Through the fire: now that Carver is out of the woods, Deborah Wright is out to make this community bank compete with big-city players.

DEBORAH C. WRIGHT'S OFFICE DOESN'T have a Park Avenue view. Instead, she looks down on the concrete jungle of 125th Street in the heart of Harlem. Below, the sidewalks are littered with paper and bustling with shoppers and street vendors Across the hall, her boardroom overlooks crumbling brownstones.

In this room Wright, chairman, president, and CEO of Carver Federal Savings Bank (No. 1 on the BE BANKS list with $648.97 million in assets), and the rest of the executive team listen to the bank's chief of staff, Boy Swan, discuss the largest deal in Carver's history: an $11 million acquisition of Brooklyn-based Community Capital Bank If successful, the deal will boost Carver's loan production, increase assets by $155 million, and help stave off the competition by establishing Carver as a commercial lender. "Our bank is quite small relative to the institutions we are competing against in our marketplace," says Wright. Not only does Carver need to increase its scale, it needs additional opportunities to expand profits. "This transaction hits both objectives," she says.

Even still, Carver will stay close to the community it serves. "We're not a bank that has a branch on Park Avenue for a reason," Wright says. "All of our branches are in the inner city. It's what we care about, and if I had my druthers, we would be successful enough to shift gears to spend time on the un-banked and the underbanked because that's the job that's really left to be done."

By focusing on untapped markets in Harlem, Brooklyn, Queens, and the Bronx, New York, Wright has taken Carver, the nation's largest black-operated publicly traded bank, off life support. When Wright took the helm in 1999, the 58-year-old fiduciary institution had net losses of $4.5 million. Much of Carver's consumer credit portfolio--$2.3 million in unsecured personal loans, $3 million in unsecured credit card accounts, and $3.1 million in automobile loans--was poorly underwritten. What's more, the bank had no stand-alone ATMs, which meant limited income from fees and services. And to make matters worse, each branch had its own set of processes and procedures, which meant they were inefficiently operating as individual entities instead of as an integrated company.

But in a few years, Wright engineered a masterful turnaround by building Carver's assets from about $416 million to nearly $650 million without buying another bank--and now Wright is turning acquisitive. As a result, Carver is on the move to outpace competitors by expanding its residential and commercial real estate loan portfolio, improving customer service, bolstering products and services, and capitalizing on its comfort zone in an area that many banks don't touch--church lending. For this, Carver Bancorp has been named the 2006 BLACK ENTERPRISE Financial Services Company of the Year.

BATTLE WITH BBOC

Although Carver is riding high, that wasn't always the case. In March 1999, a few months before Wright arrived on the scene, Kevin Cohee, CEO of OneUnited Bank--then Boston Bank of Commerce--and his wife, Teri Williams, bought 7.4% of Carver's voting shares for $1.35 million, making them one of the bank's largest shareholders. When the board fired then-CEO Thomas Clark Jr. due to mounting losses, Cohee stepped forward, proposing that Carver purchase BBOC and that he and his wife run the operation. Carver's board suspected that if the couple acquired enough Carver shares they would initiate a takeover, and chose Wright instead. That's when the real battle began.

That August, as two board seats came up for election, BBOC nominated Cohee and Williams to the board.

With BBOC's high percentage of voting shares it was likely they would win the seats. Carver called off the shareholders' meeting, prompting Cohee to file a lawsuit to force one. Next, Wright announced that Morgan Stanley and venture capital firm Provender Capital Group would invest $2.5 million in exchange for convertible preferred voting stock, giving them an 8.25% equity stake. BBOC countered with a second lawsuit and claimed that Wright sold stock to her allies knowing they would vote for incumbent board members David Dinkins and David Jones.

A very public fight ensued, with Wright challenging Cohee's understanding of conducting business in Harlem and Cohee criticizing Wright's lack of banking experience. Eventually, Cohee and Williams settled for board seats, and by 2002 had sold their shares.

Once the dust settled, Carver's first order of business focused on updating products, streamlining operations, and increasing assets. "When Deborah Wright came the company had really stagnated," says Cohen Bros. & Co. analyst Joseph Gladue. "Their product offerings were out-of-date and there were a few unprofitable branches in their network." To stop the bleeding, Carver closed three locations, which held $45 million in deposits and wrote-off $8.3 million in poorly underwritten consumer loans. The balance sheet was strong enough to withstand the write-off, but Wright didn't want to reduce the assets by that much.

That's when she reached out to some of the iconic names in New York City business, including Henry Kravis, a founder of private equity firm Kohlberg Kravis Roberts & Co.; former Metropolitan Transportation Authority Chairman Virgil Conway; and the late Robert Tisch, former vice chairman of Loews Corp. and co-owner of the New York Giants, who helped to raise the $45 million in deposits Wright needed to keep from shrinking the assets.

In addition, Carver quickly understood that it had to focus on its loyal customers. Even as she worked to make changes, Wright got an earful. "Customers were comfortable giving us the bad news," she says. They were seeking investments, more access to the banks via ATMs, and competitive rates on CDs and savings accounts.

She worked to fix the system by putting a new team in place that could help Carver meet its customers' needs and grow. Margaret Peterson, the chief human resources officer, who was initially on loan from Deutsche Bank during the turnaround at Carver but was asked to stay on, says Carver needed to streamline. "What we found here was that the branches operated pretty much independently in terms of accountability and standards." As a result, Peterson hired an information technology director to help standardize processes and procedures related to the bank's systems.

To generate addition/fee income from people looking to get cash, Carver installed four stand-alone ATM centers in 2004 and 2005. One center, which opened in Brooklyn's Bedford-Stuyvesant neighborhood, has done particularly well. "I had to fight these guys to do it," Wright says of her staff. "They didn't believe in the location. I lived in [a nearby neighborhood] for 10 years, and my dad's church was in Bed-Stuy, so I knew--where can you go get cash on that end? It's tough." Although Carver does not release specific numbers, Wright notes "that there are limited banking services in Bedford-Stuyvesant and no banks or bank ATMs within dozens of blocks of the location we chose. So the community has responded very positively to this convenient and safe place to conduct banking."

In addition, Carver teamed up with outside vendors to help it generate fee income from non-interest rate sensitive lines of business, it now sells life insurance in its branches through SBLI USA and annuities and investments through Essex National Securities Inc.

Carver would immediately realize that great customer service would keep the loyalists coming back. To gain greater market share, it needed to do more, so Carver set its sights on real estate development and commercial lending. In 1999, construction loans represented just under 4% of its total loan portfolio, compared to 11.4% in 2005. Nonresidential real estate loans, which include commercial and church loans, were just 8.3% of Carver's loan portfolio in 1999, compared to 27.5% in 2005.

Carver went after that underserved market. When The Greater Allen A.M.E. Cathedral of New York wanted to double the size of its Allen Christian School in Queens, it thought of Carver first. "When we were looking to build the original school in 1982/they went to the mainstream competition for a loan, says Edwin Reed, CFO of Allen A.M.E. The church got turned down flat. "Having been turned down by several banks before, Carver came together with a consortium of two or three minority banks willing to make the loan because they understood churches, they understood schools in the black community, and that's where the relationship began." So when it came time to do the expansion, Carver got the call.

Carver authorized a $4.5 million construction loan for the school, which turned into a $5.5 million permanent loan, including construction and additional upgrades. In addition, Carver provided $9 million of a $14.9 million affordable housing project for Harlem's Abyssinian Baptist Church. "This is an area that most banks just shy away from," says Carver's chief lending officer, James Bason, who joined Carver in 2003 from Bank of New York, where he built relationships with developers, builders, real estate investors, and brokers.

CRITICAL MASS

While Carver remains rooted in the community it serves, Wright's primary focus remains on growing the business and expanding services into more profitable business lines. This is what makes the Community Capital Bank acquisition a great fit. "It allows us to spread the cost of overhead over a larger base, and [Community Capital is] in a more profitable business, which is small business lending. For us, it makes a lot of sense," she says. If the deal goes through, Carver's assets will increase to more than $800 million. "It's essential that we become a full-service bank in the communities we serve," adds Bob Holland, an independent member of the board of directors and general partner of CSW Private Equity in New York. "We need to get more services to businesses in the community. It's not easy for savings and loans to do commercial [banking] activities."

That's not to say that every transaction has been money in the bank. In 2004, Carver's bid to buy Washington D.C.-based Independence Federal Savings Bank in a plan to form a bank with $750 million in assets was blocked by banking regulators because IFSB had been losing money. In addition, internal strife within that bank made the institution unstable as a shareholder attempted to take control of the bank, appointing two directors and buying shares on the open market while Carver was attempting the buyout. "We got caught in the middle of two factions for control of the institution. One of them purchased a blocking position; there was no way to get around that," Wright says. "I still feel bad about it. We spent a lot of money there."

This time around, Wright tried a different approach. She was introduced to Community Capital President and Chief Executive Charles Koehler and spent a few years getting to know him. She also enlisted a trusted colleague, Swan, to crunch the numbers. As chief of staff and corporate secretary, Swan handles corporate governance and shareholder and director relations.

"The main thing is going to be to get this one down and integrated well," Wright says. The next step will be jumping through regulatory hoops and "getting people in the right chairs. I think we're going to be in the M&A game for some time to come," Wright adds.

That could be tough. With a small staff--Carver employs 126--it will take more time to put everything in place. Also, many of the typical targets, other African American-owned banks, aren't actively interested in selling, Wright says.

"The hard part is that most of the black banks are privately held and they are usually family owned or linked to an individual's identity," Wright says. "That's why so many of our institutions have gone under, because it's been very difficult to get deals done."

INTEREST RATE PINCH

Like other banks, Carver is feeling the effects of more than a year of interest rate increases by the Federal Reserve that are forcing banks to pay more to attract deposits while earning less on loans. Carver needs to find a way to cut expenses, Gladue says. At 82%, the bank's efficiency ratio, a measure of its expenses, is well above its peers, he notes, adding that thrifts with $500 million to $800 million in assets located in mid-Atlantic states typically have an efficiency ratio of about 55%. But Wright explains that the "median efficiency ratios for banks our size in our region are close to 70%. High performers are in the 50% to 60% range, but we have a higher cost structure as we're in a high-cost metropolitan area." It's also difficult to find people qualified to take the bank to the next level who are willing to work on 125th Street and accept the salaries small banks like Carver can offer.

"It's been a very interesting process to recruit people to work for a black institution," Wright says. "The person has got to know what they're doing because there is no one else here who can do it for them. We don't have the luxury of having six guys who know the same thing. The guy who runs the division has to be the guy."

Carver's Manhattan address compounds the challenge, Gladue says. "Carver is in a very competitive and expensive market. The challenge is to get good lenders and a lending platform that can make a large enough volume of good quality loans to help grow the bank. That's a continuing challenge."

These days, Wright is thinking about Carver's future. She expects the bank to grow regionally, which means more acquisitions of all types of institutions--black-owned, commercial banks, and thrifts--to increase assets, write more loans, and attract deposits. With that type of growth in mind, she is clear about one thing: Her commitment to the community she serves.

CARVER FEDERAL SAVINGS BANK
Deborah C. Wright, Chairman, President & CEO
New York, NY
Founded 1948

          STAFF   ASSETS *   CAPITAL *  DEPOSITS *   LOANS *

2001        110       110        113        137          131
2002    $449.49   $484.40    $529.57    $616.42      $648.97
2003     $35.37    $39.80     $56.03     $56.89       $61.38
2004    $325.89   $334.60    $368.28    $443.32      $488.39
2005    $309.86   $338.50    $337.14    $411.46      $576.13

* IN MILLIONS OF DOLLARS

Note: Table made from bar graph.