ORGANIZATION

Nature of operations

Carver Bancorp, Inc. (on a stand-alone basis, the “Company” or “Registrant”), was incorporated in May 1996 and its principal wholly-owned subsidiaries are Carver Federal Savings Bank (the “Bank” or “Carver Federal”) and Alhambra Holding Corp., an inactive Delaware corporation. Carver Federal's wholly-owned subsidiaries are CFSB Realty Corp., Carver Community Development Corporation (“CCDC”) and CFSB Credit Corp., which is currently inactive. The Bank has a real estate investment trust, Carver Asset Corporation ("CAC"), that was formed in February 2004.

“Carver,” the “Company,” “we,” “us” or “our” refers to the Company along with its consolidated subsidiaries. The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally-chartered mutual savings and loan association. The Bank converted to a federal savings bank in 1986. On October 24, 1994, the Bank converted from a mutual holding company structure to stock form and issued 2,314,375 shares of its common stock, par value $0.01 per share. On October 17, 1996, the Bank completed its reorganization into a holding company structure (the “Reorganization”) and became a wholly-owned subsidiary of the Company.

Carver Federal’s principal business consists of attracting deposit accounts through its branches and investing those funds in mortgage loans and other investments permitted by federal savings banks. The Bank has nine branches located throughout the City of New York that primarily serve the communities in which they operate.

In September 2003, the Company formed Carver Statutory Trust I (the “Trust”) for the sole purpose of issuing trust preferred securities and investing the proceeds in an equivalent amount of floating rate junior subordinated debentures of the Company. In accordance with Accounting Standards Codification (“ASC”) 810, “Consolidation,” Carver Statutory Trust I is unconsolidated for financial reporting purposes. On September 17, 2003, Carver Statutory Trust I issued 13,000 shares, liquidation amount $1,000 per share, of floating rate capital securities. Gross proceeds from the sale of these trust preferred debt securities of $13 million, and proceeds from the sale of the trust's common securities of $0.4 million, were used to purchase approximately $13.4 million aggregate principal amount of the Company's floating rate junior subordinated debt securities due 2033. The trust preferred debt securities are redeemable at par quarterly at the option of the Company beginning on or after September 17, 2008, and have a mandatory redemption date of September 17, 2033. Cash distributions on the trust preferred debt securities are cumulative and payable at a floating rate per annum resetting quarterly with a margin of 3.05% over the three-month LIBOR. During the second quarter of fiscal year 2017, the Company applied for and was granted regulatory approval to settle all outstanding debenture interest payments through September 2016. Such payments were made in September 2016. Interest on the debentures has been deferred since September 2016, per the terms of the agreement, which permit such deferral for up to twenty consecutive quarters, as the Company is prohibited from making payments without prior regulatory approval.

Carver relies primarily on dividends from Carver Federal to pay cash dividends to its stockholders, to engage in share repurchase programs and to pay principal and interest on its trust preferred debt obligation. The OCC regulates all capital distributions, including dividend payments, by Carver Federal to Carver, and the FRB regulates dividends paid by Carver. As the subsidiary of a savings and loan association holding company, Carver Federal must file a notice or an application (depending on the proposed dividend amount) with the OCC (and a notice with the FRB) prior to the declaration of each capital distribution. The OCC will disallow any proposed dividend, for among other reasons, that would result in Carver Federal’s failure to meet the OCC minimum capital requirements. In accordance with the Agreement, Carver Federal is currently prohibited from paying any dividends without prior OCC approval, and, as such, has suspended Carver’s regular quarterly cash dividend on its common stock. There are no assurances that dividend payments to Carver will resume.

Regulation

On October 23, 2015, the Board of Directors of the Company adopted resolutions requiring, among other things, written approval from the Federal Reserve Bank of Philadelphia prior to the declaration or payment of dividends, any increase in debt by the Company, or the redemption of Company common stock.

On May 24, 2016, the Bank entered into a Formal Agreement with the OCC to undertake certain compliance-related and other actions as further described in the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission (“SEC”) on May 27, 2016. As a result of the Formal Agreement, the Bank must obtain the approval of the OCC prior to effecting any change in its directors or senior executive officers. The Bank may not declare or pay dividends or make any other capital distributions, including to the Company, without first filing an application with the OCC and receiving the prior approval of the OCC. Furthermore, the Bank must seek the OCC's written approval and the FDIC's written concurrence before entering into any "golden parachute payments" as that term is defined under 12 U.S.C. § 1828(k) and 12 C.F.R. Part 359.

Restatement

On July 7, 2017, the Finance and Audit Committee of the Board of Directors of Carver Bancorp, Inc., after consultation with BDO USA, LLP, our independent registered public accounting firm, determined that our consolidated financial statements as of and for the fiscal year ended March 31, 2016, and each of the quarters during the 2016 and 2017 fiscal years should no longer be relied upon.

Within this report, we have included restated audited results as of and for the year ended March 31, 2016, as well as restated unaudited condensed consolidated financial information for the quarterly periods in 2016 and 2017, which we refer to as the Restatement. Our consolidated financial statements as of and for the year ended March 31, 2016 included in this Annual Report on Form 10-K have been restated from the consolidated financial statements included on our Annual Report on Form 10-K for the year ended March 31, 2016.

The Restatement corrects a material error related to approximately $1.7 million of reconciling items that were identified as uncollectable and written off, primarily during the fourth quarter of fiscal year 2017, as part of the focused review of reconciliations and internal controls. Management's evaluation of the items written off concluded that approximately $1.0 million of these writeoffs should have been accounted for in prior periods: $666 thousand of the amount written off should have been accounted for in fiscal year 2016 and the $361 thousand remainder should have been accounted for in years prior to fiscal year 2016. The $666 thousand of writeoffs attributable to fiscal year 2016 have been reflected in the Consolidated Statement of Operations for the fiscal year 2016. The $361 thousand of writeoffs attributable to periods prior to fiscal year 2016 have been presented in the consolidated financial statements as an adjustment to the opening balance of Accumulated Deficit as of March 31, 2015. On the March 31, 2016 Statement of Financial Condition, these adjustments decreased Cash by $472 thousand, Loans Receivable by $391 thousand, Other Assets by $525 thousand and Other Liabilities by $497 thousand. The impact of these adjustments on the fiscal 2016 Statement of Operations was an increase to Other Non-Interest Expense of $666 thousand. The impact of these adjustment on the fiscal 2016 Statement of Cash Flows was to decrease beginning and ending Cash and Cash Equivalents by $168 thousand and $472 thousand, respectively, increase the operating cash outflow from net loss by $666 thousand and increase the operating cash inflow from other assets and liabilities by $362 thousand.

The Company also identified and corrected material errors related to the accounting for loans on the Company's servicing platforms. The accounting adjustments are related to loan system maintenance items and payment applications that were not timely processed by the Bank on to its core provider system. Management's evaluation of these items concluded that approximately $1.2 million should have been accounted for in prior periods: $865 thousand should have been accounted for in fiscal year 2016 and the $285 thousand remainder should have been accounted for in years prior to fiscal year 2016. The $865 thousand of adjustments attributable to fiscal year 2016 have been reflected in the Consolidated Statement of Operations for the fiscal year 2016 as a reduction in interest income on loans. The $285 thousand of adjustments attributable to periods prior to fiscal year 2016 have been presented in the consolidated financial statements as an adjustment to the opening balance of Accumulated deficit as of March 31, 2015. On the March 31, 2016 Statement of Financial Condition, these adjustments decreased Accrued Interest Receivable by $1.2 million and Loans by $59 thousand. The impact of these adjustments on the fiscal 2016 Statement of Cash Flows was operating cash outflows of $865 thousand from increased net loss, $52 thousand from net premium amortization on loans and $25 thousand from the net change in other assets and liabilities and an inflow of $942 thousand from the net change in Accrued Interest Receivable.

In addition to the errors described above, adjustments have been made related to other individually immaterial errors including certain corrections that had been previously identified but not recorded because they were not material to our consolidated financial statements. These corrections included adjustments to other liabilities, interest expense and certain reclassification entries. On the March 31, 2016 Statement of Financial Condition, these corrections increased both Other Liabilities and Accumulated Deficit by $158 thousand (the opening balance of Accumulated Deficit at March 31, 2015 was increased by $92 thousand.) The impact of these corrections on the fiscal 2016 Statement of Operations was to increase interest on loans by $521 thousand and interest expense on advances and other borrowed money by $66 thousand and decrease loan fees and service charges by $521 thousand.

The cumulative adjustments to correct the above errors in the consolidated financial statements as of March 31, 2016 increased previously reported Accumulated Deficit by $2.3 million and decreased previously reported Accrued Interest Receivable by $1.2 million, Other Assets by $525 thousand, Other Liabilities by $339 thousand, Cash by $472 thousand, Loans Receivable by $391 thousand and Loans Held-for-Sale by $59 thousand. The impact of the corrections also increased beginning Accumulated Deficit by $738 thousand and increased previously reported Net Loss by $1.6 million and previously reported loss per share by $0.43 for fiscal year 2016.

All applicable amounts relating to this Restatement have been reflected in the consolidated financial statements and disclosed in the notes to the consolidated financial statements in this 2017 Form 10-K. See Note 19 – Quarterly Financial Data (Unaudited) for further details of the restatement adjustments for the quarterly periods of fiscal years 2016 and 2017. The following analysis includes the financial statements as originally reported and as adjusted and takes into account the following adjustments.



CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

	March 31, 2016
$ in thousands except per share data	As Previously Reported			Adjustment			As Restated
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	63,156		$	(472	)	$	62,684
Money market investments	504			—			504
Total cash and cash equivalents	63,660			(472		)	63,188
Restricted cash	225			—			225
Investment securities:
Available-for-sale, at fair value	56,180			—			56,180
Held-to-maturity, at amortized cost (fair value of $15,653 at March 31, 2016)	15,311			—			15,311
Total investments	71,491			—			71,491

Loans held-for-sale (HFS)	2,495			(59		)	2,436

Loans receivable:
Real estate mortgage loans	517,785			(152		)	517,633
Commercial business loans	71,192			(239		)	70,953
Consumer loans	42			—			42
Loans, net	589,019			(391		)	588,628
Allowance for loan losses	(5,232		)	—			(5,232		)
Total loans receivable, net	583,787			(391		)	583,396
Premises and equipment, net	5,983			—			5,983
Federal Home Loan Bank of New York (“FHLB-NY”) stock, at cost	2,883			—			2,883
Accrued interest receivable	3,647			(1,227		)	2,420
Other assets	7,557			(525		)	7,032
Total assets	$	741,728		$	(2,674	)	$	739,054

LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Savings	$	95,230		$	—		$	95,230
Non-interest bearing checking	56,634			—			56,634
Interest-bearing checking	33,106			—			33,106
Money market	163,380			—			163,380
Certificates of deposit	255,854			—			255,854
Mortgagors deposits	2,537			—			2,537
Total deposits	606,741			—			606,741
Advances from the FHLB-NY and other borrowed money	68,403			—			68,403
Other liabilities	12,369			(339		)	12,030
Total liabilities	687,513			(339		)	687,174
EQUITY
Preferred stock (par value $0.01 per share: 45,118 Series D shares, with a liquidation preference of $1,000 per share, issued and outstanding)	45,118			—			45,118
Common stock (par value $0.01 per share: 10,000,000 shares authorized; 3,698,031 issued; 3,696,087 shares outstanding at March 31, 2016)	61			—			61
Additional paid-in capital	55,470			—			55,470
Accumulated deficit	(45,710		)	(2,335		)	(48,045		)
Treasury stock, at cost (1,944 shares at March 31, 2016)	(417		)	—			(417		)
Accumulated other comprehensive loss	(307		)	—			(307		)
Total equity	54,215			(2,335		)	51,880
Total liabilities and equity	$	741,728		$	(2,674	)	$	739,054



CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

	Year Ended March 31, 2016
$ in thousands except per share data	As Previously Reported			Adjustment			As Restated
Interest income:
Loans	$	24,702		$	(344	)	$	24,358
Mortgage-backed securities	761			—			761
Investment securities	1,295			—			1,295
Money market investments	150			—			150
Total interest income	26,908			(344		)	26,564

Interest expense:
Deposits	3,269			—			3,269
Advances and other borrowed money	1,270			66			1,336
Total interest expense	4,539			66			4,605
Net interest income	22,369			(410		)	21,959
Provision for loan losses	1,495			—			1,495
Net interest income after provision for (recovery of) loan losses	20,874			(410		)	20,464

Non-interest income:
Depository fees and charges	3,112			—			3,112
Loan fees and service charges	940			(521		)	419
Gain on sale of securities, net	1			—			1
Gain on sale of loans, net	499			—			499
Gain on real estate owned, net	35			—			35
Gain on sale of building, net	1,221			—			1,221
Lower of cost or market adjustment on loans held-for-sale	1			—			1
Other	726			—			726
Total non-interest income	6,535			(521		)	6,014

Non-interest expense:
Employee compensation and benefits	11,358			—			11,358
Net occupancy expense	4,695			—			4,695
Equipment, net	635			—			635
Data processing	1,100			—			1,100
Consulting fees	1,058			—			1,058
Federal deposit insurance premiums	527			—			527
Other	8,078			666			8,744
Total non-interest expense	27,451			666			28,117

Loss before income taxes	(42		)	(1,597		)	(1,639		)
Income tax expense	128			—			128
Net loss	$	(170	)	$	(1,597	)	$	(1,767	)

Net loss	$	(170	)	$	(1,597	)	$	(1,767	)
Total other comprehensive income	738			—			738
Comprehensive income (loss)	$	568		$	(1,597	)	$	(1,029	)

Loss per common share:
Basic	$	(0.05	)	$	(0.43	)	$	(0.48	)
Diluted	$	(0.05	)	$	(0.43	)	$	(0.48	)



CONSOLIDATED STATEMENT OF CASH FLOWS

	Year Ended March 31, 2016
$ in thousands except per share data	As Previously Reported			Adjustment			As Restated
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(170	)	$	(1,597	)	$	(1,767	)

Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses	1,495			—			1,495
Stock based compensation expense	2			—			2
Depreciation and amortization expense	1,415			—			1,415
Loss (gain) on sale of real estate owned, net of market value adjustment	(35		)	—			(35		)
Gain on sale of securities, net	(1		)	—			(1		)
Gain on sale of loans, net	(499		)	—			(499		)
Gain on sale of building	(1,221		)	—			(1,221		)
Market adjustment on held-for-sale loans	(1		)	—			(1		)
Amortization and accretion of loan premiums and discounts and deferred charges	188			(52		)	136
Amortization and accretion of premiums and discounts - securities	322			—			322
Decrease (increase) in accrued interest receivable	(866		)	942			76
Decrease (increase) in other assets	(1,915		)	943			(972		)
Increase in other liabilities	2,010			(540		)	1,470
Net cash provided by operating activities	724			(304		)	420
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities	(52,036		)	—			(52,036		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities	63,980			—			63,980
Net (decrease) increase in cash and cash equivalents	12,668			(304		)	12,364
Cash and cash equivalents at beginning of period	50,992			(168		)	50,824
Cash and cash equivalents at end of period	$	63,660		$	(472	)	$	63,188