New York Connections Play Key Role in Carver's Capital Rescue

Deborah Wright has likely never been as happy to be a New Yorker as she is this week.

Carver Bancorp Inc., a struggling thrift company where Wright is the chief executive, managed to bring in $55 million in capital in a deal led by many of the city's heavyweights.

"Being in New York is a big advantage. We are a visible company that has tried and largely succeeded in doing the right thing for our community," says Wright, whose company largely serves Harlem. "I think both downtown and uptown wanted us to succeed."

The capital includes investments of $15 million each from Goldman Sachs Group Inc. and Morgan Stanley and $10 million each from Citigroup Inc. and Prudential Insurance Co. American Express Co. and First Republic Bank are investing $2 million each.

National Community Investment Fund, a private equity fund based in Chicago that focuses on community development and already had a stake in Carver, is investing $1 million.

The investments were for convertible preferred stock that will become common equity once shareholders approve the issuance of additional shares.

Additionally, the Treasury Department has agreed to convert the $19 million of preferred shares it owns as part of the Troubled Asset Relief Program into common equity.

The net effect of the moves raises Carver's equity threefold, giving it ample capital to fulfill regulator's demands, deal with its problem assets and possibly grow, Wright says. In April, observers pegged the capital needs at $35 million.

"Our blue-chip investors put their teams in here to conduct thorough reviews. ... They are the best minds in the city and they told us, 'you want to do this once, so let's focus on the worst-case scenarios, rather than meet the expectations,'" Wright says. "So if we are right, we will have money to grow. If not, we have enough to be protected."

Wright says that while most of the investors are new, those relationships go back years.

Goldman reiterated that relationship when asked why the company decided to invest.

"Carver plays a critical role in providing financing to the people, businesses and institutions in under-served communities and have been an invaluable partner of ours in a variety of community development investments," said Alicia Glen, a managing director at the investment bank and its head of the urban investment group, in an email.

More capital may also be in the works. The $709 million-asset company is also evaluating a rights offering to existing shareholders. Such offerings have become customary in recapitalizations as a way for existing shareholders to both share in the potential upside and offset the dilution.

The recapitalization is perhaps the most successful raise for a community development bank since the recession. Last summer, several of the largest firms in the financial world, including some of those involved in the Carver deal, banded together to try and save ShoreBank in Chicago with a $140 million pool.

The architects behind the attempted ShoreBank rescue had hoped that the private money would be enough to secure an investment from Treasury. No such deal materialized and ShoreBank failed in August 2010. The money raised was then used to back Urban Partnership Bank, a newly chartered institution, to acquire ShoreBank's deposits and assets from the Federal Deposit Insurance Corp.

Observers say that Carver likely succeeded where ShoreBank did not because the New York company's problems were not as severe. At March 31, the thrift was adequately capitalized, meaning the company addressed its issues quickly. ShoreBank's attempted capital raise came when the bank was already significantly undercapitalized.

"Carver was likely more salvageable because they stuck to their knitting, while ShoreBank expanded," says William Michael Cunningham, the founder of minority bank fund MBF LP in Washington. "When ShoreBank went down, it went down fast."

Several observers also say that Carver's success lays on Wright's shoulders.

"Debbie has been a great leader for Carver and I've said since the beginning that if anybody could raise that kind of capital it would be Debbie," says Jeannine Jacokes, a senior policy adviser to the Community Development Bankers Association.

Cunningham agrees, but said that the deal likely does not telegraph any signs of hope to other community development banks, particularly black-owned banks. Before the crisis began, Cunningham said there were 36 black-owned banks and about a half dozen have failed.

"No other [black-owned] ... bank could have done this. They are publicly traded, they are in New York. Those are competitive advantages," Cunningham says. "Now, the question is, does this suck the air out of the room for all the other struggling black-owned banks. It could be harder because the usual players could say 'we already contributed'."

Carver said in a release that the new capital would boost its leverage ratio to 12.43% from 5.38% at March 31 and its total risk-based capital ratio to 19.16% from 9.6%. The Office of Thrift Supervision ordered the thrift to maintain a leverage ratio of 9% and a total risk-based capital ratio of 13%, in a March enforcement action.

Early Thursday, Carver announced a $5.5 million loss in its fiscal fourth quarter that ended March 31, compared to a $2.2 million loss a quarter earlier. The loss was driven largely by a $6.8 million loan-loss provision. Nonperforming assets totaled $78 million, or 11% of total assets at the end of the quarter, up 65% from a year earlier.