Judgment Day is Tuesday for Carver Bancorp, a fixture of the city’s business scene for 63 years and the nation’s largest bank founded and run by African-Americans. On that day, investors will gather to vote on whether to approve a rescue package for the ailing bank—and it’s not a sure bet yet that a requisite supermajority of them will do so.
“This [is] the most important annual meeting in Carver’s history and will determine the future of your institution,” Chief Executive Deborah Wright (pictured) is telling shareholders on the telephone, according to a copy of her calling script.
Carver, like many of the businesses, nonprofits and consumers it serves, was hit especially hard by the recession. It posted nearly $40 million in losses last year as it struggled with a huge amount of seriously delinquent loans, primarily real estate-related. It had $115 million in nonperforming loans as of June 30, but only $23 million in reserves. Earlier this year, federal regulators ordered the bank to raise capital.
Ms. Wright, who sits on such elite boards as the Partnership for New York City and Time Warner, persuaded Goldman Sachs, Citigroup and many of the city’s other big financial institutions in June to invest $55 million in Carver. Ms. Wright wasn’t available for comment. But selling this package to shareholders appears to be a challenge.
For starters, the deal would make the U.S. government Carver’s largest shareholder, with a 25% stake, because the feds would convert a stake they acquired upon providing the bank with $19 million in bailout money two years ago. Also, Carver’s existing stockholders would see their stakes massively diluted because the bank would issue about 136 million new shares, up from the 2.5 million it now has outstanding.
Compounding matters, Carver needs two-thirds of all investors to approve a key provision of the rescue package, rather than a simple majority. What’s more, unvoted shares count as “no” votes.
Getting the two-thirds could be tough. Ms. Wright can likely count on the support of institutions, such as the New York State Common Retirement Fund, which hold 41% of her bank’s stock, according to Institutional Shareholder Services. Ms. Wright and other Carver insiders collectively have about 4%. That’s quite some distance, however, from the support Carver needs, which explains why the bank has sent repeated letters and called shareholders this month urging them to vote.
What if Ms. Wright, who has run Carver since 1999, can’t muster the vote? One sure thing is the dividend rate on its rescue financing will soar from zero to 12%, costing the bank $6.6 million in annual expenses. That’s a hefty burden for an operation that made about $5 million in its most profitable year.
Oh, and Carver’s stock would also be delisted from Nasdaq, because it has traded for well under a dollar for so long. Shares could be had late last week for around 50 cents.