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 majority-owned interest in Carver Asset Corporation, a real estate investment trust 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, “Consolidations,” 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. Interest on the debentures has been deferred, per the terms of the agreement, as the Company is prohibited from making payments without prior 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.

Going Concern

The going concern assumption is a fundamental principle in the preparation of financial statements. It is the responsibility of management to assess the Company’s ability to continue as a going concern. In assessing this assumption, the Company has taken into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet date of March 31, 2016.

Debenture interest payments on the Carver Statutory Trust I capital securities remain on a deferral status, which is permissible under the terms of the Indenture for up to twenty consecutive quarterly periods. The quarter ended September 30, 2016 will represent the twentieth consecutive quarterly period for which interest payments have been deferred. The Company has expensed the deferred interest through the current period and currently has cash available to make the payment upon receipt of regulatory approval. We have applied for regulatory approval to make interest payments on our Trust Preferred Debt securities in September 2016 and are not aware of any information as to whether or not such approval will be granted. In connection with its application to the FRB to distribute the deferred interest payments, the Company anticipates that the FRB will review the Company’s internal assessment process for capital adequacy, the appropriate of the Company’s capital level given its overall risk profile, as well as the comprehensiveness and effectiveness of management’s capital planning. There can be no assurance that the FRB will not have a supervisory objection to the Company’s application, and, therefore, the Company has no control over whether or not the FRB will permit the deferred interest payments. In the event that the deferred interest payments on the debentures are not paid by September 19, 2016, an event of default will have occurred. If the Company fails to cure such default for a period within 30 days, either the debenture trustee or the holders of not less than 25% of the aggregate principal amount of the debentures then outstanding may, by written notice to the Company, declare the entire principal of the debentures and the interest accrued thereon to be due and payable immediately. If the Company is unable to pay the principal and interest of the debentures due to regulatory restrictions or otherwise, the holders may, thereafter, determine to sue the Company for nonpayment, which lawsuit could include a petition for involuntary bankruptcy. Based on the foregoing matters, there is substantial doubt about our ability to continue as a going concern.

The Company has prepared the consolidated financial statements contained in this annual report assuming that the Company will be able to continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. The Company’s financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The Company has expensed the deferred interest as necessary and currently has cash available to make the payment upon receipt of regulatory approval.

Regulation

On February 7, 2011, Carver Federal Savings Bank and Carver Bancorp, Inc. consented to enter into Cease and Desist Orders (the "Bank Order" and the “Company Order,” respectively, and together the "Orders") with the Office of Thrift Supervision ("OTS"). The OTS issued these Orders based upon its findings that the Company was operating with an inadequate level of capital for the volume, type and quality of assets held by the Company, that it was operating with an excessive level of adversely classified assets, and earnings inadequate to augment its capital. Effective July 21, 2011, supervisory authority for the Company Order passed to the Board of Governors of the Federal Reserve System and supervisory authority for the Bank Order passed to the Office of the Comptroller of the Currency ("OCC"). On November 3, 2014, the OCC notified the Bank that the OCC had determined that the Bank had satisfied all of the requirements of the Bank Order and directed that the Bank Order be terminated. In addition, the OCC notified the Bank that the OCC had determined that the Bank was no longer in "troubled condition" and was relieved of all prior conditions imposed on the Bank by the OTS as a result of its troubled condition designation. On September 24, 2015, the Federal Reserve notified the Company that the Company Order had been terminated and that the Company was no longer in "troubled condition."

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.

On June 29, 2011, the Company raised $55 million of capital by issuing 55,000 shares of mandatorily convertible non-voting participating preferred stock, Series C (the "Series C preferred stock"). The issuance resulted in a $51.4 million increase in equity after considering the effect of various expenses associated with the capital raise. The capital raise enabled the Company to make a capital injection of $37 million in the Bank on June 30, 2011. In December 2011, another $7 million capital injection was made in the Bank. The remainder of the net capital raised is retained by the Company for future strategic purposes or to downstream into the Bank, if necessary. No assurances can be given that the amount of capital raised is sufficient to absorb the expected losses in the Bank's loan portfolio. Should the losses be greater than expected, additional capital may be necessary in the future.

On October 25, 2011, Carver's stockholders voted to approve a 1-for-15 reverse stock split. A separate vote of approval was given to convert the Series C preferred stock to non-cumulative non-voting participating preferred stock, Series D ("the Series D preferred stock") and to common stock and to exchange the U.S. Treasury's ("Treasury") Community Development Capital Initiative ("CDCI") Series B preferred stock for common stock.

On October 27, 2011, the 1-for-15 reverse stock split was effected, which reduced the number of outstanding shares of common stock from 2,492,415 to 166,161.

On October 28, 2011, the Treasury exchanged the CDCI Series B preferred stock for 2,321,286 shares of Carver common stock and the Series C preferred stock converted into 1,208,039 shares of Carver common stock and 45,118 shares of Series D preferred stock.

Restatement

On July 12, 2016, the Finance and Audit Committee of the Board of Directors of Carver Bancorp, Inc., after consultation with KPMG LLP, our independent registered public accounting firm, determined that our consolidated financial statements for the fiscal year ended March 31, 2015, and each of the quarters of 2015 and 2016 should no longer be relied upon.

Within this report, we have included restated audited results as of and for the year ended March 31, 2015 as well as restated unaudited condensed consolidated financial information for the quarterly periods in 2016 and 2015, which we refer to as the Restatement. Our consolidated financial statements as of and for the year ended March 31, 2015 included in this Annual Report on Form 10-K has been restated from the consolidated financial statements included on our Annual Report on Form 10-K for the year ended March 31, 2015.

The Restatement corrects a material error related to the accrual of data processing and other expenses related to invoices paid to the Bank's core system service provider. In fiscal 2016, Carver Bancorp recognized expenses on invoices paid to its core system provider, and during the course of preparation of the fiscal 2016 consolidated financial statements and audit, management determined that $613 thousand of expenses should have been recognized in fiscal 2015. The cumulative adjustments to correct the errors in the consolidated financial statements as of March 31, 2015 decreased previously reported Accumulated Deficit and increased previously reported Other Liabilities by $613 thousand. The impact of the correction also decreased previously reported Net Income by $613 thousand and previously reported earnings per share by $0.17.

Management identified an accounting error related to the sale of a loan that impacted the issued financial statements for years prior to 2016. The 2015 financial statements were restated within the Company’s fiscal year 2016 Form 10-K to allow for the correction of this error in 2016. The adjustment to correct the error related to the financial statements is reflected as an increase of $598 thousand in the Accumulated Deficit balance at April 1, 2014 (FY 2015), as shown in the Statements of Changes in Equity, and a decrease in March 31, 2015 Other Assets and Accumulated Deficit balances, as shown in the Statement of Financial Condition, within Carver’s fiscal year 2016 Form 10-K.

Management also identified an accounting error related to the reporting of earnings per share (EPS). Under the two class method of computing EPS, the Company has two classes of stock to which undistributed earnings are allocated. Previously, the impact of the undistributed earnings allocated to the shares of the Company’s Series D convertible preferred stock had not been considered in this computation. Basic and Diluted EPS amounts are updated for all periods in a net income position to include 45,118 shares of Series D Preferred Stock which, under certain circumstances, could convert to 5,518,006 shares of common stock. There was no impact for fiscal year 2015 due to the fact that the Company recorded a net loss. Refer to Note 18 for the quarterly impact for those periods where EPS was restated.

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 accrued liabilities, provision for loan losses and certain reclassification entries.

For the year ended March 31, 2015, the Restatement for the material error reported a $613 thousand decrease in net income offset to an increase in other liabilities. The correction of certain other errors resulted in a reclass between cash flow from operating activities to the cash flow from investing activities section of the Consolidated Statement of Cash Flow. 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 2016 Form 10-K. For discussion of the Restatement adjustments, see Item 8. Financial Statements and Supplementary Data, Note 10 - Loss per Common Share and Note 18 – Quarterly Financial Data (Unaudited). The following analysis includes the financial statements as originally reported and as adjusted and takes into account the following adjustments.



CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	March 31, 2015
$ in thousands except per share data	As Previously Reported			Adjustment			As Restated
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	44,864		—			$	44,864
Money market investments	6,128			—			6,128
Total cash and cash equivalents	50,992			—			50,992
Restricted cash	6,354			—			6,354
Investment securities:
Available-for-sale, at fair value	101,185			(981		)	100,204
Held-to-maturity, at amortized cost (fair value of $15,653 and $12,231 at March 31, 2016 and March 31, 2015, respectively)	11,922			—			11,922
Total investments	113,107			(981		)	112,126

Loans held-for-sale (“HFS”)	2,576			148			2,724

Loans receivable:
Real estate mortgage loans	412,204			484			412,688
Commercial business loans	70,555			85			70,640
Consumer loans	434			—			434
Loans, net	483,193			569			483,762
Allowance for loan losses	(4,477		)	49			(4,428		)
Total loans receivable, net	478,716			618			479,334
Premises and equipment, net	7,075			—			7,075
Federal Home Loan Bank of New York (“FHLB-NY”) stock, at cost	3,519			—			3,519
Accrued interest receivable	2,781			—			2,781
Other assets ⁽¹⁾	11,266			(391		)	10,875
Total assets	$	676,386		$	(606	)	$	675,780

LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Savings	$	95,009		—			95,009
Non-interest bearing checking	50,731			—			50,731
Interest-bearing checking	30,860			—			30,860
Money market	148,702			—			148,702
Certificates of deposit	200,123			—			200,123
Mortgagors deposits	2,336			—			2,336
Total deposits	527,761			—			527,761
Advances from the FHLB-NY and other borrowed money	83,403			—			83,403
Other liabilities	10,243			728			10,971
Total liabilities	621,407			728			622,135
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 and March 31, 2015)	61			—			61
Additional paid-in capital	55,468			—			55,468
Accumulated deficit	(44,206		)	(1,334		)	(45,540		)
Treasury stock, at cost (1,944 shares at March 31, 2016 and March 31, 2015)	(417		)	—			(417		)
Accumulated other comprehensive loss	(1,045		)	—			(1,045		)
Total equity	54,979			(1,334		)	53,645
Total liabilities and equity	$	676,386		$	(606	)	$	675,780



CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended March 31, 2015
$ in thousands except per share data	As Previously Reported			Adjustment			As Restated
Interest income:
Loans	$	19,974		—			$	19,974
Mortgage-backed securities	799			—			799
Investment securities	1,339			—			1,339
Money market investments	215			—			215
Total interest income	22,327			—			22,327

Interest expense:
Deposits	2,853			—			2,853
Advances and other borrowed money	1,089			—			1,089
Total interest expense	3,942			—			3,942
Net interest income	18,385			—			18,385
Provision for (recovery of) loan losses	(3,010		)	168			(2,842		)
Net interest income after provision for (recovery of) loan losses	21,395			(168		)	21,227

Non-interest income:
Depository fees and charges	3,595			—			3,595
Loan fees and service charges	708			—			708
Gain on sale of securities, net	8			—			8
Gain (loss) on sale of loans, net	(2		)	—			(2		)
Gain on real estate owned, net	5			—			5
Lower of cost or market adjustment on loans held-for-sale	(28		)	—			(28		)
Other	1,282			—			1,282
Total non-interest income	5,568			—			5,568

Non-interest expense:
Employee compensation and benefits	11,588			—			11,588
Net occupancy expense	3,839			—			3,839
Equipment, net	900			—			900
Data processing	733			526			1,259
Consulting fees	952			51			1,003
Federal deposit insurance premiums	603			—			603
Other	8,099			(109		)	7,990
Total non-interest expense	26,714			468			27,182

Income (loss) before income taxes	249			(636		)	(387		)
Income tax expense	166			—			166
Consolidated net income (loss)	83			(636		)	(553		)
Less: Net loss attributable to non-controlling interest	(281		)	—			(281		)
Net income (loss) attributable to Carver Bancorp, Inc.	$	364		$	(636	)	$	(272	)

Earnings (loss) per common share:
Basic	$	0.10		(0.17		)	$	(0.07	)
Diluted	$	0.10		(0.17		)	$	(0.07	)