Carver Bancorp, Inc. Reports Second Quarter Results

Announces Second Quarter EPS of $0.23, Declares $0.08 Second Quarter Dividend and Accelerates Stock Repurchase Program  NEW YORK, Oct. 27 /PRNewswire-FirstCall/ -- Carver Bancorp, Inc. (the "Company" or "Carver") (Amex: CNY), the holding company for Carver Federal Savings Bank (the "Bank"), today announced its results of operations for the three- and six-month periods ended September 30, 2005, the second quarter of the fiscal year ending March 31, 2006 ("fiscal 2006").

The Company reported diluted earnings per share of $0.23 for the quarter ended September 30, 2005 compared to $0.09 diluted earnings per share for the same period last year. Net income available to common stockholders increased $395,000, to $601,000 compared to $206,000 for the same period last year. An increase in non-interest income and a decrease in non-interest expense were partially offset by lower net interest income and higher income tax expense in the period.

Deborah C. Wright, Chairman, President and CEO of Carver, stated: "Our retail group continues to achieve success in building core deposits from our historical and newly built branches. Modest but consistent growth in core deposits is fueling similar improvements in depository fees and charges. However, the two most important factors in Carver's results for the second quarter were the continued margin compression and the decline in mortgage refinancings. While our lending balances increased substantially based on growth in originations and purchases in a highly competitive market for commercial real estate and affordable housing, loan fees and service charges declined as refinancings ebbed."

Ms. Wright continued: "We recognize, consistent with our industry, that until the yield curve begins to steepen, our net interest margin will continue to be under pressure. As such, we will continue to focus on opportunities to replace lower yielding investments with higher yielding loans and build core and other low cost sources of deposits."

Ms. Wright continued: "We continue to conduct a comprehensive review of costs to improve the Company's efficiency ratio. Much of the increase in Carver's operating expenses follows the investment made to grow the franchise, which we believe will create long-term shareholder value. Nevertheless, we made progress last quarter in reducing costs as we successfully completed the outsourcing of our ATM driving technology. We are also working on outsourcing a number of corporate administrative functions."

Ms. Wright concluded: "We are pleased to report that as part of our commitment to deliver value to our shareholders the Company's Board of Directors declared a quarterly dividend of $0.08 per share for the second quarter, payable on November 22, 2005, to shareholders of record at the close of business on November 8, 2005. In addition, the Board of Directors has decided that the outlook for Carver's future long-term growth and earnings support management's recommendation to return up to $2.5 million of capital to shareholders through an acceleration of repurchases over the next 18 months of the remaining 148,051 shares authorized under the 2002 stock repurchase program. We believe that this overall program to deliver value to our shareholders highlights our confidence in the future success of Carver."

Stock Repurchase Program

In August 2002, Carver's Board of Directors authorized a stock repurchase program to acquire up to 231,635 shares of the Company's outstanding common stock, or approximately 10 percent of the then outstanding shares. Since that time, the Company has purchased 83,584 shares at an average price of $17.03 to fund its stock-based benefit and compensation plans. On October 25, 2005, the Board of Directors approved accelerating the repurchase of the remaining 148,051 shares under the 2002 program, or up to a $2.5 million total investment, to take place over the next 18 months. This acceleration is designed not only to return capital to shareholders and capitalize on current trading values, but also to continue funding stock-based benefit and compensation plans. Purchases for the stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. The timing and actual number of shares repurchased under the plan depends on a variety of factors including price, corporate and regulatory requirements, and other market conditions.

Income Statement Highlights

Quarterly Results

Net income available to common stockholders increased $395,000, or 191.7%, to $601,000 compared to $206,000 for the same period last year. These results were primarily due to a $433,000 decrease in non-interest expense, a $201,000 increase in non-interest income and a decrease of $49,000 in dividends paid to preferred shareholders in the same period last year. Partially offsetting the increase in net income available to common stockholders was a $110,000 decrease in net interest income and an increase in income tax expense of $178,000, as further described below.

Net interest income decreased $110,000, or 2.4%, to $4.5 million compared to $4.6 million for the same period last year. This decline was a result of an increase in interest expense of $845,000, or 35.7%, partially offset by an increase in interest income of $735,000, or 10.5%, compared to the same period last year. Interest expense rose primarily as a result of an increase in the cost of money market and certificates of deposit accounts of 61 and 91 basis points, respectively. Interest income rose despite declining yields primarily as a result of increased real estate mortgage loan balances.

The Company did not provide for additional loan loss reserves as the Company considers the current overall allowance for loan losses to be adequate.

Non-interest income increased $201,000, or 24.2%, to $1.0 million compared to $830,000 for the same period last year. Non-interest income was affected by two significant events in the prior year's quarter. The first was a $1.5 million impairment charge deemed other than temporary that resulted from a decline in the market price of Independence Federal Savings Bank common stock that the Company held. Partially offsetting the impairment charge in the prior year's quarter was the receipt of a net $1.1 million grant from the department of the Treasury. In the current quarter, non-interest income increased as a result of additional deposit fees and charges of $133,000 from increased ATM and debit card fees as well as commissions from the sale of investments and life insurance. Partially offsetting non-interest income was a decline in loan fees and service charges of $218,000, primarily a reduction in prepayment penalty income as a result of slowing mortgage refinance activity.

Non-interest expense decreased $433,000, or 8.5%, to $4.6 million compared to $5.1 million for the same period last year. The decrease in non-interest expense was primarily due to a charge of $847,000 taken in the prior year quarter resulting from the expensing of capitalized costs related to the cessation of the merger with Independence Federal Savings Bank. In the current quarter, employee compensation and benefits expense increased $262,000 primarily as a result of staffing our new branches, Company-wide annual salary increases and the increased cost of employee benefit plans. Also contributing to the increase in non-interest expense in the current quarter were additional net occupancy and equipment expenses of $105,000 and $93,000, respectively, primarily resulting from the new branches and 24/7 ATM centers.

Income before taxes increased $524,000, or 129.1%, to $930,000 compared to $406,000 for the same period last year. Income taxes increased $178,000, or 117.9%, to $329,000 compared to $151,000 for the same period last year, primarily due to the increase in income before taxes.

Six-Month Results

Net income available to common stockholders increased $203,000, or 16.4%, to $1.4 million compared to $1.2 million for the same period last year. The increase is primarily due to higher non-interest income of $459,000, a decrease of $98,000 in dividends paid for preferred stock due to a conversion of the preferred stock to common stock in the prior year, an increase in net interest income of $47,000 and a decrease in income taxes of $21,000. Partially offsetting the increase in net income available to common stockholders was an increase in non-interest expense of $422,000, as detailed below.

Net interest income increased by $47,000, or 0.5%, to $9.2 million, relatively unchanged from the same period last year. Interest income increased $1.8 million, or 12.9%, compared to the same period last year primarily as a result of increased real estate mortgage loan balances. Partially offsetting the rise in interest income was additional interest expense of $1.7 million, or an increase of 38.1%, compared to the same period last year, primarily due to increased rates and deposit balances.

Non-interest income increased $459,000, or 23.3%, to $2.4 million compared to $2.0 million for the same period last year. Non-interest income increased compared to the second quarter of fiscal 2005 when the Company recognized an impairment charge deemed other than temporary of $1.5 million, resulting from the decline in market price of 150,000 shares of Independence stock that the Company held. In the second quarter of fiscal 2006, depository fees and charges increased $242,000, resulting from higher ATM usage, growth in debit card income and commissions earned from the sale of investments and life insurance. Also contributing to the rise in non-interest income was an increase of $71,000 in other income, primarily income earned as a result of the Bank's investment in a Bank owned life insurance ("BOLI") program. These increases were partially offset by a net $1.1 million grant from the Department of the Treasury's Community Development Financial Institution Fund and a $94,000 gain from the sale of securities, both in the same period last year. Loan fees and service charges declined $67,000, primarily as a result of decreased mortgage prepayment penalties following continued decline in mortgage refinancing activity.

Non-interest expense increased $422,000, or 4.7%, to $9.4 million compared to $9.0 million for the same period last year. The increase in non-interest expense was due to increases in employee compensation and benefits expense of $785,000, resulting from the staffing of new branches, Company-wide annual salary increases in the second quarter of fiscal 2006 and the increased cost of employee benefit plans. Also contributing to the increase in non-interest expense were additional net occupancy and equipment expenses of $203,000 and $165,000, respectively, also as a result of opening the new branches and 24/7 ATM centers. Partially offsetting the increase in non-interest expense was a charge of $847,000 incurred in the same period last year, which resulted from expensing previously capitalized costs related to cessation of the merger with Independence Federal Savings Bank.

Income before taxes increased $84,000, or 3.9%, to $2.2 million relatively unchanged from the same period last year. Income taxes decreased $21,000, or 2.6%, to $793,000 compared to $814,000 for the same period last year due to a decline in the effective tax rate as a result of the tax benefit associated with the Bank's investment in a BOLI program.

Financial Condition Highlights

At September 30, 2005 total assets increased by $21.3 million, or 3.4%, to $647.7 million compared to $626.4 million at March 31, 2005. The asset growth primarily reflects increases in total loans receivable, net, and other assets of $29.3 million and $5.3 million, respectively. The increase in total loans receivable, net, is attributable to new mortgage loan originations and purchases exceeding mortgage loan repayments. The increase in other assets is primarily attributable to a short term receivable related to mortgage-backed security principal repayments being held as collateral by New York State. The increase in total assets was partially offset by a decline in total securities of $13.3 million primarily as a result of maturities and repayments. Cash and cash equivalents declined $652,000 as liquid funds were used to fund loan growth.

At September 30, 2005, total liabilities increased by $19.6 million, or 3.4%, to $600.2 million from $580.6 million at March 31, 2005. The increase in liabilities is a result of deposit growth of $12.4 million and increases in advances from the Federal Home Loan Bank of New York of $10.0 million, which were used to fund loan growth. Partially offsetting the increase in total liabilities was a decrease in other liabilities of $2.8 million, resulting primarily from the payment of income taxes.

At September 30, 2005, total stockholders' equity increased $1.7 million, or 3.7%, to $47.5 million compared to $45.8 million at March 31, 2005. The increase in total stockholders' equity was primarily attributable to increased retained earnings of $1.1 million from net income derived during fiscal 2006. Additionally, an increase of $435,000 was attributable to the re-issuance of common stock the Company previously repurchased to fund its compensation and benefit programs. Also contributing to the increase in stockholders' equity was an additional $182,000 in accumulated other comprehensive income related to the mark-to-market of the Bank's available-for-sale securities.

Asset Quality

At September 30, 2005, non-performing assets totaled $2.7 million, or 0.59% of total loans receivable, compared to $998,000, or 0.23% of total loans receivable, at March 31, 2005. While non performing assets have increased, the level of non performing assets to total loans remains within the range the Bank has experienced over the trailing eight quarters. At September 30, 2005, the allowance for loan losses of $4.1 million remained relatively unchanged from March 31, 2005. At September 30, 2005, the ratio of the allowance for loan losses to non-performing loans was 150.8% compared to 410.7% at March 31, 2005. At September 30, 2005, the ratio of the allowance for loan losses to total loans receivable was 0.89% compared to 0.96% at March 31, 2005.

Adjustment to Earnings Release Schedule

Beginning next quarter, Carver intends to issue its quarterly earnings press release approximately 45 days following quarter end, at the same time the Company files its Securities and Exchange Commission ("SEC") Form 10-Q. Carver also intends to issue its fiscal year end earnings release 45 days following the fiscal year end, but the Company's SEC Form 10-K will be filed within 90 days of year end. Changes in the timing of the earnings press release reflect a growing trend driven in part by the impact of Sarbanes-Oxley and other reporting requirements.

About Carver Bancorp, Inc.

Carver Bancorp, Inc. is the holding company for Carver Federal Savings Bank, a federally chartered stock savings bank. Carver Federal Savings Bank, the largest African- and Caribbean-American run bank in the United States, operates eight full-service branches in the New York City boroughs of Brooklyn, Queens and Manhattan. For further information, please visit the Company's website at www.carverbank.com.