Exhibit 99.1
OFFICE OF THRIFT SUPERVISION
DENIAL OF HOLDING COMPANY ACQUISITION AND RELATED APPLICATIONS
ORDER NO.: 2004-47
DATE: OCTOBER 15, 2004
DOCKET NOS.: H-2732, 05273, 07173
Carver Bancorp Inc., New York, New York (Holding Company) has applied
to the Office of Thrift Supervision (OTS), pursuant to 12 U.S.C. ss. 1467a(e)(2)
and 12 C.F.R. ss. 574.3 to acquire Independence Federal Savings Bank,
Washington, D.C. (Association) (Holding Company Application). In addition, the
Holding Company and its wholly owned subsidiary, Carver Federal Savings Bank,
New York, New York (Bank) (collectively, the Applicants) seek OTS approval: (i)
to establish and merge an interim federal savings association with the
Association, pursuant to section 18(c) of the Federal Deposit Insurance Act
(Bank Merger Act or BMA), and 12 C.F.R ss.ss. 552.2-2 and 563.22(a) (BMA
Application I); (ii) for the Bank to acquire the Association's assets and
liabilities under the Bank Merger Act and 12 C.F.R ss. 563.22(a) (BMA
Application II); (iii) for the voluntary dissolution of the Association pursuant
to 12 CFR ss. 546.4; and (iv) for the Bank to make a capital distribution of $31
million to the Holding Company to fund the acquisition, pursuant to 12 C.F.R ss.
563.140 et seq. (Collectively, the Holding Company Application and BMA
Applications I and II are referred to as the "Applications.")1 The Holding
Company also filed an application to retain more than 5% of the voting stock of
the Association pursuant to Section 10(e)(1)(A)(iii) of the Home Owners' Loan
Act (HOLA).2
BACKGROUND
The Holding Company, a publicly held Delaware corporation, is a unitary
savings and loan holding company that owns all of the stock of the Bank, a
Savings Association Insurance Fund (SAIF)-insured federal stock savings bank.
The Association is a publicly traded SAIF-insured federal stock savings bank.
The Holding Company has filed the Applications to acquire up to 100% of the
outstanding common stock of the Association, through the merger of an interim
association, chartered by the Bank, with and into the Association, with the
Association as the surviving entity. In connection with the subject transaction,
the Association will undergo a voluntary dissolution and will transfer all of
its assets and liabilities, including contingent liabilities, to the Bank, which
will operate the Association's franchise as a division of the Bank. The total
consideration to be paid by the Holding Company is approximately $30 million and
the source of funds for the acquisition is a proposed $31 million capital
distribution from the Bank to the Holding Company.
HOLDING COMPANY APPLICATIONS AND BANK MERGER ACT ACQUISITION
Section 10(e)(2) of the HOLA provides that in reviewing the proposed
acquisition of a savings association by a savings and loan holding company, OTS
must consider the managerial
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(1) Because OTS is denying the Applications, as discussed below, OTS is not
addressing the applications described in items (iii) and (iv), which are
dependent on approval of the Applications.
(2) We will address the application under Section 10(e)(1)(A)(iii) in separate
order.
ORDER NO.: 2004-47
PAGE 2
and financial resources and future prospects of the company and association
involved, the effect of the acquisition on the association, the insurance risk
to the SAIF, and the convenience and needs of the community to be served.3
Consideration of the managerial resources of a company or savings association
must include consideration of the competence, experience, and integrity of the
officers, directors, and principal shareholders of the company or savings
association.4 The Bank Merger Act and the OTS regulations thereunder impose
similar standards. Specifically, the Bank Merger Act requires OTS to consider
"the financial and managerial resources and future prospects of the existing and
proposed institutions . . . ."5 While there are minor differences in the
language of the HOLA and the Bank Merger Act, in both acts Congress intended
that OTS would look at the resources and future prospects of the acquiring
entities (savings and loan holding company and its existing savings association
subsidiary) as well as the savings association being acquired and make an
informed judgment as to the risks presented by the proposed transaction.
Similarly, the statutes require that OTS consider the impact of any acquisition
on competition.6 Also, 12 C.F.R ss. 563e.29 requires that the OTS take into
account assessments under the Community Reinvestment Act when approving holding
company acquisitions or mergers of savings associations.
In addition, the Bank Merger Act requires the responsible agency to
take into consideration, in its evaluation of a BMA application, the
effectiveness of any insured depository institution in combating money
laundering activities.7 Also, OTS regulations require that the OTS consider
whether the transaction is equitable to all concerned, whether full disclosure
has been provided regarding written or oral agreements through which any person
will receive anything of value in connection with the transaction, and whether
compensation to officers, directors, and controlling persons of the disappearing
association is reasonable.8
OTS has reviewed the Applications under these standards and has
concluded that the financial resources and future prospects of the Applicants
would be detrimental to the Applicants and the insurance risk of the SAIF, and,
therefore, are not consistent with approval.
OTS, as the regulator of the Applicants and the Association, has
extensive experience with all three parties, and has reviewed the Applicants'
present and projected financial position, including the Bank's projected
capitalization and profitability, the business plan and the Association's
current state of affairs, and concluded that the proposed acquisition will have
a detrimental impact on the financial resources of the Applicants, and the
insurance risk of the SAIF.
Upon consummation of the proposed acquisition, based on the most recent
PRO FORMA financial information provided by the Applicants, the Bank projects
that it will fall from well-
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(3) 12 U.S.C. ss. 1467a(e)(2). OTS' Control Regulations state that OTS may deny
an application by a company to acquire a savings association, "[i]f OTS finds
that the financial and managerial resources and future prospects of the accuiror
and association involved would be detrimental to the association or the
insurance risk of the SAIF... ." 12 C.F.R. ss. 574.7(c)(1)(i) (2004).
(4) Id.
(5) 12 U.S.C. ss. 1828(c)(5).
(6) 12 U.S.C. ss.ss. 1467a(e)(2) and 1828(c)(5).
(7) 12 U.S.C. ss. 1828(c)(11).
(8) 12 C.F.R. ss. 563.22(d)(1)(vi) (2004).
ORDER NO.: 2004-47
PAGE 3
capitalized to adequately capitalized status under the OTS prompt corrective
action regulations.9 Further, the subject acquisition will have a material
detrimental impact on the profitability level of the Applicants. Moreover, as
discussed, infra, these projections appear insufficient to satisfy the financial
challenges faced by the Bank.
On November 4, 2003, OTS designated the Association as both a "problem
association" and in "troubled condition" as defined at 12 C.F.R ss. 563.555 and
Sections 310 and 330 of the OTS Thrift Activities Handbook. The Association's
total assets have declined from $267 million as of December 31, 1998 to $195
million as of June 30, 2004, and the Association has experienced declining
profitability and has recently experienced significant net losses. For the year
ended December 31, 2003, the Association had a net loss of $1.4 million. The
Association's net loss for the eight-month period ending August 31, 2004, is
$2.5 million. The Association's earnings problems are mainly attributed to high
legal expenses and low profitability generally.
The Association is currently a defendant in three civil lawsuits
pending in the United States District Court for the District of Columbia. All
three suits relate to the Association's conduct in connection with a checking
account customer, the Washington Teachers Union (WTU). It is alleged that WTU
officials misappropriated and embezzled union finds.10 It is not possible at
this time to determine the Association's financial exposure as a result of these
lawsuits. The Association has not created any reserves to cover any adverse
judgments that may ultimately be rendered and the Bank's PRO FORMA income
calculations do not include any charges for the litigation. Further, the
Association is involved in ongoing litigation with its largest shareholder,
relating to claims of violations of federal securities law, breach of fiduciary
duties and tortious interference with the business relationship between the
Association and the Holding Company.
The cost of the above-described litigations has been material to the
Association, and legal expenses continue to mount. The terms of the merger
agreement, including the price per share, does not include any adjustments for
any pending lawsuits. The acquisition as presently structured, prevents the Bank
from obtaining an adequate return on its investments, thus hurting its future
prospects.
OTS notes that the above-described circumstances regarding the
Association would strain the financial and managerial resources of the
Applicants if the Applicants were to acquire the Association. OTS believes that
the Bank's management would have significant difficulties in integrating
operations of the Association into the Bank. The Bank has not explained how it
would change the operations currently conducted by the Association, nor has it
identified any personnel who would have the skill and authority to manage the
Association's business in a manner that would return the Association's
operations to profitability.
The PRO FORMA capital ratios and profitability levels, discussed above,
would not be sufficient in view of the risks described above, especially given
that the subject acquisition
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(9) 12 C.F.R. Part 565 (2004).
(10) On November 20, 2003, a number of persons associated with WTU were indicted
by a federal grand jury in a 27-count indictment charging them with conspiracy,
wire fraud, mail fraud, false statements, money laundering, and aiding the
filing of false tax returns, among other offenses, in connection with their
alleged roles in defrauding the WTU of millions of dollars between 1995 and
2002.
ORDER NO.: 2004-47
PAGE 4
would represent the Bank's first acquisition of another financial institution in
20 years and its first expansion outside of New York. Entering new geographic
markets can challenge the managerial and financial resources of an institution,
particularly in this instance where there is considerable distance between the
two markets, greater Washington, D.C. and New York. The Applicants have not
adequately demonstrated their ability to successfully undertake the acquisition
of a troubled institution in a distant market.
In sum, even accepting the Applicants' PRO FORMA financial projections,
the transaction will result in a material decrease in the Applicants'
capitalization and a material decline in the Bank's profitability. These PRO
FORMA capital ratios and profitability levels are insufficient to approve the
Applications, particularly in light of the specific circumstances presented by
the proposed transaction: (1) the Association's financial condition and
profitability have deteriorated in recent years and this deterioration has not
yet been reversed, (2) the Association is the subject of significant litigation
with no reserves established for potential adverse judgments, and (3)
restoration of the Association's business activities to profitability is a
significant challenge and is particularly challenging to the Applicants due to
the geographical distance between the Applicants' existing market in New York
and the Washington, D.C. area, the fact that the Washington, D.C. market is a
new market for the Applicants, and the Applicants have no previous experience
with such acquisitions. Based on these considerations, we conclude that the
proposed transaction would be detrimental to the Applicants.
Moreover, the adverse effect of the transaction on the financial
resources of the Applicants also has the effect of increasing the risks to the
SAIF. If the transaction were to be approved, the Applicants will be the
successors to the Association's troubled operations. The capital of both the
Holding Company and the Bank would decline significantly, and it would be
difficult to replace the capital due to the anticipated decline in the Bank's
earnings. Further, because the Applicants have not demonstrated that they can
resolve the Association's operational problems, those problems may persist,
endangering what would be a larger institution and thereby increasing the risk
to the SAIF.
CONCLUSION
Based on the foregoing analysis, OTS concludes that the effect of the
acquisition on the financial resources and future prospects of the Applicants
would be detrimental to them and to the insurance risk of the SAIF, and are
inconsistent with approval. Accordingly, the Applications are hereby denied.
By order of the Director of the Office of Thrift Supervision, or his
designee, effective ___________________________.
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Scott M. Albinson
Managing Director
Offive of Examinations, Supervision, and
Consumer Protection