
decreased $16 million as loan pay downs exceeded new loan originations. These reductions were
offset by growth in commercial non-residential mortgage loans which increased $14 million and
multifamily mortgage loans which increased $10 million on net new originations.
Office properties and equipment decreased $3.1 million, or 20.7%, to $12.1 million at March 31,
2010, compared to $15.2 million at March 31, 2009, primarily due to the sale of a bank-owned
building and the write-down of certain fixed assets as a result of the relocation and closure of two other branches.
An integral part of this strategy was the opening of Carver’s two newest branches located at 1392
Fulton Street at Restoration Plaza and at 833 Flatbush Avenue in Brooklyn, NY. These branches are
located in historically high growth neighborhoods in Brooklyn and represent a central “gateway” for
the Caribbean community to the New York Region and beyond. These new branches represent a
tremendous opportunity for Carver given the substantial presence of small businesses, non-profit
institutions, and consumers, in a geography where Carver’s brand is well recognized.
The deferred tax asset increased $4.1 million, or 39.8%, to $14.3 million at March 31, 2010,
compared to $10.2 million at March 31, 2009 primarily due to increased tax credits on NMTC
investments. The Company expects to receive additional NMTC tax benefits of approximately $7.8
million through the period ending March 31, 2014. The Company’s ability to utilize the deferred tax
asset generated by NMTC income tax benefits, as well as other deferred tax assets, depends on its
ability to meet the NMTC compliance requirements and its ability to generate sufficient taxable
income from operations or from potential tax strategies to generate taxable income in the future.
Other assets increased $4.6 million, or 92.7%, to $9.6 million at March 31, 2010, compared to $5.0
million at March 31, 2009, primarily due to an increase in prepaid expenses of $3.4 million related
to the prepayment of FDIC charges.
Liabilities and Stockholders’ Equity
Liabilities
Total
liabilities increased $16.7 million, or 2.3%, to $743.8 million at March 31, 2010, compared
to $727.1 million at March 31, 2009. The increase in total liabilities was primarily due to a
$14.1 million two-year term borrowing issued under the FDIC’s TLGP in the third quarter of fiscal
2010.
Deposits decreased $0.2 million, or 0.03%, to $603.2 million at March 31, 2010, compared to $603.4
million at March 31, 2009. Deposits were essentially flat year over year as we replaced $25
million of institutional deposits with increased core deposits, money market accounts, and
customers’ operating accounts.
Advances from the FHLB-NY and other borrowed money increased $16.5 million, or 14.4%, to $131.6
million at March 31, 2010, compared to $115.0 million at March 31, 2009. The increase in advances
and other borrowed money was primarily the result of issuing a $14.1 million two-year term
borrowing under the FDIC’s TLGP via a private placement to take advantage of the low interest rate
environment. The interest rate on the TLGP borrowing of 1.69% is substantially lower than the
weighted average rate of 3.40% on the remainder of the Bank’s borrowings.
Stockholders’ Equity
Total stockholders’ equity decreased $2.7 million, or 4.1%, to $61.7 million at March 31, 2010,
compared to $64.3 million at March 31, 2009. The decrease in total stockholders’ equity was
primarily attributable to the net loss for the year ended March 31, 2010 totaling $1.0 million plus
dividends paid of $1.9 million (common dividends of $1.0 million and U.S. Treasury Capital Purchase
Program (CPP) dividends of $0.9 million). The Bank’s capital levels exceed all regulatory
requirements of a well-capitalized financial institution.
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Comparison of Operating Results for the Years Ended March 31, 2010 and 2009
Net Loss
Net loss for fiscal 2010, was $1.0 million compared to a net loss of $7.0 million for the prior
year. The improvement for fiscal 2010 was the result of an increase in net interest income, an
increase in non-interest income, and a decrease in non-interest expense primarily due to the
non-cash goodwill impairment charge booked in fiscal 2009. These improvements were partially
offset by an increase in provision for loan losses and a decrease in income tax benefit.
Net Interest Income
Interest income decreased $1.5 million, or 3.7%, to $40.5 million for fiscal 2010 compared to $42.0
million for the prior year. The decrease was primarily the result of a $1.9 million decrease in
interest income on loans partially offset by an increase in interest income on securities. The
decrease in interest income reflects a reduction in the yield on interest-earning assets of 46
basis points to 5.39% for fiscal 2010 compared to a yield of 5.85% for the prior year period. This
decrease in yield on interest earning assets was primarily the result of a 47 basis point reduction
in the yield on loans of which 19 basis points was due to a higher level of non-performing loans
and the remainder primarily due to new loan originations coming on at lower interest rates due to
lower market interest rates. The increase in interest income on mortgage-backed securities was
primarily the result of an increase in the average balance of mortgage-backed securities from $50.0
million in the prior year period to $64.7 million in the current period.
Interest expense decreased $5.5 million, or 33.3%, to $11.0 million in fiscal 2010 compared to
$16.5 million for the prior year. The decrease in interest expense resulted primarily from an 88
basis point decrease in the average cost of interest-bearing liabilities to 1.63% for fiscal 2010
compared to an average cost of 2.51% for the prior year as higher cost institutional deposits were
replaced by lower cost core deposits and transactional accounts. This improvement was partially
offset by growth in the average balance of interest-bearing liabilities of $17.5 million, or 2.7%,
to $675.6 million at March 31, 2010, compared to $658.1 million for the prior year.
Provision for Loan Losses
The Bank recorded a $7.8 million provision for loan losses in fiscal 2010 compared to $2.7 million
for the prior year. The increased provision is in response to the Company’s current levels of
delinquencies and non-performing loans and the uncertainty caused by the uneven economic recovery
in the real estate market and the New York City economy. At March 31, 2010, non-performing assets
totaled $47.6 million, or 5.91% of total assets compared to $26.2 million or 3.31% of total assets
at March 31, 2009. Total delinquencies declined year-over-year
by 1.52% to $70.7 million or 8.8% of
total assets. The allowance for loan losses was $12.0 million at March 31, 2010, which represents
a ratio of the allowance for loan losses to non-performing loans of 31.18% compared to 27.40% at
March 31, 2009. The ratio of the allowance for loan losses to total loans was 1.79% at March 31,
2010 up from 1.10% at March 31, 2009.
Non-interest Income
Non-interest income decreased $0.1 million to $5.1 million in fiscal 2010 compared to $5.2 million
for the prior year period. The decrease is primarily due to the write down in the carrying value
of loans previously held for sale of $2.1 million, mostly offset by $1.0 million of fees recognized
during fiscal 2010 related to several NMTC transactions, a gain on the sale of securities of $0.4
million and a $1.2 million gain on the sale of a bank-owned building. The sale of this building
was an essential part of the Bank’s strategy to optimize branch locations.
Non-interest Expense
Non-interest expense decreased $7.3 million, or 19.2%, to $30.6 million in fiscal 2010 compared to
$37.8 million for the prior year. This improvement is primarily due to the $7.1 million non-cash
goodwill impairment charge incurred in the prior year. Additionally, there were decreases of $0.9
million in employee compensation and benefits on lower staffing levels and discretionary
compensation, $0.5 million in occupancy and equipment expense resulting from the branch
optimization strategy, and $0.4 million in consulting fees. These decreases in expense were
partially offset by increases of $1.1 million in FDIC insurance premiums and $0.9 million related
to the write-down of an advance to a vendor (see paragraph below).
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On February 8, 2010, the president of a money services firm which the Bank used to service its
remote ATM locations was arrested on charges of defrauding another financial institution. The Bank
has a claim pending for $850,000 for funds which we had advanced to the money services firm. The
money service firm is now under the oversight of a bankruptcy trustee. Carver has fully reserved
the $850,000 but we continue to pursue all avenues available to us for the return of our funds.
There was no adverse impact on the operations of our remote ATMs as a result of this event.
Income Taxes
The Bank recorded a tax benefit of $2.9 million in fiscal 2010 compared to a tax benefit of $3.2
million for the prior year period. The lower tax benefit in fiscal 2010 is a result of the smaller
loss generated versus the prior period. The total tax benefit for fiscal 2010 reflects tax credits
of $2.3 million generated by our NMTC investment transactions versus tax credits on NMTC investment
transactions of $2.0 million in fiscal 2009.
Comparison of Operating Results for the Years Ended March 31, 2009 and 2008
Net Income
The Company reported net loss of $7.0 million and a loss per share of $(2.87) for fiscal 2009
compared to net income of $4.0 million and diluted earnings per share of $1.55 for fiscal 2008.
The net loss for fiscal 2009 was the result of an increase in non-interest expense of $8.0 million
and provision for loan losses of $2.5 million, a decrease in non-interest income of $2.7 million,
partially offset by an increase in income tax benefit of $2.3 million. The increase in
non-interest expense is primarily the result of a non-cash goodwill impairment charge of $7.1
million.
Interest Income
Interest income decreased $6.1 million, or 12.7%, to $42.0 million in fiscal 2009 compared to
$48.1 million for the prior year period. The decrease was primarily the result of decreases in
interest income on loans of $5.3 million and interest income on investment securities of $1.2
million, partially offset by an increase in interest income on mortgage-backed securities of $0.4
million. The decrease in interest income reflects a reduction in the yield on interest-earning
assets of 98 basis points to 5.85% compared to 6.83% for the prior year period. The decrease in
yield on interest earning assets was primarily the result of a 100 basis points reduction in the
yield on loans as LIBOR and prime rate based construction loans repriced at lower rates. The
decrease in interest income on investment securities was primarily the result of a decline in the
average balance of investment securities from $22.9 million in the prior year period to $5.7
million. The higher level of interest income on mortgage-backed securities was primarily the
result of an increase in the average balance of mortgage backed securities from $39.1 million to
$50.0 million.
Interest income on loans decreased by $5.3 million, or 11.9%, to $39.2 million for fiscal 2009
compared to $44.5 million for fiscal 2008. These results were primarily driven by a yield decrease
of 100 basis points to 5.96% for fiscal 2009 compared to 6.96% for fiscal 2008.
Interest income on securities decreased by $0.8 million, or 22.9%, to $2.7 million for fiscal
2009 compared to $3.5 million for fiscal 2008. Interest income on mortgage-backed securities
increased by $0.4 million, or 19.7%, to $2.5 million for fiscal 2009 compared to $2.1 million for
fiscal 2008. The increase in interest income on mortgage-backed securities for fiscal 2009 was
primarily the result of a $10.9 million, or 27.9%, higher average averages balances of
mortgage-backed securities to $50.0 million, compared to $39.1 million for fiscal 2008. This was
partially offset by a decrease in yield of mortgage-backed securities of 34 basis points to 4.96%,
compared to 5.30% in fiscal 2008.
Additionally, the increase in interest income on mortgage-backed securities was partially
offset by a decrease in investment securities interest of $1.2 million, or 83.3%, to $0.2 million
for fiscal 2009 compared to $1.4 million for fiscal 2008. The decrease was primarily the result of
a decrease in the yield on investment securities by 207 basis points to 4.19% compared to 6.26% in
fiscal 2008. Also contributing to the decrease was the reduction of $17.2 million, or 75.1%, in
the average balances of investment securities to $5.7 million compared to $22.9 million
for fiscal 2008.
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Interest Expense
Interest expense decreased by $6.2 million, or 27.1%, to $16.5 million for fiscal 2009
compared to $22.7 million for fiscal 2008. The decrease in interest expense reflects a 98 basis
point decrease in the average cost of interest-bearing liabilities to 2.51% in fiscal 2009 compared
to 3.49% in fiscal 2008 partially offset by an increase in the average balance of interest-bearing
liabilities of $9.6 million, or 1.5%, to $658.1 million for fiscal 2009 compared to $648.5 million
for fiscal 2008.
Interest expense on deposits decreased $6.0 million, or 31.6%, to $12.9 million for fiscal
2009 compared to $18.9 million for fiscal 2008. This decrease was primarily the result of interest
paid on certificates of deposit decreasing $5.1 million, or 30.9%, to $11.4 million for fiscal 2009
compared to $16.5 million for fiscal 2008. Additionally, a 101 basis point decrease in the rate
paid on deposits to 2.27% in fiscal 2009 compared to 3.28% in fiscal 2008 contributed to the
decrease. Historically, the Bank’s customer deposits have provided a relatively low cost funding
source from which its net interest income and net interest margin have benefited. In addition, the
Bank’s relationship with various government entities has been a source of relatively stable and low
cost funding.
Interest expense on advances and other borrowed money decreased $0.2 million, or 5.3%, to $3.6
million for fiscal 2009 compared to $3.8 million for fiscal 2008. This was primarily the result of
a 115 basis point decrease in the cost of borrowed money to 3.98% in fiscal 2009 compared to 5.13%
in fiscal 2008 partially offset by a $16.5 million decrease in the average balance of outstanding
borrowings to $90.4 million for fiscal 2009 compared to $73.9 million in fiscal 2008.
Net Interest Income Before Provision for Loan Losses
Net interest income represents the difference between income on interest-earning assets and
expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of
interest-earning assets and interest-bearing liabilities and the corresponding interest rates
earned and paid. The Company’s net interest income is significantly impacted by changes in
interest rate and market yield curves. See “—Discussion of Market Risk—Interest Rate Sensitivity
Analysis” for further discussion on the potential impact of changes in interest rates on the
results of operations.
Net interest income before the provision for loan losses remained flat at $25.5 million for
fiscal 2009 and 2008.
Provision for Loan Losses and Asset Quality
The Bank provided $2.7 million in provision for loan losses for fiscal 2009 compared to $0.2
million for fiscal 2008, an increase of $2.5 million. The Bank records provisions for loan losses,
which are charged to earnings, in order to maintain the allowance for loan losses at a level that
is considered appropriate to absorb probable losses inherent in the existing loan portfolio.
Factors considered when evaluating the adequacy of the allowance for loan losses include the volume
and type of lending conducted, the Bank’s previous loan loss experience, the known and inherent
risks in the loan portfolio, adverse situations that may affect the borrowers’ ability to repay,
the estimated value of any underlying collateral, trends in the local and national economy and
trends in the real estate market.
The Bank had net charge-offs of $0.5 million for fiscal 2009 compared to $0.8 million for
fiscal 2008. At March 31, 2009 and 2008, the Bank’s allowance for loan losses was $7.0 million and
$4.9 million, respectively. The ratio of the allowance for loan losses to non-performing loans was
28.17% at March 31, 2009 compared to 170.89% at March 31, 2008. The ratio of the allowance for
loan losses to total loans was 1.06% at March 31, 2009 compared to 0.74% at March 31, 2008.
Additionally, the level of non-performing loans to total loans receivable is 3.89%. The Bank’s
future levels of non-performing loans will be influenced by economic conditions, including the
impact of those conditions on the Bank’s customers, interest rates and other internal and external
factors existing at the time. The Bank believes its reported allowance for loan losses at March
31, 2009 is adequate to provide for estimated probable losses in the loan portfolio. For further
discussion of non-performing loans and allowance for loan losses, see “Item 1—Business—General
Description of Business—Asset Quality” and Note 1 of Notes to the
Consolidated Financial Statements.
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Non-Interest Income
Non-interest income is comprised of depository fees and charges, loan fees and service
charges, fee income from banking services and charges, gains or losses from the sale of securities,
loans and other assets and other non-interest income. Non-interest income decrease by $2.7
million, or 34.2%, to $5.2 million for fiscal 2009 compared to $7.9 for fiscal 2008. The decrease
was primarily due to the loss of several one-time gains in the prior year primarily related to sale
of securities and NMTC fees as well as lower loan fee income.
Non-Interest Expense
Non-interest expense increased by $7.9 million, or 26.5%, to $37.8 million for fiscal 2009
compared to $29.9 million for fiscal 2008. The increase was primarily due a $7.1 million non-cash
goodwill impairment charge as well as increases of $1.2 million in occupancy and equipment expense,
$0.4 million in FDIC insurance and $0.6 million in professional fees, partially offset by decreases
of $1.6 million in consulting fees and $0.2 million in employee compensation and benefits.
Income Tax Expense
Income tax benefit was $3.2 million for fiscal 2009 compared to $0.9 million for fiscal 2008.
The increase in tax benefit in fiscal 2009 is reflective of the net loss in fiscal 2009 as well
recognition of $2.0 million of NMTC.
Liquidity and Capital Resources
Liquidity is a measure of the Bank’s ability to generate adequate cash to meet its financial
obligations. The principal cash requirements of a financial institution are to cover potential
deposit outflows, fund increases in its loan and investment portfolios and ongoing operating
expenses. The Bank’s primary sources of funds are deposits, borrowed funds and principal and
interest payments on loans, mortgage-backed securities and investment securities. While maturities
and scheduled amortization of loans, mortgage-backed securities and investment securities are
predictable sources of funds, deposit flows and loan and mortgage-backed securities prepayments are
strongly influenced by changes in general interest rates, economic conditions and competition.
Carver Federal monitors its liquidity utilizing guidelines that are contained in a policy developed
by its management and approved by its Board of Directors. Carver Federal’s several liquidity
measurements are evaluated on a frequent basis. The Bank was in compliance with this policy as of
March 31, 2010.
Management believes Carver Federal’s short-term assets have sufficient liquidity to cover loan
demand, potential fluctuations in deposit accounts and to meet other anticipated cash requirements.
Additionally, Carver Federal has other sources of liquidity including the ability to borrow from
the FHLB-NY utilizing unpledged mortgage-backed securities and certain mortgage loans, the sale of
available-for-sale securities and the sale of certain mortgage loans. Net borrowings increased
$16.5 million during fiscal 2010 primarily as a result of the bank allowing higher cost
certificates of deposit to runoff and replaced them with lower cost borrowings. At March 31, 2010,
the Bank had $78.2 million in borrowings with a weighted average rate of 3.06% maturing over the
next three years. The continued disruption in the credit markets has not materially impacted the
Company’s ability to access borrowings. At March 31, 2010, based on available collateral held at
the FHLB-NY, Carver Federal had the ability to borrow from the FHLB-NY an additional $51.2 million
on a secured basis, utilizing mortgage-related loans and securities as collateral.
The Bank’s most liquid assets are cash and short-term investments. The level of these assets
is dependent on the Bank’s operating, investing and financing activities during any given period.
At March 31, 2010 and 2009, assets qualifying for short-term liquidity, including cash and
short-term investments, totaled $38.3 million and $13.3 million, respectively.
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The most significant liquidity challenge the Bank faces is variability in its cash flows as a
result of
mortgage refinance activity. When mortgage interest rates decline, customers’ refinance
activities tend to accelerate, causing the cash flow from both the mortgage loan portfolio and the
mortgage-backed securities portfolio to accelerate. In contrast, when mortgage interest rates
increase, refinance activities tend to slow, causing a reduction of liquidity. However, in a
rising rate environment, customers generally tend to prefer fixed rate mortgage loan products over
variable rate products. Because Carver Federal generally sells its one-to-four family 15-year and
30-year fixed rate loan production into the secondary mortgage market, the origination of such
products for sale does not significantly reduce Carver Federal’s liquidity.
The OTS requires that the Bank meet minimum capital requirements. Capital adequacy is one of
the most important factors used to determine the safety and soundness of individual banks and the
banking system. At March 31, 2010, the Bank exceeded all regulatory minimum capital requirements
and qualified, under OTS regulations, as a well-capitalized institution. See “—Regulatory Capital
Position” below for certain information relating to the Bank’s regulatory capital compliance at
March 31, 2010.
The Consolidated Statements of Cash Flows present the change in cash from operating, investing
and financing activities. During fiscal 2010, total cash and cash equivalents increased by $25.0
million reflecting cash provided by financing activities of $14.4 million, and cash provided by
operating activities of $1.5 million, and cash provided by
investing activities of $9.2 million.
Net cash provided by financing activities was $14.4 million, primarily resulting from
increased borrowings of $16.5 million, offset partially by reductions in deposits of $0.2 million
and the payment of common dividends of $1.9 million. Net cash provided by operating activities
during this period was $1.5 million and was primarily the result of an increase in
provision for loan losses of $7.8 million, a write-down of loans held
for sale of $2.1 million, a decrease in cash flow from other assets
of $9.1 million
and changes in other non-cash charges. Net cash provided by investing activities was
$9.2 million, primarily the result of principal paydowns, maturities, and calls on securities of
$19.4 million and disposals of premises and equipment of $3.1 million, partially offset by a net
outflow of funds caused by loan activity of $12.0 million.
Off-Balance Sheet Arrangements and Contractual Obligations
The Bank is a party to financial instruments with off-balance sheet risk in the normal course
of business in order to meet the financing needs of its customers. These instruments involve, to
varying degrees, elements of credit, interest rate and liquidity risk. In accordance with
accounting principles generally accepted in the United States of America (“GAAP”), these
instruments are not recorded in the consolidated financial statements. Such instruments primarily
include lending commitments.
Lending commitments include commitments to originate mortgage and consumer loans and
commitments to fund unused lines of credit. The Bank also has contractual obligations related to
operating leases. Additionally, the Bank has a contingent liability related to a standby letter of
credit. See Note 14 of Notes to Consolidated Financial Statements for the Bank’s outstanding
lending commitments and contractual obligations at March 31, 2010.
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The Bank has contractual obligations at March 31, 2010 as follows (in thousands):
Variable Interest Entities
The Holding Company’s subsidiary, Carver Statutory Trust I, is not consolidated with Carver
Bancorp Inc. for financial reporting purposes in accordance with the FASB’s ASC Topic 810 regarding
the consolidation of variable interest entities (formerly FIN 46(R)). Carver Statutory Trust I
was formed in 2003 for the purpose of issuing $13.0 million aggregate liquidation amount of
floating rate Capital Securities due September 17, 2033 (“Capital Securities”) and $0.4 million of
common securities (which are the only voting securities of Carver Statutory Trust I), which are
100% owned by Carver Bancorp Inc., and using the proceeds to acquire Junior Subordinated Debentures
issued by Carver Bancorp Inc. Carver Bancorp Inc. has fully and unconditionally guaranteed the
Capital Securities along with all obligations of Carver Statutory Trust I under the trust agreement
relating to the Capital Securities.
The Bank’s subsidiary, Carver Community Development Corporation (“CCDC”), was formed to
facilitate its participation in local economic development and other community-based activities.
Per the NMTC Award’s Allocation Agreement between the CDFI Fund and CCDC, CCDC is permitted to form
and sub-allocate credits to subsidiary Community Development Entities (“CDEs”) to facilitate
investments in separate development projects. The Bank was originally awarded $59 million of NMTC
and received a second award in May 2009 of $65 million of NMTC.
With respect to $40 million of the original award of NMTC awards, the Bank has established
various special purpose entities through which its investments in NMTC eligible activities are
conducted. As the Bank is exposed to all of the expected losses and residual returns from these
investments the Bank is deemed the primary beneficiary. Accordingly, all of these special purpose
entities are consolidated in the Bank’s Statement of Financial Condition as of March 31, 2010 and
2009 resulting in the consolidation of assets of approximately $40.0 million and $36.9 million,
respectively.
In fiscal 2009, the Bank transferred rights to an investor in a NMTC project totaling $19.2
million and recognized a gain on the transfer of rights of $1.7 million. The Bank was required to
maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity
was called CDE-10. For financial reporting purposes, the $19.2 million transfer of rights to an
investor in a NMTC project was reflected in the other assets and the minority interest sections of
the balance sheet as the entity to which the rights were transferred was required to be
consolidated based on an evaluation of certain contractual arrangements between the Bank and the
investor. In fiscal 2009, following certain amendments to the agreement between CCDC and the
investor that resulted in a reconsideration event under the accounting guidance, the Bank
deconsolidated the entity for financial statement reporting purposes. However, under the current
arrangement, the Bank has a contingent obligation to reimburse the investor for any loss or
shortfall incurred as a result of the NMTC project not being in compliance with certain regulations
that would void the investor’s ability to otherwise utilize tax credits stemming from the award.
The maximum possible loss to Carver from such an arrangement is approximately $7.4 million. At
March 31, 2010,
Carver has not recorded any liability with respect to this obligation in accordance with the
FASB’s ASC Topic 450 regarding Accounting for Contingencies.
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In December 2009, the Bank transferred rights to an investor in a NMTC project totaling $10.5
million and recognized a gain on the transfer of rights of $0.5 million. The Bank was required to
maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity
was called CDE-13. This entity has been reviewed for possible consolidation under the accounting
guidance related to variable interest entities and based on an evaluation of the design of the
entity and its exposure to risks and rewards from its variable interests in the entity, the Bank is
not required to consolidate the entity.
In March 2010, the Bank transferred rights to investors in a NMTC projects totaling $20.5
million and recognized a gain on the transfer of rights of $0.5 million and expects to receive
additional income of $0.5 million in the future contingent upon certain events occurring. The Bank
was required to maintain a 0.01% interest in each of the newly created entities with the investor
owning the remaining 99.99%. The entities were called CDE-15, CDE-16 and CDE-17. These entities
have been reviewed for possible consolidation under the accounting guidance related to variable
interest entities and based on an evaluation of the design of the entity and its exposure to risks
and rewards from its variable interests in the entity, the Bank is not required to consolidate the
entity.
Regulatory Capital Position
The Bank must satisfy three minimum capital standards established by the OTS. For a
description of the OTS capital regulation, see “Item 1—Regulation and Supervision—Federal Banking
Regulation—Capital Requirements.”
The Bank presently exceeds all capital requirements as currently promulgated. At March 31,
2010, the Bank had tangible equity ratio, core capital ratio, and total risk-based capital ratio of
7.86%, 7.88% and 11.71%, respectively, and was considered well capitalized. For additional
information regarding Carver Federal’s Regulatory Capital and Ratios, refer to Note 12 of Notes to
Consolidated Financial Statements, “Stockholders’ Equity.”
Impact of Inflation and Changing Prices
The financial statements and accompanying notes appearing elsewhere herein have been prepared
in accordance with GAAP, which require the measurement of financial position and operating results
in terms of historical dollars without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the increased cost of
Carver Federal’s operations. Unlike most industrial companies, nearly all the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact
on Carver Federal’s performance than do the effects of the general level of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the prices of goods
and services.
The information required by this item appears under the caption “Discussion of Market
Risk—Interest Rate Sensitivity Analysis” in Item 7, incorporated herein by reference. The Company
believes that there has been no material change in the Company’s market risk at March 31, 2010 as
compared to March 31, 2009.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Carver Bancorp, Inc.: We have audited the accompanying consolidated statements of financial condition of Carver
Bancorp, Inc. and subsidiaries as of March 31, 2010 and 2009, and the related consolidated
statements of operations, changes in stockholders’ equity and comprehensive income (loss), and cash
flows for each of the years in the three-year period ended March 31, 2010. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Carver Bancorp, Inc. and subsidiaries as of March 31,
2010 and 2009, and the results of their operations and their cash flows for each of the years in
the three-year period ended March 31, 2010, in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
New York, New York July 15, 2010
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CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except per share data)
See accompanying notes to consolidated financial statements
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CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
See accompanying notes to consolidated financial statements
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CARVER
BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
See accompanying notes to consolidated financial statements
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CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See accompanying notes to consolidated financial statements
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CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Nature of operations
Carver Bancorp, Inc. (on a stand-alone basis, the “Holding Company” or “Registrant”), was
incorporated in May 1996 and its principal wholly-owned subsidiaries are Carver Federal Savings
Bank (the “Bank” or “Carver Federal”), Alhambra Holding Corp., an inactive Delaware corporation,
and Carver Federal’s wholly-owned subsidiaries, CFSB Realty Corp., Carver Community Development
Corp. (“CCDC”) and CFSB Credit Corp., which is currently inactive. The Bank has a majority owned
interest in Carver Asset Corporation, a real estate investment trust formed in February 2004.
“Carver,” the “Company,” “we,” “us” or “our” refers to the Holding Company along with its
consolidated subsidiaries. The Bank was chartered in 1948 and began operations in 1949 as Carver
Federal Savings and Loan Association, a federally chartered mutual savings and loan association.
The Bank converted to a federal savings bank in 1986. On October 24, 1994, the Bank converted from
a mutual holding company to stock form and issued 2,314,275 shares of its common stock, par value
$0.01 per share. 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.
Collectively, the Holding Company, the Bank and the Holding Company’s other direct and indirect
subsidiaries are referred to herein as the “Company” or “Carver.”
In September 2003, the Holding Company formed Carver Statutory Trust I (the “Trust”) for the
sole purpose of issuing trust preferred securities and investing the proceeds in an equivalent
amount of floating rate junior subordinated debentures of the Holding Company. In accordance with
Accounting Standards Codification (“ASC”) 810,
“Consolidations”, Carver Statutory Trust I is not consolidated for
financial reporting purposes.
Carver Federal’s principal business consists of attracting deposit accounts through its
branches and investing those funds in mortgage loans and other investments permitted by federal
savings banks. The Bank has nine branches located throughout the City of New York that primarily
serve the communities in which they operate.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts of the Holding Company, the Bank
and the Bank’s wholly-owned or majority owned subsidiaries, Carver Asset Corporation, CFSB Realty
Corp., Carver Community Development Corporation, and CFSB Credit Corp. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with U.S. generally
accepted accounting principles. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated statement of financial condition and revenues and
expenses for the period then ended. Amounts subject to significant estimates and assumptions are
items such as the allowance for loan losses, realization of deferred tax assets, intangibles,
pensions and the fair value of financial instruments. Management believes that prepayment
assumptions on mortgage-backed securities and mortgage loans are appropriate and the allowance for
loan losses is adequate. While management uses available information to recognize losses on loans,
future additions to the allowance for loan losses or future write downs of real estate owned may be
necessary based on changes in economic conditions in the areas where Carver Federal has extended
mortgages and other credit instruments. Actual results could differ significantly from those
assumptions. Current market conditions increase the risk and complexity of the judgments in these
estimates.
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In June 2009, the FASB released the Codification as the single source of authoritative
non-governmental GAAP. The Codification is effective for interim and annual periods ended after
September 15, 2009. All previously existing non-SEC accounting standards documents are superseded.
All other non-grandfathered, non-SEC accounting literature not included in the Codification is
non-authoritative. Rules and interpretive releases of the Securities and Exchange Commission
(“SEC”) are also sources of authoritative GAAP for SEC registrants. The Company’s policies were
not affected by the conversion to ASC. However, references to specific accounting guidance in the
Company’s financial statements have been changed to the appropriate section of the ASC.
In addition, the Office of Thrift Supervision (“OTS”), Carver Federal’s regulator, as an
integral part of its examination process, periodically reviews Carver Federal’s allowance for loan
losses and, if applicable, real estate owned valuations. The OTS may require Carver Federal to
recognize additions to the allowance for loan losses or additional write downs of real estate owned
based on their judgments about information available to them at the time of their examination.
Cash and cash equivalents
For the purpose of reporting cash flows, cash and cash equivalents include cash, amounts due
from depository institutions, federal funds sold and other short-term instruments with original
maturities of three months or less. Federal funds sold are generally sold for one-day periods.
The amounts due from depository institutions include a non-interest bearing account held at the
Federal Reserve Bank (“FRB”) where any additional cash reserve required on demand deposits would be
maintained. Currently, this reserve requirement is zero since the Bank’s vault cash satisfies cash
reserve requirements for deposits.
Investment Securities
When purchased, investment securities are designated as either investment securities
held-to-maturity or investment securities available-for-sale. Securities are classified as
held-to-maturity and carried at amortized cost only if the Bank has a positive intent and ability
to hold such securities to maturity. Securities held-to-maturity are carried at cost, adjusted for
the amortization of premiums and the accretion of discounts using the level-yield method over the
remaining period until maturity.
If not classified as held-to-maturity, securities are classified as available-for-sale
demonstrating management’s ability to sell in response to actual or anticipated changes in interest
rates and resulting prepayment risk or any other factors. Available-for-sale securities are
reported at fair value. Estimated fair values of securities are based on either published or
security dealers’ market value if available. If quoted or dealer prices are not available, fair
value is estimated using quoted or dealer prices for similar securities.
The Company conducts periodic reviews to identify and evaluate each investment that has an
unrealized holding loss. Unrealized holding gains or losses for securities available-for-sale are
excluded from earnings and reported net of deferred income taxes in accumulated other comprehensive
income (loss), a component of Stockholders’ Equity. Any other-than-temporary impairment is
recognized in earnings when there are non-credit losses on a debt security which management does
not intend to sell, and for which it is more-likely-than-not that the entity will not be required
to sell the security prior to the recovery of the non-credit impairment. In those situations, the
portion of the total impairment that is attributable to the credit loss would be recognized in
earnings, and the remaining difference between the debt security’s amortized cost basis and its
fair value would be included in other comprehensive income. Prior to April 1, 2009 the guidance
did not require a separate determination of the credit-related and non credit-related components of
unrealized gains and losses. During fiscal 2010 no impairment charge was recorded. During fiscal
2009, the Company recognized $52 thousand in other than temporary impairment on a security. No
impairment charge was recorded for fiscal 2008. Gains or losses on sales of securities of all
classifications are recognized based on the specific identification method.
Loans Held-for-Sale
Loans held-for-sale are carried at the lower of cost or market value as determined on an
aggregate loan basis. Premiums paid and discounts obtained on such loans held-for-sale are
deferred as an adjustment to the carrying value of the loans until the loans are sold.
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Loans Receivable
Loans receivable are carried at unpaid principal balances plus unamortized premiums, purchase
accounting mark-to-market adjustments, certain deferred direct loan origination costs and deferred
loan origination fees and discounts, less the allowance for loan losses.
The Bank defers loan origination fees and certain direct loan origination costs and accretes
such amounts as an adjustment of yield over the contractual lives of the related loans using
methodologies which approximate the interest method. Premiums and discounts on loans purchased are
amortized or accreted as an adjustment of yield over the contractual lives, of the related loans,
adjusted for prepayments when applicable, using methodologies which approximate the interest
method.
Loans are placed on non-accrual status when they are past due 90 days or more as to
contractual obligations or when other circumstances indicate that collection is not probable. When
a loan is placed on non-accrual status, any interest accrued but not received is reversed against
interest income. Payments received on a non-accrual loan are either applied to the outstanding
principal balance or recorded as interest income, depending on an assessment of the ability to
collect the loan. A non-accrual loan is restored to accrual status when principal and interest
payments become less than 90 days past due and its future collectability is reasonably assured.
The Company defines an impaired loan as a loan for which it is probable, based on current
information, that the lender will not collect all amounts due under the contractual terms of the
loan agreement. Collateral dependent impaired loans are assessed individually to determine if the
loan’s current estimated fair value of the property that collateralizes the impaired loan, if any,
is less than the recorded investment in the loan. Cash flow dependent loans are assessed
individually to determine if the present value of the expected future cash flows is less than the
recorded investment in the loan. Smaller balance homogeneous loans are evaluated for impairment
collectively unless they are modified in a trouble debt restructure. Such loans include one-to
four family residential mortgage loans and consumer loans.
Allowance for Loan and Lease Losses
The adequacy of the “Bank’s ALLL is determined, in accordance with the Interagency Policy
Statement on the Allowance for Loan and Lease Losses (the “Interagency Policy Statement”) released
by the Office of Thrift Supervision on December 13, 2006 and in accordance with ASC Topic 450 and
ASC Topic 310. The ALLL reflects management’s evaluation of the loans presenting identified loss
potential, as well as the risk inherent in various components of the portfolio.
Compliance with the Interagency Policy Statement includes management’s review of the Bank’s
loan portfolio, including the identification and review of individual problem situations that may
affect a borrower’s ability to repay. In addition, management reviews the overall portfolio
quality through an analysis of delinquency and non-performing loan data, estimates of the value of
underlying collateral, current charge-offs and other factors that may affect the portfolio,
including a review of regulatory examinations, an assessment of current and expected economic
conditions and changes in the size and composition of the loan portfolio are all taken into
consideration.
Carver maintains a general reserve allowance in accordance with ASC Topic 450 that is
comprised of two principal components: (1) a general reserve allowance for performing loans and (2)
an allocation of a general reserve allowance for certain Criticized and Classified loans. Carver
believes that the loan review of Criticized and Classified loans provides a more accurate general
reserve provision.
Carver also maintains a specific reserve allowance for Criticized and Classified loans that
are reviewed for impairment in accordance with ASC topic 310 guidelines and deemed to be impaired.
In accordance with the Interagency and GAAP guidance, Carver maintains a general allowance for
performing loans based upon a review of 10 different factors. The first factor utilized is actual
historical loss experience by major loan category expressed as a percentage of performing loans.
As the loss experience for a particular loan category increases or decreases, the level of reserves
required for that particular loan category also
increases or decreases. Because actual loss experience may not adequately predict the level
of losses imbedded in a portfolio, the Bank reviews nine qualitative factors to determine if
reserves should be increased based upon any of those factors.
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All non-performing loans and certain delinquent loans, as identified through the ALLL review
process, are evaluated individually for potential losses in accordance with Interagency and GAAP
guidance and consistent with Carver’s ALLL policy and methodology. The individuals evaluating the
loans include the Chief Risk Officer, Chief Lending Officer, Credit Officer, Workout Officer, Loan
Officers and consultants. The conclusions reached as a result of the evaluation process are
submitted to management and Board of Directors committees for their review and approval. The loans
are reviewed in accordance with ASC Topic 450. Management believes that this review provides a
better assessment of the possible losses imbedded in this portion of the portfolio. The resulting
reserves under this review still constitute a general allowance that has been allocated to the
loans reviewed in this section and may be utilized in accordance with ASC Topic 450.
ASC Topic 310 is the primary basis for valuing the impairments of specific loans whose
collectability has been called into question. The amount assigned to this aspect of the ALLL is
the individually-determined (i.e., loan-by-loan) portion thereof. The standard requires the use of
one of three approved methods to estimate the amount to be reserved for such credits. The three
methods are as follows: i) the present value of expected future cash flows discounted at the
loan’s effective interest rate, ii) the loan’s observable market price, or iii) the fair value of
the collateral if the loan is collateral dependent.
For loans individually evaluated for impairment under ASC Topic 310, the institution may
choose the appropriate measurement basis, except for an impaired collateral-dependent loan. This
guidance requires impairment of a collateral dependent loan to be measured using the fair value of
collateral method.
Criticized and Classified loans with at risk balances of $1,000,000 or more are identified and
reviewed for individual evaluation for impairment in accordance with ASC Topic 310. If it is
determined that it is probable the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement, the loan is impaired. Consumer credit non-accrual loans
are not tested for impairment because they are included in large groups of smaller-balance
homogeneous loans that, by definition, are excluded from the scope of ASC subtopic 310-10-35. If
the loan is determined to be not impaired, it is then grouped with the other loans to be
individually evaluated for potential losses. The impaired loans are then evaluated to determine
the measure of impairment amount based on one of the three measurement methods noted above. If it
is determined that there is an impairment amount, the Bank then determines whether the impairment
amount is permanent (that is a confirmed loss), in which case the impairment is charged off, or if
it is other than permanent, in which case the Bank establishes a specific valuation reserve that is
included in the total ALLL. However, in accordance with GAAP guidance, if there is no impairment
amount, no reserve is established for the loan.
All new loan originations are assigned a credit risk grade which commences with loan officers
and underwriters grading the quality of their loans one to five under a nine-category risk
classification scale, the first five categories of which represent performing loans. As part of
the approval process, the Credit Officer is responsible for reviewing and approving the assigned
credit risk grade at the time of credit approval. All loans are subject to continuous review and
monitoring for changes in their credit grading. Loans with credit risk grading that falls into
criticized or classified categories (credit grading six through nine) are further evaluated and
reserved amounts are established for each loan based on each loan’s potential for loss and includes
consideration of the sufficiency of collateral. Any adverse trend in real estate markets could
seriously affect underlying real estate collateral values available to protect against loss.
Trouble Debt Restructured Loans
Troubled debt restructured loans are those loans whose terms have been modified because of
deterioration in the financial condition of the borrower. Modifications could include extension of
the terms of the loan, reduced interest rates, and forgiveness of accrued interest and/or
principal. Once an obligation has been restructured because of such credit problems, it continues
to be considered restructured until paid in full or, if the obligation yields a market rate (a rate
equal to or greater than the rate the Company was willing to accept at the time of the
restructuring
for a new loan with comparable risk), until the year subsequent to the year in which the
restructuring takes place, provided the borrower has performed under the modified terms for at
least a six-month period. For a cash flow dependent loans the Company records an impairment charge
equal to the difference between the present value of estimated future cash flows under the
restructured terms discounted at the original loans effective interest rate, and the original loans
carrying value. For a collateral dependent loan, the Company records an impairment when the
current estimated fair value of the property that collateralizes the impaired loan, if any, is less
than the recorded investment in the loan.
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Segment Reporting
The Company has determined that all of its activities constitute one reportable operating
segment.
Concentration of Risk
The Bank’s principal lending activities are concentrated in loans secured by real estate, a
substantial portion of which is located in New York City. Accordingly, the ultimate collectability
of a substantial portion of the Company’s loan portfolio is susceptible to changes in New York’s
real estate market conditions.
Office Properties and Equipment
Office properties and equipment are comprised of land, at cost, and buildings, building
improvements, furnishings and equipment and leasehold improvements, at cost, less accumulated
depreciation and amortization. Depreciation and amortization charges are computed using the
straight-line method over the following estimated useful lives:
Maintenance, repairs and minor improvements are charged to non-interest expense in the period
incurred.
Federal Home Loan Bank Stock
The Federal Home Loan Bank of New York (“FHLB-NY”) has assigned to the Bank a mandated
membership stock purchase, based on the Bank’s asset size. In addition, for all borrowing
activity, the Bank is required to purchase shares of FHLB-NY non-marketable capital stock at par.
Such shares are redeemed by FHLB-NY at par with reductions in the Bank’s borrowing levels. On a
quarterly basis, these shares are evaluated for other-than-temporary impairment. We do not
consider these shares to be other-than-temporarily impaired at March 31, 2010. The Bank carries
this investment at historical cost.
Bank Owned Life Insurance
Bank Owned Life Insurance (“BOLI”) is carried at its cash surrender value on the balance sheet
and is classified as a non-interest-earning asset. Death benefits proceeds received in excess of
the policy’s cash surrender value are recognized in income. Returns on the BOLI assets are added
to the carrying value and included as non-interest income in the consolidated statement of income.
Any receipt of benefit proceeds is recorded as a reduction to the carrying value of the BOLI asset.
At March 31, 2010, Carver held no policy loans against its BOLI cash surrender values or
restrictions on the use of the proceeds.
Mortgage Servicing Rights
All separately recognized servicing assets and servicing liabilities are measured at fair
value.
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Real Estate Owned
Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at the lower of
loan carrying amount or the fair value at the date of acquisition less estimated selling costs.
The fair value of such assets is determined based primarily upon independent appraisals and other
relevant factors. The amounts ultimately recoverable from real estate owned could differ from the
net carrying value of these properties because of economic conditions. Costs incurred to improve
properties or prepare them for sale are capitalized. Revenues and expenses related to the holding
and operating of properties are recognized in operations as earned or incurred. Gains or losses on
sale of properties are recognized as incurred.
Identifiable Intangible Assets
Goodwill and intangible assets with indefinite useful lives are no longer amortized, rather
they are assessed, at least annually, for impairment (See note 3).
Identifiable intangible assets relate primarily to core deposit premiums, resulting from the
valuation of core deposit intangibles acquired in the purchase of branches of other financial
institutions. These identifiable intangible assets are amortized using the straight-line method
over a period of 5 years but not exceeding the estimated average remaining life of the existing
customer deposits acquired. Amortization periods for intangible assets are monitored to determine
if events and circumstances require such periods to be reduced.
Income Taxes
The Company records income taxes in accordance with ASC 740 “Income Taxes,” as amended, using
the asset and liability method. Income tax expense (benefit) consists of income taxes currently
payable/(receivable) and deferred income taxes. Temporary differences between the basis of assets
and liabilities for financial reporting and tax purposes are measured as of the balance sheet date.
Deferred tax liabilities or recognizable deferred tax assets are calculated on such differences,
using current statutory rates, which result in future taxable or deductible amounts. The effect on
deferred taxes of a change in tax rates is recognized in income in the period that includes the
enactment date. Where applicable, deferred tax assets are reduced by a valuation allowance for any
portion determined not likely to be realized. This valuation allowance would subsequently be
adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances
warrant.
Earnings (Loss) per Common Share
Basic earnings (loss) per share (“EPS”) is computed by dividing income (loss) available to
common stockholders by the weighted-average number of common shares outstanding. Diluted earnings
per common share includes any additional common shares as if all potentially dilutive common shares
were issued (for instance, stock options with an exercise price that is less than the average
market price of the common shares for the periods stated). For the purpose of these calculations,
unreleased Employee Stock Ownership Program (“ESOP”) shares are not considered to be outstanding.
For the year ended March 31, 2009 the Bank sustained net losses, therefore, the effects of stock
options were not considered in computing fully diluted earnings per common share as they would be
anti-dilutive.
Preferred and Common Dividends
On January 20, 2009, the Company issued 18,980 shares of fixed rate cumulative perpetual
preferred stock with a liquidation preference of $1 thousand per share, to the U.S. Department of
Treasury. These preferred shares pay dividends at a rate of five percent per annum. Carver accrues
the obligation for the preferred dividends as earned over the period the senior preferred shares
are outstanding.
Cash dividends to common stockholders are payable and accrued when declared by Carver’s Board
of Directors.
Treasury Stock
Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity.
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Pension Plans
The Company’s pension obligations, and the related costs, are calculated using actuarial
concepts, within the framework of the FASB guidance. The measurement of such obligations and
expenses requires that certain assumptions be made regarding several factors, most notably
including the discount rate and the expected return on plan assets. The Company evaluates these
critical assumptions on an annual basis. Other factors considered by the Company include retirement
patterns, mortality, turnover, and the rate of compensation increase.
Actuarial gain and losses, prior services cost or credits, and any remaining transition assets
or obligations that have not been recognized under previous accounting standards must be recognized
in “accumulated other comprehensive income or loss”, net of taxes effects, until they are amortized
as a component of net of periodic benefit cost. In addition, the measurement date (i.e., the date
at which plan assets and the benefit obligation are measured for financial reporting purposes) is
required to be the company’s fiscal year end.
NMTC fee income
The fee income the Company receives related to the transfers of its New Market Tax Credits
varies with each transaction but all are similar in nature. There are two basic types of fees
associated with these transactions. The first is a “sub-allocation fee” which is paid to CCDC when
the tax credits are allocated to a subsidiary entity at the time a qualified equity investment is
made. This fee is recognized by the Company at the time of allocation. The second type of fee is
paid to cover the administrative and servicing costs associated with CCDC’s compliance with NMTC
reporting requirements. This fee is recognized as the services are rendered.
Reclassifications
Certain amounts in the consolidated financial statements presented for prior years have been
reclassified to conform to the current year presentation.
Restatement to correct error in operating results previously reported for the second quarter of
fiscal 2010
The Company has restated its previously reported operating results for the second fiscal
quarter ended September 30, 2009 to adjust the estimated fair value of certain residential mortgage
loans that were classified as Held for Sale and reported at the lower of cost or fair value as of
September 30, 2009. The loans were transferred from Held for Sale to Held for Investment, effective
October 1, 2009. This restatement of second fiscal quarter
results is reflected in the operating
results reported for the full year ended March 31, 2010. Refer to Note 18. Quarterly Financial
Data (Unaudited) for further information.
Impact of Recent Accounting Standards and Interpretations
In June 2009, the FASB issued guidance on Variable Interest Entities ((ASC Subtopic 860-10)
(formerly SFAS No. 167), which amended the previous guidance applicable to variable interest
entities and changed how a reporting entity determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be consolidated. ASC
Subtopic 860-10 requires reporting entities to evaluate former qualifying special purpose entities
for consolidation, changes the approach to determining a variable interest entity’s (“VIE”) primary
beneficiary, increases the frequency of required assessments to determine whether a company is the
primary beneficiary of a VIE, clarifies the characteristics that identify a VIE, and requires
additional annual and interim disclosures. This standard is effective for fiscal years beginning
after November 15, 2009. The Company adopted this guidance on April 1, 2010 and there was no
material impact on the Company’s financial condition, results of operations or financial statement
disclosures.
In June 2009, the FASB issued a revision to earlier guidance on Transfers of Financial Assets
(ASC Subtopic 860-10) (formerly SFAS No. 166), which eliminates the concept of a “qualifying
special-purpose entity”, changes the requirements for derecognizing financial assets and includes
additional disclosures requiring more
information about transfers of financial assets in which entities have continuing exposure to
the risks related to the transferred financial assets. This guidance must be applied as of the
beginning of each reporting entity’s first annual reporting period that begins after November 15,
2009, for interim periods within the first annual reporting period and for interim and annual
reporting periods thereafter. Earlier application was prohibited. The Company will adopt this
guidance for transfers of financial assets on April 1, 2010 and does not anticipate it to have a
material effect on its consolidated financial statements.
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In May 2009, the FASB issued guidance related to Subsequent Events (ASC Subtopic 855-10)
(formerly SFAS No. 165) which established general standards of accounting for and disclosures of
events that occur after the balance sheet date but before financial statements are issued.
Specifically, this standard sets forth the period after the balance sheet date during which
management should evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial statements and the
disclosures that an entity should make about events or transactions that occurred after the balance
sheet date. Carver has evaluated subsequent events for potential recognition and/or disclosure
through the date the consolidated financial statements included in this Annual Report on Form 10-K
were issued.
In April 2009, the FASB issued guidance on Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly (ASC Subtopic 820-10) (formerly FASB Staff Position FAS 157-4) which provides
guidelines for estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased. It also includes guidance on identifying circumstances
that indicate that a transaction is not orderly. This guidance reaffirms the need to use judgment
to ascertain if an active market has become inactive and in determining fair values when markets
have become inactive. Fair value is the price that would be received from the sale of an asset or
paid to transfer a liability in an orderly transaction, not a forced liquidation or distressed
sale, between market participants at the measurement date under current market conditions. Under
this guidance, if the reporting entity concludes there has been a significant decrease in the
volume and level of activity for the asset or liability, transactions or quoted prices may not be
determinative of fair value. Further analysis is required and significant adjustments to the
transactions or quoted prices may be necessary. The Company considered this guidance in estimating
the fair value of assets and liabilities at March 31, 2010. The adoption of this guidance on April
1, 2009 did not have material impact on the Company’s consolidated financial statements for the
fiscal year ended March 31, 2010.
In April 2009, guidance was issued on Interim Disclosures about Fair Value of Financial
Instruments (ASC Subtopic 825-10) (formerly FSP FAS 107-1 and APB 28-1) related to fair value
disclosures for any financial instruments that are not currently reflected on a company’s balance
sheet at fair value. Prior to issuing this FSP, fair values for such assets and liabilities were
disclosed only once a year. The guidance now requires quarterly disclosures that provide
qualitative and quantitative information about fair value estimates for all those financial
instruments not measured on the balance sheet at fair value. The disclosure requirements were
effective for interim reporting periods ending after June 15, 2009.
In April 2009, the FASB issued guidance on Recognition and Presentation of
Other-Than-Temporary Impairments (“OTTI”) (ASC Subtopic 320-10) (formerly FSP FAS 115-2 and FAS
124-2) which relate to other-than-temporary impairment, are intended to bring greater consistency
to the timing of impairment recognition, and to provide greater clarity to investors about the
credit and non-credit components of impaired debt securities that are not expected to be sold. The
measure of impairment in comprehensive income remains fair value. The guidance also requires
increased and more timely disclosure regarding expected cash flows, credit losses, and the aging of
securities with unrealized losses. A cumulative effect adjustment is required to be recorded at
the ASC’s adoption date with respect to certain previously recognized other-than-temporary
impairment losses. This guidance is effective for interim and annual reporting periods ending after
June 15, 2009. The adoption of this guidance on April 1, 2009 did not have a material impact on
the Company’s consolidated financial statements.
In December 2008, the FASB issued guidance on Employers’ Disclosures about Postretirement
Benefit Plan Assets (ASC Subtopic 715-20) (formerly FSA FAS 132(R)-1), which provides guidance on
an employer’s disclosures about plan assets of a defined benefit pension or other postretirement
plan. The ASC clarifies that the objectives of the disclosures about postretirement benefit plan
assets are to provide users of financial statements with an understanding of: (1) how investment
allocation decisions are made, including the factors that are pertinent
to an understanding of investment policies and strategies; (2) the major categories of plan
assets; (3) the inputs and valuation techniques used to measure the fair value of plan assets; (4)
the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in
plan assets for the period; and (5) significant concentrations of risk within plan assets. In
addition, the ASC expands the disclosures related to these overall objectives. These new
disclosure requirements under ASC 715 became effective for the Company’s financial statement for
the year ended March 31, 2010 and are reported in Note 13 to Carver’s consolidated financial
statements.
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In June 2008, the FASB issued guidance on Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities (ASC 260) (formerly FSP EITF 03-6-1),
which addresses whether instruments granted in share-based payment transactions are participating
securities prior to vesting and, therefore, need to be included in the earnings allocation in
computing EPS. The guidance concluded that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents are participating securities and shall
be included in the computation of EPS pursuant to the two-class method. The Company’s restricted
stock awards are considered participating securities. This guidance is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years. All prior-period EPS
data presented was adjusted retrospectively to conform to these provisions. Early application was
not permitted. Adoption of this guidance did not have a material impact on the Company’s
computation of EPS.
In December 2007, the FASB issued guidance regarding Non-controlling Interests in Consolidated
Financial Statements (ASC Subtopic 810-10) (formerly SFAS No. 160), which established accounting
and reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. Among other things, this guidance clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements and requires consolidated net
income to be reported at amounts that include the amounts attributable to both the parent and the
non-controlling interest. This statement was effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008 and applied prospectively as of
the beginning of the fiscal year in which it is initially applied, except for the presentation and
disclosure requirements which are to be applied retrospectively for all periods presented. The
adoption of this statement did not have a material impact on the Company’s financial condition or
results of operations.
NOTE 3. IMPAIRMENT AND GOODWILL
The company reported Goodwill from its acquisition of Community Capital Bank in 2006 in the
amount of $7.1 million. In accordance with FASB guidance goodwill and intangible assets with
indefinite useful lives are no longer amortized, rather they are assessed, at least annually, for
impairment. The Company conducted an interim goodwill impairment analysis during the second
quarter of fiscal year 2009, based on indications that the fair value of the Company’s reporting
unit may have declined below its carrying value as a result of factors previously defined such as
the further decline in the Company’s market capitalization relative to the book value of
shareholders’ equity and the adverse market conditions impacting the financial services sector
generally. This analysis was completed during the third quarter ended December 31, 2008. A
valuation specialist was engaged to assist management in its fair value assessment of goodwill and
the Company determined that goodwill was impaired and recorded an impairment charge of $7.1 million
in fiscal 2009 reducing the carrying value of the goodwill to zero as of March 31, 2009.
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NOTE 4. SECURITIES
The following is a summary of securities at March 31, 2010 (in thousands):
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The following is a summary of securities at March 31, 2009 (in thousands):
The following is a summary of securities at March 31, 2008 (in thousands):
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The following is a summary regarding securities sales and/or calls of the available-for-sale
portfolio at March 31, 2010 (in thousands):
The Bank’s investment portfolio is comprised primarily of fixed rate mortgage-backed
securities guaranteed by a Government Sponsored Enterprise (“GSE”) as issuer. Carver Federal
maintains a portfolio of mortgage-backed securities in the form of Government National Mortgage
Association (“GNMA”) pass-through certificates, Federal National Mortgage Association (“FNMA”) and
Federal Home Loan Mortgage Corp (“FHLMC”) participation certificates. GNMA pass-through
certificates are guaranteed as to the payment of principal and interest by the full faith and
credit of the United States Government while FNMA and FHLMC certificates are each guaranteed by
their respective agencies as to principal and interest. Based on the high quality of the Bank’s
investment portfolio, current market conditions have not significantly impacted the pricing of the
portfolio or the Bank’s ability to obtain reliable prices.
The net unrealized gain on available-for-sale securities was $0.3 million ($224 thousand after
taxes) at March 31, 2010 and $0.2 million ($110 thousand after taxes) at March 31, 2009. On
November 30, 2002 the Bank transferred $22.8 million of mortgage-backed securities from
available-for-sale to held-to-maturity as a result of management’s intention to hold these
securities in portfolio until maturity. A related unrealized gain of $0.5 million was recorded as
a separate component of stockholders’ equity and is being amortized over the remaining lives of the
securities as an adjustment to yield. As of March 31, 2010 the carrying value of these securities
was $6.9 million and a related net unrealized gain of $72 thousand continues to be reported. There
were no sales of held-to-maturity securities in fiscal 2010, 2009 or 2008.
At March 31, 2010 the Bank pledged securities of $20.4 million as collateral for advances from
the FHLB-NY, $34.1 million as collateral for its repo agreements and $0.4 million against certain
large deposits.
The following is a summary of the carrying value (amortized cost) and fair value of securities
at March 31, 2010, by remaining period to contractual maturity (ignoring earlier call dates, if
any). Actual maturities may differ from contractual maturities because certain security issuers
have the right to call or prepay their obligations. The table below does not consider the effects
of possible prepayments or unscheduled repayments.
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The unrealized losses and fair value of securities in an unrealized loss position at
March 31, 2010 for less than 12 months and 12 months or longer were as follows (in thousands):
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