L. William Seidman Courage Award

Deborah Wright remembers some dark days as head of Carver Bancorp, the holding company for Carver Federal Savings Bank. The year was 2000, and Wright was not yet 12 months into her tenure as president of the New York-based thrift. Wright and the board had just lost a bitter proxy battle with two Boston-based dissident shareholders. A deal had been struck, allowing the shareholders to join the board in exchange for their dropping of a lawsuit against the bank.

The stakes were high for the largest African-American -run financial institution in the nation. Carveru00e2u20ac”today with $860 million in assetsu00e2u20ac”was enduring a dismal stretch of heavy losses due to an ill-fated move into consumer lending a few years earlier. The new additions to the board posed a threat to Wrightu00e2u20acu2122s mission to turn around the ailing bank and ensure a successful future for the New York City-based institution. Yet despite losing the battle, Wright had a big advantage in the war: support from a majority of the board. u00e2u20acu0153I knew that even though the board meetings might be difficult, at the end of the day I had the votes focused on doing the right thing,u00e2u20ac she says.

Wright did just that, steadily improving the bank by focusing on the basics: attracting talent, installing competent management, improving customer service, adding ATMs, expanding into commercial real estate, creating a website, and strengthening the balance sheet. Basically, the mission was to bring the bank into modern times. Wrightu00e2u20ac”now chairman, president, and chief executiveu00e2u20ac”and the rest of the board worked to steer the bank toward profitability and expand services.

These heroic efforts are paying off. For the fiscal year ending March 31, 2006, the bank earned $3.8 million, or $1.47 a diluted share, up from $2.6 million, or $1.03 a share a year earlier. Assets at the bank have almost doubled since March 31, 2002, up from $450 million. And asset quality over the years has improved, with Carver making no additional allowance for loan losses for 18 consecutive quarters ending Sept. 30.

The increases in revenue over the years have helped the thrift invest in itself and deepen its ties to the inner city neighborhoods it serves, ranging from Harlem to Brooklynu00e2u20acu2122s Bedford-Stuyvesant to the Jamaica section of Queens. The bank this year acquired Brooklyn-based Community Capital Bank, a financial institution that focuses on lending to minority and women-owned businesses. It also won, on its first application to the Treasury Department, the right to participate in the New Market Tax Credit program, securing $53 million worth of credits to help with commercial projects in low-income areas. (The bank also this year created the Carver Community Development Corp. to help administer the program.) And in November it opened a Financial Literacy Center in Harlem, with its first task to educate residents on how to avoid predatory lending. u00e2u20acu0153Itu00e2u20acu2122s a good start, and obviously as we grow as an institution and get more profitable, we hope to do a lot more,u00e2u20ac Wright says.

Therefore, due to Wrightu00e2u20acu2122s and the rest of the boardu00e2u20acu2122s efforts to turn the bank around and set up programs to improve inner city communities, Bank Director has named the directors of Carver Bancorp recipients of its third annual L. William Seidman Courage Award.

Board members at Carver emphasize the importance of running a bank well in order to remain a successful contributor to the community. Pazel Jackson Jr., a board member since 1997, recounts his days at Bowery Savings Bank, one of the largest community savings banks in the country in the 1960s and 1970s. u00e2u20acu0153The institution for many years had participated in New York City community activities on a major scale,u00e2u20ac says Jackson, whose father once had a mortgage with Carver more than 50 years ago. u00e2u20acu0153But you canu00e2u20acu2122t do that if you donu00e2u20acu2122t have a solid foundation, if you are not a viable bank. We want Carver to be financially sound first.u00e2u20ac

In a sense, in recent years Carver had returned to its roots by catching up with modern banking. The bank opened on 125th Street in Harlem under the name Carver Federal Savings & Loan Association, backed by Harlemu00e2u20acu2122s local businessmen and prominent clergymen. It expanded to Brooklyn in 1961, opening its first branch in the Bedford-Stuyvesant section. Over the next three decades the thrift continued to grow, adding seven offices and expanding its operations to Queens and Long Island.

But as the financial industry modernized in the 1980s and 1990s, Carver was slow to keep up. It didnu00e2u20acu2122t install its first ATM until 1989 and lacked conveniences such as a call center and telephone banking. One reason: It mainly invested deposits in money-market funds and mortgage-backed securities rather than using them for profitable loans. Its conservative balance sheet earned the bank income, but not enough for it to make the critical investments needed to remain competitive with other banks. That conservative attitude was in part due to an aging and cautious boardu00e2u20ac”hardly helped by the failure in 1990 of Freedom National Bank, one of the largest minority-owned banks in the country at the time. That bank subsequently went under for growing too aggressively.

Later, Carver started running into trouble of its own. A fire destroyed its headquarters in 1992. Under pressure by regulators to raise more capital, Carver sold stock for the first time to the public in 1994, with shares taking a nose dive at the sale, later leading to a $250,000 charge to settle a class-action lawsuit.

Things went from bad to worse. Under Thomas Clark Jr., a former state banking regulator who became bank president in 1995, the bank began wading into riskier lines of lending. It started originating mortgage loans and buying those of other banks. Finally, Clarku00e2u20acu2122s push into consumer, auto, and subprime loans ended in disaster. The thrift took a $7.8 million charge in its third quarter of its fiscal year ending March 31, 1999, mostly to cover for loan losses. That led to the dismissal of Clark in February 1999 and left the board to search for a new president who could offer a fresh beginning.

After a nationwide search of more than 25 applicants, the board picked Wright. In part, she stood out for what she wasnu00e2u20acu2122t: a banker. Wright, with MBA and law degrees from Harvard, served as New Yorku00e2u20acu2122s Housing Preservation and Development commissioner, then as president of the Upper Manhattan Empowerment Zone. Her no-nonsense approach, strong reputation in Harlem, and work with nonprofit groups won the board over. Jackson, a veteran board member and the only one left from before Wrightu00e2u20acu2122s tenure, says the board hired her in part for her energy level and vision on how to fix the bank. u00e2u20acu0153The fact she was a nonbanker was offset by very positive attributes she brought to the table,u00e2u20ac he says.

Wright started June 1, and quickly scheduled a meetingu00e2u20ac”along with some board membersu00e2u20ac”with the Office of Thrift Supervision. She found an ally in Robert Albanese, director of the agencyu00e2u20acu2122s northeast region. u00e2u20acu0153The OTS was also concerned I wasnu00e2u20acu2122t a banker,u00e2u20ac Wright says. u00e2u20acu0153We spent a couple of hours at the office. He was helpful to me because he reinforced to the board that I was to have a free hand in taking the very difficult steps to right the ship.u00e2u20ac

Those tough decisions included firing managers that werenu00e2u20acu2122t getting the job done. Yet Wright and the board also had to contend with battles for board control before finding replacements. Two Boston-based bankers, Kevin Cohee and Teri Williams, were looking to merge Carver with their bank and had their eyes on board seats.

Meanwhile, the New York press ran articles publicizing the banku00e2u20acu2122s heavy losses: $4.5 million in fiscal year 1999 and $1.1 million in FY 2000. The uncertain fate for Carver made recruitment of new managers all but impossible. u00e2u20acu0153Because of the difficulty of being a bank in the inner city, having a reputation being a little behind the times, getting hit with this proxy battle, and the newspapers running stories of us producing lossesu00e2u20ac”I mean, who would, quite frankly, trust their career here?u00e2u20ac Wrights asks.

So Wright reached out to business leaders and senior executives at banks she knew from her days as housing commissioner. Deutsche Bank, Fleet Bancorp., Dime Savings Bank, and JP Morgan Chase & Co. loaned employees for weeks at a time. Dime, for example, sent a team to assist each of Carveru00e2u20acu2122s departments. Chase sent staff to assess technology problems. u00e2u20acu0153We got through my first two years here basically with a borrowed team, so to speak.u00e2u20ac

But the election of Cohee and Williams to the board marked a turning point of sorts for Wright. While those board members were adversaries to her agenda, Wright took comfort in that she still had the majority of the board behind her, and support from a long list of colleagues and friends. During dinner with one friend, Wright listened. u00e2u20acu0153She told me, u00e2u20acu02dcYou donu00e2u20acu2122t have to turn around the bank in one year, but if you can show your investors what youu00e2u20acu2122ve got in terms of making the tough decisions that will put the organization on course to do better, you will win.u00e2u20acu2122u00e2u20ac Wright remained focused on the task at hand. The bank sold three unprofitable branches and set out to attract talent to fill key management positions.

Wright had already hired Margaret Peterson in September 1999 from Deutsche Bank to handle key administrative roles such as human resources. She later added Frank Deaton, a former Key Bank executive, as chief auditor in 2001. He now serves as senior vice president of operations. She tapped James Bason in 2003 from Bank of New York as chief lending officer to jumpstart commercial real estate lending.

u00e2u20acu0153Today we have a very qualified team of senior managers,u00e2u20ac says Pazel Jackson, a retired senior vice president of JP Morgan Chase. u00e2u20acu0153Debbie tackled the problem of a highly demoralized staff in 1999. She emphasized that the banku00e2u20acu2122s success was going to be very much dependent on improving customer service, so that our customers felt that they were receiving service comparable to any institution in our market.u00e2u20ac

Over time, Wright also revamped the board, adding directors with significant business and management experience. She brought on members such as Robert Holland Jr., a former president of Ben & Jerryu00e2u20acu2122s; Strauss Zelnick, a former president and chief executive of Bertelsmannu00e2u20acu2122s BMG Entertainment; David Hinds, a retired managing director at Deutsche Bank; and Edward Ruggiero, a vice president in corporate finance at Time Warner. In the process, when Cohee and Williamsu00e2u20acu2122 seats were up for renewal, the board declined, and the two sold their shares and moved on to focus on their bank, OneUnited Bank. These measures have brought nods from governance observers. Today, Carver outscores most companies in terms of corporate governance, according to Institutional Shareholder Services. Carver scored better than 99.7% of all companies in its universe, and 98.1% of its banking peers in terms of board issues, takeover defense, compensation, and auditing practices.

Wright and the board also worked to modernize the thrift. It had only one ATM when she joined. Now all eight branches have ATMs, and Carver has built five standalone ATM centers to give customers more access to their money. The thrift also added a call center. And since 2001, the bank has opened branches in Harlem, in the Jamaica section of Queens, and in the Fort Greene area of Brooklyn. Customers were also surveyed to see what types of products and services they desired. That has led to adding online banking, overdraft privileges on checking, and even credit cardsu00e2u20ac”the very instruments that burned Carver a few years before. As the bank grows, it will add more services, but with the proper due diligence. u00e2u20acu0153We have to make sure we joint venture or partner to offer services when necessary, so we donu00e2u20acu2122t go and invent insurance, IRA offerings, financial advice to our customers,u00e2u20ac Holland says. u00e2u20acu0153We just have to make sure we choose the right partners, that they have the right offerings, and that their commitment to our customers is the same as our commitment.u00e2u20acu2122

The increase in depth and breadth of services over the years has bolstered Carveru00e2u20acu2122s CRA ratings, which scored an u00e2u20acu0153outstandingu00e2u20ac during the most recent examination in 2004, up from u00e2u20acu0153satisfactoryu00e2u20ac in 2001.

Mining government resources has been another strategy at the thrift. Two of its three recently added branches have already reached profitability because the bank has been able to get them designated a banking development district by the state. The program brought in state deposits to the branches, giving them a head start to break even. u00e2u20acu0153They have been very aggressive at courting public money and state deposits,u00e2u20ac says Joseph Gladue, an analyst at Cohen Bros. & Co. in Philadelphia.

The improved financial performance has also allowed the thrift to pursue other types of government assistance. This year the thrift launched the aforementioned Carver Community Development Corp. to manage the New Market Tax Credit initiatives it won earlier this year from the Department of the Treasury. In one of its first projects, the bank lent money to renovate a dilapidated building in Harlem. The building is owned by a Wall Street executive, and the intention was to lease out office space to a group of doctors. The plan involved having the doctors manage leasing out the surplus space, but the bank was uncomfortable with doctors getting into the leasing business. u00e2u20acu0153We took a look at it and said, u00e2u20acu02dcHey, the numbers are too close,u00e2u20acu2122u00e2u20ac Wright says. u00e2u20acu0153So we sat the owner down and said, u00e2u20acu02dcLook we are not going to do this it this way because we think it will hurt the group. However weu00e2u20acu2122ve got this carrot for you.u00e2u20acu2122u00e2u20ac Instead, the bank offered the investor a reduction in the interest rate in return for requiring that he manage the property and pass on half the savings as a reduction in rent. The deal wouldnu00e2u20acu2122t have happened without the tax credit. u00e2u20acu0153The awards enabled us to go further down the list of things to do for the community,u00e2u20ac Holland adds.

Carver has also tapped government money to create its financial literacy center. The center in Harlem focuses on educating homeowners in the city who want to refinance properties, obtain reverse mortgages, or get new loans. One of its first initiatives is to build awareness on predatory lending. The center was opened thanks to a $600,000 grant from the Treasury Departmentu00e2u20acu2122s Community Development Financial Institutions Fund.

Another big move for Carver in 2006 was its purchase in September of Community Capital for $11.1 million in cash, expected to be accretive within a year. The bank had no business lending, making it hard to attract business deposits. After the debacle of moving into consumer loans in the 1990s, Wright and the board wanted expertise from outside. u00e2u20acu0153When you look at growing in communities we serve, this was an obvious piece of the puzzle that was missing,u00e2u20ac Holland says. u00e2u20acu0153It was an incredibly important strategic acquisition if we were going to grow and serve the markets that were our target areas.u00e2u20ac

To keep expanding, the bank faces plenty of challenges. Like all banks, it has felt the squeeze on margins due to higher interest rates and the inverted yield curve. It also wrestles the costs of expansion while keeping expenses in lineu00e2u20ac”its efficiency ratio was about 79%, mainly due to adding three branches in the past three years. u00e2u20acu0153Itu00e2u20acu2122s the fact that weu00e2u20acu2122re building to grow that is really a strain on our earnings,u00e2u20ac Wright says.

u00e2u20acu0153Our concern has been that we must make Carver a competitive, well-run financial institution,u00e2u20ac Jackson says. u00e2u20acu0153We have to reach certain levels of profitability, and we must be competitive in product offerings and all the things that make a bank successful.u00e2u20ac

Competition is as fierce as ever, as big banks are moving into Carveru00e2u20acu2122s neighborhoods to grab market share. In a sign of the times, Carveru00e2u20acu2122s branch at Lenox Ave. and 117th St.u00e2u20ac”once the sole provider on the blocku00e2u20ac”now faces Bank of America and Wachovia branches across the street.

Sarbanes-Oxley also weighs heavily. The extra consulting and auditing fees required for compliance is unnecessary, Wright says. She exhorted Congress to revisit the legislation to protect small banks in a September editorial to the New York Post.

Gladue, the analyst at Cohen, says Carver has managed the balance sheet well, aggressively selling off low-yielding securities, and itu00e2u20acu2122s using the proceeds to pay off higher-cost borrowings. u00e2u20acu0153They are negating the impact of the negative yield curve, and more so than other banks,u00e2u20ac Gladue says. He has a u00e2u20acu0153holdu00e2u20ac on the stock due to its price versus expected earnings over the four quarters ending Sept. 30, 2007. Gladue had a price target of $18 at the end of that period, which would represent an increase of 7.5%.

Investors are holding back for now. Its stock price traded at 19.5 times trailing earnings in mid-November, well behind the average of 36 times for thrifts of similar size in the Mid-Atlantic region, according to Gladue. The stock, trading around $16 in early December, was priced below book value. Given the potential with the inner cities and Carveru00e2u20acu2122s steady progress out of the red, Wright says she is puzzled by the tepid response. u00e2u20acu0153It really weighs on us that we are trading below book, and it is a conundrum because we see so much value in the neighborhoods we are in.u00e2u20ac

Thus, while Carveru00e2u20acu2122s board has been praised for its courage, its directors and shareholders are eagerly awaiting the time when the market praises it as well.

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