**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**_________________**




**FORM
      10-K/A**


**(Amendment
      No. 1)**





**FOR
      ANNUAL AND TRANSITION REPORTS PURSUANT TO**


**SECTIONS
      13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**




**x**
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




**For
      the fiscal year ended March 31, 2006**




**OR**




**o**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




**For
      the transition period from _________ to _________**




Commission
      File Number: **0-21487**




**CARVER
      BANCORP, INC.**


*(Exact
      name of registrant as specified in its charter)*




***Delaware***
            
            ***13-3904174***(State
                or Other Jurisdiction of Incorporation or Organization)
            
            (I.R.S.
                Employer Identification No.)***75
                West 125******th******Street, New York, New York***
            
            ***10027***(Address
                of Principal Executive Offices)
            
            (Zip
                Code)*Registrant’s
                telephone number, including area code:****(212) 230-2900******Securities
                Registered Pursuant to Section 12(b) of the
                Act:******Common
                Stock, par value $.01 per share***
            
            ***American
                Stock Exchange***(Title
                of Class)
            
            (Name
                of each Exchange on which registered)***Securities
                registered pursuant to Section 12(g) of the
                Act:******None***





Indicate   by
      check
      mark if the registrant is a well-known seasoned issuer, as defined in Rule
      405
      of the Securities Act.  ̈ Yes   x No




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.  ̈ Yes   x No




Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.   x Yes   o No




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.   [   ]




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer




o Large
      Accelerated   o Accelerated x non-accelerated




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). o Yes   x No




As
      of
      June 15, 2006, there were 2,502,247 shares of common stock of the registrant
      outstanding. The aggregate market value of the Registrant’s common stock held by
      non-affiliates (based on the closing sales price of $17.39 per share of the
      registrant’s common stock on June 15, 2006) was approximately $43.5
      million.




DOCUMENTS
      INCORPORATED BY REFERENCE:




Portions
      of registrant’s proxy statement for the Annual Meeting of stockholders for the
      fiscal year ended March 31, 2006 are incorporated by reference into Part III
      of
      this Form 10-K.









**EXPLANATORY
      NOTE**





**Carver
      Bancorp, Inc. (the “Company”) is filing this amendment No. 1 to its Annual
      Report on Form 10-K for the year ended March 31, 2006, to reflect the
      restatement of its Consolidated Statements of Cash Flows, as discussed in Note
      1
      of the Notes to the Consolidated Financial Statements contained in Part II,
      Item
      8: Financial statements and supplementary data. Except for Items 7, 8 and 9A
      of
      Part II, no other information in the Form 10-K is being amended by this
      amendment. This amendment continues to speak as of the date of the original
      filing of the Form 10-K, and the Company has not updated the disclosure in
      this
      Amendment to speak as of any later date.**







2




CARVER
      BANCORP, INC.


2006
      ANNUAL REPORT ON FORM 10-K




TABLE
      OF
      CONTENTS


Part
                  I
              
              
              PageItem
                  1.
              Business
              
              2Item
                  1A
              Risk
                  Factors
              
              27Item
                  1B
              Unresolved
                  Staff Comments
              
              29Item
                  2.
              Properties
              
              29Item
                  3.
              Legal
                  Proceedings
              
              30Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              
              30Part
                  IIItem
                  5.
              Market
                  for Registrant’s Common Equity,
                  RelatedStockholder
                  Matters and Issuer Purchases of Equity
                  Securities
              
              31Item
                  6.
              Selected
                  Financial Data
              
              33Item
                  7.
              Management’s
                  Discussion and Analysis of
                  FinancialCondition
                  and Results of Operations
              
              34Item
                  7A.
              Quantitative
                  and Qualitative Disclosures about Market
                  Risk
              
              48Item
                  8.
              Financial
                  Statements and Supplementary
                  Data
              
              49Item
                  9.
              Changes
                  in and Disagreements with Accountants
                  onAccounting
                  and Financial Disclosure
              
              78Item
                  9A.
              Controls
                  and Procedures
              
              78Item
                  9B.
              Other
                  Information
              
              79Part
                  IIIItem
                  10.
              Directors
                  and Executive Officers of Carver Bancorp,
                  Inc.
              
              79Item
                  11.
              Executive
                  Compensation
              
              79Item
                  12.
              Security
                  Ownership of Certain Beneficial
                  Ownersand
                  Management and Related Stockholder
                  Matters
              
              79Item
                  13.
              Certain
                  Relationships and Related
                  Transactions
              
              79Item
                  14.
              Principal
                  Accounting Fees and
                  Services
              
              80Part
                  IVItem
                  15.
              Exhibits,
                  Financial Statement Schedules
              
              80SIGNATURES
              
              
              81EXHIBIT
                  INDEX
              
              
              E-1





**FORWARD-LOOKING
      STATEMENTS**




This
      Annual Report on Form 10-K contains certain “forward looking statements” within
      the meaning of the Private Securities Litigation Reform Act of 1995 which may
      be
      identified by the use of such words as “may,” “believe,” “expect,” “anticipate,”
“should,” “plan,” “estimate,” “predict,” “continue,” and “potential” or the
      negative of these terms or other comparable terminology. Examples of
      forward-looking statements include, but are not limited to, estimates with
      respect to our financial condition, results of operations and business that
      are
      subject to various factors which could cause actual results to differ materially
      from these estimates. These factors include, but are not limited
      to:





·
            the
                Company's success in implementing its new business initiatives, including
                expanding its product line, adding new branch offices and ATM centers
                and
                successfully re-building its brand
                image;




·
            increases
                in competitive pressure among financial institutions or non-financial
                institutions;




·
            legislative
                or regulatory changes which may adversely affect the Company’s
                business;




·
            technological
                changes which may be more difficult or expensive than we anticipate;




·
            changes
                in interest rates which may reduce net interest margins and net interest
                income;




·
            changes
                in deposit flows, loan demand or real estate values which may adversely
                affect the Company’s business;




·
            changes
                in accounting principles, policies or guidelines which may cause
                the
                Company’s condition to be perceived differently;




·
            litigation
                or other matters before regulatory agencies, whether currently existing
                or
                commencing in the future, which may delay the occurrence or non-occurrence
                of events longer than anticipated;




·
            the
                ability of the Company to originate and purchase loans with attractive
                terms and acceptable credit quality;




·
            success
                in integrating Community Capital Bank into Carver
                operations;




·
            the
                ability of the Company to realize cost efficiencies;
                and




·
            general
                economic conditions, either nationally or locally in some or all
                areas in
                which the Company does business, or conditions in the securities
                markets
                or the banking industry which could affect liquidity in the capital
                markets, the volume of loan origination, deposit flows, real estate
                values, the levels of non-interest income and the amount of loan
                losses.




Any
      or
      all of our forward-looking statements in this Annual Report and in any other
      public statements we make may turn out to be wrong. They can be affected by
      inaccurate assumptions we might make or by known or unknown risks and
      uncertainties. Consequently, no forward-looking statement can be guaranteed.
      We
      do not intend to update any of the forward-looking statements after the date
      of
      this prospectus or to conform these statements to actual events.




**PART
      I**






**ITEM
      1. BUSINESS** ****




**OVERVIEW**




Carver
      Federal Savings Bank, a wholly owned subsidiary of Carver Bancorp, Inc., is
      the
      largest African-American operated savings bank in the nation, with $661 million
      in assets as of March 31, 2006. Headquartered in the heart of the Harlem
      community of New York City, Carver Federal Savings Bank has eight branch
      offices, five stand-alone 24/7 ATM centers, and over 120 employees. Carver
      Federal Savings Bank’s consumer and commercial offerings include an array of
      deposit and real estate loan products that facilitate investing, savings and
      borrowing by its customers. Carver Federal Savings Bank also offers wealth
      management products through a third party provider.






2




GENERALDESCRIPTION OF BUSINESS




**Carver
      Bancorp, Inc.**




Carver
      Bancorp, Inc., a Delaware corporation (on a stand-alone basis, the “Holding
      Company” or “Registrant”), is the holding company for Carver Federal Savings
      Bank, a federally chartered savings bank, and its subsidiaries (collectively,
      the “Bank” or “Carver Federal”), Carver
      Statutory Trust I (the “Trust”) and Alhambra Holding Corporation, a Delaware
      corporation (“Alhambra”) . The
      Trust, which was formed in September 2003, exists for the sole purpose of
      issuing trust preferred debt securities and investing the proceeds in an
      equivalent amount of subordinated debentures of the Holding Company. The Holding
      Company formed Alhambra to hold the Holding Company’s investment in a commercial
      office building that was subsequently sold in March 2000. Alhambra is currently
      inactive. Collectively,
      the Holding Company, the Bank and the Holding Company’s other direct and
      indirect subsidiaries are referred to herein as the “Company” or
“Carver.”




On
      October 24, 1994, Carver Federal converted from mutual to stock form and issued
      2,314,275 shares of its common stock at a price of $10 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 Holding
      Company. Pursuant to an Agreement and Plan of Reorganization, dated May 21,
      1996, each share of the Bank’s outstanding common stock was exchanged for one
      share of common stock of the Holding Company. On January 11, 2000, the Holding
      Company sold, pursuant to a Securities Purchase Agreement, dated January 11,
      2000, in a private placement 40,000 shares of Series A Convertible Preferred
      Stock (the “Series A Preferred Stock”) to Morgan Stanley & Co. Incorporated
      (“MSDW”) and 60,000 Shares of Series B Convertible Preferred Stock (the “Series
      B Preferred Stock”) to Provender Opportunities Fund L.P. (“Provender”). On June
      1, 2004, Provender sold all 60,000 of its Series B Preferred Stock to Keefe
      Bruyette & Woods, Inc (“KBW”). On October 15, 2004, both MSDW and KBW
      elected to convert their Preferred Shares into shares of the Holding Company’s
      common stock, thus an additional 208,333 shares of common stock were issued
      to
      these parties.




On
      April
      6, 2006, the Company entered into a definitive merger agreement to acquire
      Community Capital Bank (‘CCB”), a Brooklyn-based community bank with
      approximately $162 million in assets, in a cash transaction valued at
      $11.1 million, or $40.00 per Community Capital share. The agreement has
      been approved by the Boards of Directors of both companies and, on June 28,
      2006, was also approved by the stockholders of Community Capital. The
      transaction is subject to and is awaiting regulatory approval and is expected
      to
      close by September 30, 2006. The acquisition of CCB and its award-winning small
      business lending platform will expand the Company’s ability to capitalize on
      substantial growth, especially in the small business market.




The
      Holding Company conducts business as a unitary savings and loan holding company,
      and the principal business of the Holding Company consists of the operation
      of
      its wholly owned subsidiary, the Bank. The Holding Company’s executive offices
      are located at the home office of the Bank at 75 West 125th Street, New York,
      New York 10027. The Holding Company’s telephone number is (718) 230-2900.




**Carver
      Federal Savings Bank**




Carver
      Federal was chartered in 1948 and began operations in 1949 as Carver Federal
      Savings and Loan Association, a federally chartered mutual savings and loan
      association, at which time it obtained federal deposit insurance and became
      a
      member of the Federal Home Loan Bank of New York (the “FHLB-NY”). Carver Federal
      converted to a federal savings bank in 1986 and changed its name at that time
      to
      Carver Federal Savings Bank.




Carver
      Federal was founded as an African-American operated institution to provide
      residents of under-served communities with the ability to invest their savings
      and obtain credit. Carver Federal’s principal business consists of attracting
      deposit accounts through its eight branch offices and investing those funds
      in
      mortgage loans and other investments permitted to federal savings banks. Based
      on its asset size as of March 31, 2006, Carver Federal is the largest
      African-American operated financial institution in the United
      States.




On
      March
      8, 1995, Carver Federal formed CFSB Realty Corp. as a wholly owned subsidiary
      to
      hold real estate acquired through foreclosure pending eventual disposition.
      At
      March 31, 2006, this subsidiary had $218,000 in total capital and a minimal
      net
      operating loss. At March 31, 2006 no foreclosed real estate was held by the
      Company, however as a result of a property tax redemption, the Bank, through
      its
      subsidiary Carver Realty Corp., took fee ownership of a vacant tract of land
      in
      Bayshore, NY. See Note 1 of Notes to Consolidated Financial Statements. Carver
      Federal also owns CFSB Credit Corp., an inactive subsidiary originally formed
      to
      undertake the Bank’s credit card issuances. During the fourth quarter of the
      fiscal year ended March 31, 2003 (“fiscal 2003”), Carver Federal formed Carver
      Asset Corporation, a wholly owned subsidiary which qualifies as a real estate
      investment trust (“REIT”) pursuant to the Internal Revenue Code of 1986, as
      amended. This subsidiary may, among other things, be utilized by Carver Federal
      to raise capital in the future. As of March 31, 2006 Carver Asset Corporation
      owned mortgage loans valued at approximately $131 million. On August 18, 2005
      Carver Federal formed Carver Community Development Corp. (“CCDC”), a wholly
      owned community development entity whose purpose is to make qualified business
      loans in low-income communities. As of March 31, 2006 CCDC had no assets or
      results from operations.




Carver
      Federal’s current operating strategy consists primarily of: (1) the origination
      and purchase of one- to four-family residential, commercial, construction and
      multifamily real estate loans in its primary market area; (2) investing funds
      not utilized for




3




loan
      originations or purchases in the purchase of United States government agency
      securities and mortgage-backed securities; (3) developing a commercial line
      of
      business through the pending acquisition of CCB in the fiscal year ended March
      31, 2007 (“fiscal 2007”); (4) generating fee income by attracting and retaining
      core deposit accounts, and expanding its ATM network and sale of wealth
      management products; and (5) continuing to monitor and control its expenses
      by
      efficiently utilizing personnel, branch facilities and alternative delivery
      channels (telephone banking, online banking, and ATMs) to service its customers.
      The business is not operated in such a way that would require segment
      reporting.




Carver
      Federal’s primary market area for deposits consists of the areas currently
      served by its eight branch offices with an anticipation of two additional
      offices with the successful acquisition of CCB. Carver Federal considers its
      primary lending market to include Bronx, Kings, New York and Queens counties,
      together comprising New York City, and lower Westchester County, New York.
      See
“Item 2—Properties.”




Although
      Carver Federal’s branch offices are located in areas that were historically
      underserved by other financial institutions, Carver Federal is facing increasing
      competition for deposits and residential mortgage lending in its immediate
      market areas. Management believes that this competition has become more intense
      as a result of an increased examination emphasis by federal banking regulators
      on financial institutions’ fulfillment of their responsibilities under the
      Community Reinvestment Act (“CRA”) and the improving economic conditions in its
      market area. The Bank’s competition for loans comes principally from mortgage
      banking companies, commercial banks, savings banks and savings and loan
      associations. The Bank’s most direct competition for deposits comes from
      commercial banks, savings banks, savings and loan associations and credit
      unions. Competition for deposits also comes from money market mutual funds
      and
      other corporate and government securities funds as well as from other financial
      intermediaries such as brokerage firms and insurance companies. Many of Carver
      Federal’s competitors have substantially greater resources than Carver Federal
      and offer a wider array of financial services and products than Carver Federal.
      At times, these larger financial institutions may offer below market interest
      rates on mortgage loans and above market interest rates for deposits. These
      pricing concessions combined with competitors’ larger presence in the New York
      market add to the challenges Carver Federal faces in expanding its current
      market share and growing its near term profitability. The Bank believes that
      it
      can compete with these institutions by offering a competitive range of products
      and services through personalized service and community involvement and by
      growing the customer base and product suite with the pending acquisition of
      CCB.




Carver
      continues to evaluate acquisition opportunities as part of its strategic
      objective for long term growth and may acquire directly or indirectly through
      Carver Federal.




As
      of
      June 15, 2006, Carver Federal had 126 full-time equivalent employees, none
      of
      whom was represented by a collective bargaining agreement. The Bank considers
      its employee relations to be satisfactory.




**Available
      Information**




The
      Company makes available on or through its internet website, http:// www.carverbank.com ,
      its
      Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
      on
      Form 8-K, and all amendments to those reports filed or furnished pursuant to
      Section 13(a) or 15(d) of the Exchange Act. Such reports are free of charge
      and
      are available as soon as reasonably practicable after the Company electronically
      files such material with, or furnishes it to, the Securities and Exchange
      Commission (“SEC”). The public may read and copy any materials the Company files
      with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW,
      Washington, DC, 20549. Information may be obtained on the operation of the
      Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains
      an
      internet site that contains reports, proxy and information statements and other
      information regarding issuers that file electronically with the SEC, including
      the Company, at http://www.sec.gov.




In
      addition, certain other basic corporate documents, including our Corporate
      Governance Principles, Code of Ethics, Code of Ethics for Senior Financial
      Officers and the charters of our Finance and Audit Committee, Compensation
      Committee and Nominating/Corporate Governance Committee and the date of our
      annual meeting are posted on our website. Printed copies of these documents
      are
      also available free of charge to any stockholder who requests them. Stockholders
      seeking additional information should contact the Corporate Secretary’s office
      by mail at 75 West 125th Street, New York, NY 10027 or by e-mail at
      corporatesecretary@carverbank.com.





**Lending
      Activities**




*General* .
      Carver
      Federal’s principal lending activity is the origination or purchase of first
      mortgage loans for the purpose of purchasing or refinancing one- to four-family
      residential, multifamily, and commercial properties. Carver Federal also
      originates or participates in loans for the construction or renovation of
      commercial properties and residential housing developments. In addition, Carver
      Federal provides permanent and end loan financing upon completion of
      construction and, to a lesser extent, originates secured consumer and business
      loans. First mortgage loan purchases during the fiscal year ended March 31,
      2006
      (“fiscal 2006”), accounted for 46.5% of loan additions. In order to achieve the
      Bank’s loan growth objectives, loan purchases are made to supplement
      originations.




4




*Loan
      Portfolio Composition* .
      Gross
      loans receivable increased by $71.4 million, or 16.7%, to $496.2 million at
      March 31, 2006 compared to $424.7 million at March 31, 2005. Carver Federal’s
      net loan portfolio as a percentage of total assets increased to 74.7% at March
      31, 2006 compared to 67.4% at March 31, 2005. One- to four-family mortgage
      loans
      totaled $143.4 million, or 28.9% of Carver Federal’s total gross loan portfolio,
      multifamily loans totaled $104.7 million, or 21.1% of total gross loans,
      non-residential real estate loans, which includes commercial and church loans,
      totaled $154.0 million, or 31.1% of total gross loans, and construction loans,
      net of loans in process, totaled $92.5 million, or 18.6% of total gross loans.
      Consumer (credit card loans, personal loans, and home improvement loans) and
      business loans totaled $1.5 million, or 0.3% of total gross loans.




Carver
      Federal pays a premium when the effective yield on the loans being purchased
      is
      greater than the current market rate for comparable loans. These premiums are
      amortized as the loan is repaid. It is possible that, in a declining interest
      rate environment, the rate or speed at which loans repay may increase which
      may
      have the effect of accelerating the amortization of the premium and therefore
      reducing the effective yield of the loan. Total premiums Carver paid on
      purchased loans increased by $147,000 or 8.4%, to $1.9 million at March 31,
      2006
      compared to $1.7 million at March 31, 2005. The increase was attributable to
      additional premiums recorded on new loans purchased.




Allowance
      for loan losses was substantially unchanged at $4.0 million at March 31, 2006
      compared to $4.1 million at March 31, 2005. During fiscal 2006 $82,000 in net
      charge-offs were recorded and no additional provisions for loan losses were
      established. See “—Asset Quality—Asset Classification and Allowance for
      Losses.”




The
      following table sets forth selected data relating to the composition of Carver
      Federal’s loan portfolio by type of loan at the dates indicated.




**At
                  March 31,****2006**
              
              
              **2005**
              
              
              **2004**
              
              
              **2003**
              
              
              **2002****Amount**
              
              **Percent**
              
              
              **Amount**
              
              **Percent**
              
              
              **Amount**
              
              **Percent**
              
              
              **Amount**
              
              **Percent**
              
              
              **Amount**
              
              **Percent****(Dollars
                  in thousands)****Real
                  estate loans:**One-
                  to four-family
              
              $
              143,433
              
              
              28.91
              %
              
              $
              155,797
              
              
              36.69
              %
              
              $
              98,645
              
              
              27.80
              %
              
              $
              71,735
              
              
              24.20
              %
              
              $
              122,814
              
              
              41.84
              %Multifamily
              
              
              104,718
              
              
              21.11
              %
              
              
              101,899
              
              
              23.99
              %
              
              
              120,252
              
              
              33.88
              %
              
              
              131,749
              
              
              44.45
              %
              
              
              118,589
              
              
              40.39
              %Non-residential
              
              
              154,044
              
              
              31.05
              %
              
              
              116,769
              
              
              27.49
              %
              
              
              102,641
              
              
              28.92
              %
              
              
              79,244
              
              
              26.74
              %
              
              
              40,101
              
              
              13.66
              %Construction
              
              
              92,511
              
              
              18.64
              %
              
              
              48,579
              
              
              11.43
              %
              
              
              27,376
              
              
              7.71
              %
              
              
              11,539
              
              
              3.89
              %
              
              
              9,742
              
              
              3.32
              %Consumer
                  and business (1)
              
              
              1,453
              
              
              0.29
              %
              
              
              1,697
              
              
              0.40
              %
              
              
              6,010
              
              
              1.69
              %
              
              
              2,125
              
              
              0.72
              %
              
              
              2,328
              
              
              0.79
              %Total
                  gross loans
              
              
              496,159
              
              
              100.00
              %
              
              
              424,741
              
              
              100.00
              %
              
              
              354,924
              
              
              100.00
              %
              
              
              296,392
              
              
              100.00
              %
              
              
              293,574
              
              
              100.00
              %**Add:**Premium
                  on loans
              
              
              1,890
              
              
              
              
              
              
              1,743
              
              
              
              
              
              
              1,264
              
              
              
              
              
              
              867
              
              
              
              
              
              
              906**Less:**Deferred
                  fees and loan discounts
              
              
              (602
              )
              
              
              
              
              
              (400
              )
              
              
              
              
              
              (163
              )
              
              
              
              
              
              (363
              )
              
              
              
              
              
              (642
              )Allowance
                  for loan Losses
              
              
              (4,015
              )
              
              
              
              
              
              (4,097
              )
              
              
              
              
              
              (4,125
              )
              
              
              
              
              
              (4,158
              )
              
              
              
              
              
              (4,128
              )Net
                  loan portfolio
              
              $
              493,432
              
              
              
              
              
              $
              421,987
              
              
              
              
              
              $
              351,900
              
              
              
              
              
              $
              292,738
              
              
              
              
              
              $
              289,710(1)
                  Includes personal, credit card, home equity, home improvement and
                  business
                  loans.




*One-
      to Four-Family Residential Lending* .
      Traditionally, Carver Federal’s lending activity has been the origination and
      purchase of loans secured by first mortgages on existing one- to four-family
      residences. Carver
      Federal originates and purchases one- to four-family residential mortgage loans
      in amounts that usually range between $35,000 and $750,000. Approximately 95%
      of
      Carver Federal’s one- to four-family residential mortgage loans at March 31,
      2006 had adjustable rates and approximately 5% had fixed rates. Over the last
      fiscal year, Carver Federal has shifted its efforts from primarily originating
      and purchasing one- to four-family residential loans to more profitable
      non-residential and construction real estate loans. This has resulted in a
      $12.4
      million reduction in one- to four-family residential real estate
      loans.




Carver
      Federal’s one- to four-family residential mortgage loans are generally for terms
      of 30 years, amortized on a monthly basis, with principal and interest due
      each
      month. Residential mortgage loans often remain outstanding for significantly
      shorter periods than their contractual terms. These loans customarily contain
      “due-on-sale” clauses that permit the Bank to accelerate repayment of a loan
      upon transfer of ownership of the mortgaged property. Also, borrowers may
      refinance or prepay one- to four-family residential loans at their option
      without penalty.




The
      Bank’s lending policies generally limit the maximum loan-to-value (“LTV”) ratio
      on one- to four-family residential mortgage loans secured by owner-occupied
      properties to 95% of the lesser of the appraised value or purchase price, with
      private




5




mortgage
      insurance required on loans with LTV ratios in excess of 80%. Under certain
      special loan programs, Carver Federal originates and sells loans secured by
      single-family homes purchased by first time home buyers where the LTV ratio
      may
      be up to 97%.




Carver
      Federal’s fixed-rate, one- to four-family residential mortgage loans are
      underwritten in accordance with applicable secondary market underwriting
      guidelines and requirements for sale. From time to time the Bank has sold such
      loans to Federal National Mortgage Association (“FNMA”), the State of New York
      Mortgage Agency (“SONYMA”) and other third parties. Loans are generally sold
      with limited recourse on a servicing retained basis except to SONYMA where
      the
      sale is made with servicing released. Carver Federal uses several servicing
      firms to sub-service mortgage  loans,
      whether held in portfolio or sold with the servicing retained. At March 31,
      2006, the Bank, through its sub-servicers, serviced $22.8 million in loans
      for
      FNMA and $10.4 million for other third parties.




Carver
      Federal offers one-year, three-year, five/one-year and five/three-year
      adjustable-rate one- to four-family residential mortgage loans. These loans
      are
      generally retained in Carver Federal’s portfolio although they may be sold on
      the secondary market. They are indexed to the weekly average rate on one-year,
      three-year and five-year U.S. Treasury securities, respectively, adjusted to
      a
      constant maturity (usually one year), plus a margin. The rates at which interest
      accrues on these loans are adjustable every one, three or five years, generally
      with limitations on adjustments of two percentage points per adjustment period
      and six percentage points over the life of a one-year adjustable-rate mortgage
      and four percentage points over the life of three-year and five-year
      adjustable-rate mortgages.




The
      retention of adjustable-rate loans in Carver Federal’s portfolio helps reduce
      Carver Federal’s exposure to increases in prevailing market interest rates.
      However, there are unquantifiable credit risks resulting from potential
      increases in costs to borrowers in the event of upward repricing of
      adjustable-rate loans. It is possible that during periods of rising interest
      rates, the risk of default on adjustable-rate loans may increase due to
      increases in interest costs to borrowers. Although adjustable-rate loans allow
      the Bank to increase the sensitivity of its interest-earning assets to changes
      in interest rates, the extent of this interest rate sensitivity is limited
      by
      periodic and lifetime interest rate adjustment limitations. Accordingly, there
      can be no assurance that yields on the Bank’s adjustable-rate loans will fully
      adjust to compensate for increases in the Bank’s cost of funds. Adjustable-rate
      loans increase the Bank’s exposure to decreases in prevailing market interest
      rates, although decreases in the Bank’s cost of funds would tend to offset this
      effect.




*Multifamily
      Real Estate Lending.* Carver
      Federal continued to originate and purchase multifamily loans during fiscal
      2006. Rates offered on this product are considered to be competitive with
      flexible terms that make this product attractive to borrowers. Multifamily
      property lending entails additional risks compared to one- to four-family
      residential lending. For example, such loans are dependent on the successful
      operation of such buildings and can be significantly impacted by supply and
      demand conditions in the market for multifamily residential units. Over the
      past
      several years, Carver Federal has expanded its presence in the multifamily
      lending market in the New York City metropolitan area. At March 31, 2006,
      multifamily loans totaled $104.7 million, or 21.1% of Carver Federal’s gross
      loan portfolio.




Carver
      Federal’s multifamily product guidelines generally require that the maximum LTV
      not exceed 80% based on the appraised value of the mortgaged property. The
      Bank
      generally requires a debt service coverage ratio (“DSCR”) of at least 1.25 on
      multifamily loans, which requires the properties to generate cash flow after
      expenses and allowances in excess of the principal and interest payment. Carver
      Federal originates and purchases multifamily mortgage loans, which are
      predominantly adjustable rate loans that generally amortize on the basis of
      a
      15-, 20-, 25- or 30-year period and require a balloon payment after the first
      five years, or the borrower may have an option to extend the loan for two
      additional five-year periods. The Bank, on a case-by-case basis, originates
      ten-year fixed rate loans.




To
      help
      ensure continued collateral protection and asset quality for the term of
      multifamily real estate loans, Carver Federal employs a loan risk-rating system.
      Under the risk-rating system, all commercial real estate loans are risk-rated
      internally at the time of origination and again annually to evaluate any changes
      in the credit profile of the borrower and the underlying collateral. Carver
      Federal’s independent internal loan review personnel prepare written summary
      reports of multifamily real estate loan relationships of $250,000 to $2.0
      million while an independent consulting firm prepares a written report for
      relationships exceeding $2.0 million. Summary reports are then reviewed by
      the
      Internal Asset Review Committee for changes in the credit profile of individual
      borrowers and the portfolio as a whole.




*Non-residential
      Real Estate Lending* .
      Carver
      Federal’s non-residential real estate lending activity consists predominantly of
      originating loans for the purpose of purchasing or refinancing office, mixed-use
      (properties used for both commercial and residential purposes but predominantly
      commercial), retail and church buildings in its market area. Non-residential
      real estate lending entails additional risks compared with one- to four-family
      residential and multifamily lending. For example, such loans typically involve
      large loan balances to single borrowers or groups of related borrowers, and
      the
      payment experience on such loans typically is dependent on the successful
      operation of the commercial property. Carver Federal’s maximum LTV on
      non-residential real estate mortgage loans is generally 75% based on the
      appraised value of the mortgaged property. The Bank generally requires a DSCR
      of
      at least 1.30 on non-residential real estate loans. The Bank requires the
      assignment of rents of all tenants’ leases in the mortgaged




6




property,
      which serves as additional security for the mortgage loan. At March 31, 2006,
      non-residential real estate mortgage loans totaled $154.0 million, or 31.1%
      of
      the gross loan portfolio. This balance also reflects a year over year increase
      of $37.3 million which is in line with the Bank’s objective of investing in
      higher yielding loans.




All
      non-residential real estate loans are risk rated internally. At least annually,
      Carver Federal’s loan review personnel prepare written summary reports for
      relationships of $250,000 to $2.0 million. An independent third party also
      risk-rates and produce written summary reports for non-residential loans over
      $2.0 million.




Historically,
      Carver Federal has been a New York City metropolitan area leader in the
      origination of loans to churches. At March 31, 2006, loans to churches totaled
      $14.6 million, or 2.9% of the Bank’s gross loan portfolio. These loans generally
      have five-, seven- or ten-year terms with 15-, 20- or 25-year amortization
      periods and a balloon payment due at the end of the term and generally have
      no
      greater than a 70% LTV ratio. The Bank provides construction financing for
      churches and generally provides permanent financing upon completion of
      construction. There are currently 25 church loans in the Bank’s loan portfolio.




Loans
      secured by real estate owned by faith-based organizations generally are larger
      and involve greater risks than one- to four-family residential mortgage loans.
      Because payments on loans secured by such properties are often dependent on
      voluntary contributions by members of the church’s congregation, repayment of
      such loans may be subject to a greater extent to adverse conditions in the
      economy. The Bank seeks to minimize these risks in a variety of ways, including
      reviewing the organization’s financial condition, limiting the size of such
      loans and establishing the quality of the collateral securing such loans. The
      Bank determines the appropriate amount and type of security for such loans
      based
      in part upon the governance structure of the particular organization, the length
      of time the church has been established in the community and a cash flow
      analysis of the church to determine its ability to service the proposed loan.
      Carver Federal will obtain a first mortgage on the underlying real property
      and
      often requires personal guarantees of key members of the congregation and/or
      key
      person life insurance on the pastor of the congregation. The Bank may also
      require the church to obtain key person life insurance on specific members
      of
      the church’s leadership. Asset quality in the church loan category has been
      strong throughout Carver Federal’s history. Management believes that Carver
      Federal remains a leading lender to churches in its market area.




*Construction
      Lending* .
      The
      Bank originates or participates in construction loans for new construction
      and
      renovation of churches, multifamily buildings, residential developments,
      community service facilities and affordable housing programs. Carver Federal
      also offers construction loans to qualified individuals and developers for
      new
      construction and renovation of one- to four-family, multifamily or mixed use
      and
      commercial real estate in the Bank’s market area. The Bank’s construction loans
      generally have adjustable interest rates and are underwritten in accordance
      with
      the same standards as the Bank’s mortgage loans on existing properties. The
      loans provide for disbursement in stages as construction is completed.
      Participation in construction loans may be at various stages of funding.
      Construction terms are usually from 12 to 24 months. The construction loan
      interest is capitalized as part of the overall project cost and is funded
      monthly from the loan proceeds. Borrowers must satisfy all credit requirements
      that apply to the Bank’s permanent mortgage loan financing for the mortgaged
      property. Carver Federal has established additional criteria for construction
      loans to include an engineer’s plan and cost review on all construction budgets
      with appropriate interest reserves for loans in excess of $250,000.




Construction
      financing generally is considered to involve a higher degree of risk of loss
      than long term financing on improved and occupied real estate. Risk of loss
      on a
      construction loan is dependent largely upon the accuracy of the initial estimate
      of the mortgaged property’s value at completion of construction or development
      and the estimated cost (including interest) of construction. During the
      construction phase, a number of factors could result in project delays and
      cost
      overruns. If the estimate of construction costs proves to be inaccurate, the
      Bank may be required to advance funds beyond the amount originally committed
      to
      permit completion of the development. If the estimate of value proves to be
      inaccurate, the Bank may be confronted, at or prior to the maturity of the
      loan,
      with a project having a value that is insufficient to assure full repayment
      of
      such loan. The ability of a developer to sell developed lots or completed
      dwelling units will depend on, among other things, demand, pricing, availability
      of comparable properties and economic conditions. The Bank has sought to
      minimize this risk by limiting construction lending to qualified borrowers
      in
      the Bank’s market areas, limiting the aggregate amount of outstanding
      construction loans and imposing a stricter LTV ratio requirement than that
      required for one- to four-family mortgage loans.




At
      March
      31, 2006, the Bank had $92.5 million (net of $61.0 million of committed but
      undisbursed funds) in construction loans outstanding, comprising 18.6% of the
      Bank’s total gross loan portfolio. The balance at March 31, 2006 is reflective
      of a $43.9 million, or 90.4 % increase over the last fiscal year, consistent
      with management’s objective to add higher yielding loans to portfolio. Purchased
      construction loans represent 66.9% of total construction loans in portfolio.




*Consumer
      and Business Loans* .
      At
      March 31, 2006, the Bank had approximately $1.5 million in consumer and business
      loans, or 0.3% of the Bank’s gross loan portfolio. At March 31, 2006, $1.2
      million, or 83.9% of the Bank’s consumer and business loans, was unsecured and
      $234,000, or 16.1%, was secured by savings deposits. At the end of the fiscal
      year ended March 31, 2005 (“fiscal 2005”) the Bank froze all undrawn available
      credit lines on its credit card product in an effort to terminate this product
      and collect repayments on outstanding balances and related finance charges.
      Effective March 31, 2006 all unsecured credit card accounts were converted
      to
      fixed rate installment loans with an amortization period not to exceed 48
      months. The Bank had discontinued the




7




origination
      of unsecured commercial business loans during the fourth quarter of the fiscal
      year ended March 31, 1999. However, during the fourth quarter of the fiscal
      year
      ended March 31, 2006, Carver Federal’s Board of Directors approved the launch of
      an unsecured Overdraft Line of Credit (“ODLOC”) product for personal account
      relationships only and approved the Bank to provide back-up liquidity for highly
      rated U.S. corporate commercial paper borrowers (“CP Back-up”) where a minority
      bank is the administrative agent and is syndicated entirely to a minority bank
      group. As of March 31, 2006, Carver Federal originated 17 ODLOCs with $25,450
      in
      commitments. The Bank subsequent to the fiscal year end entered into one
      minority bank CP Back-up facility for $6.325 million with an AAA rated U.S.
      corporate borrower and more CP Back-up facilities are anticipated for the fiscal
      year ending March 31, 2007. The Bank is paid a commitment fee for this
      product.




Consumer
      loans generally involve more risk than first mortgage loans. Collection of
      a
      delinquent loan is dependent on the borrower’s continuing financial stability,
      and thus is more likely to be adversely affected by job loss, divorce, illness
      or personal bankruptcy. Further, the application of various federal and state
      laws, including federal and state bankruptcy and insolvency laws, may limit
      the
      amount which can be recovered. These loans may also give rise to claims and
      defenses by a borrower against Carver Federal, and a borrower may be able to
      assert claims and defenses against Carver Federal which it has against the
      seller of the underlying collateral. In underwriting secured consumer loans
      other than secured credit cards, Carver Federal considers the borrower’s credit
      history, an analysis of the borrower’s income, expenses and ability to repay the
      loan and the value of the collateral. The underwriting for secured credit cards
      only takes into consideration the value of the underlying collateral. See
“—Asset Quality—Non-performing Assets.”




*Loan
      Processing* .
      Carver
      Federal’s loan originations are derived from a number of sources, including
      referrals by realtors, builders, depositors, borrowers and mortgage brokers,
      as
      well as walk-in customers. Loans are originated by the Bank’s personnel who
      receive a base salary, commissions and other incentive compensation. Loan
      application forms are available at each of the Bank’s offices. All real estate
      loan and unsecured loan applications are forwarded to the Bank’s Lending
      Department for underwriting pursuant to standards established in Carver’s loan
      policy.




The
      underwriting and loan processing for residential loans is initiated internally
      but undergoes subsequent review by an outsourced third party provider for loans
      with LTV ratios greater 80% that require private mortgage insurance. A
      commercial real estate loan application is completed for all multifamily and
      non-residential properties which the Bank finances. Prior to loan approval,
      the
      property is inspected by a loan officer. As part of the loan approval process,
      consideration is given to an independent appraisal, location, accessibility,
      stability of the neighborhood, environmental assessment, personal credit history
      of the applicant(s) and the financial capacity of the applicant(s).




Upon
      receipt of a completed loan application from a prospective borrower, a credit
      report and other verifications are ordered to confirm specific information
      relating to the loan applicant’s income and credit standing. It is the Bank’s
      policy to obtain an appraisal of the real estate intended to secure a proposed
      mortgage loan from an independent fee appraiser approved by the Bank.




It
      is
      Carver Federal’s policy to record a lien on the real estate securing the loan
      and to obtain a title insurance policy that insures that the property is free
      of
      prior encumbrances. Borrowers must also obtain hazard insurance policies prior
      to closing and, when the property is in a flood plain as designated by the
      Department of Housing and Urban Development, paid flood insurance policies
      must
      be obtained. Most borrowers are also required to advance funds on a monthly
      basis, together with each payment of principal and interest, to a mortgage
      escrow account from which the Bank makes disbursements for items such as real
      estate taxes and hazard insurance.




*Loan
      Approval* .
      Except
      for loans in excess of $5.0 million, mortgage loan approval authority has been
      delegated by the Bank’s Board of Directors (“Board”) to the Board’s Asset
      Liability and Interest Rate Risk Committee. The Asset Liability and Interest
      Rate Risk Committee has delegated to the Bank’s Management Loan Committee, which
      consists of certain members of executive management, loan approval authority
      for
      loans up to and including $2.0 million. All one- to four-family mortgage loans
      that conform to FNMA standards and limits may be approved by the Residential
      Mortgage Loan Underwriter. Any loan that represents an exception to the Bank’s
      lending policies must be ratified by the next higher approval authority. Loans
      above $5.0 million **** must
      be
      approved by the full Board. Purchased loans are subject to the same approval
      process as originated loans.




*Loans
      to One Borrower* .
      Under
      the loans-to-one-borrower limits of the Office of Thrift Supervision (“OTS”),
      with certain limited exceptions, loans and extensions of credit to a single
      or
      related group of borrowers outstanding at one time generally may not exceed
      15%
      of the unimpaired capital and surplus of a savings bank. See “—Regulation and
      Supervision—Federal Banking Regulation—Loans to One Borrower Limitations.” At
      March 31, 2006, the maximum loan to one borrower under this test would be $9.9
      million and the Bank had no relationships that exceeded this limit.




*Loan
      Sales* .
      Originations of one- to four-family real estate loans are generally made on
      properties located within the New York City metropolitan area, although Carver
      Federal does occasionally fund loans secured by property in other areas. All
      such loans, however, satisfy the Bank’s underwriting criteria regardless of
      location. The Bank continues to offer one- to four-family fixed-rate mortgage
      loans in response to consumer demand but requires that such loans satisfy
      applicable secondary market guidelines of either FNMA or SONYMA to provide
      opportunity for subsequent sale in the secondary market as desired to manage
      interest rate risk exposure.




8




*Loan
      Originations and Purchases* .
      Loan
      originations were $111.3 million in fiscal 2006 compared to $85.8 million in
      fiscal 2005 and $87.1 million in the fiscal year ended March 31, 2004 (“fiscal
      2004”). The increase in loan originations in fiscal 2006 can be attributed to
      the Bank’s commitment to increasing its market share. The market continues to be
      challenging as new lenders enter the already fiercely competitive
      marketplace.




During
      fiscal 2006, Carver Federal purchased a total of $96.1 million of mortgage
      loans, consisting of performing adjustable-rate one- to four-family,
      construction and non-residential mortgage loans to supplement its origination
      efforts. This represented 46.5% of Carver Federal’s addition to its loan
      portfolio during fiscal 2006. The Bank purchases loans in order to increase
      interest income and to manage its liquidity position. The Bank continues to
      shift its loan production emphasis to take advantage of the higher yields and
      better interest rate risk characteristics available on multifamily and
      non-residential real estate mortgage loans, including those in construction,
      as
      well as to increase its participation in multifamily and non-residential real
      estate mortgage loans with other New York metropolitan area lenders. Loans
      purchased in fiscal 2006 decreased $8.1 million, or 7.7%, from loan purchases
      of
      $104.7 million during fiscal 2005.




The
      following table sets forth certain information with respect to Carver Federal’s
      loan originations, purchases and sales during the periods
      indicated.


**Year
                  Ended March 31,****2006**
              
              
              **2005**
              
              
              **2004****Amount**
              
              **Percent**
              
              
              **Amount**
              
              **Percent**
              
              
              **Amount**
              
              **Percent****(Dollars
                  in thousands)**Loans
                  Originated:One-
                  to four-family
              
              $
              15,132
              
              
              8.18
              %
              
              $
              15,437
              
              
              8.46
              %
              
              $
              14,284
              
              
              8.33
              %Multifamily
              
              
              18,063
              
              
              9.77
              
              
              
              15,969
              
              
              8.75
              
              
              
              5,771
              
              
              3.37Non-residential
              
              
              33,582
              
              
              18.16
              
              
              
              30,823
              
              
              16.89
              
              
              
              50,373
              
              
              29.38Construction
              
              
              44,040
              
              
              23.80
              
              
              
              23,351
              
              
              12.79
              
              
              
              12,050
              
              
              7.02Consumer
                  and business (1)
              
              
              532
              
              
              0.29
              
              
              
              221
              
              
              0.13
              
              
              
              4,662
              
              
              2.72Total
                  loans originated
              
              
              111,349
              
              
              60.21
              
              
              
              85,801
              
              
              47.02
              
              
              
              87,140
              
              
              50.82Loans
                  purchased (2)
              
              
              96,140
              
              
              51.98
              
              
              
              104,734
              
              
              57.39
              
              
              
              93,694
              
              
              54.64Loans
                  sold (3)
              
              
              (22,543
              )
              
              (12.19
              )
              
              
              (8,043
              )
              
              (4.41
              )
              
              
              (9,358
              )
              
              (5.46
              )Net
                  additions to loan portfolio
              
              $
              184,946
              
              
              100.00
              %
              
              $
              182,492
              
              
              100.00
              %
              
              $
              171,476
              
              
              100.00
              %




(1)  Comprised
      of credit card, personal, home improvement and secured business
      loans.


(2)  Comprised
      primarily of one- to four-family mortgage loans, multifamily mortgage loans
      and
      construction loans.


(3) Comprised
      primarily of one- to four-family loans.





Loans
      purchased by the Bank entail certain risks not necessarily associated with
      loans
      the Bank originates. The Bank’s purchased loans are generally acquired without
      recourse and in accordance with the Bank’s underwriting criteria for
      originations. In addition, purchased loans have a variety of terms, including
      maturities, interest rate caps and indices for adjustment of interest rates,
      that may differ from those offered at the time by the Bank in connection with
      the loans the Bank originates. The Bank initially seeks to purchase loans in
      its
      market area, however, the Bank will purchase loans secured by property secured
      outside its market area to meet its financial objectives. During fiscal 2006,
      the properties securing purchased loans were concentrated primarily in New
      York
      and to a lesser extent, Vermont, New Jersey and Massachusetts. The market areas
      in which the properties that secure the purchased loans are located may differ
      from Carver Federal’s market area and may be subject to economic and real estate
      market conditions that may significantly differ from those experienced in Carver
      Federal’s market area. There can be no assurance that economic conditions in
      these out-of-state areas will not deteriorate in the future, resulting in
      increased loan delinquencies and loan losses among the loans secured by property
      in these areas.




In
      an
      effort to reduce these risks, the Bank has sought to ensure that purchased
      loans
      satisfy the Bank’s underwriting standards and do not otherwise have a higher
      risk of collection or loss than loans originated by the Bank. A Lending
      Department officer monitors the inspection and confirms the review of each
      purchased loan. Carver Federal also requires appropriate documentation and
      further seeks to reduce its risk by requiring, in each buy/sell agreement,
      a
      series of warranties and representations as to the underwriting standards and
      the enforceability of the related legal documents. These warranties and
      representations remain in effect for the life of the loan. Any misrepresentation
      must be cured within 90 days of discovery or trigger certain repurchase
      provisions in the buy/sell agreement.




*Interest
      Rates and Loan Fees* .
      Interest rates charged by Carver Federal on mortgage loans are primarily
      determined by competitive loan rates offered in its market area and minimum
      yield requirements for loans purchased by secondary market sources. Mortgage
      loan rates reflect factors such as prevailing market interest rate levels,
      the
      supply of money available to the banking industry and the demand for such loans.
      These factors are in turn affected by general economic conditions, the monetary
      policies of the federal government, including the Board of Governors of the
      Federal Reserve System (the “Federal Reserve Board”), the general supply of
      money in the economy, tax policies and governmental budget matters.






9




Carver
      Federal charges fees in connection with loan commitments and originations,
      rate
      lock-ins, loan modifications, late payments, changes of property ownership
      and
      for miscellaneous services related to its loans. Loan origination fees are
      calculated as a percentage of the loan principal. The Bank typically receives
      fees of between zero and one point (one point being equivalent to 1% of the
      principal amount of the loan) in connection with the origination of fixed-rate
      and adjustable-rate mortgage loans. The loan origination fee, net of certain
      direct loan origination expenses, is deferred and accreted into income over
      the
      estimated life of the loan using the interest method. If a loan is prepaid
      or
      sold all remaining deferred fees with respect to such loan are taken into income
      at such time.




In
      addition to the foregoing fees, Carver Federal receives fees for servicing
      loans
      for others, which in turn generally are sub-serviced for Carver Federal by
      a
      third party servicer. Servicing activities include the collection and processing
      of mortgage payments, accounting for loan repayment funds and paying real estate
      taxes, hazard insurance and other loan-related expenses out of escrowed funds.
      Income from these activities varies from period to period with  the
      volume and type of loans originated, sold and purchased, which in turn is
      dependent on prevailing market interest rates and their effect on the demand
      for
      loans in the Bank’s market area.




*Loan
      Maturity Schedule* .
      The
      following table sets forth information at March 31, 2006 regarding the amount
      of
      loans maturing in Carver Federal’s portfolio, including scheduled repayments of
      principal, based on contractual terms to maturity. Demand loans, loans having
      no
      schedule of repayments and no stated maturity, and overdrafts are reported
      as
      due in one year or less. The table below does not include any estimate of
      prepayments, which significantly shorten the average life of all mortgage loans
      and may cause Carver Federal’s actual repayment experience to differ
      significantly from that shown below.


**Due
                  During the Year Ending**
              
              **Due
                  three****March
                  31,**
              
              **to
                  five**
              
              **Due
                  five to**
              
              **Due
                  ten to**
              
              **Due
                  after****2007**
              
              **2008**
              
              **2009**
              
              **years**
              
              **ten
                  years**
              
              **20
                  years**
              
              **20
                  years**
              
              **Total****(Dollars
                  in thousands)**Real
                  Estate Loans:One-
                  to four-family
              
              $
              2,251
              
              $
              2,288
              
              $
              1,020
              
              $
              32,744
              
              $
              456
              
              $
              2,446
              
              $
              102,228
              
              $
              143,433Multifamily
              
              
              4,407
              
              
              6,595
              
              
              16,412
              
              
              22,945
              
              
              17,045
              
              
              11,228
              
              
              26,086
              
              
              104,718Non-residential
              
              
              10,545
              
              
              10,299
              
              
              18,029
              
              
              78,330
              
              
              17,590
              
              
              8,634
              
              
              10,617
              
              
              154,044Construction
              
              
              73,444
              
              
              19,067
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              92,511Consumer
                  and business loans
              
              
              14
              
              
              116
              
              
              48
              
              
              938
              
              
              224
              
              
              103
              
              
              10
              
              
              1,453Total
              
              $
              90,661
              
              $
              38,365
              
              $
              35,509
              
              $
              134,957
              
              $
              35,315
              
              $
              22,411
              
              $
              138,941
              
              $
              496,159


The
      following table sets forth as of March 31, 2006 amounts in each loan category
      that are contractually due after March 31, 2007 and whether such loans have
      fixed or adjustable interest rates. Scheduled contractual principal repayments
      of loans do not necessarily reflect the actual lives of such assets. The average
      life of long term loans is substantially less than their contractual terms
      due
      to prepayments. In addition, due-on-sale clauses in mortgage loans generally
      give Carver Federal the right to declare a conventional loan due and payable
      in
      the event, among other things, that a borrower sells the real property subject
      to the mortgage and the loan is not repaid. The average life of mortgage loans
      tends to increase when current mortgage loan market rates are substantially
      higher than rates on existing mortgage loans and tends to decrease when current
      mortgage loan market rates are substantially lower than rat es
      on
      existing mortgage loans.


**Due
                  After March 31, 2007****Fixed**
              
              **Adjustable**
              
              **Total****(
                  In thousands )**Real
                  Estate Loans:One-
                  to four-family
              
              $
              7,454
              
              $
              133,728
              
              $
              141,182Multifamily
              
              
              33,583
              
              
              66,728
              
              
              100,311Non-residential
              
              
              36,526
              
              
              106,973
              
              
              143,499Construction
              
              
              -
              
              
              19,067
              
              
              19,067Consumer
                  and business loans
              
              
              1,085
              
              
              354
              
              
              1,439Total
              
              $
              78,648
              
              $
              326,850
              
              $
              405,498




Asset
      Quality




*General.* One
      of
      the Bank’s key operating objectives continues to be to maintain a high level of
      asset quality. Through a variety of strategies, including, but not limited
      to,
      monitoring loan delinquencies and borrower workout arrangements, the Bank has
      been proactive in addressing problem and non-performing assets which, in turn,
      has helped to build the strength of the Bank’s






10




financial
      condition. Such strategies, as well as the Bank’s concentration on one- to
      four-family, commercial mortgage lending (which includes multifamily and
      non-residential real estate loans) and construction lending, the maintenance
      of
      sound credit standards for new loan originations and a strong real estate
      market, have resulted in the Bank maintaining a low level of non-performing
      assets.




The
      underlying credit quality of the Bank’s loan portfolio is dependent primarily on
      each borrower’s ability to continue to make required loan payments and, in the
      event a borrower is unable to continue to do so, the value of the collateral
      should be adequate to secure the loan. A borrower’s ability to pay typically is
      dependent primarily on employment and other sources of income, which, in turn,
      is impacted by general economic conditions, although other factors, such as
      unanticipated expenditures or changes in the financial markets, may also impact
      the borrower’s ability to pay. Collateral values, particularly real estate
      values, are also impacted by a variety of factors, including general economic
      conditions, demographics, maintenance and collection or foreclosure
      delays.




*Non-performing
      Assets* .
      When a
      borrower fails to make a payment on a mortgage loan, immediate steps are taken
      by Carver Federal and its sub-servicers to have the delinquency cured and the
      loan restored to current status. With respect to mortgage loans, once the
      payment grace period has expired (in most instances 15 days after the due date),
      a late notice is mailed to the borrower within two business days and a late
      charge is imposed if applicable. If payment is not promptly received, the
      borrower is contacted by telephone and efforts are made to formulate an
      affirmative plan to cure the delinquency. Additional calls are made by the
      20th
      and 25th day of the delinquency. If a mortgage loan becomes 30 days delinquent,
      a letter is mailed to the borrower requesting payment by a specified date.
      If a
      mortgage loan becomes 60 days delinquent, Carver Federal seeks to make personal
      contact with the borrower and also has the property inspected. If a mortgage
      becomes 90 days delinquent, a letter is sent to the borrower demanding payment
      by a certain date and indicating that a foreclosure suit will be filed if the
      deadline is not met. If payment is still not made, the Bank may pursue
      foreclosure or other appropriate action.




When
      a
      borrower fails to make a payment on a consumer loan, steps are taken by Carver
      Federal’s loan servicing department to have the delinquency cured and the loan
      restored to current status. Once the payment grace period has expired (15 days
      after the due date), a late notice is mailed to the borrower immediately and
      a
      late charge is imposed if applicable. If payment is not promptly received,
      the
      borrower is contacted by telephone, and efforts are made to formulate an
      affirmative plan to cure the delinquency. If a consumer loan becomes 30 days
      delinquent, a letter is mailed to the borrower requesting payment by a specified
      date. If the loan becomes 60 days delinquent, the account is given to an
      independent collection agency to follow up with the collection of the account.
      If the loan becomes 90 days delinquent, a final warning letter is sent to the
      borrower and any co-borrower. If the loan remains delinquent, it is reviewed
      for
      charge-off. The Bank’s collection efforts generally continue after the loan
      is  charged
      off.




The
      following table sets forth information with respect to Carver Federal’s
      non-performing assets at the dates indicated.


**At
                  March 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(Dollars
                  in thousands)**Loans
                  accounted for on a non-accrual basis (1):Real
                  estate:One-
                  to four-family
              
              $
              1,098
              
              $
              149
              
              $
              558
              
              $
              1,113
              
              $
              756Multifamily
              
              
              763
              
              
              167
              
              
              1,532
              
              
              -
              
              
              253Non-residential
              
              
              -
              
              
              665
              
              
              -
              
              
              639
              
              
              1,754Construction
              
              
              865
              
              
              -
              
              
              23
              
              
              23
              
              
              23Consumer
                  and business
              
              
              4
              
              
              17
              
              
              10
              
              
              27
              
              
              37Total
                  non-accrual loans
              
              
              2,730
              
              
              998
              
              
              2,123
              
              
              1,802
              
              
              2,823Accruing
                  loans contractually past due 90 days or more
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  of non-accrual and accruing 90-day past due loans
              
              $
              2,730
              
              $
              998
              
              $
              2,123
              
              $
              1,802
              
              $
              2,823Other
                  non-performing assets (2):Real
                  estate:Land
              
              
              26
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  other non-performing assets
              
              
              26
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  non-performing assets (3)
              
              $
              2,756
              
              $
              998
              
              $
              2,123
              
              $
              1,802
              
              $
              2,823Non-performing
                  loans to total loans
              
              
              0.55
              %
              
              0.23
              %
              
              0.60
              %
              
              0.61
              %
              
              0.96
              %Non-performing
                  assets to total assets
              
              
              0.42
              %
              
              0.16
              %
              
              0.39
              %
              
              0.36
              %
              
              0.63
              %






11





(1)
            Non-accrual
                status denotes any loan where the delinquency exceeds 90 days past
                due and
                in the opinion of management the collection of additional interest
                is
                doubtful. Payments received on a non-accrual loan are either applied
                to
                the outstanding principal balance or recorded as interest income,
                depending on assessment of the ability to collect on the loan. During
                the
                fiscal year ended March 31, 2006, gross interest income of $79,000
                would
                have been recorded on non-accrual loans had they been current throughout
                the year.




(2)
            Other
                non-performing assets generally represent property acquired by the
                Bank in
                settlement of loans (i.e., through foreclosure, repossession or as
                an
                in-substance foreclosure). Although the Bank had no foreclosed real
                estate, as a result of a property tax redemption, the Bank took fee
                ownership of a vacant tract of land in Bayshore, NY. These assets
                are
                recorded at the lower of their fair value or the cost to acquire.




(3)
            Total
                non-performing assets consist of non-accrual loans, accruing loans
                90 days
                or more past due and property acquired in settlement of loans.






At
      March
      31, 2006, total non-performing assets increased by $1.8 million to $2.8 million
      compared to $998,000 at March 31, 2005. At March 31, 2006 other non-performing
      assets of $26,000 relates to one parcel of land that Carver Federal acquired
      as
      a result of a property tax redemption.  The
      increase in total non-performing assets for fiscal 2006 primarily reflects
      three
      additional one-to four-family residential real estate loans. Increases in
      non-performing asset levels are consistent with the growth the Bank experienced
      in its loan portfolio during the fiscal year. Management believes the Bank’s
      current level of non-performing assets to total loans remains within the range
      of its peers.




There
      were no accruing loans contractually past due 90 days or more at March 31,
      2006
      and March 31, 2005, reflecting the continued practice adopted by the Bank during
      the fiscal year ended March 31, 2000 to either write off or place on non-accrual
      status all loans contractually past due 90 days or more.




*Asset
      Classification and Allowances for Losses* .
      Federal
      regulations and the Bank’s policies require the classification of assets on the
      basis of quality on a quarterly basis. An asset is classified as “substandard”
if it is determined to be inadequately protected by the current net worth and
      paying capacity of the obligor or the current value of the collateral pledged,
      if any. An asset is classified as “doubtful” if full collection is highly
      questionable or improbable. An asset is classified as “loss” if it is considered
      un-collectible, even if a partial recovery could be expected in the future.
      The
      regulations also provide for a “special mention” designation, described as
      assets that do not currently expose a savings institution to a sufficient degree
      of risk to warrant classification but do possess credit deficiencies or
      potential weaknesses deserving management’s close attention. Assets classified
      as substandard or doubtful require a savings institution to establish general
      allowances for loan losses. If an asset or portion thereof is classified as
      a
      loss, a savings institution must either establish specific allowances for loan
      losses in the amount of the portion of the asset classified loss or charge
      off
      such amount. Federal examiners may disagree with a savings institution’s
      classifications. If a savings institution does not agree with an examiner’s
      classification of an asset, it may appeal this determination to the OTS Regional
      Director.




At
      March
      31, 2006, Carver Federal had $2.2 million of loans classified as substandard
      which represented 0.3% of the Bank’s total assets. As of March 31, 2005 the Bank
      had $1.0 million as loans classified as substandard, representing 0.2% of the
      Bank’s total assets. There were no loans classified as doubtful or loss at March
      31, 2006 and March 31, 2005.




The
      OTS,
      in conjunction with the other federal banking agencies, has adopted an
      interagency policy statement on the allowance for loan losses and lease losses.
      The policy statement provides guidance for financial institutions on both the
      responsibilities of management for the assessment and establishment of adequate
      allowances and guidance for banking agency examiners to use in determining
      the
      adequacy of general valuation guidelines. Generally, the policy statement
      recommends that institutions have effective systems and controls to identify,
      monitor and address asset quality problems, that management analyze all
      significant factors that affect the ability to collect the portfolio in a
      reasonable manner and that management establish acceptable allowance evaluation
      processes that meet the objectives set forth in the policy statement. Although
      management believes that adequate specific and general loan loss allowances
      have
      been established, actual losses are dependent upon future events and, as such,
      further additions to the level of specific and general loan loss allowances
      may
      become necessary. Federal examiners may disagree with the savings institution
      as
      to the appropriate level of the institution’s allowance for loan losses. While
      management believes Carver Federal has established its existing loss allowances
      in accordance with generally accepted accounting principles, there can be no
      assurance that regulators, in reviewing Carver Federal’s assets, will not
      require Carver Federal to increase its loss allowance, thereby negatively
      affecting Carver Federal’s reported financial condition and results of
      operations.




Carver
      Federal’s methodology for establishing the allowance for loan losses takes into
      consideration probable losses that have been identified in connection with
      specific loans as well as losses that have not been identified but can be
      expected to occur. Further, management reviews the ratio of allowances to total
      loans (including projected growth) and recommends adjustments to the level
      of
      allowances accordingly. The Internal Asset Review Committee conducts reviews
      of
      the Bank’s loans on at least a quarterly basis and evaluates the need to
      establish general and specific allowances on the basis of this review. In
      addition, management actively monitors Carver Federal’s asset quality and
      charges off loans and properties acquired in settlement of loans against the
      allowances for losses on loans and such properties when appropriate and provides
      specific loss reserves when necessary. Although management believes it uses
      the
      best information available to make determinations with respect to the allowances
      for losses, future adjustments may be necessary if economic conditions differ
      substantially from the economic conditions in the assumptions used in making
      the
      initial determinations.




Additionally,
      the Internal Asset Review Committee reviews Carver Federal’s assets on a
      quarterly basis to determine whether any assets require classification or
      re-classification. The Bank has a centralized loan servicing structure that
      relies upon






12




outside
      servicers, each of which generates a monthly report of delinquent loans. The
      Board has designated the Internal Asset Review Committee to perform quarterly
      reviews of the Bank’s asset quality, and their report is submitted to the Board
      for review. The Asset Liability and Interest Rate Risk Committee of the Board
      establishes policy relating to internal classification of loans and also
      provides input to the Internal Asset Review Committee in its review of
      classified assets. In originating loans, Carver Federal recognizes that credit
      losses will occur and that the risk of loss will vary with, among other things,
      the type of loan being made, the creditworthiness of the borrower over the
      term
      of the loan, general economic conditions and, in the case of a secured loan,
      the
      quality of the security for the loan. It is management’s policy to maintain a
      general allowance for loan losses based on, among other things, regular reviews
      of delinquencies and loan portfolio quality, character and size, the Bank’s and
      the industry’s historical and projected loss experience and current and
      forecasted economic conditions. In addition, considerable uncertainty exists
      as
      to the future improvement or deterioration of the real estate markets in various
      states, or of their ultimate impact on Carver Federal as a result of its
      purchased loans in such states. See “—Lending Activities—Loan Purchases and
      Originations.” Carver Federal increases its allowance for loan losses by
      charging provisions for possible losses against the Bank’s income. General
      allowances are established by the Board on at least a quarterly basis based
      on
      an assessment of risk in the Bank’s loans, taking into consideration the
      composition and quality of the portfolio, delinquency trends, current charge-off
      and loss experience, the state of the real estate market and economic conditions
      generally. Specific allowances are provided for individual loans, or portions
      of
      loans, when ultimate collection is considered improbable by management based
      on
      the current payment status of the loan and the fair value or net realizable
      value of the security for the loan.




At
      the
      date of foreclosure or other repossession or at the date the Bank determines
      a
      property is an impaired property, the Bank transfers the property to real estate
      acquired in settlement of loans at the lower of cost or fair value, less
      estimated selling costs. Fair value is defined as the amount in cash or
      cash-equivalent value of other consideration that a real estate parcel would
      yield in a current sale between a willing buyer and a willing seller. Any amount
      of cost in excess of fair value is charged-off against the allowance for loan
      losses. Carver Federal records an allowance for estimated selling costs of
      the
      property immediately after foreclosure. Subsequent to acquisition, management
      periodically evaluates the property and an allowance is established if the
      estimated fair value of the property, less estimated costs to sell, declines.
      If, upon ultimate disposition of the property, net sales proceeds exceed the
      net
      carrying value of the property, a gain on sale of real estate is recorded.
      At
      March 31, 2006, the Bank had no foreclosed real estate, however, as a result
      of
      a property tax redemption, the Bank took fee ownership of a vacant tract of
      land
      in Bayshore, NY. See Note 1 of Notes to Consolidated Financial Statements.




The
      following table sets forth an analysis of Carver Federal’s allowance for loan
      losses for the periods indicated .


**Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(Dollars
                  in thousands)**Balance
                  at beginning of year
              
              $
              4,097
              
              $
              4,125
              
              $
              4,158
              
              $
              4,128
              
              $
              3,551Loans
                  charged-off:Real
                  Estate:One-
                  to four-family
              
              
              17
              
              
              8
              
              
              6
              
              
              2
              
              
              -Non-residential
              
              
              -
              
              
              -
              
              
              55
              
              
              -
              
              
              -Consumer
                  and business
              
              
              100
              
              
              65
              
              
              264
              
              
              226
              
              
              500Total
                  Charge-offs
              
              
              117
              
              
              73
              
              
              325
              
              
              228
              
              
              500Recoveries:One-
                  to four-family
              
              
              5
              
              
              -
              
              
              107
              
              
              -
              
              
              3Non-residential
              
              
              -
              
              
              -
              
              
              10
              
              
              -
              
              
              -Consumer
                  and business
              
              
              30
              
              
              45
              
              
              175
              
              
              258
              
              
              174Total
                  Recoveries
              
              
              35
              
              
              45
              
              
              292
              
              
              258
              
              
              177Net
                  loans charged-off (recovered)
              
              
              82
              
              
              28
              
              
              33
              
              
              (30
              )
              
              323Provision
                  for losses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              900Balance
                  at end of year
              
              $
              4,015
              
              $
              4,097
              
              $
              4,125
              
              $
              4,158
              
              $
              4,128Ratio
                  of net charge-offs to average loans outstanding
              
              
              0.02
              %
              
              0.01
              %
              
              0.01
              %
              
              -0.01
              %
              
              0.11
              %Ratio
                  of allowance to total loans
              
              
              0.81
              %
              
              0.96
              %
              
              1.16
              %
              
              1.40
              %
              
              1.41
              %Ratio
                  of allowance to non-performing assets (1)
              
              
              147.07
              %
              
              410.65
              %
              
              194.30
              %
              
              230.74
              %
              
              146.23
              %




(1)
       Non-performing assets consist of non-accrual loans, accruing loans 90 days
      or more past due and property acquired in settlement of loans.






13




The
      following table allocates the allowance for loan losses by asset category at
      the
      dates indicated. The allocation of the allowance to each category is not
      necessarily indicative of future losses and does not restrict the use of the
      allowance to absorb losses in any category.


**At
                  March 31,****2006**
              
              
              **2005**
              
              
              **2004**
              
              
              **2003**
              
              
              **2002****%
                  of Loans**
              
              
              
              
              **%
                  of Loans**
              
              
              
              
              **%
                  of Loans**
              
              
              
              
              **%
                  of Loans**
              
              
              
              
              **%
                  of Loans****in
                  Each**
              
              
              
              
              **in
                  Each**
              
              
              
              
              **in
                  Each**
              
              
              
              
              **in
                  Each**
              
              
              
              
              **in
                  Each****Category**
              
              
              
              
              **Category**
              
              
              
              
              **Category**
              
              
              
              
              **Category**
              
              
              
              
              **Category****to
                  Total**
              
              
              
              
              **to
                  Total**
              
              
              
              
              **to
                  Total**
              
              
              
              
              **to
                  Total**
              
              
              
              
              **to
                  Total****Amount**
              
              **Gross
                  Loans**
              
              
              **Amount**
              
              **Gross
                  Loans**
              
              
              **Amount**
              
              **Gross
                  Loans**
              
              
              **Amount**
              
              **Gross
                  Loans**
              
              
              **Amount**
              
              **Gross
                  Loans****(Dollars
                  in thousands)**Loans:Real
                  EstateOne-
                  to four-family
              
              $
              565
              
              
              28.91
              %
              
              $
              528
              
              
              36.69
              %
              
              $
              355
              
              
              27.80
              %
              
              $
              298
              
              
              24.20
              %
              
              $
              429
              
              
              41.84
              %Multifamily
              
              
              1,084
              
              
              21.11
              %
              
              
              898
              
              
              23.99
              %
              
              
              1,240
              
              
              33.88
              %
              
              
              656
              
              
              44.45
              %
              
              
              1,468
              
              
              40.39
              %Non-residential
              
              
              960
              
              
              31.05
              %
              
              
              1,129
              
              
              27.49
              %
              
              
              853
              
              
              28.92
              %
              
              
              1,967
              
              
              26.74
              %
              
              
              729
              
              
              13.66
              %Construction
              
              
              303
              
              
              18.64
              %
              
              
              212
              
              
              11.43
              %
              
              
              158
              
              
              7.71
              %
              
              
              170
              
              
              3.89
              %
              
              
              76
              
              
              3.32
              %Consumer
                  and business
              
              
              442
              
              
              0.29
              %
              
              
              554
              
              
              0.40
              %
              
              
              487
              
              
              1.69
              %
              
              
              344
              
              
              0.72
              %
              
              
              377
              
              
              0.79
              %Unallocated
              
              
              661
              
              
              N/A
              
              
              
              776
              
              
              N/A
              
              
              
              1,032
              
              
              N/A
              
              
              
              723
              
              
              N/A
              
              
              
              1,049
              
              
              N/ATotal
                  Allowance for loan losses
              
              $
              4,015
              
              
              100.00
              %
              
              $
              4,097
              
              
              100.00
              %
              
              $
              4,125
              
              
              100.00
              %
              
              $
              4,158
              
              
              100.00
              %
              
              $
              4,128
              
              
              100.00
              %






**Investment
      Activities**




*General.* The Bank
      utilizes mortgage-backed and other investment securities in its asset/liability
      management strategy. In making investment decisions, the Bank considers, among
      other things, its yield and interest rate objectives, its interest rate and
      credit risk position and its liquidity and cash flow.




The
      Bank
      must maintain minimum levels of investments that qualify as liquid assets under
      OTS regulations. Liquidity may increase or decrease depending upon the
      availability of funds and comparative yields on investments in relation to
      the
      return on loans. The Bank’s liquidity policy requires that cash flow projections
      are regularly reviewed and updated to assure that adequate liquidity is
      maintained.




Generally,
      the investment policy of the Bank is to invest funds among categories of
      investments and maturities based upon the Bank's asset/liability management
      policies, investment quality, loan and deposit volume and collateral
      requirements, liquidity needs and performance objectives. Statement
      of Financial Accounting Standards (“SFAS”)
      No. 115, “ *Accounting
      for Certain Investments in Debt and Equity Securities”,* requires
      that securities be classified into three categories:  trading,
      held-to-maturity, and available-for-sale. Securities that are bought and held
      principally for the purpose of selling them in the near term are classified
      as
      trading securities and are reported at fair value with unrealized gains and
      losses included in earnings. Debt securities for which the Bank has the positive
      intent and ability to hold to maturity are classified as held-to-maturity and
      reported at amortized cost. All other securities not classified as trading
      or
      held-to-maturity are classified as available-for-sale and reported at fair
      value
      with unrealized gains and losses included, on an after-tax basis, in a separate
      component of stockholders’ equity. At March 31, 2006, the Bank had no securities
      classified as trading. At March 31, 2006, $81.9 million, or 75.6% of the Bank’s
      mortgage-backed and other investment securities, was classified as
      available-for-sale. The remaining $26.4 million, or 24.4%, was classified as
      held-to-maturity.




*Mortgage-Backed
      Securities.* The Bank
      has invested in mortgage-backed securities in order to achieve its
      asset/liability management goals and collateral needs. Although mortgage-backed
      securities generally yield from 60 to 100 basis points less than whole loans,
      they present substantially lower credit risk, are more liquid than individual
      mortgage loans and may be used to collateralize obligations of the Bank. Because
      Carver Federal receives regular payments of principal and interest from its
      mortgage-backed securities, these investments provide more consistent cash
      flows
      than investments in other debt securities, which generally only pay principal
      at
      maturity. Mortgage-backed securities also help the Bank meet certain
      definitional tests for favorable treatment under federal banking and tax laws.
      See “—Regulation and Supervision—Federal Banking Regulation—QTL Test” and
“Federal and State Taxation.”




At
      March
      31, 2006, mortgage-backed securities constituted 14.6% of total assets, as
      compared to 20.2% of total assets at March 31, 2005. Carver Federal maintains
      a
      significant portfolio of mortgage-backed securities in the form of Government
      National Mortgage Association (“GNMA”) pass-through certificates, FNMA and FHLMC
      participation certificates. GNMA pass-through certificates are guaranteed as
      to
      the payment of principal and interest by the full faith and credit of the United
      States Government while FNMA and FHLMC certificates are each guaranteed by
      their
      respective agencies as to principal and interest. Mortgage-backed securities
      generally entitle Carver Federal to receive a pro rata portion of the cash
      flows
      from an identified pool of mortgages. The






14




cash
      flows from such pools are segmented and paid in accordance with a predetermined
      priority to various classes of securities issued by the entity. Carver Federal
      has also invested in pools of loans guaranteed as to principal and interest
      by
      the Small Business Administration (“SBA”).




The
      Bank
      seeks to manage interest rate risk by investing in adjustable-rate
      mortgage-backed securities, which at March 31, 2006 constituted $91.7 million,
      or 95.6% of the mortgage-backed securities portfolio. Mortgage-backed
      securities, however, expose Carver Federal to certain unique risks. In a
      declining rate environment, accelerated prepayments of loans underlying these
      securities expose Carver Federal to the risk that it will be unable to obtain
      comparable yields upon reinvestment of the proceeds. In the event the
      mortgage-backed security has been funded with an interest-bearing liability
      with
      maturity comparable to the original estimated life of the mortgage-backed
      security, the  Bank’s
      interest rate spread could be adversely affected. Conversely, in a rising
      interest rate environment, the Bank may experience a lower than estimated rate
      of repayment on the underlying mortgages, effectively extending the estimated
      life of the mortgage-backed security and exposing the Bank to the risk that
      it
      may be required to fund the asset with a liability bearing a higher rate of
      interest.




The
      following table sets forth the carrying value of Carver Federal’s
      mortgage-backed securities at the dates indicated.


**At
                  March 31,****2006**
              
              **2005**
              
              **2004****(In
                  thousands)****Available-for-Sale:**GNMA
              
              $
              63,007
              
              $
              83,425
              
              $
              55,512Fannie
                  Mae
              
              
              4,589
              
              
              8,149
              
              
              12,626FHLMC
              
              
              2,209
              
              
              3,908
              
              
              6,712Total
                  available-for-sale
              
              
              69,805
              
              
              95,482
              
              
              74,850**Held-to-Maturity:**GNMA
              
              $
              809
              
              $
              1,070
              
              $
              1,465Fannie
                  Mae
              
              
              7,900
              
              
              10,780
              
              
              20,386FHLMC
              
              
              17,372
              
              
              19,115
              
              
              21,305Other
              
              
              323
              
              
              337
              
              
              318Total
                  held-to-maturity
              
              
              26,404
              
              
              31,302
              
              
              43,474Total
                  mortgage-backed securities
              
              $
              96,209
              
              $
              126,784
              
              $
              118,324




The
      following table sets forth the scheduled final maturities, book and fair values
      for Carver Federal’s mortgage-backed securities at March 31, 2006. Expected
      maturities will differ from contractual maturities due to scheduled repayments
      and because borrowers may have the right to call or prepay obligations with
      or
      without prepayment penalties. The following table does not take into
      consideration the effects of scheduled repayments or the effects of possible
      prepayments.


**Weighted****Book**
              
              **Fair**
              
              **Average****Value**
              
              **Value**
              
              **Rate****(Dollars
                  in thousands)****Available-for-sale
                  :**One
                  through five years
              
              $
              300
              
              $
              303
              
              
              6.23
              %Five
                  through ten years
              
              
              1,524
              
              
              1,471
              
              
              4.53
              %After
                  ten years
              
              
              68,600
              
              
              68,031
              
              
              3.78
              %$
              70,424
              
              $
              69,805
              
              
              3.81
              %**Held-to-maturity:**One
                  through five years
              
              $
              50
              
              $
              50
              
              
              5.69
              %After
                  ten years
              
              
              26,354
              
              
              25,830
              
              
              5.65
              %$
              26,404
              
              $
              25,880
              
              
              5.65
              %




*Other
      Investment Securities.* In
      addition to mortgage-backed securities, the Bank also invests in high-quality
      assets (primarily government and agency obligations) with short and intermediate
      terms (typically seven years or less) to maturity. Carver Federal is permitted
      under federal law to make certain investments, including investments in
      securities issued by various federal agencies and state and municipal
      governments, deposits at the Federal Home Loan Bank (“FHLB”), certificates of
      deposit in federally insured institutions, certain bankers’ acceptances and
      federal funds. The Bank may also invest, subject to certain limitations,
      in






15




commercial
      paper having one of the two highest investment ratings of a nationally
      recognized credit rating agency, and certain other types of corporate debt
      securities and mutual funds. In fiscal 2005, as a result of the attempted
      acquisition of Independence Federal Savings Bank (“IFSB”), Carver invested in
      150,000 shares of IFSB common stock totaling $3.1 million. However, on May
      11,
      2005, subsequent to the termination of that acquisition agreement, the Company
      sold its entire equity investment in IFSB for an aggregate price of $1.6
      million.




The
      following table sets forth the carrying value of Carver Federal’s other
      securities available-for-sale at the dates indicated.


**At
                  March 31,****2006**
              
              **2005**
              
              **2004****(In
                  thousands)**U.S.
                  Government and Equity securities:Available-for-sale
              
              $
              12,077
              
              $
              22,551
              
              $
              21,553




The
      following table sets forth by scheduled maturities the book and fair values
      for
      Carver Federal’s other securities available -for-sale at March 31, 2006.


**Weighted****Book**
              
              **Fair**
              
              **Average****Value**
              
              **Value**
              
              **Rate****(In
                  thousands)**Available-for-sale:Less
                  than one year
              
              $
              2,000
              
              $
              1,982
              
              
              2.43
              %One
                  through five years
              
              
              10,386
              
              
              10,095
              
              
              3.85
              %$
              12,386
              
              $
              12,077
              
              
              3.62
              %




*Other
      Earning Assets.* Federal
      regulations require the Bank to maintain an investment in FHLB stock and a
      sufficient amount of liquid assets which may be invested in cash and specified
      securities. For additional information, see “—Regulation and Supervision—Federal
      Banking Regulation—Liquidity.”




The
      following table sets forth the carrying value of Carver Federal’s investment in
      FHLB stock and liquid assets at the dates indicated.


**At
                  March 31,****2006**
              
              **2005**
              
              **2004****(In
                  thousands)**FHLB
                  stock
              
              $
              4,627
              
              $
              5,125
              
              $
              4,576Federal
                  funds sold
              
              
              8,700
              
              
              6,800
              
              
              8,200






**Deposit
      Activity and Other Sources of Funds**




*General.* Deposits
      are the primary source of Carver Federal’s funds for lending and other
      investment purposes. In addition to deposits, Carver Federal derives funds
      from
      loan principal repayments, loan and investment interest payments, maturing
      investments and fee income. Loan and mortgage-backed securities repayments
      and
      interest payments are a relatively stable source of funds, while deposit inflows
      and outflows are significantly influenced by prevailing market interest rates,
      pricing of deposits, competition and general economic conditions. Borrowed
      money
      may be used to supplement the Bank’s available funds, and from time to time the
      Bank borrows funds from the FHLB and has borrowed funds through repurchase
      agreements.




*Deposits.* Carver
      Federal attracts deposits principally from within its market area by offering
      a
      variety of deposit instruments, including passbook and statement accounts and
      certificates of deposit, which range in term from 91 days to seven years.
      Deposit terms vary, principally on the basis of the minimum balance required,
      the length of time the funds must remain on deposit and the interest rate.
      Carver Federal also offers Individual Retirement Accounts. Carver Federal’s
      policies are designed primarily to attract deposits from local residents and
      businesses through the Bank’s branch offices. Carver Federal also holds deposits
      from






16




various
      governmental agencies or authorities and corporations. At March 31, 2006 the
      Bank held $10.6 million in brokered deposits, specifically certificates of
      deposits.




Deposit
      interest rates, maturities, service fees and withdrawal penalties on deposits
      are established based on the Bank’s funds acquisition and liquidity
      requirements, the rates paid by the Bank’s competitors, current market rates,
      the Bank’s growth goals and applicable regulatory restrictions and requirements.




The
      following table sets forth the change in dollar amount of deposits accounts
      offered by Carver Federal between the dates indicated. In fiscal 2006 the Bank
      opened one additional stand-alone ATM in Bedford Stuyvesant, Brooklyn. During
      fiscal 2005 the Bank opened two branch offices as well as two stand-alone ATMs.
      The first branch office and ATM were opened in July 2004 at Atlantic Terminal
      in
      Fort Greene, Brooklyn. A second ATM at 116 th Street
      and a branch office at 145 th Street
      in Harlem were opened in December 2004 and January 2005, respectively. During
      fiscal 2004 the Bank opened two stand-alone ATMs in Harlem and a new branch
      office in Jamaica, Queens. The Bank’s branch offices on 116 th Street
      and 145 th Street
      in Harlem and in Jamaica operate in New York State designated Banking
      Development Districts (“BDD”), which allow Carver Federal to participate in
      BDD-related activities, including acquiring New York City and New York State
      deposits. As of March 31, 2006, Carver Federal held $136.1 million in BDD
      deposits.


**Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004****(Dollars
                  in thousands)**Deposits
                  at beginning of year
              
              $
              455,870
              
              $
              375,519
              
              $
              349,066Net
                  increase before interest credited
              
              
              39,847
              
              
              74,896
              
              
              21,804Interest
                  credited
              
              
              8,921
              
              
              5,455
              
              
              4,649Deposits
                  at end of year
              
              $
              504,638
              
              $
              455,870
              
              $
              375,519Net
                  increase during the year:Amount
              
              $
              48,768
              
              $
              80,351
              
              $
              26,453Percent
              
              
              10.7
              %
              
              21.4
              %
              
              7.6
              %




The
      following table sets forth the distribution in the various types of the Bank’s
      deposit accounts and the related weighted average interest rates paid at the
      dates indicated.




**At
                  March 31,****2006**
              
              
              **2005**
              
              
              **2004****Amount**
              
              **Percent
                  of Total Deposits**
              
              **Weighted
                  Average Rate**
              
              
              **Amount**
              
              **Percent
                  of Total Deposits**
              
              **Weighted
                  Average Rate**
              
              
              **Amount**
              
              **Percent
                  of Total Deposits**
              
              **Weighted
                  Average Rate****(Dollars
                  in thousands)**Non-interest-bearing
                  demand
              
              $
              31,085
              
              
              6.2
              %
              
              -
              %
              
              $
              25,570
              
              
              5.6
              %
              
              -
              %
              
              $
              20,966
              
              
              5.6
              %
              
              -
              %NOW
                  demand
              
              
              27,904
              
              
              5.5
              
              
              0.31
              
              
              
              24,095
              
              
              5.3
              
              
              0.30
              
              
              
              22,671
              
              
              6.0
              
              
              0.30Savings
                  and clubs
              
              
              139,724
              
              
              27.7
              
              
              0.68
              
              
              
              137,810
              
              
              30.2
              
              
              0.62
              
              
              
              131,120
              
              
              34.9
              
              
              0.60Money
                  market savings
              
              
              40,045
              
              
              7.9
              
              
              2.41
              
              
              
              36,294
              
              
              8.0
              
              
              1.34
              
              
              
              30,842
              
              
              8.2
              
              
              0.74Certificates
                  of deposit
              
              
              263,963
              
              
              52.3
              
              
              3.76
              
              
              
              229,685
              
              
              50.4
              
              
              2.30
              
              
              
              168,066
              
              
              44.8
              
              
              1.97Other
              
              
              1,917
              
              
              0.4
              
              
              1.47
              
              
              
              2,416
              
              
              0.5
              
              
              1.13
              
              
              
              1,854
              
              
              0.5
              
              
              1.46Total
              
              $
              504,638
              
              
              100.0
              %
              
              2.37
              %
              
              $
              455,870
              
              
              100.0
              %
              
              1.47
              %
              
              $
              375,519
              
              
              100.0
              %
              
              1.18
              %






17




The
      following table sets forth the amount and maturities of certificates of deposit
      in specified weighted average interest rate categories at March 31,
      2006.


**Period
                  to Maturity**
              
              **March
                  31,****Less
                  Than**
              
              
              
              
              
              **After**
              
              **Total**
              
              **Percent****Rate**
              
              **One
                  Year**
              
              **1-2
                  Years**
              
              **2-3
                  Years**
              
              **3
                  Years**
              
              **2006**
              
              **of
                  Total**
              
              **2005**
              
              **2004****(Dollars
                  in thousands)**0%
                  - 0.99%
              
              $
              635
              
              $
              16
              
              $
              10
              
              $
              85
              
              $
              746
              
              
              0.28
              %
              $
              688
              
              $
              29,8481%
                  - 1.99%
              
              
              8,826
              
              
              304
              
              
              7
              
              
              -
              
              
              9,137
              
              
              3.46
              
              
              122,459
              
              
              69,4342%
                  - 3.99%
              
              
              105,120
              
              
              14,943
              
              
              7,862
              
              
              9,677
              
              
              137,602
              
              
              52.13
              
              
              92,181
              
              
              53,2944%
                  and over
              
              
              102,997
              
              
              4,932
              
              
              2,577
              
              
              5,972
              
              
              116,478
              
              
              44.13
              
              
              14,357
              
              
              15,490Total
              
              $
              217,578
              
              $
              20,195
              
              $
              10,456
              
              $
              15,734
              
              $
              263,963
              
              
              100.00
              %
              $
              229,685
              
              $
              168,066




Carver
      Federal’s certificates of deposit of $100,000 or more were $183.5 million as of
      March 31, 2006 compared to $161.7 million at March 31, 2005. These certificates
      of deposit over $100,000 include BDD deposits of $136.1 million and $101.0
      million at March 31, 2006 and 2005, respectively. Other deposits with balances
      of $100,000 or more totaled $ 80.9 million and $64.8 million at March 31, 2006
      and 2005, respectively.




*Borrowed
      Money.* Deposits
      are the primary source of funds for Carver Federal’s lending, investment and
      general operating activities. Carver Federal is authorized, however, to use
      advances and securities sold under agreements to repurchase (“Repos”) from the
      FHLB and approved primary dealers to supplement its supply of funds and to
      meet
      deposit withdrawal requirements. The FHLB functions as a central bank providing
      credit for savings institutions and certain other member financial institutions.
      As a member of the FHLB system, Carver Federal is required to own stock in
      the
      FHLB and is authorized to apply for advances. Advances are made pursuant to
      several different programs, each of which has its own interest rate and range
      of
      maturities. Advances from the FHLB are secured by Carver Federal’s stock in the
      FHLB and a pledge of Carver Federal’s mortgage loan and mortgage-backed
      securities portfolios. One of the elements of Carver Federal’s investment
      strategy is to leverage the balance sheet by increasing liabilities with FHLB
      advances and Repos and investing borrowed funds primarily in adjustable-rate
      mortgage loan and mortgage-backed securities products.




On
      September 17, 2003, Carver Federal 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 were $13.0 million and,
      together with the proceeds from the sale of the trust's common securities,
      were
      used to purchase approximately $13.4 million aggregate principal amount of
      the
      Holding Company's floating rate junior subordinated debt securities due 2033.
      The trust preferred debt securities are redeemable quarterly at the option
      of
      the Company beginning on or after July 7, 2007 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 (reset
      quarterly) equal to 3.05% over 3-month LIBOR, with a rate at March 31, 2006
      of
      7.97%. The subordinated debt securities amounted to $12.9 million at March
      31,
      2006 and are included in other borrowed money on the consolidated statement
      of
      financial condition. The Bank takes into consideration the term of borrowed
      money with the repricing cycle of the mortgage loans on the balance sheet.
      At
      March 31, 2006, Carver Federal had outstanding $93.8 million in total borrowed
      money, consisting of the subordinated debt securities and advances from
      FHLB.






18




The
      following table sets forth certain information regarding Carver Federal’s
      borrowed money at the dates and for the periods indicated:


**At
                  or for the Year EndedMarch 31,****2006**
              
              
              **2005**
              
              
              **2004**Amounts
                  outstanding at the end of year:
              
              
              **(Dollars
                  in thousands)**FHLB-NY
                  advances
              
              $
              80,935
              
              $
              102,500
              
              $
              91,516Guaranteed
                  preferred beneficial interest in junior subordinated
                  debentures
              
              
              12,857
              
              
              12,799
              
              
              12,741Loan
                  for employee stock ownership plan
              
              
              -
              
              
              -
              
              
              25Rate
                  paid at year end:FHLB-NY
                  advances
              
              
              4.13
              %
              
              3.78
              %
              
              3.92
              %Guaranteed
                  preferred beneficial interest in junior subordinated
                  debentures
              
              
              7.97
              %
              
              6.08
              %
              
              4.16
              %Loan
                  for employee stock ownership plan
              
              
              -
              
              
              -
              
              
              4.00
              %Maximum
                  amount of borrowing outstanding at any month end:FHLB-NY
                  advances
              
              $
              112,488
              
              $
              112,506
              
              $
              112,030Guaranteed
                  preferred beneficial interest in junior subordinated
                  debentures
              
              
              12,857
              
              
              12,799
              
              
              12,742Loan
                  for employee stock ownership plan
              
              
              -
              
              
              -
              
              
              207Approximate
                  average amounts outstanding for year:FHLB-NY
                  advances
              
              $
              94,798
              
              $
              97,013
              
              $
              99,359Guaranteed
                  preferred beneficial interest in junior subordinated
                  debentures
              
              
              12,827
              
              
              12,768
              
              
              6,854Loan
                  for employee stock ownership plan
              
              
              -
              
              
              -
              
              
              137Approximate
                  weighted average rate paid during the year (1):FHLB-NY
                  advances
              
              
              3.81
              %
              
              3.71
              %
              
              3.74
              %Guaranteed
                  preferred beneficial interest in junior subordinated
                  debentures
              
              
              7.50
              %
              
              5.49
              %
              
              4.78
              %Loan
                  for employee stock ownership plan
              
              
              -
              
              
              -
              
              
              4.07
              %(1)
                   The approximate weighted average rate paid during the year was
                  computed by dividing the average amounts
                  outstanding into the related interest expense for the
                  year.






**REGULATION
      AND SUPERVISION**




**General**




The
      Bank
      is subject to extensive regulation, examination and supervision by its primary
      regulator, the OTS. The Bank’s deposit accounts are insured up to applicable
      limits by the Federal Deposit Insurance Corporation (“FDIC”) under the Savings
      Association Insurance Fund (“SAIF”), and it is a member of the FHLB. The Bank
      must file reports with the OTS concerning its activities and financial
      condition, and it must obtain regulatory approvals prior to entering into
      certain transactions, such as mergers with, or acquisitions of, other depository
      institutions. The Holding Company, as a unitary savings and loan holding
      company, is subject to regulation, examination and supervision by the OTS and
      is
      required to file certain reports with, and otherwise comply with, the rules
      and
      regulations of the OTS and of the Securities and Exchange Commission (the “SEC”)
      under the federal securities laws. The OTS and the FDIC periodically perform
      safety and soundness examinations of the Bank and the Holding Company and test
      our compliance with various regulatory requirements. The OTS has primary
      enforcement responsibility over federally chartered savings banks and has
      substantial discretion to impose enforcement action on an institution that
      fails
      to comply with applicable regulatory requirements, particularly with respect
      to
      its capital requirements. In addition, the FDIC has the authority to recommend
      to the Director of the OTS that enforcement action be taken with respect to
      a
      particular federally chartered savings bank and, if action is not taken by
      the
      Director, the FDIC has authority to take such action under certain
      circumstances.




This
      regulation and supervision establishes a comprehensive framework to regulate
      and
      control the activities in which an institution can engage and is intended
      primarily for the protection of the insurance fund and depositors. This
      structure also gives the regulatory authorities extensive discretion in
      connection with their supervisory and enforcement activities and examination
      policies, including policies with respect to the classification of assets and
      the establishment of adequate loan loss reserves for regulatory purposes. Any
      change in such laws and regulations whether by the OTS, the FDIC or through
      legislation could have a material adverse impact on the Bank and the Holding
      Company and their operations and stockholders.






19




The
      description of statutory provisions and regulations applicable to federally
      chartered savings banks and their holding companies and of tax matters set
      forth
      in this document does not purport to be a complete description of all such
      statutes and regulations and their effects on the Bank and the Holding
      Company.




**Federal
      Banking Regulation**




*Activity
      Powers* .
      The
      Bank derives its lending and investment powers from the Home Owners’ Loan Act,
      as amended (“HOLA”), and the regulations of the OTS. Under these laws and
      regulations, the Bank may invest in mortgage loans secured by residential and
      commercial real estate, commercial and consumer loans, certain types of debt
      securities and certain other assets. The Bank may also establish service
      corporations that may engage in activities not otherwise permissible for the
      Bank, including certain real estate equity investments and securities and
      insurance brokerage. The Bank’s authority to invest in certain types of loans or
      other investments is limited by federal law.




*Loans
      to One Borrower Limitations* .
      The
      Bank is generally subject to the same limits on loans to one borrower as a
      national bank. With specified exceptions, the Bank’s total loans or extension of
      credit to a single borrower or group of related borrowers may not exceed 15%
      of
      the Bank’s unimpaired capital and unimpaired surplus, which does not include
      accumulated other comprehensive income. The Bank may lend additional amounts
      up
      to 10% of its unimpaired capital and unimpaired surplus if the loans or
      extensions of credit are fully secured by readily marketable collateral. The
      Bank currently complies with applicable loans to one borrower limitations.
      At
      March 31, 2006, the Bank’s limit on loans to one borrower based on its
      unimpaired capital and surplus was $9.9 million.




*QTL
      Test* *.* **** Under
      HOLA, the Bank must comply with a qualified thrift lender (“QTL”) test. Under
      this test, the Bank is required to maintain at least 65% of its “portfolio
      assets” in certain “qualified thrift investments” on a monthly basis in at least
      nine months of the most recent twelve-month period. “Portfolio assets” means, in
      general, an association’s total assets less the sum of (a) specified liquid
      assets up to 20% of total assets, (b) goodwill and other intangible assets
      and (c) the value of property used to conduct the Bank’s business.
“Qualified thrift investments” include various types of loans made for
      residential and housing purposes, investments related to such purposes,
      including certain mortgage-backed and related securities and consumer loans.
      If
      the Bank fails the QTL test, it must either operate under certain restrictions
      on its activities or convert from a thrift charter to a bank charter. In
      addition, if the Bank does not requalify under the QTL test within three years
      after failing the test, the institution would be prohibited from engaging in
      any
      activity not permissible for a national bank and would have to repay any
      outstanding advances from the FHLB as promptly as possible. At March 31,
      2006, the Bank maintained approximately 69.3% of its portfolio assets in
      qualified thrift investments. The Bank had also met the QTL test in each of
      the
      prior 12 months and was, therefore, a qualified thrift lender.




*Capital
      Requirements.* OTS
      regulations require the Bank to meet three minimum capital ratios:




(1)
      a
      tangible capital ratio requirement of 1.5% of total assets, as adjusted under
      OTS regulations;




(2)
      a
      leverage ratio requirement of 4% of core capital to such adjusted total assets;
      and




(3)
      a
      risk-based capital ratio requirement of 8% of core and supplementary capital
      to
      total risk-weighted assets.




In
      determining compliance with the risk-based capital requirement, the Bank must
      compute its risk-weighted assets by multiplying its assets and certain
      off-balance sheet items by risk-weights, which range from 0% for cash and
      obligations issued by the U.S. government or its agencies to 100% for consumer
      and commercial loans, as assigned by the OTS capital regulations based on the
      risks that the OTS believes are inherent in the type of asset.




Generally,
      tangible capital is defined as common stockholders’ equity (including retained
      earnings), certain non-cumulative perpetual preferred stock and related earnings
      and minority interests in equity accounts of fully consolidated subsidiaries,
      less intangibles (other than certain mortgage servicing rights) and investments
      in and loans to subsidiaries engaged in activities not permissible for a
      national bank.




Core
      capital is defined similarly to tangible capital, but also includes certain
      qualifying supervisory goodwill less certain disallowed assets. Supplementary
      capital includes cumulative and other perpetual preferred stock, mandatory
      convertible securities, subordinated debt and intermediate preferred stock
      and
      the allowance for loan and lease losses. In addition, up to 45% of unrealized
      gains on available-for-sale equity securities with a readily determinable fair
      value may be included in supplementary capital. The allowance for loan and
      lease
      losses includable in supplementary capital is limited to a maximum of 1.25%
      of
      risk-weighted assets, and the amount of supplementary capital that may be
      included as total capital cannot exceed the amount of core capital.




In
      assessing an institution’s capital adequacy, the OTS takes into consideration
      not only these numeric factors but qualitative factors as well, and has the
      authority to establish higher capital requirements for individual institutions
      where necessary. The Bank, as a matter of prudent management, targets as its
      goal the maintenance of capital ratios which exceed these minimum requirements
      and are consistent with the Bank’s risk profile. At March 31, 2006, the
      Bank exceeded each of its capital requirements with a tangible capital ratio
      of
      9.4%, leverage capital ratio of 9.4% and total risk-based capital ratio of
      13.2%.




The
      Federal Deposit Insurance Corporation Improvement Act, as amended (“FDICIA”),
      requires that the OTS and other federal banking agencies revise their risk-based
      capital standards, with appropriate transition rules, to ensure that they take
      into






20




account
      interest rate risk, concentrations of risk and the risks of non-traditional
      activities. The OTS adopted regulations, effective January 1, 1994, that set
      forth the methodology for calculating an interest rate risk (“IRR”) component to
      be incorporated into the OTS risk-based capital regulations. On May 10,
      2002, the OTS adopted an amendment to its capital regulations which eliminated
      the IRR component of the risk-based capital requirement. Pursuant to the
      amendment, the OTS will continue to monitor the IRR of individual institutions
      through the OTS requirements for IRR management, the ability of the OTS to
      impose individual minimum capital requirements on institutions that exhibit
      a
      high degree of IRR, and the requirements of Thrift Bulletin 13a, which provides
      guidance on the management of IRR and the responsibility of boards of directors
      in that area. In addition, the OTS monitors the IRR of individual institutions
      through a variety of means, including an analysis of the change in portfolio
      value, or NPV. NPV is defined as the net present value of the expected future
      cash flows of an entity’s assets and liabilities and therefore, hypothetically
      represents the value of an institution’s net worth. The OTS has also used this
      NPV analysis as part of its evaluation of certain applications or notices
      submitted by thrift institutions. In addition, OTS Bulletin 13a provides
      guidance on the management of IRR and the responsibility of boards of directors
      in that area. The OTS, through its general oversight of the safety and soundness
      of savings associations, retains the right to impose minimum capital
      requirements on individual institution to the extent the institution is not
      in
      compliance with certain written guidelines established by the OTS regarding
      NPV
      analysis. The OTS has not imposed any such requirements on the
      Bank.




*Prompt
      Corrective Action Regulations* .
      Under
      the prompt corrective action regulations, the OTS is authorized and, in some
      cases, required to take supervisory actions against undercapitalized savings
      banks. For this purpose, a savings bank would be placed in one of the following
      five categories based on the bank’s regulatory capital: well-capitalized;
      adequately capitalized; undercapitalized; significantly undercapitalized; or
      critically undercapitalized.




The
      severity of the action authorized or required to be taken under the prompt
      corrective action regulations increases as a bank’s capital decreases within the
      three undercapitalized categories. All banks are prohibited from paying
      dividends or other capital distributions or paying management fees to any
      controlling person if, following such distribution, the bank would be
      undercapitalized. Generally, a capital restoration plan must be filed with
      the
      OTS within 45 days of the date a bank receives notice that it is
“undercapitalized,” “significantly undercapitalized” or “critically
      undercapitalized.” In addition, various mandatory supervisory actions become
      immediately applicable to the institution, including restrictions on growth
      of
      assets and other forms of expansion. Under the OTS regulations, generally,
      a
      federally chartered savings bank is treated as well capitalized if its total
      risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital
      ratio is 6% or greater, and its leverage ratio is 5% or greater, and it is
      not
      subject to any order or directive by the OTS to meet a specific capital level.
      When appropriate, the OTS can require corrective action by a savings association
      holding company under the “prompt corrective action” provisions of federal law.
      At March 31, 2006, the Bank was considered well-capitalized by the OTS.




*Limitation
      on Capital Distributions.* The OTS
      imposes various restrictions on the Bank’s ability to make capital
      distributions, including cash dividends, payments to repurchase or otherwise
      acquire its shares and other distributions charged against capital. A savings
      institution that is the subsidiary of a savings and loan holding company, such
      as the Bank, must file a notice with the OTS at least 30 days before making
      a
      capital distribution. However, the Bank must file an application for prior
      approval if the total amount of its capital distributions (including each
      proposed distribution), for the applicable calendar year would exceed the Bank’s
      net income for that year plus the Bank’s retained net income for the previous
      two years.




The
      Bank
      may not pay dividends to the Holding Company if, after paying those dividends,
      the Bank would fail to meet the required minimum levels under risk-based capital
      guidelines and the minimum leverage and tangible capital ratio requirements
      or
      the OTS notified the Bank that it was in need of more than normal
      supervision.




The
      Bank
      is prohibited from making capital distributions if:




(1)
            the
                Bank would be undercapitalized following the
                distribution;




(2)
            the
                proposed capital distribution raises safety and soundness concerns;
                or




(3)
            the
                capital distribution would violate a prohibition contained in any
                statute,
                regulation or agreement.




*Liquidity* .
      The
      Bank maintains liquidity levels to meet operational needs. In the normal course
      of business, the levels of liquid assets during any given period are dependent
      on operating, investing and financing activities. Cash and due from banks,
      federal funds sold and repurchase agreements with maturities of three months
      or
      less are the Bank’s most liquid assets. The Bank maintains a liquidity policy to
      maintain sufficient liquidity to ensure its safe and sound
      operations.




*Branching* .
      Subject
      to certain limitations, federal law permits the Bank to establish branches
      in
      any state of the United States. The authority for the Bank to establish an
      interstate branch network would facilitate a geographic diversification of
      the
      Bank’s activities. This authority under federal law and OTS regulations preempts
      any state law purporting to regulate branching by federal savings
      associations.






21




*Community
      Reinvestment* .
      Under
      the Community Reinvestment Act, as amended (“CRA”), as implemented by OTS
      regulations, the Bank has a continuing and affirmative obligation to help meet
      the credit needs of its entire community, including low and moderate income
      neighborhoods. The CRA does not establish specific lending requirements or
      programs for the Bank nor does it limit the Bank’s discretion to develop the
      types of products and services that it believes are best suited to its
      particular community. The CRA does however require the OTS, in connection with
      its examination of the Bank, to assess the Bank’s record of meeting the credit
      needs of its community and to take such record into account in its evaluation
      of
      certain applications by the Bank.




In
      particular, the system focuses on three tests:




(1)
            a
                lending test, to evaluate the institution’s record of making loans in its
                assessment areas;




(2)
            an
                investment test, to evaluate the institution’s record of investing in
                community development projects, affordable housing and programs benefiting
                low or moderate income individuals and businesses;
                and




(3)
            a
                service test, to evaluate the institution’s delivery of banking services
                through its branch offices, ATM centers and other
                offices.




The
      CRA
      also requires all institutions to make public disclosure of their CRA ratings.
      The Bank received an “Outstanding” CRA rating in its most recent examination
      conducted in 2004.




Regulations
      require that we publicly disclose certain agreements that are in fulfillment
      of
      CRA. The Holding Company has no such agreements in place at this
      time.




*Transactions
      with Related Parties* .
      The
      Bank’s authority to engage in transactions with its “affiliates” and insiders is
      limited by OTS regulations and by Sections 23A, 23B, 22 (g) and 22 (h) of
      the Federal Reserve Act (“FRA”). In general, these transactions must be on terms
      which are as favorable to the Bank as comparable transactions with
      non-affiliates. Additionally, certain types of these transactions are restricted
      to an aggregate percentage of the Bank’s capital. Collateral in specified
      amounts must usually be provided by affiliates in order to receive loans from
      the Bank. In addition, OTS regulations prohibit a savings bank from lending
      to
      any of its affiliates that is engaged in activities that are not permissible
      for
      bank holding companies and from purchasing the securities of any affiliate
      other
      than a subsidiary.




The
      Bank’s authority to extend credit to its directors, executive officers, and 10%
      shareholders, as well as to entities controlled by such persons, is currently
      governed by the requirements of Sections 22(g) and 22(h) of the FRA and
      Regulation O of the Federal Reserve Board (“FRB”). Among other things, these
      provisions require that extensions of credit to insiders (a) be made on
      terms that are substantially the same as, and follow credit underwriting
      procedures that are not less stringent than, those prevailing for comparable
      transactions with unaffiliated persons and that do not involve more than the
      normal risk of repayment or present other unfavorable features and (b) not
      exceed certain limitations on the amount of credit extended to such persons,
      individually and in the aggregate, which limits are based, in part, on the
      amount of the Bank’s capital. In addition, extensions of credit in excess of
      certain limits must be approved by the Bank’s board of directors. At March 31,
      2006, there were no loans to officers or directors.




The
      FRB
      has confirmed its previous interpretations of Sections 23A and 23B of the
      FRA with Regulation W. The OTS has also conformed its regulations to agree
      with Regulation W. Regulation W made various changes to existing law
      regarding Sections 23A and 23B, including expanding the definition of what
      constitutes an “affiliate” subject to Sections 23A and 23B and exempting
      certain subsidiaries of state-chartered banks from the restrictions of
      Sections 23A and 23B.




The
      OTS
      regulations provide for additional restrictions imposed on savings associations
      under Section 11 of HOLA, including provisions prohibiting a savings association
      from making a loan to an affiliate that is engaged in non-bank holding company
      activities and provisions prohibiting a savings association from purchasing
      or
      investing in securities issued by an affiliate that is not a subsidiary. The
      OTS
      regulations also include certain specific exemptions from these prohibitions.
      The FRB and the OTS expect each depository institution that is subject to
      Sections 23A and 23B to implement policies and procedures to ensure
      compliance with Regulation W and the OTS regulation. These regulations have
      had no material adverse effect on our business.




Section 402
      of the Sarbanes-Oxley Act prohibits the extension of personal loans to directors
      and executive officers of issuers (as defined in the Sarbanes-Oxley Act). The
      prohibition, however, does not apply to mortgages advanced by an insured
      depository institution, such as the Bank, that is subject to the insider lending
      restrictions of Section 22(h) of the FRA.




*Assessment* .
      The OTS
      charges assessments to recover the cost of examining savings associations and
      their affiliates. These assessments are based on three components: the size
      of
      the association, on which the basic assessment is based; the association’s
      supervisory condition, which results in an additional assessment based on a
      percentage of the basic assessment for any savings institution with a composite
      rating of 3, 4, or 5 in its most recent safety and soundness examination; and
      the complexity of the association’s operations, which results in an additional
      assessment based on a percentage of the basic assessment for any savings
      association that managed over $1 billion in trust assets, serviced for others
      loans aggregating more than $1 billion, or had certain off-balance sheet assets
      aggregating more than $1 billion. Effective July 1, 2004, the OTS adopted a
      final rule replacing examination






22




fees
      for
      savings and loan holding companies with semi-annual assessments. For fiscal
      2006, Carver paid $143,000 in OTS assessments.




*Enforcement* .
      The OTS
      has primary enforcement responsibility over the Bank. This enforcement authority
      includes, among other things, the ability to assess civil money penalties,
      to
      issue cease and desist orders and to remove directors and officers. In general,
      these enforcement actions may be initiated in response to violations of laws
      and
      regulations and unsafe or unsound practices.




*Standards
      for Safety and Soundness* .
      The OTS
      has adopted guidelines prescribing safety and soundness standards. The
      guidelines establish general standards relating to internal controls and
      information systems, internal audit systems, loan documentation, credit
      underwriting, interest rate exposure, asset growth, asset quality, earnings,
      and
      compensation, fees and benefits. In general, the guidelines require, among
      other
      things, appropriate systems and practices to identify and manage the risks
      and
      exposures specified in the guidelines. In addition, OTS regulations authorize,
      but do not require, the OTS to order an institution that has been given notice
      that it is not satisfying these safety and soundness standards to submit a
      compliance plan. If, after being so notified, an institution fails to submit
      an
      acceptable compliance plan or fails in any material respect to implement an
      accepted compliance plan, the OTS must issue an order directing action to
      correct the deficiency and may issue an order directing other actions of the
      types to which an undercapitalized association is subject under the “prompt
      corrective action” provisions of federal law. If an institution fails to comply
      with such an order, the OTS may seek to enforce such order in judicial
      proceedings and to impose civil money penalties.




*Insurance
      of Deposit Accounts* .
      The
      Bank is a member of the SAIF and pays its deposit insurance assessments to
      the
      SAIF. The FDIC also maintains another insurance fund, BIF, which primarily
      insures the deposits of banks and state chartered savings banks. Under federal
      law, the FDIC established a risk-based assessment system for determining the
      deposit insurance assessments to be paid by insured depository institutions.
      Under the assessment system, the FDIC assigns an institution to one of three
      capital categories based on the institution’s financial information as of the
      quarter ending three months before the beginning of the assessment period:
      (1)
      well-capitalized, (2) adequately capitalized and (3) undercapitalized. An
      institution’s assessment rate depends on the capital category and supervisory
      category to which it is assigned. Under the regulation, there are nine
      assessment risk classifications (i.e., combinations of capital groups and
      supervisory subgroups) to which different assessment rates are applied.
      Assessment rates currently range from 0.0% of deposits for an institution in
      the
      highest category (i.e., well-capitalized and financially sound, with no more
      than a few minor weaknesses) to 0.27% of deposits for an institution in the
      lowest category (i.e., undercapitalized and substantial supervisory concern).
      The FDIC is authorized to raise the assessment rates as necessary to maintain
      the required reserve ratio of the deposit insurance fund to 1.25%.




In
      addition, all FDIC insured institutions are required to pay assessments to
      the
      FDIC at an annual rate of approximately 1.44% per $100,000 of insured deposits
      to fund interest payments on the bonds issued by the Financing Corporation
      (“FICO”), an agency of the federal government established to recapitalize the
      predecessor to the SAIF. These assessments will continue until the FICO bonds
      mature in 2017. The Bank’s total expense in fiscal 2006 for FDIC assessment for
      FICO bonds interest payments was $61,000. Due to the Bank’s favorable assessment
      risk classification there was no deposit insurance assessment on our deposits
      for fiscal 2006.




*Federal
      Home Loan Bank System* .
      The
      Bank is a member of the FHLB -NY which is one of the twelve regional FHLBs
      composing the FHLB System. Each FHLB provides a central credit facility
      primarily for its member institutions. The Bank, as an FHLB member, is required
      to acquire and hold shares of capital stock in the FHLB-NY in an amount equal
      to
      the greater of (i) 1% of the aggregate principal amount of its unpaid
      residential mortgage loans, home purchase contracts and similar obligations
      at
      the beginning of each year, and (ii) 5% (or such greater fraction as established
      by the FHLB) of its outstanding advances from the FHLB. The Bank was in
      compliance with this requirement with an investment in the capital stock of
      the
      FHLB at March 31, 2006 of $4.6 million. Any advances from a FHLB must be
      secured by specified types of collateral, and all long term advances may be
      obtained only for the purpose of providing funds for residential housing
      finance.




FHLBs
      are
      required to provide funds for the resolution of insolvent thrifts and to
      contribute funds for affordable housing programs. These requirements could
      reduce the amount of earnings that the FHLBs can pay as dividends to their
      members and could also result in the FHLBs imposing a higher rate of interest
      on
      advances to their members. If dividends were reduced, or interest on future
      FHLB
      advances increased, the Bank’s net interest income would be adversely affected.
      Dividends from FHLB-NY to the Bank amounted to $274,000 for fiscal 2006,
      $130,000 for fiscal 2005 and $126,000 for fiscal 2004. In the third quarter
      of
      fiscal 2004, the FHLB-NY suspended dividend payments to stockholders due to
      losses in its securities portfolio, but resumed payment in the fourth quarter.
      The dividend rate paid on FHLB stock at March 31, 2006 was 5.25%.




Under
      the
      Gramm-Leach-Bliley Act, as amended (“Gramm-Leach”), which repeals historical
      restrictions and eliminates many federal and state law barriers to affiliations
      among banks and securities firms, insurance companies and other financial
      service providers, membership in the FHLB system is now voluntary for all
      federally-chartered savings banks such as the Bank. Gramm-Leach also replaces
      the existing redeemable stock structure of the FHLB system with a capital
      structure that requires each FHLB to meet a leverage limit and a risk-based
      permanent capital requirement. Two classes of stock are authorized: Class A
      (redeemable on six months notice) and Class B (redeemable on five years notice).
      Pursuant to regulations promulgated by the Federal Housing






23




Finance
      Board, as required by Gramm-Leach, the FHLB-NY has adopted a capital plan that
      will change the foregoing minimum stock ownership requirements for FHLB-NY
      stock. Under the new capital plan, each member of the FHLB-NY will have to
      maintain a minimum investment in FHLB-NY capital stock in an amount equal to
      the
      sum of (1) the greater of $1,000 or 0.20% of the member’s mortgage-related
      assets and (2) 4.50% of the dollar amount of any outstanding advances under
      such member’s Advances, Collateral Pledge and Security Agreement with the
      FHLB-NY. The FHLB-NY, however, has postponed the implementation of the new
      capital plan, and the new implementation date has not yet been
      determined.




*Federal
      Reserve System* .
      Under
      the FRB’s regulations, the Bank is required to maintain non-interest-earning
      reserves against its transaction accounts. FRB regulations generally require
      that (a) reserves of 3% must be maintained against aggregate transaction
      accounts between $7.0 million and $48.3 million (subject to adjustment by
      the FRB), and (b) a reserve of $1.2 million and 10% (subject to adjustment
      by the FRB between 8% and 14%) must be maintained against that portion of total
      transaction accounts in excess of $48.3 million. The first
      $7.0 million of otherwise reservable balances are exempted from the reserve
      requirements. The Bank is in compliance with these reserve requirements. Because
      required reserves must be maintained in the form of either vault cash, a
      non-interest-bearing account at a Federal Reserve Bank, or a pass-through
      account as defined by the FRB, the effect of this reserve requirement is to
      reduce the Bank’s interest-earning assets to the extent that the requirement
      exceeds vault cash.




*Privacy
      Protection.* Carver
      Federal is subject to OTS regulations implementing the privacy protection
      provisions of Gramm-Leach. These regulations require the Bank to disclose its
      privacy policy, including identifying with whom it shares “nonpublic personal
      information,” to customers at the time of establishing the customer relationship
      and annually thereafter. The regulations also require the Bank to provide its
      customers with initial and annual notices that accurately reflect its privacy
      policies and practices. In addition, to the extent its sharing of such
      information is not exempted, the Bank is required to provide its customers
      with
      the ability to “opt-out” of having the Bank share their nonpublic personal
      information with unaffiliated third parties before they can disclose such
      information, subject to certain exceptions.




The
      Bank
      is subject to regulatory guidelines establishing standards for safeguarding
      customer information. These regulations implement certain provisions of
      Gramm-Leach. The guidelines describe the agencies’ expectations for the
      creation, implementation and maintenance of an information security program,
      which would include administrative, technical and physical safeguards
      appropriate to the size and complexity of the institution and the nature and
      scope of its activities. The standards set forth in the guidelines are intended
      to insure the security and confidentiality of customer records and information,
      protect against any anticipated threats or hazards to the security or integrity
      of such records and protect against unauthorized access to or use of such
      records or information that could result in substantial harm or inconvenience
      to
      any customer. The Bank has a policy to comply with the foregoing
      guidelines.




*Holding
      Company Regulation* .
      The
      Holding Company is a savings and loan holding company regulated by the OTS.
      As
      such, the Holding Company is registered with and is subject to OTS examination
      and supervision, as well as certain reporting requirements. In addition, the
      OTS
      has enforcement authority over the Holding Company and its subsidiaries. Among
      other things, this authority permits the OTS to restrict or prohibit activities
      that are determined to be a serious risk to the financial safety, soundness
      or
      stability of a subsidiary savings institution. Unlike bank holding companies,
      federal savings and loan holding companies are not subject to any regulatory
      capital requirements or to supervision by the FRB.




Gramm-Leach
      restricts the powers of new unitary savings and loan holding companies. Unitary
      savings and loan holding companies that are “grandfathered,” i.e., unitary
      savings and loan holding companies in existence or with applications filed
      with
      the OTS on or before May 4, 1999, such as Carver, retain their authority under
      the prior law. All other unitary savings and loan holding companies are limited
      to financially related activities permissible for bank holding companies, as
      defined under Gramm-Leach. Gramm-Leach also prohibits non-financial companies
      from acquiring grandfathered unitary savings and loan holding
      companies.




*Restrictions
      Applicable to All Savings and Loan Holding Companies.* Federal
      law prohibits a savings and loan holding company, including the Holding Company,
      directly or indirectly, from acquiring:




(1)
            control
                (as defined under HOLA) of another savings institution (or a holding
                company parent) without prior OTS
                approval;




(2)
            through
                merger, consolidation, or purchase of assets, another savings institution
                or a holding company thereof, or acquiring all or substantially all
                of the
                assets of such institution (or a holding company), without prior
                OTS
                approval; or




(3)
            control
                of any depository institution not insured by the FDIC (except through
                a
                merger with and into the holding company’s savings institution subsidiary
                that is approved by the OTS).




A
      savings
      and loan holding company may not acquire as a separate subsidiary an insured
      institution that has a principal office outside of the state where the principal
      office of its subsidiary institution is located, except:


(1)
            in
                the case of certain emergency acquisitions approved by the
                FDIC;   24


(2)
            if
                such holding company controls a savings institution subsidiary that
                operated a home or branch office in such additional state as of March
                5,
                1987; or




(3)
            if
                the laws of the state in which the savings institution to be acquired
                is
                located specifically authorize a savings institution chartered by
                that
                state to be acquired by a savings institution chartered by the state
                where
                the acquiring savings institution or savings and loan holding company
                is
                located or by a holding company that controls such a state chartered
                association.




The
      HOLA
      prohibits a savings and loan holding company (directly or indirectly, or through
      one or more subsidiaries) from acquiring another savings association or holding
      company thereof without prior written approval of the OTS; acquiring or
      retaining, with certain exceptions, more than 5% of a non-subsidiary savings
      association, a non-subsidiary holding company, or a non-subsidiary company
      engaged in activities other than those permitted by the HOLA; or acquiring
      or
      retaining control of a depository institution that is not federally insured.
      In
      evaluating applications by holding companies to acquire savings associations,
      the OTS must consider the financial and managerial resources and future
      prospects of the company and institution involved, the effect of the acquisition
      on the risk to the insurance funds, the convenience and needs of the community
      and competitive factors.




*Federal
      Securities Laws* .
      The
      Holding Company is subject to the periodic reporting, proxy solicitation, tender
      offer, insider trading restrictions and other requirements under the Securities
      Exchange Act of 1934, as amended (“Exchange Act”).




*Delaware
      Corporation Law* .
      The
      Holding Company is incorporated under the laws of the State of Delaware. Thus,
      it is subject to regulation by the State of Delaware and the rights of its
      shareholders are governed by the General Corporation Law of the State of
      Delaware.




*New
      York State Banking Regulations* .
      The New
      York State Banking Department has adopted Section 6-L to the banking law
      and regulations which impose restrictions and limitations on certain high cost
      home loans made by any individual or entity, including a federally-chartered
      savings bank, that originates more than one high cost home loan in New York
      State in a 12-month period. Among other things, the regulations and statute
      prohibit certain mortgage loan provisions and certain acts and practices by
      originators and impose certain disclosure and reporting requirements. It is
      unclear whether these provisions would be preempted by Section 5(a) of
      HOLA, as implemented by the lending and investment regulations of the OTS.
      The
      OTS has not yet adopted regulations regarding high-cost mortgage loans and
      is
      currently considering whether it will do so. Although the Bank does not
      originate loans that meet the definition of “high-cost mortgage loan” under the
      proposed regulations, in the event the Bank determines to originate such loans
      in the future, the Bank may be subject to such regulation, if adopted as
      proposed.




*Other
      Federal Regulation.* The
      Bank
      is subject to OTS regulations implementing the Uniting and Strengthening America
      by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
      Act
      of 2001, or the USA PATRIOT Act. The USA PATRIOT Act gives the federal
      government new powers to address terrorist threats through enhanced domestic
      security measures, expanded surveillance powers, increased information sharing,
      and broadened anti-money laundering requirements. By way of amendments to the
      Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended
      to
      encourage information sharing among bank regulatory agencies and law enforcement
      bodies. Further, certain provisions of Title III impose affirmative obligations
      on a broad range of financial institutions, including banks, thrifts, brokers,
      dealers, credit unions, money transfer agents and parties registered under
      the
      Commodity Exchange Act.




Title
      III
      of the USA PATRIOT Act and the related OTS regulations impose the following
      requirements with respect to financial institutions:




•
            Establishment
                of anti-money laundering programs.





•
            Establishment
                of a program specifying procedures for obtaining identifying information
                from customers seeking to open new accounts, including verifying
                the
                identity of customers within a reasonable period of
                time.





•
            Establishment
                of enhanced due diligence policies, procedures and controls designed
                to
                detect and report money laundering.





•
            Prohibition
                on correspondent accounts for foreign shell banks and compliance
                with
                recordkeeping obligations with respect to correspondent accounts
                of
                foreign banks.






**FEDERAL
      AND STATE TAXATION**




**Federal
      Taxation**




*General.* The
      Holding Company and the Bank currently file consolidated federal income tax
      returns, report their income for






25




tax
      return purposes on the basis of a taxable-year ending March 31st, using the
      accrual method of accounting and are subject to federal income taxation in
      the
      same manner as other corporations with some exceptions, including in particular
      the Bank’s tax reserve for bad debts discussed below. The following discussion
      of tax matters is intended only as a summary and does not purport to be a
      comprehensive description of the tax rules applicable to the Bank or the Holding
      Company.




*Bad
      Debt Reserves.* Prior to
      fiscal 2004 the Bank met the requirement as a “small bank” (one with assets
      having an adjusted tax basis of $500 million or less) and was permitted to
      maintain a reserve for bad debts with respect to “qualifying loans,” which, in
      general, are loans secured by certain interests in real property, and to make,
      within specified formula limits, annual additions to the reserve which are
      deductible for purposes of computing the Bank’s taxable income. In fiscal years
      2006, 2005 and 2004 the Bank was not considered to be a small bank as total
      assets exceeded $500 million.




*Distributions.* To the
      extent that the Bank makes “non-dividend distributions” to shareholders, such
      distributions will be considered to result in distributions from the Bank’s
“base year reserve,” i.e., its reserve as of March 31, 1988, to the extent
      thereof and then from its supplemental reserve for losses on loans, and an
      amount based on the amount distributed will be included in the Bank’s taxable
      income. Non-dividend distributions include distributions in excess of the Bank’s
      current and accumulated earnings and profits, distributions in redemption of
      stock and distributions in partial or complete liquidation. However, dividends
      paid out of the Bank’s current or accumulated earnings and profits, as
      calculated for federal income tax purposes, will not constitute non-dividend
      distributions and, therefore, will not be included in the Bank’s taxable income.




The
      amount of additional taxable income created from a non-dividend distribution
      is
      an amount that, when reduced by the tax attributable to the income, is equal
      to
      the amount of the distribution. Thus, approximately one and one-half times
      the
      non-dividend distribution would be includable in gross income for federal income
      tax purposes, assuming a 34% federal corporate income tax rate.




*Elimination
      of Dividends; Dividends-Received Deduction.* The
      Holding Company may exclude from its income 100% of dividends received from
      the
      Bank as a member of the same affiliated group of corporations. The corporate
      dividends-received deduction is generally 70% in the case of dividends received
      from unaffiliated corporations with which the Holding Company and the Bank
      will
      not file a consolidated tax return, except that if the Holding Company or the
      Bank owns more than 20% of the stock of a corporation distributing a dividend,
      then 80% of any dividends received may be deducted.






**State
      and Local Taxation**




*State
      of New York.* The Bank
      and the Holding Company are subject to New York State franchise tax on their
      entire net income or one of several alternative bases, whichever results in
      the
      highest tax. “Entire net income” means federal taxable income with adjustments.
      The Bank and the Holding Company file combined returns and are subject to
      taxation in the same manner as other corporations with some exceptions,
      including the Bank’s deductions for additions to its reserve for bad debts. The
      New York State franchise tax rate based upon entire net income for both fiscal
      years 2006 and 2005 was 9.03%, (including the Metropolitan Commuter
      Transportation District Surcharge) of net income. In general, the Holding
      Company is not required to pay New York State tax on dividends and interest
      received from the Bank or on gains realized on the sale of Bank stock. 60%
      of
      dividend income, and gains and losses from subsidiary capital are excluded
      from
      New York State entire net income. Distributions to Carver Federal received
      from
      Carver Asset Corporation are eligible for the New York State dividends received
      deduction. However, the Holding Company has been subject to a franchise tax
      rate
      of 3.51% (including the Metropolitan Commuter Transportation District Surcharge)
      for both fiscal years 2006 and 2005 based upon alternative entire net income.
      For this purpose, alternative entire net income is determined by adding back
      60%
      of dividend income, and gains and losses from subsidiary capital to New York
      State entire net income.




New
      York
      State has enacted legislation that enabled the Bank to avoid the recapture
      of
      the New York State tax bad debt reserves that otherwise would have occurred
      as a
      result of the changes in federal law and to continue to utilize either the
      federal method or a method based on a percentage of its taxable income for
      computing additions to its bad debt reserve.




*New
      York City.* The Bank
      and the Holding Company are also subject to a similarly calculated New York
      City
      banking corporation tax of 9% on income allocated to New York City. In this
      connection, legislation was enacted regarding the use and treatment of tax
      bad
      debt reserves that is substantially similar to the New York State legislation
      described above. The Bank and the Holding Company are subject to New York City
      banking corporation tax of 3% on alternative entire net income allocated to
      New
      York City.




*Delaware
      Taxation.* As a
      Delaware holding company not earning income in Delaware, the Holding Company
      is
      exempted from Delaware corporate income tax but is required to file an annual
      report with and pay an annual franchise tax to the State of Delaware.






26




**EXECUTIVE
      OFFICERS OF THE HOLDING COMPANY**




The
      name,
      position, term of office as officer and period during which he or she has served
      as an officer is provided below for each executive officer of the Holding
      Company as of June 15, 2006. Each of the persons listed below is an executive
      officer of the Holding Company and the Bank, holding the same office in
      each.




**Deborah
      C. Wright** ,
      age
      48, **** has
      served as **** President
      and Chief Executive Officer and a Director of the Holding Company and Carver
      Federal since June 1, 1999. In February 2005, Ms. Wright was elected Chairman
      of
      the Board. Prior to joining Carver, Ms. Wright was President & Chief
      Executive Officer of the Upper Manhattan Empowerment Zone Development
      Corporation, a position she held since May 1996.




**Roy
      Swan,** age
      42, **** has
      served Senior Vice President, Corporate Secretary and Chief of Staff since
      May
      2005. Prior to joining Carver, Mr. Swan served as Vice President, Finance &
Administration at Time Warner Inc. since March 2003.




**James
      H. Bason,** age **** 51,
      has
      served as Senior Vice President and Chief Lending Officer since March 2003.
      Previously Mr. Bason was Vice President and Real Estate Loan Officer at The
      Bank
      of New York where he had been employed since 1991. At the Bank of New York,
      Mr.
      Bason was responsible for developing and maintaining relationships with
      developers, builders, real estate investors and brokers to provide construction
      and permanent real estate financing.




**Frank
      Deaton,** age 37,
      has served **** as
      Senior
      Vice President of Operations since January 2005 and formerly served as Chief
      Auditor since May 2001. Mr. Deaton was previously Vice President and Risk Review
      Manager with Key Bank in Cleveland, Ohio where he was responsible for developing
      the scope and overseeing completion of credit, operational and regulatory
      compliance audits for a variety of business units.




**Carmelo
      Felix,** age
      56,
      has served **** as
      Senior
      Vice President and Chief Auditor since January 2005. Mr. Felix was previously
      Deputy General Manager at Korea Exchange Bank’s Regional Headquarters for the
      Americas where he was responsible for the administration of the bank’s Internal
      Audit Department in the Western Hemisphere.




**William
      Gray,** age
      50, **** has
      served **** as
      Senior
      Vice President and Chief Financial Officer since February 2002. Mr. Gray had
      been employed at the Dime Savings Bank of New York since 1992, most recently
      serving as Vice President/Director of Business Unit Planning and Support in
      the
      Controller’s Department where he was responsible for identifying and evaluating
      strategic initiatives for several businesses.




**Margaret
      D. Peterson,** age 54,
      has served as Senior
      Vice President and Chief Human
      Resources Officer since June 2002. She joined Carver in October 1999 as Senior
      Vice President and Chief Administrative Officer. Ms. Peterson came to Carver
      from Deutsche Bank where she had served as a Compensation Planning Consultant
      in
      Corporate Human Resources.






**ITEM
      IA.** **RISK
      FACTORS**




Risk
      is
      an inherent part of Carver’s business and activities. The following is a summary
      of risk factors relevant to the Company’s operations which should
      be
      carefully reviewed. These risk factors do not necessarily appear in the
      order of importance.




**Changes
      in interest rate environment may negatively affect Carver’s net income, mortgage
      loan originations and valuation of available for sale
      securities** *.* The
      Company’s earnings depend largely on the relationship between the yield on
      interest-earning assets, primarily our mortgage loans and mortgage-backed
      securities, and the cost of deposits and borrowings. This relationship, known
      as
      the interest rate spread, is subject to fluctuation and is affected by economic
      and competitive factors which influence market interest rates, the volume and
      mix of interest-earning assets and interest-bearing liabilities, and the
      level
      of non-performing assets. Fluctuations in market interest rates
      affect customer
      demand for products and services. Carver is subject to interest rate risk to
      the
      degree that its interest-bearing liabilities reprice or mature more slowly
      or
      more rapidly or on a different basis than its interest-earning
      assets.




In
      addition, the actual amount of time before mortgage loans and mortgage-backed
      securities are repaid can be significantly impacted by changes in mortgage
      prepayment rates and prevailing market interest rates. Mortgage prepayment
      rates
      will vary due to a number of factors, including the regional economy in the
      area
      where the underlying mortgages were originated, seasonal factors, demographic
      variables and the ability to assume the underlying mortgages. However, the
      major
      factors affecting prepayment rates are prevailing interest rates, related
      mortgage refinancing opportunities and competition.




The
      Company’s objective is to fund its liquidity needs primarily through lower
      costing deposit growth. However, from time to time Carver Federal borrows from
      the FHLB. More recently, the cost of deposits and the rate to borrow have become
      significantly higher with the rising interest rate environment, which
      has negatively impacted net interest income.




During
      fiscal 2006, the Federal Open Market Committee (“FOMC”) raised the federal funds
      rate eight times (a total of 200 basis points). U.S. Treasury yields have
      increased in fiscal 2006 from fiscal 2005 with the exception of the 30-year
      U.S.
      Treasury yield, which has decreased. Although U.S. Treasury yields have risen,
      yields on the longer term maturities have not risen to the same degree as
      shorter term yields. This has resulted in a significant flattening of the U.S.
      Treasury yield curve. The Bank’s short-term borrowings, as well as its deposits,
      are generally priced relative to short-term U.S. Treasury yields; whereas
      its






27




mortgage
      loans and mortgage-backed securities are generally priced relative to
      medium-term (two-to-five years) U.S. Treasury yields. The flattening of the
      yield curve reduces the spread between the yield on our interest-earning assets
      and the cost of deposits and borrowings, thereby reducing net
      income.




Interest
      rates are expected to continue to fluctuate and the Company cannot predict ** future
      Federal Reserve Board actions or other factors that will cause rates to
      change.




The
      estimated fair value of our available-for-sale securities portfolio may increase
      or decrease depending on changes in interest rates. Carver Federal’s securities
      portfolio is comprised primarily of adjustable rate securities. As interest
      rates have continued to rise, there has been an improvement in the valuation
      of
      the Bank’s available for sale securities.




**Carver’s
      results of operations are affected by economic conditions in the New
      York** **metropolitan area.** At
      March
      31, 2006, a significant portion of the Bank’s lending portfolio was concentrated
      in the New York metropolitan area. As a result of this geographic concentration,
      Carver’s results of operations are largely dependent on economic conditions in
      this area. Decreases in real estate values could adversely affect the value
      of
      property used as collateral for loans to its borrowers. Adverse changes in
      the
      economy caused by inflation, recession, unemployment or other factors beyond
      our
      control may also have a negative effect on the ability of borrowers to make
      timely loan payments, which would have an adverse impact on our earnings.
      Consequently, deterioration in economic conditions in the New York metropolitan
      area could have a material adverse impact on the quality of the Bank’s loan
      portfolio, which could result in increased delinquencies, decreased interest
      income results as well as an adverse impact on loan loss experience with
      probable increased allowance for loan losses. Such deterioration also could
      adversely impact the demand for products and services, and, accordingly, further
      negatively affect results of operations.




**Strong
      competition within Carver’s market areas could hurt expected profits and slow
      growth.** The
      New
      York metropolitan area has a high density of financial institutions, a number
      of
      which are significantly larger and with greater financial resources.
      Additionally, various large out-of-state financial institutions continue to
      enter the New York metropolitan area market. All are considered competitors
      to
      varying degrees.




Carver
      Federal faces intense competition both in making loans and attracting deposits.
      Competition for loans, both locally and in the aggregate, comes principally
      from
      mortgage banking companies, commercial banks, savings banks and savings and
      loan
      associations. Most direct competition for deposits comes from commercial banks,
      savings banks, savings and loan associations and credit unions. The Bank also
      faces competition for deposits from money market mutual funds and other
      corporate and government securities funds as well as from other financial
      intermediaries such as brokerage firms and insurance companies. Market area
      competition is a factor in pricing the Bank’s loans and deposits, which could
      reduce net interest income. Competition also makes it more challenging to
      effectively grow loan and deposit balances. The Company’s profitability depends
      upon its continued ability to successfully compete in its market
      areas.




The
      Bank’s increased emphasis on non-residential and construction real estate
      lending may create
      increased exposure to lending risks. At March 31, 2006,  $246.6
      million, or 49.7%, of our total loan portfolio consisted of non-residential
      and construction real
      estate loans compared to $165.3 million, or 38.9% at March 31, 2005.
      N on-residential
      and construction real
      estate loans generally involve a greater degree of credit risk than one- to-four
      family loans because they typically have larger balances and are more sensitive
      to changes in the economy. Payments on these loans often depend upon the
      successful operation and management of the underlying properties and the
      businesses which operate from within them; repayment of such loans may be
      affected by factors outside the borrower's control, such as adverse conditions
      in the real estate market or the economy or changes in government
      regulation.




**Carver
      Federal's ability to pay dividends or lend funds to the Company is subject
      to
      regulatory limitations which may prevent the Company from making future dividend
      payments or principal and interest payments on its debt
      obligation.** ** Carver
      is
      a unitary savings and loan association holding company regulated by the OTS
      and
      almost all of its operating assets are owned by Carver Federal. Carver relies
      primarily on dividends from the Bank 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 OTS regulates all capital distributions
      by
      the Bank to the Company, including dividend payments. 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 OTS
      prior
      to each capital distribution. The OTS will disallow any proposed dividend that
      would result in failure to meet the OTS’ minimum capital requirements. Based on
      Carver Federal's current financial condition, it is not expected that this
      provision will have any impact on the Company’s receipt of dividends from the
      Bank. Payment of dividends by Carver Federal also may be restricted at any
      time,
      at the discretion of the OTS, if it deems the payment to constitute an unsafe
      or
      unsound banking practice.




The
      Company operates in a highly regulated industry which limits the manner and
      scope of its business activities.




**Acquisitions
      may not produce revenue enhancements and may result in unforeseen integration
      difficulties.** The
      Company periodically explores acquisition opportunities through which it seeks
      to expand market share. Recently, the Company entered into a definitive
      agreement to acquire CCB in an effort to expand its product line by entering
      the
      small business market. Difficulty in integrating this and any other acquired
      business may result in the Company not being able to realize expected revenue
      increases and cost savings,
      and may cause disruption of its business, and may otherwise adversely affect its ability to achieve the anticipated benefits of the
      acquisition.






28




**Changes
      in laws, government regulation and monetary policy may have a material effect
      on
      our results of operations.** Financial
      institution regulation has been the subject of significant legislation and
      may
      be the subject of further significant legislation in the future, none of which
      is in the Company’s control. Significant new laws or changes in, or repeals of,
      existing laws, including with respect to federal and state taxation, may cause
      results of operations to differ materially. In addition, cost of compliance
      could adversely affect Carver’s ability to operate profitably. Further, federal
      monetary policy significantly affects credit conditions for Carver Federal,
      particularly as implemented through the Federal Reserve System. A material
      change in any of these conditions could have a material impact on Carver
      Federal, and therefore on the Company’s results of operations.




**Carver
      faces system failure risks and security risks.** ** The
      computer systems and network infrastructure the Company and its
      third party service providers use could be vulnerable to unforeseen problems.
      Fire, power loss or other failures may effect Carver’s computer
      equipment and other technology. Also, the Company’s computer systems and network
      infrastructure could be damaged
      by "hacking" and "identity theft."




**Our
      business could suffer if we** **fail** **to
      retain skilled people.** The
      Company’s success depends on its ability to attract and retain  key
      employees reflecting current market opportunities and challenges. Competition
      for the best people is intense, and the Company’s size and limited resources may
      present additional challenges in being able to retain the best
      possible employees.




**Acts
      or threats of terrorism, military activity, and other political actions could
      adversely affect general** **economic
      or industry conditions.** ****** Geopolitical
      conditions may affect the Company’s earnings. Furthermore, acts of terrorism,
      and the government's reaction to such acts, could affect business and
      earnings.




**A
      natural disaster could harm Carver’s business.** Natural
      disasters could harm the Company’s operations directly through interference with
      communications, as
      well
      as through the
      destruction of facilities and financial information systems.






**ITEM
      1B. UNRESOLVED STAFF COMMENTS**




Not
      applicable.






**ITEM
      2. PROPERTIES.** ****




The
      Bank
      currently conducts its business through one administrative office and eight
      branch offices (including the 125 th Street
      office) and five stand-alone ATM centers and stand-alone ATMs. Carver Federal
      entered into a license agreement with Essex Corporation on March 23, 2004 to
      operate an Investment Center at the Bank’s Malcolm X Boulevard branch office but
      does not share any other owned or leased spaces with any other businesses.
      The
      following table sets forth certain information regarding Carver Federal’s
      offices and other material properties at March 31, 2006. The Bank believes
      that
      such facilities are suitable and adequate for its operational
      needs.






29




**Lease**
              
              **Percentage**
              
              **Net
                  Book****Year**
              
              **Owned
                  or**
              
              **Expiration**
              
              **Space**
              
              **Value
                  of****Opened**
              
              **Leased**
              
              **Date**
              
              **Utilization**
              
              **Property**(In
                  thousands)MAIN
                  OFFICE75
                  West 125th Street
              
              
              1996
              
              
              Owned
              
              
              
              
              
              100
              
              $
              5,583New
                  York, NYBRANCH
                  OFFICES1281
                  Fulton StreetBrooklyn,
                  NY
              
              
              1989
              
              
              Owned
              
              
              
              
              
              70
              
              
              1,4031009-1015
                  Nostrand AvenueBrooklyn,
                  NY
              
              
              1975
              
              
              Owned
              
              
              
              
              
              100
              
              
              312115-02
                  Merrick BoulevardJamaica,
                  NY
              
              
              1996
              
              
              Leased
              
              
              02/2011
              
              
              75
              
              
              266130
                  Malcolm X BoulevardNew
                  York, NY
              
              
              2001
              
              
              Leased
              
              
              05/2006
              
              
              100
              
              
              535158-45
                  Archer AvenueJamaica,
                  New York
              
              
              2003
              
              
              Leased
              
              
              07/2018
              
              
              100
              
              
              8471
                  Hanson PlaceBrooklyn,
                  NY
              
              
              2004
              
              
              Leased
              
              
              07/2014
              
              
              100
              
              
              1100300
                  West 145 StreetNew
                  York, NY
              
              
              2004
              
              
              Leased
              
              
              12/2009
              
              
              100
              
              
              461ATM
                  CENTERS503
                  West 125th StreetNew
                  York, NY
              
              
              2003
              
              
              Leased
              
              
              03/2013
              
              
              100
              
              
              133601
                  West 137th StreetNew
                  York, NY
              
              
              2003
              
              
              Leased
              
              
              10/2013
              
              
              100
              
              
              1391
                  Hanson PlaceBrooklyn,
                  NY
              
              
              2004
              
              
              Leased
              
              
              07/2009
              
              
              100
              
              
              151400
                  5th AvenueNew
                  York, NY
              
              
              2005
              
              
              Leased
              
              
              08/2013
              
              
              100
              
              
              1321950
                  Fulton StreetNew
                  York, NY
              
              
              2005
              
              
              Leased
              
              
              01/2010
              
              
              100
              
              
              172Total
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              11,098







The
      net
      book value of Carver Federal’s investment in premises and equipment totaled
      approximately $13.2 million at March 31, 2006.






**ITEM
      3. LEGAL PROCEEDINGS** **.**




From
      time
      to time, Carver Federal is a party to various legal proceedings incident to
      its
      business. Certain claims, suits, complaints and investigations involving Carver
      Federal, arising in the ordinary course of business, have been filed or are
      pending. The Company is of the opinion, after discussion with legal counsel
      representing Carver Federal in these proceedings, that the aggregate liability
      or loss, if any, arising from the ultimate disposition of these matters would
      not have a material adverse effect on the Company’s consolidated financial
      position or results of operations. At March 31, 2006, there were no material
      legal proceedings to which the Company or its subsidiaries was a party or to
      which any of their property was subject.






**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS.**




During
      the quarter ended March 31, 2006, no matter was submitted to a vote of our
      security holders through the solicitation of proxies or otherwise.






30







**PART
      II**




**ITEM
      5.**   **MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.**




The
      Holding Company’s common stock is listed on the American Stock Exchange under
      the symbol “CNY.” As of June 15, 2006, there were 2,502,247 shares of the common
      stock outstanding, held by approximately 1,079 stockholders of record. The
      following table shows the high and low per share sales prices of the common
      stock and the dividends declared for the quarters indicated.


**High**
              
              **Low**
              
              **Dividend**
              
              
              
              **High**
              
              **Low**
              
              **Dividend****Fiscal
                  Year 2006**
              
              
              
              
              
              
              
              **Fiscal
                  Year 2005**June
                  30, 2005
              
              $
              18.75
              
              $
              16.90
              
              $
              0.08
              
              
              June
                  30, 2004
              
              $
              23.95
              
              $
              19.15
              
              $
              0.05September
                  30, 2005
              
              $
              17.35
              
              $
              16.30
              
              $
              0.08
              
              
              September
                  30, 2004
              
              $
              20.45
              
              $
              17.95
              
              $
              0.07December
                  31, 2005
              
              $
              16.70
              
              $
              15.00
              
              $
              0.08
              
              
              December
                  31, 2004
              
              $
              20.82
              
              $
              18.55
              
              $
              0.07March
                  31, 2006
              
              $
              17.32
              
              $
              15.00
              
              $
              0.08
              
              
              March
                  31, 2005
              
              $
              20.07
              
              $
              18.38
              
              $
              0.07




The
      Board
      initially established the payment of a quarterly dividend to common shareholders
      on January 9, 2003. Subsequently, each quarter the Board meets to decide on
      the
      amount per share to be declared. On May 9, 2006, the Holding Company’s Board of
      Directors declared a $0.08 cash dividend to shareholders for the fourth quarter
      of fiscal 2006, this represents a $0.03 per share increase from the $0.05 paid
      at inception of the Board establishing payment of a quarterly dividend.




Under
      OTS
      regulations, the Bank will not be permitted to pay dividends to the Holding
      Company on its capital stock if its regulatory capital would be reduced below
      applicable regulatory capital requirements or if its stockholders’ equity would
      be reduced below the amount required to be maintained for the liquidation
      account, which was established in connection with the Bank’s conversion to stock
      form. The OTS capital distribution regulations applicable to savings
      institutions (such as the Bank) that meet their regulatory capital requirements
      permit, after not less than 30 days prior notice to the OTS, capital
      distributions during a calendar year that do not exceed the Bank’s net income
      for that year plus its retained net income for the prior two years. For
      information concerning the Bank’s liquidation account, see Note 11 of the Notes
      to the Consolidated Financial Statements.




Unlike
      the Bank, the Holding Company is not subject to OTS regulatory restrictions
      on
      the payment of dividends to its stockholders, although the source of such
      dividends will be dependent, in part, upon capital distributions from the Bank.
      The Holding Company is subject to the requirements of Delaware law, which
      generally limit dividends to an amount equal to the excess of the net assets
      of
      the Company (the amount by which total assets exceed total liabilities) over
      its
      statutory capital, or if there is no such excess, to its net profits for the
      current and/or immediately preceding fiscal year.




On
      August
      6, 2002 the Holding Company announced a stock repurchase program to repurchase
      up to 231,635 shares of its outstanding common stock. To date, 94,474 shares
      of
      its common stock have been repurchased in open market transactions at an average
      price of $16.90 per share. The Holding Company intends to use repurchased shares
      to fund its stock-based benefit and compensation plans and for any other purpose
      the Board deems advisable in compliance with applicable law. The following
      table
      details purchases the Holding Company made of its common stock during the fourth
      quarter of fiscal 2006.


Total
                  Number
              
              MaximumTotal
              
              
              
              of
                  Shares
              
              Number
                  of SharesNumber
                  of
              
              Average
              
              Purchased
                  as part
              
              that
                  May Yet BeShares
              
              Price
                  Paid
              
              of
                  Publicly
              
              Purchased
                  Under thePurchased
              
              per
                  Share
              
              Announced
                  Plans
              
              PlansJanuary
                  1, 2006 throughJanuary
                  31, 2006
              
              
              300
              
              
              15.44
              
              
              300
              
              
              140,361February
                  1, 2006 throughFebruary
                  28, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              140,361March
                  1, 2006 throughMarch
                  31, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              140,361-
              
              
              15.44
              
              
              -


Carver
      has three equity compensation plans: (1) The Management Recognition Plan (“MRP”)
      which provides for automatic grants of restricted stock to certain employees
      as
      of the date the plan became effective in June of 1995. Additionally, the MRP
      makes






31




provision
      for added discretionary grants of restricted stock to those employees so
      selected by the Compensation Committee of the Board who administers the plan.
      (2) The Incentive Compensation Plan (“ICP”) provides for grants of cash bonuses,
      restricted stock and stock options to the employees selected by the Compensation
      Committee. (3) The Option Plan provides for automatic option grants to certain
      employees as of the date the plan became effective in June of 1995, and like
      the
      MRP, also makes provision for added discretionary option grants to those
      employees so selected by the Compensation Committee. Additional information
      regarding Carver’s equity compensation plans is incorporated by reference from
      the section entitled “Securities Authorized for Issuance Under Equity
      Compensation Plans” in the Proxy Statement.









32




**ITEM
                6. SELECTED FINANCIAL
                DATA**




Set
      forth
      below are our selected consolidated financial and other data. This financial
      data is derived in part from, and should be read in conjunction with our
      consolidated financial statements and related notes.


**At
                  or for the Fiscal Year Ended March 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(Dollars
                  in thousands, except per share data)****Selected
                  Financial Condition Data:**Assets
              
              $
              660,993
              
              $
              626,377
              
              $
              538,830
              
              $
              509,845
              
              $
              450,306Loans,
                  net
              
              
              493,432
              
              
              421,987
              
              
              351,900
              
              
              292,738
              
              
              289,710Securities
              
              
              108,286
              
              
              149,335
              
              
              139,877
              
              
              165,585
              
              
              105,464Cash
                  and cash equivalents
              
              
              22,904
              
              
              20,420
              
              
              22,774
              
              
              23,160
              
              
              34,851Deposits
              
              
              504,638
              
              
              455,870
              
              
              375,519
              
              
              349,066
              
              
              327,542Borrowed
                  funds
              
              
              93,792
              
              
              115,299
              
              
              104,282
              
              
              108,996
              
              
              75,651Long-term
                  Obligations
              
              
              48,153
              
              
              84,129
              
              
              80,506
              
              
              91,762
              
              
              60,749Stockholders'
                  equity
              
              $
              48,697
              
              $
              45,801
              
              $
              44,645
              
              $
              41,073
              
              $
              36,742Number
                  of deposit accounts
              
              
              41,614
              
              
              40,199
              
              
              38,578
              
              
              41,220
              
              
              41,200Number
                  of offices
              
              
              8
              
              
              8
              
              
              6
              
              
              5
              
              
              5**Operating
                  Data:**Interest
                  income
              
              $
              32,385
              
              $
              28,546
              
              $
              26,234
              
              $
              27,390
              
              $
              28,395Interest
                  expense
              
              
              13,493
              
              
              9,758
              
              
              8,700
              
              
              8,983
              
              
              12,047Net
                  interest income
              
              
              18,892
              
              
              18,788
              
              
              17,534
              
              
              18,407
              
              
              16,348Provision
                  for loan losses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              900Net
                  interest income after provision for loan losses
              
              
              18,892
              
              
              18,788
              
              
              17,534
              
              
              18,407
              
              
              15,448Non-interest
                  income
              
              
              5,341
              
              
              4,075
              
              
              5,278
              
              
              3,161
              
              
              4,485Non-interest
                  expenses
              
              
              19,134
              
              
              18,696
              
              
              15,480
              
              
              14,704
              
              
              14,339Income
                  before income taxes
              
              
              5,099
              
              
              4,167
              
              
              7,332
              
              
              6,864
              
              
              5,594Income
                  taxes
              
              
              1,329
              
              
              1,518
              
              
              2,493
              
              
              3,033
              
              
              881Net
                  income
              
              $
              3,770
              
              $
              2,649
              
              $
              4,839
              
              $
              3,831
              
              $
              4,713Basis
                  earnings per common share
              
              $
              1.50
              
              $
              1.06
              
              $
              2.03
              
              $
              1.59
              
              $
              1.98Diluted
                  earnings per common share
              
              $
              1.47
              
              $
              1.03
              
              $
              1.87
              
              $
              1.52
              
              $
              1.89Cash
                  dividends per common share
              
              $
              0.32
              
              $
              0.26
              
              $
              0.20
              
              $
              0.10
              
              $
              0.05**Selected
                  Statistical Data:**Return
                  on average assets (1)
              
              
              0.60
              %
              
              0.45
              %
              
              0.93
              %
              
              0.83
              %
              
              1.11
              %Return
                  on average equity (2)
              
              
              7.93
              
              
              5.80
              
              
              11.40
              
              
              9.77
              
              
              13.78Net
                  interest margin (3)
              
              
              2.97
              
              
              3.41
              
              
              3.56
              
              
              4.26
              
              
              4.09Average
                  interest rate spread (4)
              
              
              3.18
              
              
              3.26
              
              
              3.40
              
              
              4.08
              
              
              3.89Efficiency
                  ratio (5)
              
              
              78.96
              
              
              81.77
              
              
              67.86
              
              
              68.18
              
              
              77.89Operating
                  expense to average assets (6)
              
              
              3.04
              
              
              3.21
              
              
              2.97
              
              
              3.18
              
              
              3.37Average
                  equity to average assets
              
              
              7.54
              
              
              7.84
              
              
              8.13
              
              
              8.48
              
              
              8.03Common
                  Dividend payout ratio (7)
              
              
              20.63
              
              
              24.64
              
              
              9.86
              
              
              3.19
              
              
              2.55**Asset
                  Quality Ratios:**Non-performing
                  assets to total assets (8)
              
              
              0.42
              %
              
              0.16
              %
              
              0.39
              %
              
              0.36
              %
              
              0.63
              %Non-performing
                  assets to total loans receivable (8)
              
              
              0.55
              
              
              0.23
              
              
              0.60
              
              
              0.61
              
              
              0.96Allowance
                  for loan losses to total loans receivable
              
              
              0.81
              
              
              0.96
              
              
              1.16
              
              
              1.40
              
              
              1.41






(1) 
                 Net income divided by average total assets
              (2) 
                 Net income divided by average total equity
              (3) 
                 Net interest income divided by average interest-earning
                assets.
              (4) 
                 The difference between the weighted average yield on
                interest-earning assets and the weighted average cost of interest-bearing
                liabilities.
              (5) 
                 Non-interest expense (other than real estate owned expenses) divided
                by the sum of net interest income and non-interest
              income
                (other than net security gains and losses and other non-recurring
                income).
              (6) 
                 Non-interest expense less real estate owned expenses, divided by
                average total assets.
              (7) 
                 Dividends paid to common stockholders as a percentage of net income
                available to common stockholders.
              (8) 
                 Non-performing assets consist of non-accrual loans, loans accruing
                90 days or more past due, and property acquired in settlement of
                loans.






33






**ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS.**




The
      following discussion and analysis should be read in conjunction with our
      Consolidated Financial Statements and Notes to Consolidated Financial Statements
      presented elsewhere in this report. The Company’s results of operations are
      significantly affected by general economic and competitive conditions,
      particularly changes in market interest rates, government policies, changes
      in
      accounting standards and actions of regulatory agencies.




**Executive
      Summary**




Carver
      Bancorp, Inc., is a bank holding company organized under the laws of the state
      of Delaware and registered as a “bank holding company” under the Bank Holding
      Company Act of 1956, as amended. Carver is committed to providing superior
      customer service while offering a range of banking products and financial
      services to our retail and commercial customers. The Holding Company’s primary
      subsidiary is Carver Federal Savings Bank, which operates from eight branch
      offices in the New York City boroughs of Manhattan, Brooklyn and
      Queens.




Consistent
      with the thrift industry, Carver Federal’s net income is dependent primarily on
      net interest income, which is the difference between interest income earned
      on
      its loan, investment and mortgage-backed securities portfolios and the interest
      paid on its interest-bearing liabilities, such as deposits and borrowings.
      In
      addition, net income is affected by the level of provision for loan losses,
      as
      well as non-interest income and operating expenses. The interest rate climate
      in
      2006 was a challenging one for the industry and therefore Carver, as net
      interest margin declined following interest rate policy by the Federal Reserve
      over the last two years, which had the effect of substantially reducing the
      margin between earning assets and liabilities. Carver’s core strategy continues
      to emphasize increasing assets, namely commercial real estate loans, and
      liabilities, primarily core deposits, sourced through our branch offices. In
      addition, the company is aggressively working to reduce costs, to improve its
      efficiency ratio, following investments in new branch offices and ATM locations,
      to increase the Bank’s presence in its core marketplace.




**Merger
      with Community Capital Bank**




In
      addition to these and other steps to grow organically, Carver is actively
      pursuing acquisition opportunities to expand its presence in markets consistent
      with its urban niche, which are designed to increase assets and/or fee income.
      As a result, on April 5, 2006, the Bank entered into a definitive agreement
      to
      acquire Community Capital Bank (“CCB”), a leader in providing loans to small
      businesses in New York City’s urban marketplace, in a cash transaction valued at
      $11.1 million. The acquisition was approved by CCB shareholders on June 28,
      2006 and is expected to close by September 30, 2006, subject to customary
      closing conditions including regulatory approvals.




By
      providing Carver with a commercial banking platform, the transaction with CCB
      will better position the Bank to capitalize on one of the fastest growing and
      affluent urban consumer and small business markets in the country. Small
      business lending, which is typically a higher margin lending platform than
      real
      estate lending, will enable Carver to increase core deposits and loan balances,
      thereby increasing net interest margin and fee income. Efficiencies are also
      expected from an in market merger of an institution with two branch offices
      in
      Brooklyn, New York and approximately $162 million in assets.




**Fiscal
      2006**




Throughout
      fiscal 2006 the interest rate environment continued to negatively impact the
      Bank’s net interest margin. To stem margin loss, the Bank successfully
      implemented a strategy to increase assets when accretive while replacing
      securities with higher yielding mortgage loans. Additionally, higher costing
      borrowings were replaced with lower costing deposits. The growth in assets
      and
      deposits followed investments in new branch and ATM locations, new product
      offerings, and marketing efforts. However, these investments and others
      increased the Bank’s operating expenses. With diligent cost cutting efforts and
      outsourcing strategies the growth in expenses was limited and resulted in modest
      improvements to the Bank’s efficiency ratio.




In
      fiscal
      2006, the Bank experienced strong growth in its core business with increases
      in
      net loans receivable and deposits, compared to March 31, 2005. During fiscal
      2006, the national and local real estate markets remained strong and continued
      to support Carver’s lending abilities increasing the loan portfolio despite the
      fact that loan repayments remained high, at fiscal 2005 levels. Deposits rose
      through growth in our checking, money market and certificate of deposit
      accounts. Both the securities and borrowings portfolios were reduced, consistent
      with our strategy to use normal cash flows from the repayment of mortgage-backed
      securities as well as the increase in deposits to fund higher yielding loans
      and
      repay borrowings.




The
      FOMC
      raised the federal funds rate eight times resulting in an increase of 200 basis
      points during the fiscal year. While short term U.S. treasury yields have risen,
      yields on the longer end of the treasury yield curve have not risen to the
      same
      degree as short term yields resulting in a significant flattening of the U.S.
      Treasury yield curve. Additionally, there was interest rate volatility within
      individual quarters, which resulted in volatility in cash flows and refinance
      activity. As a result of this rate environment and






34




despite
      the growth in our balance sheet, Carver’s net interest income remained
      relatively flat while net interest margin declined year over year.




As
      previously noted, fiscal 2006 reflected strong growth in the Bank’s loan
      portfolio while maintaining solid asset quality. As a result, the Company did
      not provide for additional loan loss reserves as it considers the current
      allowance for loan losses to be adequate.




The
      Bank’s strategy to enhance fee income from operations has resulted in year over
      year increases in depository fees and charges, primarily ATM fees, debit card
      income and commissions from the sale of investments and insurance. In addition,
      the Bank benefited from improvements in loan fees and service charges, primarily
      loan prepayment penalty income.




Net
      income for fiscal 2006 was impacted by increased expenses resulting from the
      full year effect of expanding the Bank’s franchise in fiscal 2005. During fiscal
      2005, the Bank successfully opened two full service state-of-the-art branch
      offices, one in Brooklyn and the other in Harlem. Additionally, the Bank opened
      two 24/7 ATM banking centers in Harlem and Brooklyn in fiscal 2005 and stand
      alone ATMs in Brooklyn in fiscal 2006. These investments increased operating
      expenses substantially. During fiscal 2006, in an effort to control expenses,
      Carver implemented company-wide cost cutting initiatives including the
      outsourcing of several technology functions as well as a number of corporate
      administrative functions. These efforts helped hold expenses to a modest
      increase in expenses year over year.




**Fiscal
      2007**




The
      outlook for fiscal 2007 reflects many of the economic and competitive factors
      that the Bank and the banking industry faced in fiscal 2006. As a result, we
      expect the operating environment to remain challenging with short-term interest
      rates continuing to rise while medium- and long term interest rates remain
      stable or rise moderately, which could have the effect of exerting further
      pressure on the Bank’s net interest margin. Structurally, the Bank’s balance
      sheet exhibits an asset sensitive bias over the long term. As a result, the
      Bank’s greatest exposure is to a lower rate environment as asset yields would be
      expected to decline while deposit costs would be expected to stabilize. Should
      rates continue to rise, additional margin compression would be expected in
      the
      near term, however, management anticipates that the Bank’s balance sheet would
      benefit over time from a prolonged rising rate environment.




In
      this
      challenging climate, the Bank will continue to focus on growth in its core
      businesses, namely the expansion of commercial real estate loans and retail
      deposits. With the acquisition of CCB, we expect to begin to capitalize on
      additional new business opportunities noted above. In addition, based on our
      success in substantially increasing loans in our urban markets in the last
      several fiscal years, Carver Federal has been consistently successful in
      competing for attractive resources from the public sector to extend our
      reach.




Notably,
      on June 1, 2006, Carver Federal was selected by the U.S. Department of Treasury
      to receive an allocation of $59 million in New Markets Tax Credits (“NMTC”) to
      provide loans to business willing to invest in low-income communities, including
      small business and certain real estate loans and other investments. The
      allocation was awarded to Carver Community Development Corporation, a for profit
      Community Development Entity (“CDE”) created by the Bank. Tax credits awarded by
      the government through the NMTC program enable loans to be made with advantaged
      terms including, in some cases, below market interest rates, thereby increasing
      capital to underserved communities. The NMTC program provides a credit to Carver
      Federal against federal income taxes when the Bank makes an equity investment
      in
      its CDE, which in turn uses this investment to make qualified loans in
      low-income communities, consistent with Carver’s marketplace. The allocations
      are expected to be made available during calendar year 2007, and annually
      thereafter over a seven year period. During this period, the Bank will be able
      to receive 39% of the award or approximately $23 million in tax credits to
      be
      claimed over a seven year period, consistent with the CDE’s ability to make
      loans meeting the Treasury Department’s guidelines. A substantial portion of
      this benefit will be utilized for revitalization of our community, pursuant
      to
      the goals of the NMTC program. However, executing this program well is expected
      to increase our lending in our marketplace and improve shareholder value by
      reducing the Bank’s taxes. Carver is gratified to have been selected upon its
      first application in a highly competitive selection process.




Deposit
      growth is expected to follow our new business and marketing effort to core
      customer groups including landlords, churches and other non-profits as residents
      of the communities we serve. New products were offered to increase market share
      in these customer segments during fiscal 2006 including a lock-box service
      for
      landlords to collect rental payments, a checking overdraft line of credit (in
      an
      effort to continue building our checking account deposit base) and participation
      in the Certificate of Deposit Account Registry Services program to more
      efficiently address the collateral needs of large balance depositors.




Regarding
      mortgage lending, the strength of originations and the purchase mortgage market
      coupled with the anticipated reduced level of loan prepayments should result
      in
      continued strong loan portfolio growth in fiscal 2007. Products such as
      sub-prime and jumbo mortgages for sale in the secondary market were introduced
      in fiscal 2006 to address the needs of additional prospective borrowers. Added
      emphasis to promote these products will be provided in fiscal 2007 in an effort
      to further fuel fee income growth. Planned net income growth in fiscal 2007
      will
      be achieved by expanding non-interest income and emphasizing cost containment






35




measures
      in fiscal 2007 thereby lowering the Bank’s efficiency ratio. It is anticipated
      that if further flattening of the U.S. Treasury yield curve occurs, the Bank
      may
      utilize the cash flow of an expansion in its core business to reduce its
      securities and borrowing portfolios, thereby limiting asset growth.




The
      retail and lending teams of Carver and CCB are developing a strategy to onboard
      CCB customers and increase products to deepen those relationships, in addition
      to new business activities designed to capitalize on Carver’s larger footprint.
      In addition we are evaluating strategies to increase efficiencies and maximize
      the combination of the Company’s balance sheets.




**Critical
      Accounting Policies**




Various
      elements of our accounting policies, by their nature, are inherently subject
      to
      estimation techniques, valuation assumptions and other subjective assessments.
      Our policy with respect to the methodologies used to determine the allowance
      for
      loan losses is our most critical accounting policy. This policy is important
      to
      the presentation of our financial condition and results of operations, and
      it
      involves a higher degree of complexity and requires management to make difficult
      and subjective judgments, which often require assumptions or estimates about
      highly uncertain matters. The use of different judgments, assumptions and
      estimates could result in material differences in our results of operations
      or
      financial condition.




See
      Note
      1 of Notes to Consolidated Financial Statements for a description of our
      critical accounting policies including those related to allowance for loan
      losses and an explanation of the methods and assumptions underlying its
      application.




**Asset/Liability
      Management**




Net
      interest income, the primary component of Carver Federal’s net income, is
      determined by the difference or “spread” between the yield earned on
      interest-earning assets and the rates paid on its interest-bearing liabilities
      and the relative amounts of such assets and liabilities. Because Carver
      Federal’s interest-bearing liabilities consist primarily of shorter term deposit
      accounts, Carver Federal’s interest rate spread can be adversely affected by
      changes in general interest rates if its interest-earning assets are not
      sufficiently sensitive to changes in interest rates. The Bank has sought to
      reduce its exposure to changes in interest rates by more closely matching the
      effective maturities and repricing periods of its interest-earning assets and
      interest-bearing liabilities through a variety of strategies, including the
      origination and purchase of adjustable-rate mortgage loans for its portfolio,
      investment in adjustable-rate mortgage-backed securities and shorter-term
      investment securities and the sale of all long term fixed-rate mortgage loans
      originated into the secondary market.




**Discussion
      of Market Risk—Interest Rate Sensitivity Analysis**




As
      a
      financial institution, the Bank’s primary component of market risk is interest
      rate volatility. Fluctuations in interest rates will ultimately impact both
      the
      level of income and expense recorded on a large portion of the Bank’s assets and
      liabilities, and the market value of all interest-earning assets, other than
      those which are short term in maturity. Since all of the Company’s
      interest-bearing liabilities and virtually all of the Company’s interest-earning
      assets are held by the Bank, most of the Company’s IRR exposure is retained by
      the Bank. As a result, all significant IRR management procedures are performed
      at the Bank. Based upon the Bank’s nature of operations, the Bank is not subject
      to foreign currency exchange or commodity price risk. The Bank does not own
      any
      trading assets.




Carver
      Federal seeks to manage its IRR by monitoring and controlling the variation
      in
      repricing intervals between its assets and liabilities. To a lesser extent,
      Carver Federal also monitors its interest rate sensitivity by analyzing the
      estimated changes in market value of its assets and liabilities assuming various
      interest rate scenarios. As discussed more fully below, there are a variety
      of
      factors which influence the repricing characteristics of any given asset or
      liability.




The
      matching of assets and liabilities may be analyzed by examining the extent
      to
      which such assets and liabilities are “interest rate sensitive” and by
      monitoring an institution’s interest rate sensitivity gap. An asset or liability
      is said to be interest rate sensitive within a specific period if it will mature
      or reprice within that period. The interest rate sensitivity gap is defined
      as
      the difference between the amount of interest-earning assets maturing or
      repricing within a specific period of time and the amount of interest-bearing
      liabilities repricing within that same time period. A gap is considered positive
      when the amount of interest rate sensitive assets exceeds the amount of interest
      rate sensitive liabilities and is considered negative when the amount of
      interest rate sensitive liabilities exceeds the amount of interest rate
      sensitive assets. Generally, during a period of falling interest rates, a
      negative gap could result in an increase in net interest income, while a
      positive gap could adversely affect net interest income. Conversely, during
      a
      period of rising interest rates a negative gap could adversely affect net
      interest income, while a positive gap could result in an increase in net
      interest income. As illustrated below, Carver Federal had a negative one-year
      gap equal to 25.48% of total rate sensitive assets at March 31, 2006. As a
      result, Carver Federal’s net interest income could be negatively affected by
      rising interest rates and positively affected by falling interest
      rates.






36




The
      following table sets forth information regarding the projected maturities,
      prepayments and repricing of the major rate-sensitive asset and liability
      categories of Carver Federal as of March 31, 2006. Maturity repricing dates
      have
      been projected by applying estimated prepayment rates based on the current
      rate
      environment. The information presented in the following table is derived in
      part
      from data incorporated in “Schedule CMR: Consolidated Maturity and Rate,” which
      is part of the Bank’s quarterly reports filed with the OTS. The repricing and
      other assumptions are not necessarily representative of the Bank’s actual
      results. Classifications of items in the table below are different from those
      presented in other tables and the financial statements and accompanying notes
      included herein and do not reflect non-performing loans.


**Three**
              
              
              
              **Over
                  One****or**
              
              **Four
                  to**
              
              **Through**
              
              **Over
                  Three**
              
              **Over
                  Five**
              
              **Over****Less**
              
              **Twelve**
              
              **Three**
              
              **Through**
              
              **Through**
              
              **Ten****Months**
              
              **Months**
              
              **Years**
              
              **Five
                  Years**
              
              **Ten
                  Years**
              
              **Years**
              
              **Total****(Dollars
                  in thousands)****Rate
                  Sensitive Assets:**Loans
                  and mortgage-backed securities
              
              $
              95,862
              
              $
              34,878
              
              $
              96,802
              
              $
              56,499
              
              $
              150,598
              
              $
              155,001
              
              $
              589,640Federal
                  funds sold and interest earning deposits
              
              
              9,300
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              9,300Investment
                  securities
              
              
              969
              
              
              3,839
              
              
              7,847
              
              
              4,038
              
              
              11
              
              
              -
              
              
              16,704Total
                  interest-earning assets
              
              
              106,131
              
              
              38,717
              
              
              104,649
              
              
              60,537
              
              
              150,609
              
              
              155,001
              
              
              615,644**Rate
                  Sensitive Liabilities:**NOW
                  demand
              
              
              4,539
              
              
              5,236
              
              
              12,564
              
              
              10,652
              
              
              14,085
              
              
              11,914
              
              
              58,990Savings
                  and clubs
              
              
              9,561
              
              
              9,647
              
              
              19,159
              
              
              12,126
              
              
              29,483
              
              
              59,747
              
              
              139,723Money
                  market savings
              
              
              2,437
              
              
              1,360
              
              
              8,668
              
              
              19,895
              
              
              3,018
              
              
              4,667
              
              
              40,045Certificates
                  of deposit
              
              
              40,617
              
              
              176,961
              
              
              30,680
              
              
              14,883
              
              
              818
              
              
              3
              
              
              263,962Borrowings
              
              
              18,867
              
              
              32,484
              
              
              44,165
              
              
              -
              
              
              194
              
              
              -
              
              
              95,710Total
                  interest-bearing liabilities
              
              $
              76,021
              
              $
              225,688
              
              $
              115,236
              
              $
              57,556
              
              $
              47,598
              
              $
              76,331
              
              $
              598,430Interest
                  Sensitivity Gap
              
              $
              30,110
              
              $
              (186,971
              )
              $
              (10,587
              )
              $
              2,981
              
              $
              103,011
              
              $
              78,670
              
              $
              17,214Cumulative
                  Interest Sensitivity Gap
              
              $
              30,110
              
              $
              (156,861
              )
              $
              (167,448
              )
              $
              (164,467
              )
              $
              (61,456
              )
              $
              17,214
              
              
              -Ratio
                  of Cumulative Gap to Total RateSensitive
                  assets
              
              
              4.89
              %
              
              -25.48
              %
              
              -27.20
              %
              
              -26.71
              %
              
              -9.98
              %
              
              2.80
              %






The
      table
      above assumes that fixed maturity deposits are not withdrawn prior to maturity
      and that transaction accounts will decay as disclosed in the table
      above.




Certain
      shortcomings are inherent in the method of analysis presented in the table
      above. Although certain assets and liabilities may have similar maturities
      or
      periods of repricing, they may react in different degrees to changes in the
      market interest rates. The interest rates on certain types of assets and
      liabilities may fluctuate in advance of changes in market interest rates, while
      rates on other types of assets and liabilities may lag behind changes in market
      interest rates. Certain assets, such as adjustable-rate mortgages, generally
      have features that restrict changes in interest rates on a short-term basis
      and
      over the life of the asset. In the event of a change in interest rates,
      prepayments and early withdrawal levels would likely deviate significantly
      from
      those assumed in calculating the table. Additionally, credit risk may increase
      as many borrowers may experience an inability to service their debt in the
      event
      of a rise in interest rate. Virtually all of the adjustable-rate loans in Carver
      Federal’s portfolio contain conditions that restrict the periodic change in
      interest rate.




*Net
      Portfolio Value (“NPV”) Analysis.* As part
      of its efforts to maximize net interest income while managing risks associated
      with changing interest rates, management also uses the NPV methodology.




Under
      this methodology, IRR exposure is assessed by reviewing the estimated changes
      in
      net interest income (“NII”) and NPV that would hypothetically occur if interest
      rates rapidly rise or fall along the yield curve. Projected values of NII and
      NPV at both higher and lower regulatory defined rate scenarios are compared
      to
      base case values (no change in rates) to determine the sensitivity to changing
      interest rates.






37




Presented
      below, as of March 31, 2006, is an analysis of the Bank’s IRR as measured by
      changes in NPV and NII for instantaneous and sustained parallel shifts of 100
      basis points in market interest rates. Such limits have been established with
      consideration of the impact of various rate changes and the Bank’s current
      capital position. The Bank considers its level of IRR for fiscal 2006, as
      measured by changes in NPV, to be minimal. The information set forth below
      relates solely to the Bank; however, because virtually all of the Company’s IRR
      exposure lies at the Bank level, management believes the table below also
      similarly reflects an analysis of the Company’s IRR.


**Net
                  Portfolio Value**
              
              **NPV
                  as a % of PV of Assets****Change
                  in Rate**
              
              **$
                  Amount**
              
              **$
                  Change**
              
              **%
                  Change**
              
              **NPV
                  Ratio**
              
              **Change****(Dollars
                  in thousands)**+300
                  bp
              
              
              69,337
              
              
              (18,204
              )
              
              -21
              %
              
              10.55
              %
              
              -226
                  bp+200
                  bp
              
              
              76,222
              
              
              (11,319
              )
              
              -13
              %
              
              11.43
              %
              
              -138
                  bp+100
                  bp
              
              
              82,270
              
              
              (5,271
              )
              
              -6
              %
              
              12.18
              %
              
              -63
                  bp0
                  bp
              
              
              87,541
              
              
              -
              
              
              -
              
              
              12.81
              %
              
              --100
                  bp
              
              
              91,875
              
              
              4,334
              
              
              5
              %
              
              13.31
              %
              
              +50
                  bp-200
                  bp
              
              
              95,524
              
              
              7,983
              
              
              9
              %
              
              13.71
              %
              
              +90
                  bp
  **March
                  31, 2006****Risk
                  Measures: +200 BP Rate Shock**Pre-Shock
                  NPV Ratio: NPV as % of PV of Assets
              
              12.81%Post-Shock
                  NPV Ratio
              
              11.43%Sensitivity
                  Measure; Decline in NPV Ratio
              
              138
                  bp




Certain
      shortcomings are inherent in the methodology used in the above IRR measurements.
      Modeling changes in NPV require the making of certain assumptions, which may
      or
      may not reflect the manner in which actual yields and costs respond to changes
      in market interest rates. In this regard, the NPV table presented assumes that
      the composition of Carver Federal’s interest sensitive assets and liabilities
      existing at the beginning of a period remains constant over the period being
      measured and also assumes that a particular change in interest rates is
      reflected uniformly across the yield curve regardless of the duration to
      maturity or repricing of specific assets and liabilities. Accordingly, although
      the NPV table provides an indication of Carver Federal’s IRR exposure at a
      particular point in time, such measurements are not intended to and do not
      provide a precise forecast of the effect of changes in market interest rates
      on
      Carver Federal’s net interest income and may differ from actual results.




**Average
      Balance, Interest and Average Yields and Rates**




The
      following table sets forth certain information relating to Carver Federal’s
      average interest-earning assets and average interest-bearing liabilities and
      reflects the average yield on assets and the average cost of liabilities for
      the
      years indicated. These yields and costs are derived by dividing income or
      expense by the average balances of assets or liabilities, respectively, for
      the
      periods shown. Average balances are derived from average month-end balances,
      except for federal funds which are derived from daily balances. The use of
      average monthly balances instead of average daily balances on all other accounts
      should not result in material differences in the information
      presented.






38




The
      table
      also presents information for the years indicated with respect to the difference
      between the weighted average yield earned on interest-earning assets and the
      weighted average rate paid on interest-bearing liabilities, or “interest rate
      spread,” which savings institutions have traditionally used as an indicator of
      profitability. Another indicator of an institution’s profitability is its “net
      interest margin,” which is its net interest income divided by the average
      balance of interest-earning assets. Net interest income is affected by the
      interest rate spread and by the relative  amounts
      of interest-earning assets and interest-bearing liabilities. When
      interest-earning assets approximate or exceed  interest-bearing
      liabilities, any positive interest rate spread will generate net interest
      income.


**Month
                  Ended March 31, 2006**
              
              **Year
                  Ended March 31, 2006****Average**
              
              **Average**
              
              **Average**
              
              
              
              **Average****Balance**
              
              **Yield/Cost**
              
              **Balance**
              
              **Interest**
              
              **Yield/Cost****(Dollars
                  in thousands)****Interest-earning
                  Assets:**Loans
                  (1)
              
              $
              487,937
              
              
              6.77
              %
              $
              443,461
              
              $
              26,563
              
              
              5.99
              %Investment
                  securities (2)
              
              
              18,105
              
              
              3.84
              %
              
              25,698
              
              
              971
              
              
              3.78
              %Mortgage-backed
                  securities
              
              
              98,366
              
              
              4.22
              %
              
              113,574
              
              
              4,439
              
              
              3.91
              %Federal
                  funds
              
              
              5,929
              
              
              4.37
              %
              
              12,166
              
              
              412
              
              
              3.39
              %Total
                  interest-earning assets
              
              
              610,337
              
              
              6.25
              %
              
              594,899
              
              
              32,385
              
              
              5.44
              %Non-interest-earning
                  assets
              
              
              34,387
              
              
              
              
              
              35,198Total
                  assets
              
              $
              644,724
              
              
              
              
              $
              630,097**Interest-bearing
                  Liabilities:**Deposits:NOW
                  demand
              
              $
              25,640
              
              
              0.30
              %
              $
              24,397
              
              $
              74
              
              
              0.30
              %Savings
                  and clubs
              
              
              139,304
              
              
              0.68
              %
              
              137,934
              
              
              919
              
              
              0.67
              %Money
                  market savings
              
              
              33,806
              
              
              2.01
              %
              
              36,583
              
              
              601
              
              
              1.64
              %Certificates
                  of deposit
              
              
              259,378
              
              
              3.76
              %
              
              237,992
              
              
              7,297
              
              
              3.07
              %Total
                  deposits
              
              
              458,128
              
              
              2.50
              %
              
              436,906
              
              
              8,891
              
              
              2.03
              %Mortgagors
                  deposits
              
              
              1,789
              
              
              1.46
              %
              
              2,044
              
              
              30
              
              
              1.47
              %Borrowed
                  money
              
              
              98,407
              
              
              4.56
              %
              
              107,551
              
              
              4,572
              
              
              4.25
              %Total
                  deposits and interest-bearing liabilities
              
              
              558,324
              
              
              2.86
              %
              
              546,501
              
              
              13,493
              
              
              2.47
              %Non-interest-bearing
                  liabilities:Demand
              
              
              30,940
              
              
              
              
              
              29,079Other
                  liabilities
              
              
              6,413
              
              
              
              
              
              6,980Total
                  liabilities
              
              
              595,677
              
              
              
              
              
              582,560Stockholders'
                  equity
              
              
              49,047
              
              
              
              
              
              47,537Total
                  liabilities and stockholders' equity
              
              $
              644,724
              
              
              
              
              $
              630,097Net
                  interest income
              
              
              
              
              
              
              
              
              
              
              $
              18,892Average
                  interest rate spread
              
              
              
              
              
              3.39
              %
              
              
              
              
              
              
              
              2.97
              %Net
                  interest margin
              
              
              
              
              
              3.52
              %
              
              
              
              
              
              
              
              3.18
              %Ratio
                  of average interest-earning assets tointerest-bearing
                  liabilities
              
              
              
              
              
              109.32
              %
              
              
              
              
              
              
              
              108.86
              %




(1)
      Includes non-accrual loans.


(2)
      Includes FHLB-NY stock.






39





**Year
                  Ended March 31,****2005**
              
              **2004****Average**
              
              
              
              **Average**
              
              **Average**
              
              
              
              **Average****Interest
                  Earning Assets:**
              
              **Balance**
              
              **Interest**
              
              **Yield/Cost**
              
              **Balance**
              
              **Interest**
              
              **Yield/Cost****(Dollars
                  in thousands)**Loans
                  (1)
              
              $
              384,916
              
              $
              22,940
              
              
              5.96
              %
              $
              314,297
              
              $
              20,117
              
              
              6.40
              %Investment
                  securities (2)
              
              
              29,547
              
              
              827
              
              
              2.80
              %
              
              29,708
              
              
              1,161
              
              
              3.91
              %Mortgage-backed
                  securities
              
              
              125,643
              
              
              4,605
              
              
              3.67
              %
              
              126,764
              
              
              4,789
              
              
              3.78
              %Fed
                  funds sold
              
              
              10,724
              
              
              174
              
              
              1.62
              %
              
              22,194
              
              
              167
              
              
              0.75
              %Total
                  interest earning assets
              
              
              550,830
              
              
              28,546
              
              
              5.18
              %
              
              492,963
              
              
              26,234
              
              
              5.32
              %Non-interest
                  earning assets
              
              
              31,677
              
              
              
              
              
              
              
              
              28,423Total
                  assets
              
              $
              582,507
              
              
              
              
              
              
              
              $
              521,386**Interest
                  Bearing Liabilities:**DepositsNOW
                  demand
              
              $
              22,933
              
              $
              69
              
              
              0.30
              %
              $
              23,286
              
              $
              85
              
              
              0.37
              %Savings
                  and clubs
              
              
              133,621
              
              
              801
              
              
              0.60
              %
              
              130,509
              
              
              1,001
              
              
              0.77
              %Money
                  market savings
              
              
              30,116
              
              
              302
              
              
              1.00
              %
              
              27,662
              
              
              235
              
              
              0.85
              %Certificates
                  of deposit
              
              
              208,584
              
              
              4,258
              
              
              2.04
              %
              
              163,382
              
              
              3,304
              
              
              2.02
              %Total
                  deposits
              
              
              395,254
              
              
              5,430
              
              
              1.37
              %
              
              344,839
              
              
              4,625
              
              
              1.34
              %Mortgagers
                  deposits
              
              
              2,217
              
              
              25
              
              
              1.15
              %
              
              1,643
              
              
              24
              
              
              1.46
              %Borrowed
                  money
              
              
              109,787
              
              
              4,303
              
              
              3.92
              %
              
              106,350
              
              
              4,051
              
              
              3.81
              %Total
                  interest bearing liabilities
              
              
              507,258
              
              
              9,758
              
              
              1.92
              %
              
              452,832
              
              
              8,700
              
              
              1.92
              %Non-interest-bearing
                  liabilities:Demand
              
              
              22,857
              
              
              
              
              
              
              
              
              19,408Other
                  liabilities
              
              
              6,724
              
              
              
              
              
              
              
              
              6,746Total
                  liabilities
              
              
              536,839
              
              
              
              
              
              
              
              
              478,986Stockholders'
                  equity
              
              
              45,668
              
              
              
              
              
              
              
              
              42,400Total
                  liabilities and stockholders' equity
              
              $
              582,507
              
              
              
              
              
              
              
              $
              521,386Net
                  interest income
              
              
              
              
              $
              18,788
              
              
              
              
              
              
              
              $
              17,534Average
                  interest rate spread
              
              
              
              
              
              
              
              
              3.26
              %
              
              
              
              
              
              
              
              3.40
              %Net
                  interest margin
              
              
              
              
              
              
              
              
              3.41
              %
              
              
              
              
              
              
              
              3.56
              %Ratio
                  of avgerage interest-earning assets tointerest-bearing
                  liabilities
              
              
              
              
              
              
              
              
              108.59
              %
              
              
              
              
              
              
              
              108.86
              %




(1)
      Includes non-accrual loans.


(2)
      Includes FHLB-NY stock.






**Rate/Volume
      Analysis**




The
      following table sets forth information regarding the extent to which changes
      in
      interest rates and changes in volume of interest related assets and liabilities
      have affected Carver Federal’s interest income and expense during the periods
      indicated. For each category of interest-earning asset and interest-bearing
      liability, information is provided for changes attributable to: (1) changes
      in
      volume (changes in volume multiplied by new rate); (2) changes in rates (change
      in rate multiplied by old volume); and (3) changes in rate/volume. Changes
      in
      rate/volume variance are allocated proportionately between changes in rate
      and
      changes in volume.






40




**Year
                  Ended March 31,****2006
                  vs. 2005**
              
              **2005
                  vs. 2004****Increase
                  (Decrease) due to**
              
              **Increase
                  (Decrease) due to****Volume**
              
              **Rate**
              
              **Total**
              
              **Volume**
              
              **Rate**
              
              **Total****(Dollars
                  in thousands)****Interest
                  Earning Assets:**Loans
              
              $
              3,489
              
              $
              134
              
              $
              3,623
              
              $
              4,209
              
              $
              (1,386
              )
              $
              2,823Investment
                  securities
              
              
              (1
              )
              
              145
              
              
              144
              
              
              (5
              )
              
              (329
              )
              
              (334
              )Mortgage-backed
                  securities
              
              
              (560
              )
              
              394
              
              
              (166
              )
              
              (41
              )
              
              (143
              )
              
              (184
              )Fed
                  funds
              
              
              23
              
              
              215
              
              
              238
              
              
              (186
              )
              
              193
              
              
              7Total
                  interest earning assets
              
              
              2,951
              
              
              888
              
              
              3,839
              
              
              3,977
              
              
              (1,665
              )
              
              2,312**Interest
                  Bearing Liabilities:**DepositsNOW
                  demand
              
              
              (4
              )
              
              (1
              )
              
              (5
              )
              
              1
              
              
              15
              
              
              16Savings
                  and clubs
              
              
              (26
              )
              
              (83
              )
              
              (109
              )
              
              (19
              )
              
              219
              
              
              200Money
                  market savings
              
              
              (65
              )
              
              (234
              )
              
              (299
              )
              
              (25
              )
              
              (43
              )
              
              (68
              )Certificates
                  of deposit
              
              
              (600
              )
              
              (2,448
              )
              
              (3,048
              )
              
              (923
              )
              
              (31
              )
              
              (954
              )Total
                  deposits
              
              
              (695
              )
              
              (2,766
              )
              
              (3,461
              )
              
              (966
              )
              
              160
              
              
              (806
              )Mortgagers
                  deposits
              
              
              2
              
              
              (7
              )
              
              (5
              )
              
              7
              
              
              (8
              )
              
              (1
              )Borrowed
                  money
              
              
              83
              
              
              (352
              )
              
              (269
              )
              
              (149
              )
              
              (102
              )
              
              (251
              )Total
                  deposits and interest bearing liabilities
              
              
              (610
              )
              
              (3,125
              )
              
              (3,735
              )
              
              (1,108
              )
              
              50
              
              
              (1,058
              )Net
                  change in interest income
              
              $
              2,341
              
              $
              (2,237
              )
              $
              104
              
              $
              2,869
              
              $
              (1,615
              )
              $
              1,254






**Comparison
      of Financial Condition at March 31, 2006 and 2005**




At
      March
      31, 2006, total assets increased by $34.6 million, or 5.5%, to $661.0 million
      compared to $626.4 million at March 31, 2005. The increase in total assets
      was
      primarily attributable to an increase in loans receivable partially offset
      by a
      reduction in total securities.




Loans
      receivable, net, increased by $71.4 million, or 16.9%, to $493.4 million as
      of
      March 31, 2006 compared to $422.0 million one year ago. The net loan growth
      during fiscal 2006 reflects loan originations of $111.3 million and loan
      purchases of $96.1 million, offset by principal repayments of $113.5 million
      and
      loans sold to various third party purchasers of $22.5 million. One- to
      four-family mortgage loans decreased by $12.4 million, or 7.9%, to $143.4
      million at March 31, 2006 compared to $155.8 million at March 31, 2005. The
      decrease in one- to four-family loans is primarily due to repayments and loan
      sales of $36.9 and $22.5 million, respectively, partially offset by loan
      originations and purchases of $15.1 and $32.2 million, respectively. Multifamily
      real estate loans increased by $2.8 million, or 2.8%, to $104.7 million at
      March
      31, 2006 compared to $101.9 million at March 31, 2005 as originations and
      purchases of $18.1 and $9.5 million, respectively, exceeded repayments of $24.8
      million. Non-residential real estate loans increased by $37.3 million, or 31.9%,
      to $154.0 million at March 31, 2006 compared to $116.8 million at March 31,
      2005
      primarily as a result of originations and purchases of $33.6 and $27.3 million,
      respectively, partially offset by repayments of $23.6 million during the year.
      Construction loans increased by $43.9 million, or 90.4%, to $92.5 million at
      March 31, 2006 compared to $48.6 million at March 31, 2005 primarily due to
      originations and purchases of $44.0 and $27.1 million, respectively, partially
      offset by repayments of $27.2 million. The Bank continues to grow its balance
      sheet through focusing on the origination of real estate loans in the markets
      it
      serves and will continue to augment these originations with loan purchases.
      Consumer and business loans decreased by $244,000, or 14.4%, to $1.5 million
      at
      March 31, 2006 compared to $1.7 million at March 31, 2005 reflecting repayments
      of $776,000 partially offset by new originations of $532,000.




Total
      securities at March 31, 2006 decreased $41.0 million to $108.3 million from
      $149.3 million at March 31, 2005, reflecting a decline of $36.2 million in
      available-for-sale securities and a $4.9 million decrease in held-to-maturity
      securities. The decrease in available-for-sale securities primarily reflects
      $60.6 million of principal repayments and maturities, $1.6 million in proceeds
      from sales of securities partially offset by purchases of new available-for-sale
      securities of $26.8 million. The $4.9 million decrease in held-to-maturity
      securities reflects principal payments and maturities. Available-for-sale
      securities represented 75.6% of the total securities portfolio at March 31,
      2006
      compared to 79.0% at March 31, 2005. The current strategy is to reduce the
      investment portfolio through normal cash flows and reinvest the proceeds into
      higher yielding loans. However, the Bank may invest in securities from time
      to
      time to help diversify its asset portfolio and satisfy collateral requirements
      for certain deposits.




At
      March
      31, 2006, total liabilities increased $31.7 million, or 5.5%, to $612.3 million
      compared to $580.6 million at March






41




31,
      2005.
      Deposits increased $48.8 million, or 10.7%, to $504.6 million at March 31,
      2006
      from $455.9 million at March 31, 2005. The increase in deposits was primarily
      attributable to increases of $34.3 million in certificates of deposit, $9.3
      million in demand accounts, $3.8 million in money market accounts and $1.9
      million in regular savings and club accounts. Deposit increases reflects $35.0
      million in new certificates of deposit from the City and the State under New
      York State‘s Banking Development District program and new money from the Bank’s
      increased retail depositors from new branch offices. These additional funds
      from
      deposit growth were used to fund loan originations/purchases and repay
      borrowings. Total FHLB-NY borrowings decreased $21.6 million, or 21.0%, to
      $80.9
      million at March 31, 2006 from $102.5 million at March 31, 2005 as a result
      of
      net repayments of maturing advances.




At
      March
      31, 2006, stockholders’ equity increased $2.9 million, or 6.3%, to $48.7 million
      compared to $45.8 million at March 31, 2005. The increase in stockholders’
equity was primarily attributable to additional retained earnings of $3.0
      million and net stock transactions of $349,000 partially offset by $439,000
      additional accumulated other comprehensive loss. The change in accumulated
      other
      comprehensive loss consists of a net loss of $158,000 related to the
      mark-to-market of the Bank’s available-for-sale securities and a net reserve of
      $281,000 for the Company’s unfunded employee pension liability. The Bank’s
      capital levels meet regulatory requirements of a well capitalized financial
      institution.




**Comparison
      of Operating Results for the Years Ended March 31, 2006 and
      2005**




***Net
      Income***




The
      Bank
      reported net income for fiscal 2006 of $3.8 million compared to $2.6 million
      for
      the prior fiscal year. Net income available to common stockholders for fiscal
      2006 was $3.8 million, or $1.47 per diluted common share compared to $2.5
      million, or $1.03 per diluted common share, for fiscal 2005. The increase in
      net
      income was primarily due to higher non-interest income of $1.3 million, a
      decline in income tax expense of $189,000 and an increase in net interest income
      of $104,000 partially offset by an increase in non-interest expense of $438,000.




***Interest
      Income***




Interest
      income increased in fiscal 2006 by $3.8 million, or 13.5% to $32.4 million,
      from
      the prior fiscal year. The average balance of interest-earning assets increased
      to $594.9 million for fiscal 2006 from $550.8 million for the prior fiscal
      year.
      Adding to the increase was a rise in the average yield on interest-earning
      assets to 5.44% for fiscal 2006 compared to 5.18% for fiscal 2005.




Interest
      income on loans increased by $3.6 million, or 15.8%, to $26.6 million for fiscal
      2006 compared to $22.9 million for the prior fiscal year. The increase in
      interest income from loans was primarily the result of a $58.5 million increase
      in average loan balances to $443.5 million for fiscal 2006 compared to $384.9
      million for fiscal 2005, coupled with the effects of a 3 basis point increase
      in
      the average rate earned on loans to 5.99% for fiscal 2006 from 5.96% for the
      prior fiscal year. The increase in the average balance of loans reflects
      originations and purchases in excess of principal collections. The minimal
      increase in the average rate earned on loans was principally due to the
      repricing of certain construction loans that are tied to short term rates that
      have increased with the rise in the overnight federal funds rate, see “Item 7.
      Management Discussion and Analysis—Liquidity and Capital
      Resources.”




Interest
      income on mortgage-backed securities decreased by $166,000, or 3.6%, to $4.4
      million for fiscal 2006 compared to $4.6 million for the prior fiscal year,
      reflecting a decrease of $12.1 million in the average balance of mortgage-backed
      securities to $113.6 million for fiscal 2006 compared to $125.6 million for
      fiscal 2005. Partially offsetting the decline was an 24 basis point increase
      in
      the average rate earned on mortgage-backed securities to 3.91% for fiscal 2006
      from 3.67% for the prior fiscal year. The decrease in the average balance of
      such securities demonstrates Management’s commitment to invest proceeds received
      from increased deposits and the cash flows from the repayment of investments
      into higher yielding assets.




Interest
      income on investment securities increased by approximately $144,000, or 17.4%,
      to $971,000 for fiscal 2006 compared to $827,000 for the prior fiscal year.
      The
      increase in interest income on investment securities reflects a 98 basis point
      increase in the average rate earned on investment securities to 3.78% for fiscal
      2006 from 2.80% for the prior fiscal year partially offset by a decrease of
      $3.8
      million in the average balance of investment securities to $25.7 million for
      fiscal 2006 compared to $29.5 million for fiscal 2005.




Interest
      income on federal funds increased $238,000, or 136.8%, to $412,000 for fiscal
      2006 compared to $174,000 for the prior fiscal year. The increase is primarily
      attributable to a 177 basis point increase in the average rate earned on federal
      funds coupled with a $1.4 million increase in the average balance of federal
      funds year over year. This large increase in the returns on federal funds was
      realized as the FRB continually raised the federal funds rate over the course
      of
      the entire fiscal year.




***Interest*** **** ***Expense***




42




Interest
      expense increased by $3.7 million, or 38.3%, to $13.5 million for fiscal 2006
      compared to $9.8 million for the prior fiscal year. The increase in interest
      expense reflects an increase of $39.2 million in the average balance of
      interest-bearing liabilities to $546.5 million in fiscal 2006 from $507.3
      million in fiscal 2005. Additionally, the total cost of interest-bearing
      liabilities increased 55 basis points to 2.47% in fiscal 2006 compared to 1.92%
      in the prior year. The increase in the average balance of interest-bearing
      liabilities in fiscal 2006 compared to fiscal 2005 was due to increases in
      both
      the average balance of interest-bearing deposits and the average balance of
      borrowed money.




Interest
      expense on deposits increased $3.5 million, or 63.5%, to $8.9 million for fiscal
      2006 compared to $5.5 million for the prior fiscal year. This increase is
      attributable to a $41.7 million, or 10.5%, increase in the average balance
      of
      interest-bearing deposits to $436.9 million for fiscal 2006 compared to $395.3
      million for fiscal 2005 coupled with a 66 basis point increase year over year
      in
      the cost of average deposits. The increase in the average balance of
      interest-bearing deposits was primarily due to an increase in the average
      balance of certificates of deposit of $29.4 million, or 14.1%, an increase
      in
      the average balance of money market accounts of $6.5 million, or 21.5%, an
      increase in the average balance of savings and club accounts of $4.3 million,
      or
      3.2%, and an increase in the average balance of checking accounts of $1.5
      million, or 6.4%. The increase in the average rate paid on deposits was
      principally due to the rise in the interest rate environment throughout fiscal
      2006.




Interest
      expense on borrowed money increased by $269,000 or 6.3%, to $4.6 million for
      fiscal 2006 compared to $4.3 million for the prior fiscal year. The increase
      in
      interest expense on borrowed money for fiscal 2006 reflects a rise of 33 basis
      points in the average cost of borrowed money, primarily the result of increases
      in the indexed rate of trust preferred debt securities which adjust quarterly
      and have increased in the current interest rate environment. Partially
      offsetting the increase was a $2.2 million decline in the average balance of
      borrowed money reflecting management’s strategy of using deposit growth and cash
      flows from the repayment of mortgage-backed securities to repay FHLB-NY
      advances.




***Net
      Interest Income***




Net
      interest income represents the difference between income on interest-earning
      assets and expense on interest-bearing liabilities. Net interest income depends
      primarily upon the volume of interest-earning assets and interest-bearing
      liabilities and the corresponding interest rates earned and paid. Our net
      interest income is significantly impacted by changes in interest rate and market
      yield curves. See “—Discussion of Market Risk—Interest Rate Sensitivity
      Analysis” for further discussion on the potential impact of changes in interest
      rates on our results of operations.




Net
      interest income before the provision for loan losses increased $104,000, or
      0.6%, to $18.9 million for fiscal 2006 compared to $18.8 million for the prior
      fiscal year. This modest increase was achieved as a result of an increase in
      both the average balance and the return on average interest-earning assets
      of
      $44.1 million and 26 basis points, respectively. Mainly offsetting the increase
      in net interest income was an increase in the average balance and cost of
      interest-bearing liabilities of $39.2 million and 55 basis points, respectively.
      The result was a 29 basis point decrease in the interest rate spread to 2.97%
      for fiscal 2006 compared to 3.26% for the prior fiscal year. The net interest
      margin also decreased to 3.18% for fiscal 2006 compared to 3.41% for fiscal
      2005.




***Provision
      for Loan Losses***




During
      fiscal 2005 no provision was recorded for loan losses. The Bank records
      provisions for loan losses, which are charged to earnings, in order to maintain
      the allowance for loan losses at a level that is considered appropriate to
      absorb probable losses inherent in the existing loan portfolio. Factors
      considered when evaluating the adequacy of the allowance for loan losses include
      the volume and type of lending conducted, the Bank’s previous loan loss
      experience, the known and inherent risks in the loan portfolio, adverse
      situations that may affect the borrowers’ ability to repay, the estimated value
      of any underlying collateral and trends in the local and national economy and
      trends in the real estate market.





During
      fiscal 2006, the Bank had net charge-offs of $82,000 compared to $28,000 for
      fiscal 2005. At March 31, 2006, non-performing loans totaled $2.8 million or
      0.55% of total loans compared to $998,000, or 0.23% of total loans, at March
      31,
      2005. At March 31, 2006, the Bank’s allowance for loan losses was $4.0 million
      compared to $4.1 million at March 31, 2005, resulting in a ratio of the
      allowance to non-performing loans of 147.1% at March 31, 2006 compared to 410.7%
      at March 31, 2005, and a ratio of allowance for possible loan losses to total
      loans of 0.81% and 0.96% at March 31, 2006 and March 31, 2005, respectively.
      The
      Bank believes its reported allowance for loan loss at March 31, 2006 is adequate
      to provide for estimated probable losses in the loan portfolio. For further
      discussion of non-performing loans and allowance for loan losses, see “Item
      1—Business—General Description of Business—Asset Quality” and Note 1 of Notes to
      the Consolidated Financial Statements.





***Non-Interest
      Income***




Non-interest
      income is comprised of loan fees and service charges, fee income from banking
      services and charges, gains or losses from the sale of securities, loans and
      other assets and certain other miscellaneous non-interest income. Non-interest
      income increased $1.3 million, or 31.1%, to $5.3 million for fiscal 2006
      compared to $4.1 million for fiscal 2005. The rise in non-interest income was
      comprised of an increase of $363,000 in loan fees and service charges, primarily
      greater loan prepayment penalty income




43




and
      late
      charge fees. Additional depository fees and charges of $246,000 were achieved
      primarily from higher ATM usage, growth in debit card income and commissions
      earned on the sale of investments and life insurance. Further contributing
      to
      the rise in non-interest income was additional gains on the sale of loans of
      $267,000, predominantly from the bulk sale of $10.7 million of residential
      one-to four family mortgage loans. An increase of $77,000 in other income was
      also achieved primarily as a result of additional income earned on the Bank’s
      investment in a bank owned life insurance program. Further contributing to
      the
      increase in non-interest income year over year was the Company’s recognition of
      a $1.5 million impairment charge deemed other than temporary in the second
      quarter of fiscal 2005, resulting from the decline in market price of 150,000
      shares of IFSB stock that the Company previously held. Partially offsetting
      that
      impairment charge in fiscal 2005 was the receipt of a net $1.1 million Community
      Development Financial Institutions grant from the Department of the Treasury
      and
      a $94,000 gain from the sale of securities.




***Non*** **-** ***Interest*** **** ***Expense***




Non-interest
      expense increased by $438,000, or 2.3%, to $19.1 million for fiscal 2006
      compared to $18.7 million for the prior fiscal year. The
      increase in non-interest expense was primarily attributable to increases in
      net
      occupancy and equipment expenses of $327,000 and $331,000, respectively,
      resulting from the full year effect in fiscal 2006 of the new branch office
      and
      ATM center openings in fiscal 2005. Also contributing to the rise in
      non-interest expense were increases in retail banking chargeoffs, legal fees
      and
      insurance costs of $196,000, $160,000 and $112,000, respectively. Partially
      offsetting the increase in non-interest expense was a charge of $847,000 in
      fiscal 2005 for merger and acquisition expenses related to the attempted
      acquisition of IFSB. Much
      of
      the increase in the Bank’s operating expenses was a result of the
      investment made in fiscal 2004 and 2005 to grow the franchise. During
      fiscal 2006, in
      an
      effort to reduce non-interest expenses, the Bank
      implemented cost cutting strategies by outsourcing our
      ATM
      driving technology as well as a number of corporate administrative
      functions.




***Income*** **** ***Tax*** **** ***Expense***




Income
      tax expense was $1.3 million for fiscal 2006, a decline of $189,000 or 12.5%,
      from $1.5 million for fiscal 2005 as a result of a $500,000 recovery of income
      tax expense in fiscal 2006 attributable to the release of contingency reserves
      for closed tax examination years. As a result the effective tax rate in fiscal
      2006 was 26.1%, compared to 36.4% for fiscal 2005. It is anticipated that the
      effective tax rate for fiscal 2007 will be more comparative to that of fiscal
      2005.




**Comparison
      of Operating Results for the Years Ended March 31, 2005 and
      2004**




***Net
      Income***




The
      Bank
      reported net income for fiscal 2005 of $2.6 million compared to $4.8 million
      for
      the prior fiscal year. Net income available to common stockholders for fiscal
      2005 was $2.5 million, or $1.03 per diluted common share compared to $4.6
      million, or $1.87 per diluted common share, for fiscal 2004. The decrease in
      net
      income was primarily due to an increase in non-interest expense of $3.2 million
      and a decrease in non-interest income of $1.2 million partially offset by an
      increase in net interest income of $1.3 million and a $975,000 reduction in
      income tax expense.




***Interest
      Income***




Interest
      income increased for fiscal 2005 by $2.3 million, or 8.8% to $28.5 million,
      from
      the prior fiscal year. The average balance of interest-earning assets increased
      to $550.8 million for fiscal 2005 from $493.0 million for the prior fiscal
      year.
      This increase was partially offset by a decline in the average yield on
      interest-earning assets to 5.18% for fiscal 2005 compared to 5.32% for fiscal
      2004.




Interest
      income on loans increased by $2.8 million, or 14.0%, to $22.9 million for fiscal
      2005 compared to $20.1 million for the prior fiscal year. The increase in
      interest income from loans was primarily the result of a $70.6 million increase
      in average loan balances to $384.9 million for fiscal 2005 compared to $314.3
      million for fiscal 2004, the effects of which were partially offset by a 44
      basis point decrease in the average rate earned on loans to 5.96% for fiscal
      2005 from 6.40% for the prior fiscal year. The increase in the average balance
      of loans reflects originations and purchases in excess of principal collections.
      The decline in the average rate earned on loans was principally due to the
      downward pricing on loan products during the low interest rate environment
      experienced during most of fiscal 2005.




Interest
      income on mortgage-backed securities decreased by $184,000, or 3.8%, to $4.6
      million for fiscal 2005 compared to $4.8 million for the prior fiscal year,
      reflecting the combined effects an 11 basis point decrease in the average rate
      earned on mortgage-backed securities to 3.67% for fiscal 2005 from 3.78% for
      the
      prior fiscal year, and a decrease of $1.1 million in the average balance of
      mortgage-backed securities to $125.6 million for fiscal 2005 compared to $126.8
      million for fiscal 2004. The decrease in the average balance of such securities
      demonstrates Management’s commitment to invest proceeds received from increased
      borrowings and deposits into higher yielding assets.






44




Interest
      income on investment securities decreased by approximately $334,000, or 28.8%,
      to $827,000 for fiscal 2005 compared to $1.2 million for the prior fiscal year.
      The decrease in interest income on investment securities reflects a 111 basis
      point decrease in the average rate earned on investment securities to 2.80%
      for
      fiscal 2005 from 3.91% for the prior fiscal year and a decrease of $161,000
      in
      the average balance of investment securities to $29.5 million for fiscal 2005
      compared to $29.7 million for fiscal 2004.




Interest
      income on federal funds increased $7,000, or 4.2%, to $174,000 for fiscal 2005
      compared to $167,000 for the prior fiscal year. The increase is primarily
      attributable to an 87 basis point increase in the average rate earned on federal
      funds, partially offset by a $11.5 million decrease in the average balance
      of
      federal funds year over year. This large increase in the returns on federal
      funds was realized as the FRB continually increased the federal funds rate
      during the entire fiscal year.




***Interest*** **** ***Expense***




Interest
      expense increased by $1.1 million, or 12.2%, to $9.8 million for fiscal 2005
      compared to $8.7 million for the prior fiscal year. The increase in interest
      expense reflects an increase of $54.4 million in the average balance of
      interest-bearing liabilities to $507.2 million in fiscal 2005 from $452.8
      million in fiscal 2004 as the total cost of interest-bearing liabilities
      remained unchanged at 1.92% from year to year. The increase in the average
      balance of interest-bearing liabilities in fiscal 2005 compared to fiscal 2004
      was due to increases in both the average balance of interest-bearing deposits
      and the average balance of borrowed money.




Interest
      expense on deposits increased $806,000, or 17.3%, to $5.5 million for fiscal
      2005 compared to $4.6 million for the prior fiscal year. This increase is
      attributable to a $50.4 million, or 14.6%, increase in the average balance
      of
      interest-bearing deposits to $395.3 million for fiscal 2005 compared to $344.8
      million for fiscal 2004 and, to a much lesser extent, a 3 basis point increase
      year over year in the cost of average deposits. The increase in the average
      balance of interest-bearing deposits was primarily due to an increase in the
      average balance of certificates of deposit of $45.2 million, or 27.7%, an
      increase in the average balance of savings and club accounts of $3.1 million,
      or
      2.4%, and an increase in the average balance of money market accounts of $2.5
      million, or 8.92%. The increase in average interest-bearing deposits was
      achieved largely through deposits generated by the two new branch offices and
      two new ATMs in fiscal 2005. The slight increase in the average rate paid on
      deposits was principally due to the ascend in the interest rate environment
      towards the end of fiscal 2005.




Interest
      expense on borrowed money increased by $252,000 or 6.2%, to $4.3 million for
      fiscal 2005 compared to $4.1 million for the prior fiscal year. The increase
      in
      interest expense on borrowed money for fiscal 2005 reflects a $3.4 million,
      or
      3.2%, increase in the average balance of borrowed money reflecting the effects
      of the trust preferred debt securities being outstanding for twelve months
      in
      fiscal 2005 as compared to six months in fiscal 2004, the year they were issued.
      Also contributing to the increase in interest expense is a rise of 11 basis
      points in the average cost of borrowed money primarily the result of increases
      in the indexed rate of the trust preferred debt securities which adjust
      quarterly and has increased in the current interest rate
      environment.




***Net
      Interest Income***




Net
      interest income before the provision for loan losses increased $1.3 million,
      or
      7.2%, to $18.8 million for fiscal 2005 compared to $17.5 million for the prior
      fiscal year. This increase was achieved despite a decline in the return on
      average interest-earning assets of 14 basis points in fiscal 2005 from fiscal
      2004 while the cost of interest-bearing liabilities used to fund
      interest-earning assets remained unchanged from year to year. The result was
      a
      14 basis point decrease in the interest rate spread to 3.26% for fiscal 2005
      compared to 3.40% for the prior fiscal year. The net interest margin also
      decreased to 3.41% for fiscal 2005 compared to 3.56% for fiscal
      2004.




***Provision
      for Loan Losses***




During
      fiscal 2005 no provision was recorded for loan losses. During fiscal 2005,
      the
      Bank had net charge-offs of $28,000 compared to $33,000 for fiscal 2004. At
      March 31, 2005, non-performing loans totaled $998,000 or 0.2% of total loans
      compared to $2.1 million, or 0.6% of total loans, at March 31, 2004. At March
      31, 2005, the Bank’s allowance for loan losses was $4.1 million, substantially
      unchanged from the allowance at March 31, 2004, resulting in a ratio of the
      allowance to non-performing loans of 410.7% at March 31, 2005 compared to 194.3%
      at March 31, 2004, and a ratio of allowance for possible loan losses to total
      loans of 0.96% and 1.16% at March 31, 2005 and March 31, 2004,
      respectively.





***Non-Interest
      Income***




Non-interest
      income decreased $1.2 million, or 22.8%, to $4.1 million for fiscal 2005
      compared to $5.3 million for fiscal 2004. The decrease is primarily due a $1.5
      million impairment charge taken on the IFSB stock held in our available for
      sale
      portfolio. Additionally, with the slow down in loan refinancing activity, lower
      loan prepayment penalty income resulted in a decline in loan fees and service
      charges of $739,000. Further, other non-interest income declined $373,000 when
      compared to the same period last fiscal year when a recovery of $558,000 was
      recorded as income in recognition of previously unrecognized mortgage loan
      income. Offsetting these reductions to non-interest income are income from
      the
      receipt of a net $1.1 million Community Development






45




Financial
      Institutions grant from the Department of Treasury, an increase of $287,000
      in
      depository fees and charges from additional depositors of our new branch offices
      and ATM centers, and a $63,000 gain from securities sale.




***Non*** **-** ***Interest*** **** ***Expense***




Non-interest
      expense increased by $3.2 million, or 20.8%, to $18.7 million for fiscal 2005
      compared to $15.5 million for the prior fiscal year. The
      increase in non-interest expense was primarily attributable to increases of
      $1.9
      million in salaries and employee benefits as a result of additions to staff
      from
      the branch expansion, severance and related costs of $355,000 and increased
      costs of benefits plans. Net occupancy and equipment expenses increased $514,000
      and $122,000, respectively, mainly as a result of opening the new branch offices
      and ATMs. Additionally, this fiscal year recorded a charge of $847,000 for
      merger and acquisition expenses related to the attempted acquisition of IFSB. These
      increases in non-interest expenses were slightly offset by a year over year
      $141,000  decrease
      in other non-interest expense primarily the net result of lower consulting,
      FDIC
      deposit assessment and loan related expenses Offset by higher advertising,
      telephone and retail related expenses.




***Income*** **** ***Tax*** **** ***Expense***




Income
      tax expense was $1.5 million for fiscal 2005, a decline of $975,000 or 39.1%,
      decrease from $2.5 million for fiscal 2004 due to a reduction in the Company’s
      net income before taxes. The effective tax rate in fiscal 2005 was 36.4%,
      compared to 34.0% for fiscal 2004.




**Liquidity
      and Capital Resources**




Liquidity
      is a measure of the Bank’s ability to generate adequate cash to meet financial
      obligations. The principal cash requirements of a financial institution are
      to
      cover potential deposit outflows, fund increases in its loan and investment
      portfolios and cover its ongoing operating expenses. The Company’s primary
      sources of funds are deposits, borrowed funds, principal and interest payments
      on loans, mortgage-backed securities and investment securities and fee income.
      While maturities and scheduled amortization of loans, mortgage-backed securities
      and investment securities are predictable sources of funds, deposit flows and
      loan and mortgage-backed securities prepayments are strongly influenced by
      changes in general interest rates, economic conditions and
      competition.




Management
      believes the Bank’s short-term assets have sufficient liquidity to cover loan
      demand, potential fluctuations in deposit accounts and to meet other anticipated
      cash requirements. In addition, as previously discussed, the Bank has the
      ability to borrow funds from the FHLB-NY to meet any liquidity needs. The
      Bank
      monitors its liquidity utilizing guidelines that are contained in a policy
      developed by management of the Bank and approved by the Bank’s Board of
      Directors. The Bank’s several liquidity measurements are evaluated on a frequent
      basis. The Bank was in compliance with this policy as of March 31,
      2006.




Congress
      eliminated the statutory liquidity requirement which required federal savings
      banks to maintain a minimum amount of liquid assets of between 4% and 10%,
      as
      determined by the Director of the OTS, the Bank’s primary federal regulator. The
      Bank is required to maintain sufficient liquidity to ensure its safe and sound
      operation. As a result of the elimination of the liquidity requirement, the
      Bank
      manages its liquidity through a Board-approved liquidity policy. The Bank’s most
      liquid assets are cash and short-term investments. The level of these assets
      is
      dependent on the Bank’s operating, investing and financing activities during any
      given period. At March 31, 2006 and 2005, assets qualifying for short-term
      liquidity, including cash and short-term investments, totaled $25.2 million
      and
      $30.2 million, respectively .




The
      levels of the Bank’s short-term liquid assets are dependent on the Bank’s
      operating, financing and investing activities during any given period. The
      most
      significant liquidity challenge the Bank currently faces is the variability
      in
      its cash flows as a result of mortgage refinance activity. As mortgage interest
      rates increase, customers’ refinance activities tend to decline, causing the
      cash flow from both the mortgage loan portfolio and the mortgage-backed
      securities portfolio to decelerate. During fiscal 2005 the federal funds rate
      increased seven separate times resulting in a total increase in the federal
      funds rate of 175 basis points. The federal funds rate was again raised in
      fiscal 2006 eight separate times resulting in an additional increase in the
      federal funds rate of 200 basis points. While the Bank experienced relatively
      high loan and securities repayments over the last two fiscal years primarily
      as
      a result of increased mortgage loan refinancing activity caused by the low
      longer term interest rate environment, management anticipates a leveling of
      these prepayments in fiscal 2007 as longer term rates remain at current levels
      or begin to climb the effect of which can hinder liquidity.




The
      Consolidated Statements of Cash Flows present the change in cash from operating,
      investing and financing activities. During fiscal 2006, cash and cash
      equivalents increased by $2.5 million. Net cash provided by operating activities
      was $7.2 million, representing primarily the proceeds from the sale of loans.
      Net cash used in investing activities was $31.0 million, which was primarily
      the
      result of originations and purchases of loans and purchases of securities
      partially offset by repayments and maturities of loans and securities sales.
      Net
      cash provided by financing activities was $26.4 million, reflecting primarily
      net increases in deposits partially offset by repayments of borrowings from
      the
      FHLB-NY and stock dividend payments.






46




**Off
      Balance Sheet Arrangements and Contractual Obligations**




The
      Bank
      is a party to financial instruments with off-balance sheet risk in the normal
      course of business in order to meet the financing needs of its customers. These
      instruments involve, to varying degrees, elements of credit, interest rate
      and
      liquidity risk. In accordance with accounting principles generally accepted
      in
      the United States of America (“GAAP”), these instruments are not recorded in the
      consolidated financial statements. Such instruments primarily include lending
      commitments.




Lending
      commitments include commitments to originate mortgage and consumer loans and
      commitments to fund unused lines of credit. The Bank also has contractual
      obligations related to operating leases. Additionally, the Bank has a contingent
      liability related to a standby letter of credit. The Bank has outstanding
      commitments and contractual obligations as follows:


March
                  31,2006
              
              2005(Dollars
                  in thousands)Commitments
                  to originate mortgage loans
              
              $
              64,163
              
              $
              44,129Commitments
                  to originate commercial and consumer loans
              
              
              439
              
              
              515Letters
                  of credit
              
              
              1,795
              
              
              1,908Total
              
              $
              66,397
              
              $
              46,552




The
      following table presents the Bank’s contractual obligations at March 31,
      2006.




**Payments
                  due by period****Contractual**
              
              
              
              **Less
                  than**
              
              **1
                  - 3**
              
              **3
                  - 5**
              
              **More
                  than****Obligations**
              
              **Total**
              
              **1
                  year**
              
              **years**
              
              **years**
              
              **5
                  years****(In
                  Thousands)**Long
                  term debt obligations:FHLB
                  advances
              
              $
              80,935
              
              $
              49,434
              
              $
              31,307
              
              $
              -
              
              $
              194Guaranteed
                  preferred beneficial interest injunior
                  subordinated debentures
              
              
              12,857
              
              
              
              
              
              12,857Total
                  long term debt obligations
              
              
              93,792
              
              
              49,434
              
              
              44,164
              
              
              -
              
              
              194Operating
                  lease obligations:Lease
                  obligations for rental properties
              
              
              4,452
              
              
              657
              
              
              1,338
              
              
              1,227
              
              
              1,230Total
                  contractual obligations
              
              $
              98,244
              
              $
              50,091
              
              $
              45,502
              
              $
              1,227
              
              $
              1,424






**Regulatory
      Capital Position**




The
      Bank
      must satisfy three minimum capital standards established by the OTS. For a
      description of the OTS capital regulation, see “Item 1—Regulation and
      Supervision—Federal Banking Regulation—Capital Requirements.”




The
      Bank
      presently exceeds all capital requirements as currently promulgated. At March
      31, 2006, the Bank had tangible, core, and total risk-based capital ratios
      of
      9.4%, 9.4% and 13.2%, respectively and was considered well
      capitalized.






47






The
      following table reconciles the Bank’s stockholders’ equity at March 31, 2006
      under GAAP to regulatory capital requirements.


**Regulatory
                  Capital Requirements****GAAP**
              
              **Tangible**
              
              **Leverage**
              
              **Risk-Based****Capital**
              
              **Capital**
              
              **Capital**
              
              **Capital****(Dollars
                  in thousands)**Stockholders'
                  Equity at March 31, 2006 (1)
              
              $
              61,814
              
              $
              61,814
              
              $
              61,814
              
              $
              61,814Add:General
                  valuation allowances
              
              
              
              
              
              -
              
              
              -
              
              
              4,015Unrealized
                  loss on securities available-for-sale, net
              
              
              
              
              
              393
              
              
              393
              
              
              393Regulatory
                  Capital
              
              
              
              
              
              62,207
              
              
              62,207
              
              
              66,222Minimum
                  Capital requirement
              
              
              
              
              
              9,929
              
              
              26,477
              
              
              40,074Regulatory
                  Capital Excess
              
              
              
              
              $
              52,278
              
              $
              35,730
              
              $
              26,148




(1)
      Reflects Bank only.






**Impact
      of Inflation and Changing Prices**




The
      financial statements and accompanying notes appearing elsewhere herein have
      been
      prepared in accordance with GAAP, which require the measurement of financial
      position and operating results in terms of historical dollars without
      considering the changes in the relative purchasing power of money over time
      due
      to inflation. The impact of inflation is reflected in the increased cost of
      Carver Federal’s operations. Unlike most industrial companies, nearly all the
      assets and liabilities of the Bank are monetary in nature. As a result, interest
      rates have a greater impact on Carver Federal’s performance than do the effects
      of the general level of inflation. Interest rates do not necessarily move in
      the
      same direction or to the same extent as the prices of goods and services.






**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
      ABOUT MARKET
      RISK.**




The
      information required by this item appears under the caption “Discussion of
      Market Risk—Interest Rate Sensitivity Analysis” in Item 7, incorporated herein
      by reference.






**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
      DATA.**






48






**Report
      of Independent Registered Public Accounting Firm**






**To
      the Board of Directors and Stockholders**


**Carver
      Bancorp, Inc.:**




We
      have
      audited the accompanying consolidated statements of financial condition of
      Carver Bancorp, Inc. and subsidiaries as of March 31, 2006 and 2005, and the
      related consolidated statements of income, changes in stockholders’ equity and
      comprehensive income, and cash flows for each of the years in the three-year
      period ended March 31, 2006. These consolidated financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these consolidated financial statements based on our
      audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




As
      discussed in note 1 on restatement, Carver Bancorp, Inc. and subsidiaries has
      restated its consolidated statements of cash flows for each of the years in
      the
      three-year period ended March 31, 2006.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Carver Bancorp. Inc. and
      subsidiaries as of March 31, 2006 and 2005, and the results of their operations
      and their cash flows for each of the years in the three-year period ended March
      31, 2006, in conformity with U.S. generally accepted accounting
      principles.






/s/
      KPMG
      LLP


New
      York,
      New York


June
      29,
      2006, except for the consolidated statements of cash flows and note 1 on
      restatement as to which the date is February 28, 2007.








49


**CARVER
                  BANCORP, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF FINANCIAL CONDITION****(In
                  thousands, except share data)****March
                  31,**
              
              **March
                  31,****2006**
              
              **2005****ASSETS**Cash
                  and cash equivalents:Cash
                  and due from banks
              
              $
              13,604
              
              $
              13,020Federal
                  funds sold
              
              
              8,700
              
              
              6,800Interest
                  earning deposits
              
              
              600
              
              
              600Total
                  cash and cash equivalents
              
              
              22,904
              
              
              20,420Securities:Available-for-sale,
                  at fair value (including pledged as collateral of $79,211 and
                  $112,503at
                  March 31, 2006 and 2005, respectively)
              
              
              81,882
              
              
              118,033Held-to-maturity,
                  at amortized cost (including pledged as collateral of $26,039 and
                  $30,900at
                  March 31, 2006 and 2005, respectively; fair value of $25,880and
                  $31,310 at March 31,2006
                  and 2005, respectively)
              
              
              26,404
              
              
              31,302Total
                  securities
              
              
              108,286
              
              
              149,335Loans
                  receivable:Real
                  estate mortgage loans
              
              
              495,994
              
              
              424,387Consumer
                  and commercial business loans
              
              
              1,453
              
              
              1,697Allowance
                  for loan losses
              
              
              (4,015
              )
              
              (4,097
              )Total
                  loans receivable, net
              
              
              493,432
              
              
              421,987Office
                  properties and equipment, net
              
              
              13,194
              
              
              13,658Federal
                  Home Loan Bank of New York stock, at cost
              
              
              4,627
              
              
              5,125Bank
                  owned life insurance
              
              
              8,479
              
              
              8,173Accrued
                  interest receivable
              
              
              2,970
              
              
              2,702Other
                  assets
              
              
              7,101
              
              
              4,977Total
                  assets
              
              $
              660,993
              
              $
              626,377**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Liabilities:Deposits
              
              $
              504,638
              
              $
              455,870Advances
                  from the Federal Home Loan Bank of New York and other borrowed
                  money
              
              
              93,792
              
              
              115,299Other
                  liabilities
              
              
              13,866
              
              
              9,407Total
                  liabilities
              
              
              612,296
              
              
              580,576Stockholders'
                  equity:Common
                  stock (par value $0.01 per share: 10,000,000 shares authorized;
                  2,524,691
                  shares issued;2,506,822
                  and 2,501,338 outstanding at March 31, 2006 and 2005,
                  respectively)
              
              
              25
              
              
              25Additional
                  paid-in capital
              
              
              23,935
              
              
              23,937Retained
                  earnings
              
              
              25,736
              
              
              22,748Unamortized
                  awards of common stock under ESOP and management recognition plan
                  ("MRP")
              
              
              (22
              )
              
              (254
              )Treasury
                  stock, at cost (17,869 and 23,353 shares at March 31, 2006 and
                  2005,
                  respectively)
              
              
              (303
              )
              
              (420
              )Accumulated
                  other comprehensive loss
              
              
              (674
              )
              
              (235
              )Total
                  stockholders' equity
              
              
              48,697
              
              
              45,801Total
                  liabilities and stockholders' equity
              
              $
              660,993
              
              $
              626,377See
                  accompanying notes to consolidated financial statements






50




**CARVER
                  BANCORP, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF INCOME****(In
                  thousands, except per share data)****For
                  the Year Ended March 31,****2006**
              
              **2005**
              
              **2004**Interest
                  Income:Loans
              
              $
              26,563
              
              $
              22,940
              
              $
              20,117Mortgage-backed
                  securities
              
              
              4,439
              
              
              4,605
              
              
              4,789Investment
                  securities
              
              
              971
              
              
              827
              
              
              1,161Federal
                  funds sold
              
              
              412
              
              
              174
              
              
              167Total
                  interest income
              
              
              32,385
              
              
              28,546
              
              
              26,234Interest
                  expense:Deposits
              
              
              8,921
              
              
              5,455
              
              
              4,649Advances
                  and other borrowed money
              
              
              4,572
              
              
              4,303
              
              
              4,051Total
                  interest expense
              
              
              13,493
              
              
              9,758
              
              
              8,700Net
                  interest income
              
              
              18,892
              
              
              18,788
              
              
              17,534Provision
                  for loan losses
              
              
              -
              
              
              -
              
              
              -Net
                  interest income after provision for loan losses
              
              
              18,892
              
              
              18,788
              
              
              17,534Non-interest
                  income:Depository
                  fees and charges
              
              
              2,458
              
              
              2,212
              
              
              1,925Loan
                  fees and service charges
              
              
              2,231
              
              
              1,675
              
              
              2,607Gain
                  on sale of securities
              
              
              -
              
              
              94
              
              
              31Impairment
                  of securities
              
              
              -
              
              
              (1,547
              )
              
              -Gain
                  on sale of loans
              
              
              351
              
              
              277
              
              
              116Gain
                  on sale of fixed assets
              
              
              -
              
              
              -
              
              
              2Grant
                  income
              
              
              -
              
              
              1,140
              
              
              -Other
              
              
              301
              
              
              224
              
              
              597Total
                  non-interest income
              
              
              5,341
              
              
              4,075
              
              
              5,278Non-interest
                  expense:Employee
                  compensation and benefits
              
              
              9,512
              
              
              9,461
              
              
              7,587Net
                  occupancy expense
              
              
              2,284
              
              
              1,957
              
              
              1,443Equipment,
                  net
              
              
              1,939
              
              
              1,608
              
              
              1,486Merger
                  related expenses
              
              
              -
              
              
              847
              
              
              -Other
              
              
              5,399
              
              
              4,823
              
              
              4,964Total
                  non-interest expense
              
              
              19,134
              
              
              18,696
              
              
              15,480Income
                  before income taxes
              
              
              5,099
              
              
              4,167
              
              
              7,332Income
                  taxes
              
              
              1,329
              
              
              1,518
              
              
              2,493Net
                  income
              
              
              3,770
              
              
              2,649
              
              
              4,839Dividends
                  applicable to preferred stock
              
              
              -
              
              
              114
              
              
              197Net
                  income available to common stockholders
              
              $
              3,770
              
              $
              2,535
              
              $
              4,642Earnings
                  per common share:Basic
              
              $
              1.50
              
              $
              1.06
              
              $
              2.03Diluted
              
              $
              1.47
              
              $
              1.03
              
              $
              1.87See
                  accompanying notes to consolidated financial statements






51


**CARVER
                  BANCORP, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
                  INCOME****(In
                  thousands)****PREFERRED
                  STOCK**
              
              **COMMON
                  STOCK**
              
              **ADDITIONAL
                  PAID-IN CAPITAL**
              
              **RETAINED
                  EARNINGS**
              
              **TREASURY
                  STOCK**
              
              **ACCUMULATED
                  OTHER COMPREHENSIVE INCOME (LOSS)**
              
              **COMMON
                  STOCK ACQUIRED BY ESOP**
              
              **COMMON
                  STOCK ACQUIRED BY MRP**
              
              **TOTAL
                  STOCK-HOLDERS’ EQUITY****Balance
                  - March 31, 2003**
              
              **$**
              **1**
              
              **$**
              **23**
              
              **$**
              **23,781**
              
              **$**
              **16,712**
              
              **$**
              **(190**
              **)**
              **$**
              **750**
              
              **$**
              **-**
              
              **$**
              **(4**
              **)**
              **$**
              **41,073**Comprehensive
                  income:Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              4,839
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,839Change
                  in net unrealized gain on available-for-sale securities, net of
                  taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (492
              )
              
              -
              
              
              -
              
              
              (492
              )Comprehensive
                  income, net of taxes:
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,347Dividends
                  paid
              
              
              -
              
              
              -
              
              
              -
              
              
              (659
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (659
              )Purchase
                  of treasury stock
              
              
              -
              
              
              -
              
              
              82
              
              
              -
              
              
              (200
              )
              
              -
              
              
              -
              
              
              -
              
              
              (118
              )Purchase
                  of shares for MRP
              
              
              -
              
              
              -
              
              
              19
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (17
              )
              
              2**Balance
                  - March 31, 2004**
              
              
              **1**
              
              
              **23**
              
              
              **23,882**
              
              
              **20,892**
              
              
              **(390**
              **)**
              
              **258**
              
              
              **-**
              
              
              **(21**
              **)**
              
              **44,645**Comprehensive
                  income :Net
                  income
              
              
              -
              
              
              -
              
              
              
              
              
              2,649
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,649Change
                  in net unrealized gain on available-for-sale securities, net of
                  taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (493
              )
              
              -
              
              
              -
              
              
              (493
              )Comprehensive
                  income, net of taxes:
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,156Dividends
                  paid
              
              
              -
              
              
              -
              
              
              -
              
              
              (793
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (793
              )Preferred
                  stock redemption
              
              
              (1
              )
              
              2
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1Treasury
                  stock activity
              
              
              -
              
              
              -
              
              
              55
              
              
              -
              
              
              (30
              )
              
              -
              
              
              -
              
              
              -
              
              
              25Allocation
                  of ESOP Stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (126
              )
              
              -
              
              
              (126
              )Purchase
                  of shares for MRP
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (107
              )
              
              (107
              )**Balance—March
                  31, 2005**
              
              
              **-**
              
              
              **25**
              
              
              **23,937**
              
              
              **22,748**
              
              
              **(420**
              **)**
              
              **(235**
              **)**
              
              **(126**
              **)**
              
              **(128**
              **)**
              
              **45,801**Comprehensive
                  income :Net
                  income
              
              
              -
              
              
              -
              
              
              
              
              
              3,770
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,770Loss
                  on pension liability
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (281
              )
              
              
              
              
              
              
              
              (281
              )Change
                  in net unrealized loss on available-for-sale securities, net of
                  taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (158
              )
              
              -
              
              
              -
              
              
              (158
              )Comprehensive
                  income, net of taxes:
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,331Dividends
                  paid
              
              
              -
              
              
              -
              
              
              -
              
              
              (782
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (782
              )Treasury
                  stock activity
              
              
              -
              
              
              -
              
              
              (2
              )
              
              -
              
              
              117
              
              
              -
              
              
              -
              
              
              -
              
              
              115Allocation
                  of ESOP Stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              116
              
              
              -
              
              
              116Purchase
                  of shares for MRP
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              116
              
              
              116**Balance—March
                  31, 2006**
              
              **$**
              **-**
              
              **$**
              **25**
              
              **$**
              **23,935**
              
              **$**
              **25,736**
              
              **$**
              **(303**
              **)**
              **$**
              **(674**
              **)**
              **$**
              **(10**
              **)**
              **$**
              **(12**
              **)**
              **$**
              **48,697**See
                  accompanying notes to consolidated financial
                  statements.






52




**CARVER
                  BANCORP, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(In
                  thousands)****Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004**As
                  previously
                reported
              
              **Restated**
              
              As
                  previously reported
              
              **Restated**
              
              As
                  previously reported
              
              **Restated**Cash
                  flows from operating activities:Net
                  income
              
              $
              3,770
              
              **$**
              **3,770**
              
              $
              2,649
              
              **$**
              **2,649**
              
              $
              4,839
              
              **$**
              **4,839**Adjustments
                  to reconcile net income to net cash provided by(used
                  in) operating activities:Provision
                  for loan losses
              
              
              -
              
              
              **-**
              
              
              -
              
              
              **-**
              
              
              -
              
              
              **-**Stock-based
                  compensation expense
              
              
              233
              
              
              **233**
              
              
              358
              
              
              **358**
              
              
              128
              
              
              **128**Depreciation
                  expense
              
              
              1,546
              
              
              **1,546**
              
              
              1,423
              
              
              **1,423**
              
              
              1,146
              
              
              **1,146**Amortization
                  of intangibles
              
              
              -
              
              
              **-**
              
              
              -
              
              
              **-**
              
              
              178
              
              
              **178**Other
                  amortization
              
              
              863
              
              
              **863**
              
              
              1,502
              
              
              **1,502**
              
              
              1,848
              
              
              **1,848**Impaiment
                  charge on Securities
              
              
              1,547
              
              
              **-**
              
              
              -
              
              
              **1,547**
              
              
              -
              
              
              **-**Gain
                  on sale of securities
              
              
              -
              
              
              **-**
              
              
              (94
              )
              
              **(94**
              **)**
              
              (31
              )
              
              **(31**
              **)**Gain
                  on sale of loans
              
              
              (351
              )
              
              **(351**
              **)**
              
              (277
              )
              
              **(277**
              **)**
              
              (116
              )
              
              **(116**
              **)**Disbursements
                  for originations of loans held-for-sale
              
              
              -
              
              
              **(12,646**
              **)**
              
              -
              
              
              **(7,631**
              **)**
              
              -
              
              
              **(9,904**
              **)**Proceeds
                  from sale of loans held-for-sale
              
              
              22,908
              
              
              **12,197**
              
              
              8,404
              
              
              **8,319**
              
              
              9,590
              
              
              **9,474**Changes
                  in assets and liabilities:
              
              
              
              
              
              
              
              
              .
              
              
              **.**(Increase)
                  decrease in accrued interest receivable
              
              
              (268
              )
              
              **(268**
              **)**
              
              (213
              )
              
              **(213**
              **)**
              
              857
              
              
              **857**(Increase)
                  decrease in other assets
              
              
              (2,430
              )
              
              **(2,430**
              **)**
              
              (7,618
              )
              
              **(7,618**
              **)**
              
              4,478
              
              
              **4,478**Increase
                  (decrease) in other liabilities
              
              
              4,249
              
              
              **4,249**
              
              
              (4,452
              )
              
              **(4,452**
              **)**
              
              3,481
              
              
              **3,481**Net
                  cash provided by (used in) operating activities
              
              
              30,520
              
              
              **7,163**
              
              
              3,229
              
              
              **(4,487**
              **)**
              
              26,398
              
              
              **16,378**Cash
                  flows from investing activities:Purchases
                  of securities:Available-for-sale
              
              
              (26,811
              )
              
              **(26,811**
              **)**
              
              (83,219
              )
              
              **(83,219**
              **)**
              
              (58,477
              )
              
              **(58,477**
              **)**Held-to-maturity
              
              
              (19
              )
              
              **(19**
              **)**
              
              
              
              
              
              
              
              (19,859
              )
              
              **(19,859**
              **)**Proceeds
                  from principal payments, maturities and calls of
                  securities:Available-for-sale
              
              
              60,645
              
              
              **60,645**
              
              
              51,383
              
              
              **51,383**
              
              
              65,060
              
              
              **65,060**Held-to-maturity
              
              
              4,816
              
              
              **4,816**
              
              
              11,996
              
              
              **11,996**
              
              
              12,693
              
              
              **12,693**Proceeds
                  from sales of available-for-sale securities
              
              
              1,575
              
              
              **1,575**
              
              
              7,288
              
              
              **7,288**
              
              
              23,902
              
              
              **23,902**Disbursements
                  for loan originated for held-for-investment
              
              
              (111,349
              )
              
              **(98,704**
              **)**
              
              (85,801
              )
              
              **(78,170**
              **)**
              
              (87,140
              )
              
              **(77,236**
              **)**Loans
                  purchased from third parties
              
              
              (96,140
              )
              
              **(96,140**
              **)**
              
              (104,734
              )
              
              **(104,734**
              **)**
              
              (93,694
              )
              
              **(93,694**
              **)**Principal
                  collections on loans held-for-investment
              
              
              113,468
              
              
              **113,482**
              
              
              112,518
              
              
              **112,603**
              
              
              111,821
              
              
              **111,937**Proceeds
                  from sale of loans held-for-investment
              
              
              -
              
              
              **10,697**
              
              
              -
              
              
              **-**
              
              
              -
              
              
              **-**Redemption
                  of FHLB-NY stock
              
              
              498
              
              
              **498**
              
              
              (549
              )
              
              **(549**
              **)**
              
              864
              
              
              **864**Additions
                  to premises and equipment
              
              
              (1,082
              )
              
              **(1,082**
              **)**
              
              (3,399
              )
              
              **(3,399**
              **)**
              
              (2,779
              )
              
              **(2,779**
              **)**Net
                  cash used in investing activities
              
              
              (54,400
              )
              
              **(31,043**
              **)**
              
              (94,517
              )
              
              **(86,801**
              **)**
              
              (47,609
              )
              
              **(37,589**
              **)**Cash
                  flows from financing activities:Net
                  increase in deposits
              
              
              48,768
              
              
              **48,768**
              
              
              79,789
              
              
              **79,789**
              
              
              26,501
              
              
              **26,501**Net
                  repayment of FHLB advances
              
              
              (21,507
              )
              
              **(21,507**
              **)**
              
              10,959
              
              
              **10,959**
              
              
              (4,714
              )
              
              **(4,714**
              **)**Common
                  stock repurchased
              
              
              (115
              )
              
              **(115**
              **)**
              
              (1,021
              )
              
              **(1,021**
              **)**
              
              (303
              )
              
              **(303**
              **)**Dividends
                  paid
              
              
              (782
              )
              
              **(782**
              **)**
              
              (793
              )
              
              **(793**
              **)**
              
              (659
              )
              
              **(659**
              **)**Net
                  cash provided by financing activities
              
              
              26,364
              
              
              **26,364**
              
              
              88,934
              
              
              **88,934**
              
              
              20,825
              
              
              **20,825**Net
                  increase (decrease) in cash and cash equivalents
              
              
              2,484
              
              
              **2,484**
              
              
              (2,354
              )
              
              **(2,354**
              **)**
              
              (386
              )
              
              **(386**
              **)**Cash
                  and cash equivalents at beginning of the period
              
              
              20,420
              
              
              **20,420**
              
              
              22,774
              
              
              **22,774**
              
              
              23,160
              
              
              **23,160**Cash
                  and cash equivalents at end of the period
              
              $
              22,904
              
              **$**
              **22,904**
              
              $
              20,420
              
              **$**
              **20,420**
              
              $
              22,774
              
              **$**
              **22,774**Supplemental
                  disclosure of cashflow information:Change
                  in unrealized (loss) gain on valuation of
                  available-for-saleinvestments,
                  net
              
              $
              (158
              )
              **$**
              **(158**
              **)**
              $
              (493
              )
              **$**
              **(493**
              **)**
              $
              (492
              )
              **$**
              **(492**
              **)**Cash
                  paid for-Interest
              
              $
              13,502
              
              **$**
              **13,502**
              
              $
              9,718
              
              **$**
              **9,718**
              
              $
              8,739
              
              **$**
              **8,739**Income
                  taxes
              
              $
              2,107
              
              **$**
              **2,107**
              
              $
              2,395
              
              **$**
              **2,395**
              
              $
              2,825
              
              **$**
              **2,825**See
                  accompanying notes to consolidated financial statements






53




**CARVER
      BANCORP, INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      1.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**




**Nature
      of operations**




Carver
      Bancorp, Inc. (on a stand-alone basis, the “Holding Company” or “Registrant”),
      was incorporated in May 1996 and its principal wholly owned subsidiary is Carver
      Federal Savings Bank (the “Bank” or “Carver Federal”). Carver
      Statutory Trust I (the “Trust”) is another wholly owned subsidiary of the
      Holding Company . The
      Trust, which was formed in September 2003, exists for the sole purpose of
      issuing trust preferred debt securities and investing the proceeds in an
      equivalent amount of subordinated debentures of the Holding Company. CFSB Realty
      Corp., CFSB Credit Corp. and Carver Community Development Corp. are wholly
      owned
      subsidiaries of the Bank. CFSB Credit Corp. is currently inactive. The Bank
      owns
      a majority interest in Carver Asset Corporation, a real estate investment trust
      formed in February 2004. 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 and changed its name at that time. On October 24, 1994, the Bank
      converted from mutual to stock form and issued 2,314,275 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 Holding Company. In connection with
      the
      Reorganization, each share of the Bank’s outstanding common stock was exchanged
      for one share of the Holding Company’s common stock, par value $0.01 per share.
      On January 11, 2000, the Holding Company sold in a private placement, pursuant
      to a Securities Purchase Agreement dated January 11, 2000, 40,000 shares of
      Series A Convertible Preferred Stock (the “Series A Preferred Stock”) to Morgan
      Stanley & Co. Incorporated (“MSDW”) and 60,000 Shares of Series B
      Convertible Preferred Stock (the “Series B Preferred Stock”) to Provender
      Opportunities Fund L.P. (“Provender”). On June 1, 2004, Provender sold all
      60,000 of its Series B Preferred Stock to Keefe Bruyette & Woods, Inc
      (“KBW”). On October 15, 2004, both MSDW and KBW elected to convert their
      Preferred Shares into shares of Holding Company’s common stock, thus an
      additional 208,333 shares of common stock were issued to these parties. See
      Note
      11 of Notes to the Consolidated Financial Statements. Collectively, the Holding
      Company, the Bank and the Holding Company’s other direct and indirect
      subsidiaries are referred to herein as the “Company” or “Carver.”




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




**Basis
      of consolidated financial statement presentation**




The
      consolidated financial statements include the accounts of the Holding Company,
      Carver Statutory Trust I, the Bank and the Bank’s wholly owned or majority owned
      subsidiaries, Carver Asset Corporation, CFSB Realty Corp. and CFSB Credit Corp.
      All significant intercompany accounts and transactions have been eliminated
      in
      consolidation.




The
      consolidated financial statements have been prepared in conformity with
      accounting principles generally accepted in the United States of America. In
      preparing the consolidated financial statements, management is required to
      make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities as of the date of the consolidated statement of financial condition
      and revenues and expenses for the period then ended. Estimates that are
      particularly susceptible to significant changes in the near-term relate to
      prepayment assumptions on mortgage-backed securities and mortgage loans, the
      determination of the allowance for loan losses and, if applicable, the valuation
      of real estate owned. Actual results could differ significantly from those
      estimates.




Management
      believes that prepayment assumptions on mortgage-backed securities and mortgage
      loans are appropriate and the allowance for loan losses is adequate. While
      management uses available information to recognize losses on loans, future
      additions to the allowance for loan losses or future write downs of real estate
      owned may be necessary based on changes in economic conditions in the areas
      where Carver Federal had extended mortgages and other credit instruments.




In
      addition, the Office of Thrift supervision (“OTS”) our regulator, as an integral
      part of its examination process, periodically reviews Carver Federal’s allowance
      for loan losses and, if applicable, real estate owned valuations. The OTS may
      require Carver Federal to recognize additions to the allowance for loan losses
      or additional write downs of real estate owned based on their judgments about
      information available to them at the time of their examination.




**Cash
      and cash equivalents**




Cash
      and
      cash equivalents include cash and amounts due from depository institutions
      and
      federal funds sold which are generally sold for one-day periods. The amounts
      due
      from depository institutions include a non-interest bearing account held at
      the
      Federal Reserve Bank (“FRB”) where any additional cash reserve required on
      demand deposits would be maintained. Currently, this




54




reserve
      requirement is zero since the Bank’s vault cash satisfies cash reserve
      requirements for deposits.




**Securities**




The
      Bank
      does not have trading securities but does differentiate between held-to-maturity
      securities and available-for-sale securities. When purchased, securities are
      designated in either the securities held-to-maturity portfolio or securities
      available-for-sale portfolio. Securities should be classified as
      held-to-maturity and carried at amortized cost only if the Bank has a positive
      intent and ability to hold such securities to maturity. If not classified as
      held-to-maturity, such securities are classified as securities
      available-for-sale demonstrating management’s ability to sell in response to
      actual or anticipated changes in interest rates and resulting prepayment risk
      or
      any other factors. Available-for-sale securities are reported at fair value.
      Unrealized holding gains or losses for securities available-for-sale are to
      be
      excluded from earnings and reported net of deferred income taxes as a separate
      component of accumulated other comprehensive (loss) income, a component of
      Stockholders’ Equity. Any impairment in the available-for-sale securities deemed
      other-than-temporary, is written down against the cost basis and charged to
      earnings. No impairment charge was recorded for fiscal 2006, however, during
      fiscal 2005 Carver recorded a $1.5 million charge to earnings for impairment
      in
      available-for-sale securities deemed other-than-temporary on the 150,000 shares
      of Independence Federal Savings Bank common stock (“IFSB”) that it held in
      portfolio.




Securities
      held-to-maturity are carried at cost, adjusted for the amortization of premiums
      and the accretion of discounts using the level-yield method over the remaining
      period until maturity.




Gains
      or
      losses on sales of securities of all classifications are recognized based on
      the
      specific identification method.




**Loans
      Receivable**




Loans
      receivable are carried at unpaid principal balances plus unamortized premiums
      and certain deferred direct loan origination costs, less the allowance for
      loan
      losses and deferred loan fees and discounts.




The
      Bank
      defers loan origination fees and certain direct loan origination costs and
      accretes such amounts as an adjustment of yield over the expected lives of
      the
      related loans using methodologies which approximate the interest method.
      Premiums and discounts on loans purchased are amortized or accreted as an
      adjustment of yield over the contractual lives, adjusted for prepayments when
      applicable, of the related loans using methodologies which approximate the
      interest method.




Loans
      are
      generally placed on non-accrual status when they are past due 90 days or more
      as
      to contractual obligations or when other circumstances indicate that collection
      is questionable. When a loan is placed on non-accrual status, any interest
      accrued but not received is reversed against interest income. Payments received
      on a non-accrual loan are either applied to the outstanding principal balance
      or
      recorded as interest income, depending on an assessment of the ability to
      collect the loan. A non-accrual loan is restored to accrual status when
      principal and interest payments become less than 90 days past due and its future
      collectibility is reasonably assured.




**Allowance
      for Loan Losses**




An
      allowance for loan losses is maintained at a level considered adequate to
      provide for potential loan losses. Management is responsible for determining
      the
      adequacy of the allowance for loan losses and the periodic provisioning for
      estimated losses included in the consolidated financial statements. The
      evaluation process is undertaken on a quarterly basis, but may increase in
      frequency should conditions arise that would require management’s prompt
      attention, such as business combinations and opportunities to dispose of
      non-performing and marginally performing loans by bulk sale or any development
      which may indicate an adverse trend.




Carver
      Federal maintains a loan review system, which allows for a periodic review
      of
      its loan portfolio and the early identification of potential problem loans.
      Such
      system takes into consideration, among other things, delinquency status, size
      of
      loans, type of collateral and financial condition of the borrowers. Loan loss
      allowances are established for problem loans based on a review of such
      information and/or appraisals of the underlying collateral. On the remainder
      of
      its loan portfolio, loan loss allowances are based upon a combination of factors
      including, but not limited to, actual loan loss experience, composition of
      loan
      portfolio, current economic conditions and management’s judgment. Although
      management believes that adequate loan loss allowances have been established,
      actual losses are dependent upon future events and, as such, further additions
      to the level of the loan loss allowance may be necessary in the
      future.




The
      methodology employed for assessing the appropriateness of the allowance consists
      of the following criteria:




·
            Establishment
                of reserve amounts for all specifically identified criticized loans
                that
                have been designated as requiring attention by management’s internal loan
                review program, bank regulatory examinations or the external
                auditors.






55




·
            An
                average loss factor, giving effect to historical loss experience
                over
                several years and linked to cyclical trends, is applied to smaller
                balance
                homogenous types of loans not subject to specific review. These loans
                include residential one- to four-family, multifamily, nonresidential
                and
                construction loans and also include consumer and business loans.




Recognition
      is also given to the changed risk profile brought about by business
      combinations, customer knowledge, the results of ongoing credit quality
      monitoring processes and the cyclical nature of economic and business
      conditions. An important consideration in applying these methodologies is the
      concentration of real estate related loans located in the New York City
      metropolitan area.




The
      initial allocation or specific-allowance methodology commences with loan
      officers and underwriters grading the quality of their loans on an nine-category
      risk classification scale. Loans identified from this process as below
      investment grade are referred to the Internal Asset Review Committee for further
      analysis and identification of those factors that may ultimately affect the
      full
      recovery or collectibility of principal and/or interest. These loans are subject
      to continuous review and monitoring while they remain in the criticized
      category. Additionally, the Internal Asset Review Committee is responsible
      for
      performing periodic reviews of the loan portfolio that are independent from
      the
      identification process employed by loan officers and underwriters. Gradings
      that
      fall into criticized categories are further evaluated and reserve amounts,
      if
      necessary, are established for each loan.




The
      second allocation or loss factor approach to common or homogeneous loans is
      made
      by applying the average loss factor based on several years of loss experience
      to
      the outstanding balances in each loan category. It gives recognition to the
      loss
      experience of acquired businesses, business cycle changes and the real estate
      components of loans. Since many loans depend upon the sufficiency of collateral,
      any adverse trend in the real estate markets could seriously affect underlying
      values available to protect against loss.




Other
      evidence used to support the amount of the allowance and its components are
      as
      follows:




·  Regulatory
      examinations




·  Amount
      and trend of criticized loans




·  Actual
      losses




·  Peer
      comparisons with other financial institutions




·  Economic
      data associated with the real estate market in the Company’s market
      area




·  Opportunities
      to dispose of marginally performing loans for cash consideration




A
      loan is
      considered to be impaired, as defined by Statement of Financial Accounting
      Standards (“SFAS”) No. 114, *“Accounting
      by Creditors for Impairment of a Loan”* (“SFAS
      114”), when it is probable that Carver Federal will be unable to collect all
      principal and interest amounts due according to the contractual terms of the
      loan agreement. Carver Federal tests loans covered under SFAS 114 for impairment
      if they are on non-accrual status or have been restructured. Consumer credit
      non-accrual loans are not tested for impairment because they are included in
      large groups of smaller-balance homogeneous loans that, by definition along
      with
      leases, are excluded from the scope of SFAS 114. Impaired loans are required
      to
      be measured based upon the present value of expected future cash flows,
      discounted at the loan’s initial effective interest rate, or at the loan’s
      market price or fair value of the collateral if the loan is collateral
      dependent. If the loan valuation is less than the recorded value of the loan,
      an
      impairment reserve must be established for the difference. The impairment
      reserve is established by either an allocation of the reserve for credit losses
      or by a provision for credit losses, depending on various circumstances.
      Impairment reserves are not needed when credit losses have been recorded so
      that
      the recorded investment in an impaired loan is less than the loan
      valuation.




**Concentration
      of Risk**




The
      Bank’s principal lending activities are concentrated in loans secured by real
      estate, a substantial portion of which is located in the State of New York.
      Accordingly, the ultimate collectibility of a substantial portion of the
      Company’s loan portfolio is susceptible to changes in New York’s real estate
      market conditions.




**Premises
      and Equipment**




Premises
      and equipment are comprised of land, at cost, and buildings, building
      improvements, furnishings and equipment and leasehold improvements, at cost,
      less accumulated depreciation and amortization. Depreciation and amortization
      charges are computed using the straight-line method over the following estimated
      useful lives:




Buildings
                  and improvements
              10
                  to 25 yearsFurnishings
                  and equipment
              3
                  to 5 yearsLeasehold
                  improvements
              Lesser
                  of useful life or remaining term of
                  lease






56




Maintenance,
      repairs and minor improvements are charged to non-interest expense in the period
      incurred.




**Bank
      Owned Life Insurance**




Bank
      Owned Life Insurance (“BOLI”) is carried at its cash surrender value on the
      balance sheet and is classified as a non-interest-earning asset. Death benefits
      proceeds received in excess of the policy’s cash surrender value are recognized
      to income. Returns on the BOLI assets are added to the carrying value and
      included as non-interest income in the consolidated statement of operations.
      Any
      receipt of benefit proceeds is recorded as a reduction to the carrying value
      of
      the BOLI asset. At March 31, 2006, Carver held no policy loans against its
      BOLI
      cash surrender values or restrictions on the use of the proceeds.




**Mortgage
      Servicing Rights**




Mortgage
      servicing rights (“MSR”) on mortgage loans are recognized at the sale of
      mortgage loans where servicing rights are retained. At recognition, this asset
      is recorded onto the balance sheet as a non-interest-earning asset. **** The
      initial recognition of MSR is based on the fair value of total estimated income
      from the servicing of these loans. The asset is then amortized over the
      estimated life of the serviced loans.




**Real
      Estate Owned**




Real
      estate acquired by foreclosure or deed in lieu of foreclosure is recorded at
      the
      fair value at the date of acquisition and thereafter carried at the lower of
      cost or fair value less estimated selling costs. The fair value of such assets
      is determined based primarily upon independent appraisals and other relevant
      factors. The amounts ultimately recoverable from real estate owned could differ
      from the net carrying value of these properties because of economic conditions.




Costs
      incurred to improve properties or prepare them for sale are capitalized.
      Revenues and expenses related to the holding and operating of properties are
      recognized in operations as earned or incurred. Gains or losses on sale of
      properties are recognized as incurred. At March 31, 2006, the Bank had no
      foreclosed real estate, however as a result of a property tax redemption, the
      Bank took fee ownership of a vacant tract of land in Bayshore, NY with a
      carrying amount of $10,000 and is included with other assets on the statement
      of
      condition.




**Identifiable
      Intangible Assets**




Carver
      Federal adopted Statement of Financial Accounting Standards No.142 (“SFAS No.
      142”), *“Goodwill
      and Other Intangible Assets”* on
      January 1, 2002. SFAS 142 requires that goodwill and intangible assets with
      indefinite useful lives no longer be amortized, but instead tested for
      impairment at least annually.




Identifiable
      intangible assets relate primarily to core deposit premiums, resulting from
      the
      valuation of core deposit intangibles acquired in the purchase of branch
      offices. These identifiable intangible assets are amortized using the
      straight-line method over periods not exceeding the estimated average remaining
      life of the existing customer deposits acquired. Amortization periods range
      from
      5 to 15 years. Amortization periods for intangible assets are monitored to
      determine if events and circumstances require such periods to be reduced.




At
      March
      31, 2006 Carver had no goodwill or identifiable intangible assets on its
      books.




**Income
      Taxes**




Carver
      Federal accounts for income taxes using the asset and liability method.
      Temporary differences between the basis of assets and liabilities for financial
      reporting and tax purposes are measured as of the balance sheet date. Deferred
      tax liabilities or recognizable deferred tax assets are calculated on such
      differences, using current statutory rates, which result in future taxable
      or
      deductible amounts. The effect on deferred taxes of a change in tax rates is
      recognized in income in the period that includes the enactment date.




**Impairment**




The
      Company annually evaluates long-lived assets, certain identifiable intangibles,
      deferred costs for indication of impairment in value. There was no impairment
      on
      these assets for the past three years and when required, asset impairment will
      be recorded as an expense in the current period.




**Earnings
      (loss) per Common Share**




Basic
      earnings per share (“EPS”) is computed by dividing income available to common
      stockholders by the weighted-average number of common shares outstanding.
      Diluted EPS includes any additional common shares as if all potentially
      dilutive






57




common
      shares were issued (e.g. outstanding share awards under the Company’s stock
      option plan). For the purpose of these calculations, unreleased shares of the
      Carver Federal Savings Bank Employee Stock Ownership Plan (“ESOP”) are not
      considered to be outstanding.




**Treasury
      Stock**




Treasury
      stock is recorded at cost and is presented as a reduction of stockholders’
equity.




**Pension
      Plans**




In
      February 1998, the FASB issued SFAS No. 132, *“Employers’
      Disclosures about Pensions and Other Postretirement Benefits”* (“SFAS
      132”). SFAS 132 revises employers’ disclosures about pension and other
      postretirement benefit plans. It does not change the measurement or recognition
      of those plans.




**Stock-Based
      Compensation Plans**




Compensation
      expense is recognized for the Bank’s ESOP equal to the fair value of shares
      committed to be released for allocation to participant accounts. Any difference
      between the fair value at that time and the ESOP’s original acquisition cost is
      charged or credited to stockholders’ equity (additional paid-in capital). The
      cost of unallocated ESOP shares (shares not yet committed to be released) is
      reflected as a reduction of stockholders’ equity.




The
      Holding Company grants “incentive stock options” only to its employees and
      grants “nonqualified stock options” to employees and non-employee directors.
      Under Accounting Principle Board Opinion (“APB”) No. 25 *“Accounting
      for Stock Issued to Employees”* ,
      no
      compensation expense is recognized if the exercise price of the option is
      greater than or equal to the fair market value of the underlying stock on the
      date of grant. In December 2004, the FASB issued a revised Statement of
      Financial Accounting Standards No. 123 “ *Accounting
      for Stock Based Compensation, Share Based Payment”,* (“SFAS
      123R”) which requires that compensation cost relating to share-based payment
      transactions be recognized in the financial statements. The associated costs
      will be measured based on the fair value of the equity instruments issued.
      SFAS
      123R covers a wide range of share-based compensation arrangements including
      share options, restricted share plans, performance-based awards, share
      appreciation rights and employee share purchase plans. SFAS 123R is effective
      as
      of the first annual reporting period beginning after June 15, 2005. Carver
      Federal will adopt SFAS 123R as of April 1, 2006.




The
      Holding Company’s management recognition and retention plan (“MRP”) is also
      accounted for in accordance with APB Opinion No. 25. The fair value of the
      shares awarded, measured at the grant date, is recognized as unearned
      compensation (a deduction from stockholders’ equity) and amortized to
      compensation expense as the shares become vested. When MRP shares become vested,
      the Company records a credit to additional paid-in capital for tax benefits
      attributable to any MRP deductions in excess of the grant-date fair value
      charged to expense, for financial reporting purposes.




Carver
      Federal applies APB Opinion No. 25, *“Accounting
      for Stock Issued to Employees,”* and
      related interpretations in accounting for our stock-based Plan under which
      there
      is no charge to earnings for stock option awards and the dilutive effect of
      outstanding options is reflected as additional share dilution in the computation
      of earnings per share.




The
      following table illustrates net income and earnings per common share pro forma
      results with the application of SFAS 123R for Carver’s Stock Option Plan, for
      the years ended March 31:


**2006**
              
              **2005**
              
              **2004****(Dollars
                  in thousands, except per share data)**Net
                  Income available to common shareholders:As
                  reported
              
              $
              3,770
              
              $
              2,535
              
              $
              4,642Total
                  stock-based employee compensation expenseexpense
                  determined under fair value based methods forall
                  awards, net of related tax effects
              
              
              (105
              )
              
              (124
              )
              
              (158
              )Pro
                  forma
              
              $
              3,665
              
              $
              2,411
              
              $
              4,484Basic
                  earnings per share:As
                  reported
              
              $
              1.50
              
              $
              1.06
              
              $
              2.03Pro
                  forma
              
              
              1.46
              
              
              1.01
              
              
              1.96Diluted
                  earnings per share:As
                  reported
              
              $
              1.47
              
              $
              1.03
              
              $
              1.87Pro
                  forma
              
              
              1.43
              
              
              0.98
              
              
              1.81Weighted
                  average number of shares outstanding
              
              
              2,506,029
              
              
              2,381,980
              
              
              2,283,802






58




The
      fair
      value of the option grants was estimated on the date of the grant using the
      Black-Scholes option pricing model applying the following weighted average
      assumptions: risk-free interest rates of 4.50%, 3.50% and 2.50%, for the
      relevant fiscal years ended March 31, 2006, 2005 and 2004 (“fiscal 2006”,
“fiscal 2005” and “fiscal 2004”), respectively; volatility of 19% for fiscal
      2006 and 35% fiscal 2005 and 45% fiscal 2004; expected dividend yield was
      calculated using annual dividends of $0.32 per share for fiscal 2006, $0.28
      for
      fiscal 2005 and $0.20 for fiscal 2004; and an expected life of seven years
      for
      employees and directors option grants.




**Restatement**




Restatement
      of the Consolidated Statements of Cash Flows




The
      Company is restating its previously reported Consolidated Statements of Cash
      Flows for the fiscal years ended March 31, 2006, 2005 and 2004 related to the
      classification of proceeds from the sale of certain mortgage loans. The
      restatements result from misclassification of cash flows from mortgage loans
      the
      Company originated with the intent to sell, which were reflected in cash flows
      from investing activities rather than in cash flows from operating activities.
      Additionally, the Company misclassified other cash flows on loans originated
      as
      held-for-investment as cash flows from operating activities rather than as
      cash
      flows from investing activities. The restatement solely affects the
      classification of these activities and the subtotals of cash flows from
      operating and investing activities presented in the affected Consolidated
      Statements of Cash Flows, and has no impact on the net increase in total cash
      and cash equivalents as set forth in the Consolidated Statements of Cash Flows
      for any of the previously reported periods. Additionally, the restatements
      do
      not affect the Company’s Consolidated Statements of Financial Condition,
      Consolidated Statements of Operations and Consolidated Statements of Changes
      in
      Stockholders Equity for the affected periods. Accordingly, the
      Company’s previously reported revenues, net income, earnings per
      share, total assets and regulatory capital remain unchanged.




The
      Company is also restating its previously reported Consolidated Statements of
      Cash Flows for the fiscal years ended March 31, 2006 and 2005 to correct a
      typographical error which erroneously reflected an impairment charge in
      cashflows from operating activities in 2006 instead of 2005. This error was
      solely a typographical error and did not affect the subtotals for the
      periods.




**Reclassifications**
  Certain
        amounts in the consolidated financial statements presented for prior years
        have
        been reclassified to conform to the current year
        presentation.




**NOTE
      2.** **SECURITIES**




The
      following is a summary of securities at March 31, 2006:


**Gross
                  Unrealized****Amortized**
              
              
              
              
              
              **Estimated****Cost**
              
              **Gains**
              
              **Losses**
              
              **Fair-Value****(In
                  thousands)****Available-for-Sale:**Mortgage-backed
                  securities:Pass-through
                  certificates:Government
                  National Mortgage Association
              
              $
              63,499
              
              $
              48
              
              $
              (540
              )
              $
              63,007Federal
                  Home Loan Mortgage Corporation
              
              
              2,229
              
              
              8
              
              
              (28
              )
              
              2,209Federal
                  National Mortgage Association
              
              
              4,696
              
              
              3
              
              
              (110
              )
              
              4,589Total
                  mortgage-backed securities
              
              
              70,424
              
              
              59
              
              
              (678
              )
              
              69,805U.S.
                  Government Agency Securities
              
              
              12,386
              
              
              -
              
              
              (309
              )
              
              12,077Total
                  available-for-sale
              
              
              82,810
              
              
              59
              
              
              (987
              )
              
              81,882**Held-to-Maturity:**Mortgage-backed
                  securities:Pass-through
                  certificates:Government
                  National Mortgage Association
              
              
              809
              
              
              36
              
              
              -
              
              
              845Federal
                  Home Loan Mortgage Corporation
              
              
              17,372
              
              
              15
              
              
              (500
              )
              
              16,887Federal
                  National Mortgage Association
              
              
              7,900
              
              
              34
              
              
              (107
              )
              
              7,827Small
                  Business Administration
              
              
              323
              
              
              -
              
              
              (2
              )
              
              321Total
                  held-to-maturity
              
              
              26,404
              
              
              85
              
              
              (609
              )
              
              25,880Total
                  securities
              
              $
              109,214
              
              $
              144
              
              $
              (1,596
              )
              $
              107,762





59





The
      following is a summary of securities at March 31, 2005:




**Gross
                  Unrealized****Amortized**
              
              
              
              
              
              **Estimated****Cost**
              
              **Gains**
              
              **Losses**
              
              **Fair
                  Value****(In
                  thousands)****Available-for-Sale:**Mortgage-backed
                  securities:Pass-through
                  certificates:Government
                  National Mortgage Association
              
              $
              83,861
              
              $
              98
              
              $
              (534
              )
              $
              83,425Federal
                  Home Loan Mortgage Corporation
              
              
              3,922
              
              
              14
              
              
              (28
              )
              
              3,908Federal
                  National Mortgage Association
              
              
              8,247
              
              
              17
              
              
              (115
              )
              
              8,149Total
                  mortgage-backed securities
              
              
              96,030
              
              
              129
              
              
              (677
              )
              
              95,482Equity
                  Securities
              
              
              1,575
              
              
              -
              
              
              -
              
              
              1,575U.S.
                  Government Agency Securities
              
              
              21,144
              
              
              -
              
              
              (168
              )
              
              20,976Total
                  available-for-sale
              
              
              118,749
              
              
              129
              
              
              (845
              )
              
              118,033**Held-to-Maturity:**Mortgage-backed
                  securities:Pass-through
                  certificates:Government
                  National Mortgage Association
              
              
              1,070
              
              
              59
              
              
              -
              
              
              1,129Federal
                  Home Loan Mortgage Corporation
              
              
              19,115
              
              
              32
              
              
              (71
              )
              
              19,076Federal
                  National Mortgage Association
              
              
              10,780
              
              
              110
              
              
              (120
              )
              
              10,770Small
                  Business Administration
              
              
              337
              
              
              -
              
              
              (2
              )
              
              335Total
                  held-to-maturity
              
              
              31,302
              
              
              201
              
              
              (193
              )
              
              31,310Total
                  securities
              
              $
              150,051
              
              $
              330
              
              $
              (1,038
              )
              $
              149,343


The
      net
      unrealized loss on available-for-sale securities was $928,000 ($575,000 after
      taxes) at March 31, 2006 and $716,000 ($444,000 after taxes) at March 31, 2005.
      On November 30, 2002 the Bank transferred
      $22.8 million
      of mortgage-backed securities from available-for-sale to held-to-maturity as
      a
      result of management’s intention to hold these securities in portfolio until
      maturity. A related unrealized gain of $468,000 was recorded as a separate
      component of stockholders’ equity and is being amortized over the remaining
      lives of the securities as an adjustment to yield. As of March 31, 2006 the
      carrying value of these securities was $16.0 million and a related net
      unrealized gain of $183,000 continues to be reported. Changes
      in unrealized holding gains and losses between fiscal 2006 and fiscal 2005
      resulted in an after-tax decrease in stockholders’ equity of $158,000. These
      gains and losses will continue to fluctuate based on changes in the portfolio
      and market conditions.




There
      were no gains or losses resulting from the sale of available-for-sale securities
      in fiscal 2006. In fiscal 2005, an other than temporary impairment charge
      related to the investment in IFSB common stock was recorded and was subsequently
      sold in fiscal 2006. Additionally, sales of available-for-sale securities in
      fiscal 2005 and 2004 resulted in gross realized gains of $94,000 and $31,000,
      respectively.




At
      March
      31, 2006 the Bank pledged securities of $38.3 million as collateral for advances
      from the Federal Home Loan Bank of New York (“FHLB-NY”).






60




The
      following is a summary of the carrying value (amortized cost) and fair value
      of
      securities at March 31, 2006, by remaining period to contractual maturity
      (ignoring earlier call dates, if any). Actual maturities may differ from
      contractual maturities because certain security issuers have the right to call
      or prepay their obligations.




**Book
                  Value**
              
              **Fair
                  Value**
              
              **Weighted
                  Avg**
                **Rate****(Dollars
                  in Thousands)****Available-for-Sale:**Less
                  than one year
              
              $
              2,000
              
              $
              1,982
              
              
              2.43
              %One
                  through five years
              
              
              10,687
              
              
              10,398
              
              
              3.92
              %Five
                  through ten years
              
              
              1,524
              
              
              1,471
              
              
              4.53
              %After
                  ten years
              
              
              68,599
              
              
              68,031
              
              
              3.78
              %$
              82,810
              
              $
              81,882
              
              
              3.78
              %**Held-to-maturity:**One
                  through five years
              
              $
              50
              
              $
              50
              
              
              5.69
              %After
                  ten years
              
              
              26,354
              
              
              25,830
              
              
              5.65
              %$
              26,404
              
              $
              25,880
              
              
              5.65
              %






The
      unrealized losses and fair value of securities in an unrealized loss position
      at
      March 31, 2006 for less than 12 months and 12 months or longer were as
      follows:


**Less
                  than 12 months**
              
              **12
                  months or longer**
              
              **Total****Unrealized**
              
              **Fair**
              
              **Unrealized**
              
              **Fair**
              
              **Unrealized**
              
              **Fair****Losses**
              
              **Value**
              
              **Losses**
              
              **Value**
              
              **Losses**
              
              **Value****(In
                  thousands)****Available-for-Sale:**Mortgage-backed
                  securities
              
              $
              (152
              )
              $
              19,051
              
              $
              (526
              )
              $
              39,795
              
              $
              (678
              )
              $
              58,846U.S.
                  Government Agency Securities
              
              
              (141
              )
              
              5,725
              
              
              (168
              )
              
              6,352
              
              
              (309
              )
              
              12,077Total
                  available-for-sale
              
              
              (293
              )
              
              24,776
              
              
              (694
              )
              
              46,147
              
              
              (987
              )
              
              70,923**Held-to-Maturity:**Mortgage-backed
                  securities
              
              
              (502
              )
              
              16,777
              
              
              (107
              )
              
              6,224
              
              
              (609
              )
              
              23,001Total
                  securities
              
              $
              (795
              )
              $
              41,553
              
              $
              (801
              )
              $
              52,371
              
              $
              (1,596
              )
              $
              93,924






The
      unrealized losses and fair value of securities in an unrealized loss position
      at
      March 31, 2005 for less than 12 months and 12 months or longer were as
      follows:


**Less
                  than 12 months**
              
              **12
                  months or longer**
              
              **Total****Unrealized**
              
              **Fair**
              
              **Unrealized**
              
              **Fair**
              
              **Unrealized**
              
              **Fair****Losses**
              
              **Value**
              
              **Losses**
              
              **Value**
              
              **Losses**
              
              **Value**(in
                  thousands)**Available-for-Sale:**Mortgage-backed
                  securities
              
              $
              (225
              )
              $
              42,625
              
              $
              (452
              )
              $
              27,522
              
              $
              (677
              )
              $
              70,147U.S.
                  Government Agency Securities
              
              
              (168
              )
              
              20,976
              
              
              -
              
              
              -
              
              
              (168
              )
              
              20,976Total
                  available-for-sale
              
              
              (393
              )
              
              63,601
              
              
              (452
              )
              
              27,522
              
              
              (845
              )
              
              91,123**Held-to-Maturity:**Mortgage-backed
                  securities
              
              
              (3
              )
              
              1,186
              
              
              (190
              )
              
              10,475
              
              
              (193
              )
              
              11,661Total
                  securities
              
              $
              (396
              )
              $
              64,787
              
              $
              (642
              )
              $
              37,997
              
              $
              (1,038
              )
              $
              102,784






A
      total
      of 46 securities had an unrealized loss at March 31, 2006 compared to 33 at
      March 31, 2005. Based on estimated fair v alue,
      all
      the securities in an unrealized loss position were United States government
      agency-backed securities, which represents 86.7% and 68.8% of total securities
      at March 31, 2006 and 2005, respectively. The cause of the temporary impairment
      is directly






61




related
      to the change in interest rates. In general, as interest rates rise, the fair
      value of securities will decline, and conversely as interest rates decline,
      the
      fair value of securities will increase. Management considers fluctuations in
      fair value as a result of interest rate changes to be temporary, which is
      consistent with the Bank’s experience. The impairments are deemed temporary
      based on the direct relationship of the decline in fair value to movements
      in
      interest rates, the life of the investments and their high credit
      quality.






**NOTE
      3.   LOANS RECEIVABLE, NET** ****





A
      summary
      of loans receivable, net follows:




**March
                    31,****2006**
                
                
                **2005****Amount**
                
                **Percent**
                
                
                **Amount**
                
                **Percent****(Dollars
                    in thousands)****Real
                    estate loans:**One-
                    to four-family
                
                $
                143,433
                
                
                28.91
                %
                
                $
                155,797
                
                
                36.69
                %Multifamily
                
                
                104,718
                
                
                21.11
                
                
                
                101,899
                
                
                23.99Nonresidential
                
                
                154,044
                
                
                31.05
                
                
                
                116,769
                
                
                27.49Construction
                
                
                92,511
                
                
                18.64
                
                
                
                48,579
                
                
                11.43Consumer
                    and business
                
                
                1,453
                
                
                0.29
                
                
                
                1,697
                
                
                0.40Total
                    gross loans
                
                
                496,159
                
                
                100.00
                %
                
                
                424,741
                
                
                100.00
                %**Add:**Premium
                    on loans
                
                
                1,890
                
                
                
                
                
                
                1,743**Less:**Deferred
                    fees and loan discounts
                
                
                (602
                )
                
                
                
                
                
                (400
                )Allowance
                    for loan Losses
                
                
                (4,015
                )
                
                
                
                
                
                (4,097
                )Total
                
                **$**
                **493,432**
                
                
                
                
                
                **$**
                **421,987**






At
      March
      31, 2006, 82.3% of the Company’s real estate loans receivable was principally
      secured by properties located in the State of New York.




The
      mortgage loan portfolios serviced for Federal National Mortgage Association
      (“FNMA”) and other third parties are not included in the accompanying
      consolidated financial statements. The unpaid principal balances of these loans
      aggregated $33.2 million, $17.9 million and $11.7 million at March 31, 2006,
      2005 and 2004, respectively. Custodial escrow balances, maintained in connection
      with the above-mentioned loan servicing, were approximately $114,000, $56,000
      and $40,000 at March 31, 2006, 2005 and 2004, respectively. During the year
      ended March 31, 2006 the Bank sold $22.5 million in loans with a recognized
      gain
      of $158,000, as compared to $8.0 million in loans sold during fiscal 2005 with
      an $84,000 gain recognized. Also recognized from these loan sales were gains
      of
      $193,000 for both fiscal 2006 and 2005 from other mortgage servicing rights
      since the loans were sold with servicing retained.




At
      March
      31, 2006 the Bank pledged $141.8 million in total mortgage loans as collateral
      for borrowings from the FHLB-NY.




The
      following is an analysis of the allowance for loan losses:




Year
                  ended March 31,2006
              
              2005
              
              2004Balance
                  at beginning of the year
              
              $
              4,097
              
              $
              4,125
              
              $
              4,158Provision
                  charged to operations
              
              
              -
              
              
              -
              
              
              -Recoveries
                  of amounts previously charged-off
              
              
              35
              
              
              45
              
              
              292Charge-offs
                  of loans
              
              
              (117
              )
              
              (73
              )
              
              (325
              )Balance
                  at end of the year
              
              $
              4,015
              
              $
              4,097
              
              $
              4,125






Non-accrual
      loans consist of loans for which the accrual of interest has been discounted
      as
      a result of such loans becoming 90 days or more delinquent as to principal
      and/or interest payments. Interest income on non-accrual loans is recorded
      when
      received. Restructured loans consist of loans where borrowers have been granted
      concessions in regards to the terms of their loans due to financial or other
      difficulties, which rendered them unable to repay their loans under the original
      contractual terms.




At
      March
      31, 2006, 2005 and 2004 the recorded investment in impaired loans was $2.8
      million, $998,000 and $2.1 million, respectively, all of which represented
      non-accrual loans. The related allowance for credit losses was approximately
      $276,000,






62




$160,000
      and $317,000 at March 31, 2006, 2005 and 2004, respectively. The impaired loan
      portfolio is primarily collateral dependent. The average recorded investment
      in
      impaired loans during the fiscal years ended March 31, 2006, 2005 and 2004
      was
      approximately $2.2 million, $1.6 million and $2.0 million, respectively. For
      the
      fiscal years ended March 31, 2006, 2005 and 2004, the Company did not recognize
      any interest income on these impaired loans. Interest income of $79,000, $83,000
      and $185,000, respectively, for the fiscal years ended March 31, 2006, 2005
      and
      2004 would have been recorded on impaired loans had they performed in accordance
      with their original terms.




At
      March
      31, 2006, 2005 and 2004, there were no loans to officers or
      directors.






**NOTE
      4.**  **PREMISES
      AND EQUIPMENT, NET**




The
      detail of premises and equipment is as follows:




**March
                  31,****2006**
              
              **2005****(In
                  thousands)**Land
              
              $
              415
              
              $
              415Building
                  and improvements
              
              
              9,391
              
              
              9,195Leasehold
                  improvements
              
              
              4,404
              
              
              3,939Furniture
                  and Equipment
              
              
              8,367
              
              
              7,73422,577
              
              
              21,283Less
                  accumulated depreciation and amortization
              
              
              9,383
              
              
              7,625$
              13,194
              
              $
              13,658






Depreciation
      and amortization charged to operations for the fiscal years ended March 31,
      2006, 2005 and 2004 amounted to $1.5 million, $1.4 million and $1.1 million,
      respectively.






**NOTE
      5.    ACCRUED INTEREST RECEIVABLE**




The
      detail of accrued interest receivable is as follows:




**March
                  31,****2006**
              
              **2005****(In
                  thousands)**Loans
                  receivable
              
              $
              2,300
              
              $
              1,895Mortgage-backed
                  securities
              
              
              482
              
              
              576Investments
                  and other interest bearing assets
              
              
              188
              
              
              231Total
                  accrued interest receivable
              
              $
              2,970
              
              $
              2,702






**NOTE
      6.    DEPOSITS**




Deposit
      balances and weighted average stated interest rates at March 31
      follow:




**2006**
              
              
              **2005****Amount**
              
              **Percent
                  of**
                **Total**
                **Deposits**
              
              **Weighted**
                **Average
                  Rate**
              
              
              **Amount**
              
              **Percent
                  of**
                **Total**
                **Deposits**
              
              **Weighted**
                **Average
                  Rate****(Dollars
                  in thousands)**Non-interest
                  -bearing demand
              
              $
              31,085
              
              
              6.2
              %
              
              -
              %
              
              $
              25,570
              
              
              5.6
              %
              
              -
              %NOW
                  demand
              
              
              27,904
              
              
              5.5
              
              
              0.31
              
              
              
              24,095
              
              
              5.2
              
              
              0.30Savings
                  and clubs
              
              
              139,724
              
              
              27.7
              
              
              0.68
              
              
              
              137,810
              
              
              30.2
              
              
              0.62Money
                  market savings
              
              
              40,045
              
              
              7.9
              
              
              2.41
              
              
              
              36,294
              
              
              8.0
              
              
              1.34Certificates
                  of deposit
              
              
              263,963
              
              
              52.3
              
              
              3.76
              
              
              
              229,685
              
              
              50.4
              
              
              2.30Other
              
              
              1,917
              
              
              0.4
              
              
              1.47
              
              
              
              2,416
              
              
              0.5
              
              
              1.13Total
              
              $
              504,638
              
              
              100.0
              %
              
              2.37
              %
              
              $
              455,870
              
              
              100.0
              %
              
              1.47
              %





63






Scheduled
      maturities of certificates of deposit follow:




**March
                  31,****2006**
              
              **2005****(In
                  thousands)**Certificates
                  of deposit by remainingterm to contractual maturity:Within
                  one year
              
              $
              217,578
              
              $
              186,585After
                  one but within two years
              
              
              20,195
              
              
              13,412After
                  two but within three years
              
              
              10,456
              
              
              8,512After
                  three years
              
              
              15,734
              
              
              21,176Total
              
              $
              263,963
              
              $
              229,685






The
      aggregate amount of certificates of deposit with minimum denominations of
      $100,000 or more was approximately $183.5 million at March 31, 2006 compared
      to
      $161.7 million at March 31, 2005.




Interest
      expense on deposits for the years ended March 31 follows:




**2006**
              
              **2005**
              
              **2004****(In
                  thousands)**NOW
                  demand
              
              $
              74
              
              $
              69
              
              $
              85Savings
                  and clubs
              
              
              919
              
              
              801
              
              
              1,001Money
                  market savings
              
              
              601
              
              
              302
              
              
              235Certificates
                  of deposit
              
              
              7,321
              
              
              4,268
              
              
              3,3158,915
              
              
              5,440
              
              
              4,636Mortgagors
                  deposits
              
              
              30
              
              
              25
              
              
              24Penalty
                    for early withdrawal of
                certificates
                  of deposit
              
              
              (24
              )
              
              (10
              )
              
              (11
              )Total
                  interest expense
              
              $
              8,921
              
              $
              5,455
              
              $
              4,649







**NOTE
      7.    BORROWED MONEY**




*Federal
      Home Loan Bank Advances.* FHLB-NY
      advances and weighted average interest rates by remaining period to maturity
      at
      March 31 as follow:




**2006**
              
              **2005****(Dollars
                  in thousands)****Maturing****Year
                  Ended**
              
              **Weighted**
              
              
              
              
              **Weighted****March
                  31,**
              
              **Average
                  Rate**
              
              
              **Amount**
              
              **Average
                  Rate**
              
              
              **Amount**2006
              
              
              -
              %
              
              $
              -
              
              
              3.41
              %
              
              $
              34,8402007
              
              
              4.40
              
              
              
              49,434
              
              
              4.21
              
              
              
              36,1342008
              
              
              3.65
              
              
              
              16,200
              
              
              3.65
              
              
              
              16,2002009
              
              
              3.78
              
              
              
              15,107
              
              
              3.78
              
              
              
              15,1072012
              
              
              3.50
              
              
              
              194
              
              
              3.50
              
              
              
              2194.13
              %
              
              $
              80,935
              
              
              3.78
              %
              
              $
              102,500





As
      a
      member of the FHLB-NY, the Bank may have outstanding FHLB-NY borrowings in
      a
      combination of term advances and overnight funds of up to 25% of its total
      assets, or approximately $165 million at March 31, 2006. Borrowings are secured
      by the Bank’s investment in FHLB-NY stock and by a blanket security agreement.
      This agreement requires the Bank to maintain as collateral certain qualifying
      assets (principally mortgage loans and securities) not otherwise pledged. At
      March 31, 2006, advances






64




were
      secured by pledges of the Bank’s investment in the capital stock of the FHLB-NY
      totaling $4.6 million and a blanket assignment of the Bank’s unpledged
      qualifying mortgage loans of $141.8 million and mortgage-backed and investment
      securities of $38.3 million. Included in the total assets held at the FHLB-NY
      as
      collateral for borrowings is excess borrowing capacity of $23.2 million.





*Securities
      Sold Under Agreements to Repurchase.* In
      securities sold under agreements to repurchase, the Bank borrows funds through
      the transfer of debt securities to the FHLB-NY, as counterparty, and
      concurrently agrees to repurchase the identical securities at a fixed price
      on a
      specified date. Repurchase agreements are collateralized by the securities
      sold
      and, in certain cases, by additional margin securities. At March 31, 2006 and
      2005 there were no securities sold under agreements to repurchase outstanding.




*Subordinated
      Debt Securities.* 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 were $13.0
      million, and, together with the proceeds from the sale of the trust's common
      securities, were used to purchase approximately $13.4 million aggregate
      principal amount of the Holding Company's floating rate junior subordinated
      debt
      securities due 2033. The trust preferred debt securities are redeemable
      quarterly at the option of the Company beginning on or after July 7, 2007 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. At March 31, 2006 and 2005 the rate paid on these trust preferred debt
      securities was 7.97% and 6.08%, respectively.




The
      following table sets forth certain information regarding Carver Federal’s
      borrowings at the dates and for the periods indicated:




**At
                  or for the Year Ended****March
                  31,****2006**
              
              **2005**
              
              **2004****(Dollars
                  in thousands)**Amounts
                  outstanding at the end of year:FHLB
                  advances
              
              $
              80,935
              
              $
              102,500
              
              $
              91,516Guaranteed
                  preferred beneficial interest in junior subordinated
                  debentures
              
              
              12,857
              
              
              12,799
              
              
              12,741Loan
                  for employee stock ownership plan
              
              
              -
              
              
              -
              
              
              25Rate
                  paid at year end:FHLB
                  advances
              
              
              4.13
              %
              
              3.78
              %
              
              3.92
              %Guaranteed
                  preferred beneficial interest in junior subordinated
                  debentures
              
              
              7.97
              %
              
              6.08
              %
              
              4.16
              %Loan
                  for employee stock ownership plan
              
              
              -
              
              
              -
              
              
              4.00
              %Maximum
                  amount of borrowing outstanding at any month end:FHLB
                  advances
              
              $
              112,488
              
              $
              112,506
              
              $
              112,030Guaranteed
                  preferred beneficial interest in junior subordinated
                  debentures
              
              
              12,857
              
              
              12,799
              
              
              12,742Loan
                  for employee stock ownership plan
              
              
              -
              
              
              -
              
              
              207Approximate
                  average amounts outstanding for year:FHLB
                  advances
              
              $
              94,798
              
              $
              97,013
              
              $
              99,359Guaranteed
                  preferred beneficial interest in junior subordinated
                  debentures
              
              
              12,827
              
              
              12,768
              
              
              6,854Loan
                  for employee stock ownership plan
              
              
              -
              
              
              -
              
              
              137Approximate
                  weighted average rate paid during year (1):FHLB
                  advances
              
              
              3.81
              %
              
              3.71
              %
              
              3.74
              %Guaranteed
                  preferred beneficial interest in junior subordinated
                  debentures
              
              
              7.50
              %
              
              5.49
              %
              
              4.78
              %Loan
                  for employee stock ownership plan
              
              
              -
              
              
              -
              
              
              4.07
              %




(1)
          The
          approximate weighted average rate paid during the year was computed by
          dividing
          the average






65






**NOTE
      8.    INCOME TAXES**




The
      components of income tax expense for the years ended March 31 are as follows:




**2006**
              
              **2005**
              
              **2004****(In
                  thousands)**Federal
                  income tax expense (benefit):Current
              
              $
              1,155
              
              $
              1,978
              
              $
              1,634Deferred
              
              
              35
              
              
              (782
              )
              
              4271,190
              
              
              1,196
              
              
              2,061State
                  and local income tax expense (benefit):Current
              
              
              196
              
              
              418
              
              
              342Deferred
              
              
              (57
              )
              
              (96
              )
              
              90139
              
              
              322
              
              
              432Valuation
                  allowance
              
              
              -
              
              
              -
              
              
              -Total
                  provision for income tax expense
              
              $
              1,329
              
              $
              1,518
              
              $
              2,493




The
      reconciliation of the expected federal income tax rate to the consolidated
      effective tax rate for fiscal years ended March 31 follows:




**2006**
              
              
              **2005**
              
              
              **2004****Amount**
              
              **Percent**
              
              
              **Amount**
              
              **Percent**
              
              
              **Amount**
              
              **Percent****(Dollars
                  in thousands)**Statutory
                  Federal income tax
              
              $
              1,734
              
              
              34.0
              %
              
              $
              1,417
              
              
              34.0
              %
              
              $
              2,493
              
              
              34.0
              %State
                  and local income taxes, net of Federal tax benefit
              
              
              92
              
              
              1.8
              
              
              
              213
              
              
              5.1
              
              
              
              285
              
              
              3.9General
                  business credit
              
              
              (73
              )
              
              (1.5
              )
              
              
              -
              
              
              -
              
              
              
              -
              
              
              -Release
                  of contingency reserve
              
              
              (500
              )
              
              (9.8
              )
              
              
              -
              
              
              -
              
              
              
              -
              
              
              -Other
              
              
              76
              
              
              1.5
              
              
              
              (112
              )
              
              (2.7
              )
              
              
              (285
              )
              
              (3.9
              )Total
                  income tax expense
              
              $
              1,329
              
              
              26.0
              %
              
              $
              1,518
              
              
              36.4
              %
              
              $
              2,493
              
              
              34.0
              %






Carver
      Federal’s stockholders’ equity includes approximately $2.8 million at each of
      March 31, 2006, 2005 and 2004, which has been segregated for federal income
      tax
      purposes as a bad debt reserve. The use of this amount for purposes other than
      to absorb losses on loans may result in taxable income for federal income taxes
      at the then current tax rate.






66




Tax
      effects of existing temporary differences that give rise to significant portions
      of deferred tax assets and deferred tax liabilities at March 31 of the years
      indicated follow:




**2006**
              
              **2005****(In
                  thosands)**Deferred
                  Tax AssetsIncome
                  from affiliate
              
              $
              1,975
              
              $
              1,873Allowance
                  for loan losses
              
              
              1,365
              
              
              1,393Deferred
                  loan fees
              
              
              235
              
              
              137Compensation
                  and benefits
              
              
              113
              
              
              384Non-accrual
                  loan interest
              
              
              284
              
              
              274Reserve
                  for losses on other assets
              
              
              65
              
              
              32Investment
                  security impairment
              
              
              -
              
              
              588Capital
                  loss carryforward
              
              
              591
              
              
              -Unrealized
                  loss on available-for-sale securities
              
              
              240
              
              
              144Minimum
                  pension liability
              
              
              173
              
              
              -Other
              
              
              2
              
              
              -Total
                  Deferred Tax Assets
              
              
              5,043
              
              
              4,825Deferred
                  Tax LiabilitiesDepreciation
              
              
              352
              
              
              428Total
                  Deferred Tax Liabilities
              
              
              352
              
              
              428Net
                  Deferred Tax Assets
              
              $
              4,691
              
              $
              4,397




A
      valuation allowance against the deferred tax assets at March 31, 2006 and 2005
      was not established since it is more likely than not that the results of future
      operations will generate sufficient future taxable income to realize the
      deferred tax asset.







**NOTE
      9.   EARNINGS PER COMMON SHARE**




The
      following table reconciles the earnings available to common shareholders
      (numerator) and the weighted average common stock outstanding (denominator)
      for
      both basic and diluted earnings per share for the periods
      presented:




**Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004****(In
                  thousands)**Net
                  income
              
              $
              3,770
              
              $
              2,649
              
              $
              4,839Preferred
                  stock dividends
              
              
              -
              
              
              (114
              )
              
              (197
              )Net
                  income – basic
              
              
              3,770
              
              
              2,535
              
              
              4,642Impact
                  of conversion/potential conversion of convertible preferred stock
                  to
                  common stock
              
              
              -
              
              
              114
              
              
              197Net
                  income – diluted
              
              $
              3,770
              
              $
              2,649
              
              $
              4,839Weighted
                  average common shares outstanding – basic
              
              
              2,506
              
              
              2,382
              
              
              2,284Effect
                  of dilutive options
              
              
              59
              
              
              84
              
              
              97Effect
                  of dilutive securities convertible preferred stock
              
              
              -
              
              
              113
              
              
              208Weighted
                  average common shares outstanding – diluted
              
              
              2,565
              
              
              2,579
              
              
              2,589






**NOTE
      10.    STOCKHOLDERS’ EQUITY**




*Conversion
      and Stock Offering.* On
      October 24, 1994, the Bank issued in an initial public offering 2,314,375 shares
      of common stock, par value $0.01 (the “Common Stock”), at a price of $10 per
      share resulting in net proceeds of $21.5 million. As part of the initial public
      offering, the Bank established a liquidation account at the time of conversion,
      in an amount equal to the surplus and reserves of the Bank at September 30,
      1994. In the unlikely event of a complete liquidation of the Bank (and only
      in
      such event), eligible depositors who continue to maintain accounts shall be
      entitled to receive a distribution from the liquidation account. The total
      amount of the liquidation account may be decreased if the balances of eligible
      deposits decreased as measured on the annual determination dates. The balance
      of
      the liquidation account was approximately $2.1 million (unaudited) at both
      March
      31, 2006 and 2005, based on an assumed decrease of 15.25% of eligible deposits
      per annum. On October 17, 1996, the Bank completed the Reorganization and became
      the wholly owned subsidiary of the Holding Company. Pursuant to an Agreement
      and
      Plan of






67




Reorganization,
      dated May 21, 1996, each share of the Bank’s outstanding common stock was
      exchanged for one share of the Holding Company’s common stock. In connection
      with the Reorganization, a shareholder of the Bank exercised appraisal rights
      and 100 shares of the Bank’s common stock were purchased from such shareholder
      in the fourth fiscal quarter of 1997. Accordingly, 2,314,275 shares of the
      Holding Company’s common stock were issued in exchange for each outstanding
      share of Bank common stock. The Bank is not permitted to pay dividends to the
      Holding Company on its capital stock if the effect thereof would cause its
      net
      worth to be reduced below either: (i) the amount required for the liquidation
      account, or (ii) the amount required for the Bank to comply with applicable
      minimum regulatory capital requirements.




*Convertible
      Preferred Stock* .
      On
      January 11, 2000, the Holding Company sold in a private placement, pursuant
      to a
      Securities Purchase Agreement, dated January 11, 2000, 40,000 shares of Series
      A
      Convertible Preferred Stock (the “Series A Preferred Stock”) to Morgan Stanley
& Co. Incorporated (“MSDW”) and 60,000 Shares of Series B Convertible
      Preferred Stock (the “Series B Preferred Stock”) to Provender Opportunities Fund
      L.P. (“Provender”). In addition, Carver Federal entered into a Registration
      Rights Agreement, dated January 11, 2000, with MSDW and Provender. The gross
      proceeds from the private placement were $2.5 million. On June 1, 2004,
      Provender sold all 60,000 of its Series B Preferred Stock to Keefe Bruyette
      & Woods, Inc.




The
      Series A Preferred Stock and Series B Preferred Stock (collectively the
“Preferred Stock”) accrued annual dividends at $1.97 per share. Dividends were
      paid semi-annually on June 15 and December 15 of each year. Each share of
      Preferred Stock was convertible at the option of the holder, at any time, into
      2.08333 shares of Carver Federal’s Common Stock, subject to certain antidilution
      adjustments. The Holding Company had the option to redeem the Preferred Stock
      beginning January 15, 2004. In the event of any liquidation, dissolution or
      winding up of Carver Federal, whether voluntary or involuntary, the holders
      of
      the shares of Preferred Stock would be entitled to receive $25 per share of
      Preferred Stock plus all dividends accrued and unpaid thereon. Each share of
      Preferred Stock would be entitled to one vote for each share of Common Stock
      into which the Preferred Stock would be converted. On
      September 15, 2004, the Holding Company issued a press release and mailed a
      Notice of Redemption and a related Letter of Transmittal to the holders of
      the
      Preferred Stock, stating that it would redeem all 40,000 outstanding shares
      of
      its Series A Convertible Preferred Stock and all 60,000 outstanding shares
      of
      its Series B Convertible Preferred Stock. The Preferred Stock shares were to
      be
      redeemed on October 15, 2004 (“Redemption Date”) at a redemption price of $26.97
      per share plus $0.65 in accrued and unpaid dividends to, but excluding, the
      Redemption Date for an aggregate redemption price of $27.62 per Preferred Share.
      Dividends on the Preferred Shares would have ceased to accrue on the Redemption
      Date.  On
      October 15, 2004 the holders of all 40,000 outstanding shares of its Series
      A
      Convertible Preferred Stock and all 60,000 outstanding shares of its Series
      B
      Convertible Preferred Stock, elected, prior to the Redemption Date, pursuant
      to
      the Certificate of Designations, Preferences and Rights of the Preferred Shares,
      to convert their Preferred Shares into shares of Carver's common stock, par
      value $0.01 (the "Common Stock"). Upon conversion of their Preferred Shares,
      the
      holders were issued an aggregate of 208,333 shares of Common Stock.




*Regulatory
      Capital* .
      The
      operations and profitability of the Bank are significantly affected by
      legislation and the policies of the various regulatory agencies. The OTS has
      promulgated capital requirements for financial institutions consisting of
      minimum tangible and core capital ratios of 1.5% and 3.0%, respectively, of
      the
      institution’s adjusted total assets and a minimum risk-based capital ratio of
      8.0% of the institution’s risk weighted assets. Although the minimum core
      capital ratio is 3.0%, the Federal Deposit Insurance Corporation Improvement
      Act, as amended (“FDICIA”), stipulates that an institution with less than 4.0%
      core capital is deemed undercapitalized. At March 31, 2006 and 2005, the Bank
      exceeded all of its regulatory capital requirements.




The
      following is a summary of the Bank’s actual capital amounts and ratios as of
      March 31, 2006 and 2005 compared to the OTS requirements for minimum capital
      adequacy and for classification as a well-capitalized institution:




**Minimum
                    Capital**
                
                
                **Classification
                    as****Bank
                    Actual**
                
                
                **Adequacy**
                
                
                **Well
                    Capitalized****Amount**
                
                **Ratio**
                
                
                **Amount**
                
                **Ratio**
                
                
                **Amount**
                
                **Ratio**March
                    31, 2006
                
                **(Dollars
                    in thousands)**Tangible
                    capital
                
                $
                62,207
                
                
                9.4
                %
                
                $
                9,929
                
                
                1.5
                %
                
                
                N/A
                
                
                N/A
                %Leverage
                    capital
                
                
                62,207
                
                
                9.4
                
                
                
                26,477
                
                
                4.0
                
                
                
                33,096
                
                
                5.0Risk-based
                    capital:Tier
                    1
                
                $
                62,207
                
                
                12.4
                
                
                $
                20,037
                
                
                4.0
                
                
                $
                30,056
                
                
                6.0Total
                
                
                66,222
                
                
                13.2
                
                
                
                40,074
                
                
                8.0
                
                
                $
                50,093
                
                
                10.0March
                    31, 2005Tangible
                    capital
                
                $
                57,684
                
                
                9.2
                %
                
                $
                9,404
                
                
                1.5
                %
                
                
                N/A
                
                
                N/A
                %Leverage
                    capital
                
                
                57,684
                
                
                9.2
                
                
                
                25,078
                
                
                4.0
                
                
                
                31,348
                
                
                5.0Risk-based
                    capital:Tier
                    1
                
                $
                57,684
                
                
                14.6
                
                
                $
                15,877
                
                
                4.0
                
                
                $
                23,753
                
                
                6.0Total
                
                
                61,781
                
                
                15.6
                
                
                
                31,670
                
                
                8.0
                
                
                
                39,587
                
                
                10.0






68





The
      following table reconciles the Bank’s stockholders’ equity at March 31, 2006, in
      accordance with accounting principles generally accepted in the U.S. to
      regulatory capital requirements:




**Regulatory
                  Capital Requirements****GAAP**
              
              **Tangible**
              
              **Leverage**
              
              **Risk-Based****Capital**
              
              **Capital**
              
              **Capital**
              
              **Capital****(In
                  thousands)**Stockholders'
                  Equity at March 31, 2006 (1)
              
              $
              61,814
              
              $
              61,814
              
              $
              61,814
              
              $
              61,814Add:General
                  valuation allowances
              
              
              
              
              
              -
              
              
              -
              
              
              4,015Deduct:Unrealized
                  gain (loss) on securities available-for-sale, net
              
              
              
              
              
              393
              
              
              393
              
              
              393Regulatory
                  Capital
              
              
              
              
              
              62,207
              
              
              62,207
              
              
              66,222Minimum
                  Capital requirement
              
              
              
              
              
              9,929
              
              
              26,477
              
              
              40,074Regulatory
                  Capital Excess
              
              
              
              
              $
              52,278
              
              $
              35,730
              
              $
              26,148
  (1)
        Reflects Bank only.






*Comprehensive
      Income.* Comprehensive
      income represents net income and certain amounts reported directly in
      stockholders’ equity, such as the net unrealized gain or loss on securities
      available for sale and loss on pension liability. The Holding Company has
      reported its comprehensive income for fiscal 2006, 2005 and 2004 in the
      Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive
      Income. Carver Federal’s accumulated other comprehensive income or loss (other
      than net income or loss) included net unrealized losses on securities at March
      31, 2006 and 2005 of $393,000 and $235,000, respectively. Included in the
      amounts at March
      31, 2006 and 2005 were unrealized gains of $183,000 and $209,000, respectively,
      relating to available-for-sale securities that were transferred during fiscal
      2003 to held-to-maturity. This unrealized gain is an unrealized gain reported
      as
      a separate component of stockholders’ equity and is amortized over the remaining
      lives of the securities as an adjustment to yield .
      Also
      included in accumulated other comprehensive income or loss at March 31, 2006
      was
      a loss on the Bank’s employee pension plan liability of $281,000, net of
      taxes.






**NOTE
      11.    EMPLOYEE BENEFIT AND STOCK COMPENSATION PLANS**




*Pension
      Plan* .
      Carver
      Federal has a non-contributory defined benefit pension plan covering all
      eligible employees. The benefits are based on each employee’s term of service.
      Carver Federal’s policy was to fund the plan with contributions which equal the
      maximum amount deductible for federal income tax purposes. The plan was
      curtailed during the fiscal year ended March 31, 2001.




The
      following table sets forth the plan’s changes in benefit obligation, changes in
      plan assets and funded status and amounts recognized in Carver Federal’s
      consolidated financial statements at March 31:




**2006**
              
              **2005****(In
                  thousands)**Change
                  in projected benefit obligation during the yearProjected
                  benefit obligation at the beginning of year
              
              $
              2,785
              
              $
              2,736Interest
                  cost
              
              
              163
              
              
              167Actuarial
                  loss
              
              
              197
              
              
              136Benefits
                  paid
              
              
              (253
              )
              
              (254
              )Projected
                  benefit obligation at end of year
              
              $
              2,892
              
              $
              2,785Change
                  in fair value of plan assets during the yearFair
                  value of plan assets at beginning of year
              
              $
              2,950
              
              $
              3,068Actual
                  return on plan assets
              
              
              173
              
              
              136Benefits
                  paid
              
              
              (253
              )
              
              (254
              )Fair
                  value of plan assets at end of year
              
              $
              2,870
              
              $
              2,950Funded
                  status
              
              $
              (22
              )
              $
              165Unrecognized
                  loss / (gain)
              
              
              454
              
              
              203Accrued
                  pension cost
              
              $
              432
              
              $
              368






69




Net
      periodic pension benefit included the following components for the years ended
      March 31 are:




**2006**
              
              **2005**
              
              **2004****(In
                  thousands)**Interest
                  cost
              
              $
              163
              
              $
              167
              
              $
              172Expected
                  return on plan assets
              
              
              (227
              )
              
              (236
              )
              
              (223
              )Amortization
                  of:Unrecognized
                  (gain)
              
              
              –
              
              
              –
              
              
              –Net
                  periodic pension (benefit)
              
              $
              (64
              )
              $
              (69
              )
              $
              (51
              )






Significant
      actuarial assumptions used in determining plan benefits for the years ended
      March 31 are:


**2006**
              
              **2005**
              
              **2004**Annual
                  salary increase (1)
              
              
              N/A
              
              
              N/A
              
              
              N/AExpected
                  long-term return on assets
              
              
              8.00
              %
              
              8.00
              %
              
              8.00
              %Discount
                  rate used in measurement of benefit obligations
              
              
              5.75
              %
              
              6.38
              %
              
              6.50
              %(1)
                The
                annual salary increase rate is not applicable as the plan is
                frozen.


*Savings
      Incentive Plan.* Carver
      has a savings incentive plan, pursuant to Section 401(k) of the Code, for all
      eligible employees of the Bank. Pursuant to the plan, Carver may make an annual
      non-elective contribution to the 401(k) plan on behalf of each eligible employee
      up to 2% of the employee’s annual pay, subject to IRS limitations. This
      non-elective Carver contribution may be made regardless of whether or not the
      employee makes a contribution to the 401(k) plan. To be eligible for the
      non-elective Carver contribution, the employee must be 21 years of age, have
      completed at least one year of service and be employed as of the last day of
      the
      plan year, December 31. In addition, Carver matches contributions to the plan
      equal to 100% of pre-tax contributions made by each employee up to a maximum
      of
      4% of their pay, subject to IRS limitations. All such matching contributions
      to
      the plan will be fully vested and non-forfeitable at all times regardless of
      the
      years of service. However, the non-elective Carver contribution, if awarded,
      vests over a five-year period. Total savings incentive plan expenses for the
      years ended March 31, 2006, 2005 and 2004 were $198,000, $174,000 and $95,000,
      respectively.




*Directors’
      Retirement Plan.* Concurrent
      with the conversion to the stock form of ownership, Carver Federal adopted
      a
      retirement plan for non-employee directors. The plan was curtailed during the
      fiscal year ended March 31, 2001. The benefits are payable based on the term
      of
      service as a director. The following table sets forth the plan’s changes in
      benefit obligation, changes in plan assets and funded status and amounts
      recognized in Carver Federal’s consolidated financial statements at March 31:




**2006**
              
              **2005****(In
                  thousands)**Change
                  in projected benefit obligation during the yearProjected
                  benefit obligation at beginning of year
              
              $
              136
              
              $
              169Interest
                  cost
              
              
              7
              
              
              9Actuarial
                  (gain) loss
              
              
              (7
              )
              
              1Benefits
                  paid
              
              
              (34
              )
              
              (43
              )Projected
                  benefit obligation at end of year
              
              $
              102
              
              $
              136Change
                  in fair value of plan assets during the yearFair
                  value of plan assets at beginning of year
              
              $
              –
              
              $
              –Employer
                  contributions
              
              
              34
              
              
              43Benefits
                  paid
              
              
              (34
              )
              
              (43
              )Fair
                  value of plan assets at end of year
              
              $
              –
              
              $
              –Funded
                  Status
              
              $
              (102
              )
              $
              (136
              )Unrecognized
                  (gain)
              
              
              (22
              )
              
              (16
              )Accrued
                  pension cost
              
              $
              (124
              )
              $
              (152
              )






70




Net
      periodic pension cost for the years ended March 31, 2006, 2005 and 2004 included
      the following:




**2006**
              
              **2005**
              
              **2004****(In
                  thousands)**Interest
                  cost
              
              $
              6
              
              $
              9
              
              $
              12Net
                  periodic pension cost
              
              $
              6
              
              $
              9
              
              $
              12






The
      actuarial assumptions used in determining plan benefits include a discount
      rate
      of 5.75%, 6.1% and 6.4% for the years ended March 31, 2006, 2005 and 2004,
      respectively.




*BOLI.* The
      Bank
      owns one BOLI plan which was formed to offset future employee benefit costs
      and
      provide additional benefits due to its tax exempt nature. Only officer level
      employees are covered under this program.




An
      initial investment of $8.0 million was made to the BOLI program on September
      21,
      2004. At March 31, 2006 the Consolidated Statement of Conditions reflects a
      net
      cash surrender value of $8.5 million. The related income is reflected in the
      Consolidated Statement of Operations as a component of other non-interest
      income.




*Management
      Recognition Plan* (“MRP”) *.* The
      MRP
      provides for automatic grants of restricted stock to certain employees as of
      the
      September 12, 1995 adoption of the MRP. On March 28, 2005 the plan was amended
      for all future awards. The MRP provides for additional discretionary grants
      of
      restricted stock to those employees selected by the committee established to
      administer the MRP. Awards granted prior to March 28, 2005, generally vest
      in
      three to five equal annual installments commencing on the first anniversary
      date
      of the award, provided the recipient is still an employee of the Holding Company
      or the Bank on such date. Under the amended plan awards granted after March
      28,
      2005 vest based on a five-year
      performance-accelerated vesting schedule. Ten percent of the awarded shares
      vest
      in each of the first four years and the remainder in the fifth year. Using
      a
      performance-accelerated vesting schedule, with return on assets (“ROA”) as the
      performance measure, the vesting period can be accelerated in years three and
      four if the Bank meets or exceeds the three-year average ROA for its peer
      group . Awards
      will become 100% vested upon termination of service due to death or disability.
      When shares become vested and are distributed, the recipients will receive
      an
      amount equal to any accrued dividends with respect thereto. On September 23,
      2003, the MRP was amended to increase the number of shares available to 119,431.
      Pursuant to the MRP, the Bank recognized $134,000, $158,000 and $128,000 as
      expense for the years ended March 31, 2006, 2005 and 2004, respectively.




*Employee
      Stock Ownership Plan.* Effective
      upon conversion, an ESOP was established for all eligible employees. The ESOP
      used $1,821,320 in proceeds from a term loan obtained from a third-party
      institution to purchase 182,132 shares of Bank common stock in the initial
      public offering. The term loan principal was payable over forty equal quarterly
      installments through September 2004. Interest on the term loan was payable
      quarterly, initially at a rate of 3.0% over the average federal funds rate.
      On
      May 20, 2002, the term loan was modified to provide for interest at a fixed
      rate
      of 4.0% per annum. Each year until the loan paid off in June of 2004, the Bank
      made discretionary contributions to the ESOP, which were equal to principal
      and
      interest payments required on the term loan less any dividends received by
      the
      ESOP on unallocated shares.




Shares
      purchased with the loan proceeds were initially pledged as collateral for the
      term loan. Currently, shares are purchased in the open market in accordance
      with
      Carver’s common stock repurchase program and are held in a suspense account for
      future allocation among the participants on the basis of compensation, as
      described by the Plan, in the year of allocation. Accordingly, the ESOP shares
      pledged as collateral are reported as unearned ESOP shares in the consolidated
      statements of financial condition. As shares are committed to be released from
      collateral, the Bank reports compensation expense equal to the current market
      price of the shares, and the shares become outstanding for net income per common
      share computations. ESOP compensation expense was $200,000, $200,000 and $0
      for
      the years ended March 31, 2006, 2005 and 2004, respectively.




The
      ESOP
      shares at March 31 follow:




**2006**
              
              **2005****(I****n
                  thousands****)**Allocated
                  shares
              
              
              72
              
              
              78Unallocated
                  shares
              
              
              1
              
              
              5Total
                  ESOP shares
              
              
              73
              
              
              83Fair
                  value of unallocated shares
              
              $
              10
              
              $
              95






*Stock
      Option Plan.* ****** During
      1995, the Holding Company adopted the 1995 Stock Option Plan (the “Plan”) to
      advance the interests of the Bank through providing stock options to select
      key
      employees and directors of the Bank and its affiliates. The number of shares
      reserved for issuance under the plan is 338,862. At March 31, 2006, there were
      238,061 options outstanding and 144,836 were exercisable. Options are granted
      at
      the fair market value of Carver Federal common stock at the time of the grant
      for a period






71




not
      to
      exceed ten years. Under the Plan option grants generally vest on an annual
      basis
      ratably over either three or five years, commencing after one year of service
      and, in some instances, portions of option grants vest at the time of the grant.
      On March 28, 2005, the plan was amended and vesting of future awards is based
      on a five-year
      performance-accelerated vesting schedule. Ten percent of the awarded options
      vest in each of the first four years and the remainder in the fifth year. Using
      a performance-accelerated vesting schedule, ROA as the performance measure,
      the
      vesting period can be accelerated in years three and four if the Bank meets
      or
      exceeds the three-year average ROA for its peer group . All
      options are exercisable immediately upon a participant’s disability, death or a
      change in control, as defined in the Plan.




Information
      regarding stock options as of and for the years ended March 31 follows:




**2006**
              
              **2005**
              
              **2004****Weighted**
              
              
              
              **Weighted**
              
              
              
              **Weighted****Average**
              
              
              
              **Average**
              
              
              
              **Average****Exercise**
              
              
              
              **Exercise**
              
              
              
              **Exercise****Options**
              
              **Price**
              
              **Options**
              
              **Price**
              
              **Options**
              
              **Price**Outstanding,
                  beginning of year
              
              
              225,292
              
              $
              12.37
              
              
              229,636
              
              $
              11.25
              
              
              192,176
              
              $
              10.07Granted
              
              
              35,277
              
              
              16.98
              
              
              39,347
              
              
              19.65
              
              
              43,638
              
              
              16.35Exercised
              
              
              (9,903
              )
              
              9.57
              
              
              (35,954
              )
              
              12.75
              
              
              (77
              )
              
              12.06Forfeited
              
              
              (12,605
              )
              
              17.44
              
              
              (7,737
              )
              
              14.38
              
              
              (6,101
              )
              
              10.39Outstanding,
                  end of year
              
              
              238,061
              
              
              12.90
              
              
              225,292
              
              
              12.37
              
              
              229,636
              
              
              11.25Exercisable
                  at year end
              
              
              144,836
              
              
              
              
              
              151,846
              
              
              
              
              
              108,925






Information
      regarding stock options at March 31, 2006 follows:




**Options
                  Outstanding**
              
              **Options
                  Exercisable****Weighted**
              
              **Weighted**
              
              
              
              **Weighted****Average**
              
              **Average**
              
              
              
              **Average****Range
                  of**
              
              
              
              **Remaining**
              
              **Exercise**
              
              
              
              **Exercise****Exercise
                  Prices**
              
              **Shares**
              
              **Life**
              
              **Price**
              
              **Shares**
              
              **Price**$
              8.00
              
              $
              8.99
              
              
              60,000
              
              
              4
                  years
              
              $
              8.17
              
              
              60,000
              
              $
              8.179.00
              
              
              9.99
              
              
              38,060
              
              
              5
                  years
              
              
              9.92
              
              
              38,060
              
              
              9.9210.00
              
              
              10.99
              
              
              6,000
              
              
              5
                  years
              
              
              10.52
              
              
              6,000
              
              
              10.5212.00
              
              
              12.99
              
              
              40,576
              
              
              6
                  years
              
              
              12.10
              
              
              39,776
              
              
              12.0913.00
              
              
              13.99
              
              
              1,000
              
              
              2
                  years
              
              
              13.81
              
              
              1,000
              
              
              13.8115.00
              
              
              15.99
              
              
              2,265
              
              
              10
                  years
              
              
              15.10
              
              
              -
              
              
              -16.00
              
              
              16.99
              
              
              30,480
              
              
              7
                  years
              
              
              16.47
              
              
              -
              
              
              -17.00
              
              
              17.99
              
              
              29,327
              
              
              9
                  years
              
              
              17.13
              
              
              -
              
              
              -19.00
              
              
              19.99
              
              
              29,243
              
              
              8
                  years
              
              
              19.64
              
              
              -
              
              
              -20.00
              
              
              20.99
              
              
              729
              
              
              9
                  years
              
              
              20.00
              
              
              -
              
              
              -21.00
              
              
              21.99
              
              
              381
              
              
              8
                  years
              
              
              21.76
              
              
              -
              
              
              -Total
              
              
              
              
              
              238,061
              
              
              
              
              
              
              
              
              144,836







**NOTE
      12.    COMMITMENTS AND CONTINGENCIES**




*Credit
      Related Commitments.* The
      Bank
      is a party to financial instruments with off-balance sheet risk in the normal
      course of business to meet the financing needs of its customers.




These
      financial instruments primarily include commitments to extend credit and to
      sell
      loans. Those instruments involve, to varying degrees, elements of credit and
      interest rate risk in excess of the amount recognized in the statements of
      financial condition. The contract amounts of those instruments reflect the
      extent of involvement the Bank has in particular classes of financial
      instruments.




The
      Bank’s exposure to credit loss in the event of nonperformance by the other party
      to the financial instrument for commitments to extend credit is represented
      by
      the contractual notional amount of those instruments. The Bank uses the same
      credit policies making commitments as it does for on-balance-sheet instruments.






72




The
      Bank
      has outstanding various commitments as follows:




March
                  31,2006
              
              2005(In
                  thousands)Commitments
                  to originate mortgage loans
              
              $
              64,163
              
              $
              44,129Commitments
                  to originate commercial and consumer loans
              
              
              439
              
              
              515Letters
                  of credit
              
              
              1,795
              
              
              1,908Total
              
              $
              66,397
              
              $
              46,552




At
      March
      31, 2006, of the $64.2 million in outstanding commitments to originate mortgage
      loans, $61.0 million represented construction loans at an average rate of 5.70%,
      $1.3 million represented commitments to originate non-residential mortgage
      loans
      at rates within a range of 6.50% to 7.00% and $1.9 million represented the
      balance of one-four residential loans at rates between 6.38% and
      7.25%.




The
      balance of commitments on commercial and consumer loans at March 31, 2006 is
      primarily undisbursed funds from approved unsecured commercial lines of credit.
      All such lines carry adjustable rates mainly tied to prime. At March 31, 2006,
      the Bank maintained one letter of credit in the amount of $1.8
      million.




Commitments
      to extend credit are agreements to lend to a customer as long as there is no
      violation of any condition established in the contract. Commitments generally
      have fixed expiration dates or other termination clauses and may require payment
      of a fee. Since some of the commitments are expected to expire without being
      drawn upon, the total commitment amounts do not necessarily represent future
      cash requirements. The Bank evaluates each customer’s creditworthiness on a
      case-by-case basis. The amount of collateral obtained if deemed necessary by
      the
      Bank upon extension of credit is based on management’s credit evaluation of the
      counter-party.




*Lease
      Commitments.* Rentals,
      including real estate taxes, under long term operating leases for certain branch
      offices aggregated approximately $717,000, $479,000, and $245,000 for the years
      ended March 31, 2006, 2005 and 2004, respectively. As of March 31, 2005, minimum
      rental commitments under all noncancellable leases with initial or remaining
      terms of more than one year and expiring through 2018 follow:




**Year
                  Ending**
              
              
              **Minimum****March
                  31,**
              
              
              **Rental****(In
                  Thousands)**2007
              
              
              6572008
              
              
              6772009
              
              
              6622010
              
              
              6212011
              
              
              605Thereafter
              
              
              1,230$
              4,452







The
      Bank
      also has, in the normal course of business, commitments for services and
      supplies. Management does not anticipate losses on any of these transactions.




*Legal
      Proceedings* .
      From
      time to time, Carver Federal is a party to various legal proceedings incident
      to
      its business. Certain claims, suits, complaints and investigations involving
      Carver Federal, arising in the ordinary course of business, have been filed
      or
      are pending. The Company is of the opinion, after discussion with legal counsel
      representing Carver Federal in these proceedings, that the aggregate liability
      or loss, if any, arising from the ultimate disposition of these matters would
      not have a material adverse effect on the Company’s consolidated financial
      position or results of operations. At March 31, 2006, there were no material
      legal proceedings to which the Company or its subsidiaries was a party or to
      which any of their property was subject.






**NOTE
      13.    FAIR VALUE OF FINANCIAL INSTRUMENTS**




SFAS
      107 *“Disclosures
      about Fair Value of Financial Instruments”* requires
      the Bank to disclose, in addition to the carrying value, the fair value of
      certain financial instruments, both assets and liabilities recorded on and
      off
      balance sheet, for which it is practicable to estimate fair value. SFAS 107
      defines financial instrument as cash, evidence of ownership of an entity, or
      a
      contract that conveys or imposes on an entity the contractual right or
      obligation to either receive or deliver cash or another financial instrument.
      The fair value of a financial instrument is defined as the amount at which
      the
      instrument could be exchanged in a current transaction between willing parties,
      other than a forced or liquidation sale and is best evidenced by a quoted market
      price if one exists. In cases where quoted market prices are not available,
      estimated fair values have been determined by the Bank using the best






73




available
      data and estimation methodology suitable for each category of financial
      instrument. For those loans and deposits with floating interest rates, it is
      presumed that estimated fair values generally approximate their recorded book
      balances. The estimation methodologies used and the estimated fair values and
      carrying values of the Bank’s financial instruments are set forth below:




**Cash
      and cash equivalents and accrued interest receivable**




The
      carrying amounts for cash and cash equivalents and accrued interest receivable
      approximate fair value because they mature in three months or less.




**Securities**




The
      fair
      values for securities available-for-sale, mortgage-backed securities
      held-to-maturity and investment securities held-to-maturity are based on quoted
      market or dealer prices, if available. If quoted market or dealer prices are
      not
      available, fair value is estimated using quoted market or dealer prices for
      similar securities.




**Loans
      receivable**




The
      fair
      value of loans receivable is estimated by discounting future cash flows, using
      current rates at which similar loans would be made to borrowers with similar
      credit ratings and for the same remaining maturities of such loans.




**Mortgage
      servicing rights**




The
      fair
      value of mortgage servicing rights is estimated by discount future cash flows,
      using current rates at which similar loans would be made to borrowers with
      similar credit ratings and for the same remaining maturities of such
      loans.




**Deposits**




The
      fair
      value of demand, savings and club accounts is equal to the amount payable on
      demand at the reporting date. The fair value of certificates of deposit is
      estimated using rates currently offered for deposits of similar remaining
      maturities. The fair value estimates do not include the benefit that results
      from the low-cost funding provided by deposit liabilities compared to the cost
      of borrowing funds in the market.




**Borrowings**




The
      fair
      values of advances from the Federal Home Loan Bank of New York, securities
      sold
      under agreement to repurchase and other borrowed money are estimated using
      the
      rates currently available to the Bank for debt with similar terms and remaining
      maturities.




**Commitments**




The
      fair
      market value of unearned fees associated with financial instruments with
      off-balance sheet risk at March 31, 2005 approximates the fees received. The
      fair value is not considered material.




The
      carrying amounts and estimated fair values of the Bank’s financial instruments
      for the following years:




**At
                  March 31,****2006**
              
              **2005****Carrying**
              
              **Estimated**
              
              **Carrying**
              
              **Estimated****Amount**
              
              **Fair
                  Value**
              
              **Amount**
              
              **Fair
                  Value****(In
                  thousands)**Financial
                  Assets:Cash
                  and cash equivalents
              
              $
              22,904
              
              $
              22,904
              
              $
              20,420
              
              $
              20,420Investment
                  securities available-for-sale
              
              
              12,078
              
              
              12,078
              
              
              22,551
              
              
              22,551Mortgage
                  backed securities available-for-sale
              
              
              69,804
              
              
              69,804
              
              
              95,482
              
              
              95,482Mortgage
                  backed securities held-to-maturity
              
              
              26,404
              
              
              25,880
              
              
              31,302
              
              
              31,310Loans
                  receivable
              
              
              493,432
              
              
              488,258
              
              
              421,987
              
              
              424,886Accrued
                  interest receivable
              
              
              2,970
              
              
              2,970
              
              
              2,702
              
              
              2,702Mortgage
                  servicing rights
              
              
              339
              
              
              325
              
              
              179
              
              
              161Financial
                  Liabilities:Deposits
              
              $
              504,638
              
              $
              506,886
              
              $
              453,454
              
              $
              451,752Advances
                  from FHLB of New York
              
              
              80,935
              
              
              79,848
              
              
              102,500
              
              
              101,651Other
                  borrowed money
              
              
              12,857
              
              
              12,857
              
              
              12,799
              
              
              12,799






74




**Limitations**




The
      fair
      value estimates are made at a discrete point in time based on relevant market
      information about the financial instruments. These estimates do not reflect
      any
      premium or discount that could result from offering for sale at one time the
      entire holdings of a particular financial instrument. Because no quoted market
      value exists for a significant portion of the Bank’s financial instruments, fair
      value estimates are based on judgments regarding future expected loss
      experience, current economic conditions, risk characteristics of various
      financial instruments, and other factors. These estimates are subjective in
      nature and involve uncertainties and matters of significant judgment and,
      therefore, cannot be determined with precision. Changes in assumptions could
      significantly affect the estimates.




In
      addition, the fair value estimates are based on existing off balance sheet
      financial instruments without attempting to value anticipated future business
      and the value of assets and liabilities that are not considered financial
      instruments. Other significant assets and liabilities that are not considered
      financial assets and liabilities include premises and equipment and advances
      from borrowers for taxes and insurance. In addition, the tax ramifications
      related to the realization of unrealized gains and losses can have a significant
      effect on fair value estimates and have not been considered in any of the
      estimates.




Finally,
      reasonable comparability between financial institutions may not be likely due
      to
      the wide range of permitted valuation techniques and numerous estimates which
      must be made given the absence of active secondary markets for many of the
      financial instruments. This lack of uniform valuation methodologies introduces
      a
      greater degree of subjectivity to these estimated fair values.






**NOTE
      14.    QUARTERLY FINANCIAL DATA (UNAUDITED)**




The
      following is a summary of unaudited quarterly financial data for fiscal years
      ended March 31, 2006 and 2005:




**Three
                  Months Ended****June
                  30**
              
              **September
                  30**
              
              **December
                  31**
              
              **March
                  31****(Dollars
                  in thousands, except per share data)****Fiscal
                  2006**Interest
                  income
              
              $
              7,752
              
              $
              7,748
              
              $
              8,210
              
              $
              8,676Interest
                  expense
              
              
              (3,052
              )
              
              (3,213
              )
              
              (3,438
              )
              
              (3,791
              )Net
                  interest income
              
              
              4,700
              
              
              4,535
              
              
              4,772
              
              
              4,885Provision
                  for loan losses
              
              
              -
              
              
              -
              
              
              -
              
              
              -Non-interest
                  income
              
              
              1,399
              
              
              1,031
              
              
              1,123
              
              
              1,788Non-interest
                  expense
              
              
              (4,795
              )
              
              (4,636
              )
              
              (4,668
              )
              
              (5,037
              )Income
                  tax expense
              
              
              (464
              )
              
              (329
              )
              
              60
              
              
              (595
              )Net
                  income
              
              $
              840
              
              $
              601
              
              $
              1,287
              
              $
              1,041Earnings
                  per common shareBasic
              
              $
              0.34
              
              $
              0.24
              
              $
              0.51
              
              $
              0.42Diluted
              
              $
              0.33
              
              $
              0.23
              
              $
              0.50
              
              $
              0.41**Fiscal
                  2005**Interest
                  income
              
              $
              6,712
              
              $
              7,013
              
              $
              7,223
              
              $
              7,597Interest
                  expense
              
              
              (2,168
              )
              
              (2,368
              )
              
              (2,485
              )
              
              (2,737
              )Net
                  interest income
              
              
              4,544
              
              
              4,645
              
              
              4,738
              
              
              4,860Provision
                  for loan losses
              
              
              -
              
              
              -
              
              
              -
              
              
              -Non-interest
                  income
              
              
              1,139
              
              
              1,198
              
              
              1,203
              
              
              901Non-interest
                  expense
              
              
              (3,938
              )
              
              (5,069
              )
              
              (4,507
              )
              
              (5,179
              )Income
                  tax expense
              
              
              (663
              )
              
              (291
              )
              
              (514
              )
              
              (190
              )Net
                  income
              
              $
              1,082
              
              $
              483
              
              $
              920
              
              $
              392Earnings
                  per common shareBasic
              
              $
              0.45
              
              $
              0.09
              
              $
              0.37
              
              $
              0.16Diluted
              
              $
              0.42
              
              $
              0.09
              
              $
              0.36
              
              $
              0.15




75





**NOTE
      15.    CARVER BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL
      STATEMENTS**




**CONDENSED
                  STATEMENTS OF FINANCIAL CONDITION****As
                  of March 31,****2006**
              
              **2005****(In
                  thousands)****Assets**Cash
                  on deposit with the Bank
              
              $
              59
              
              $
              289Investment
                  securities
              
              
              -
              
              
              1,575Investment
                  in subsidiaries
              
              
              62,219
              
              
              57,851Other
                  assets
              
              
              3
              
              
              140**Total
                  Assets**
              
              $
              62,281
              
              $
              59,855**Liabilities
                  and Stockholders' Equity**Borrowings
              
              $
              13,260
              
              $
              13,202Accounts
                  payable to subsidiaries
              
              
              66
              
              
              667Other
                  liabilities
              
              
              258
              
              
              185Total
                  liabilities
              
              $
              13,584
              
              $
              14,054Stockholders’
                  equity
              
              
              48,697
              
              
              45,801**Total
                  Liabilities and Stockholders’ Equity**
              
              $
              62,281
              
              $
              59,855






**CONDENSED
                  STATEMENTS OF OPERATIONS****YEAR
                  ENDED MARCH 31,****2006**
              
              **2005**
              
              **2004****(In
                  thousands)****Income**Equity
                  in net income from Subsidiaries
              
              $
              6,758
              
              $
              7,119
              
              $
              8,328Interest
                  income from deposit with the Bank
              
              
              5
              
              
              7
              
              
              9Other
                  income
              
              
              22
              
              
              23
              
              
              9Total
                  income
              
              
              6,785
              
              
              7,149
              
              
              8,346**Expenses**Interest
                  Expense on Borrowings
              
              
              985
              
              
              721
              
              
              337Salaries
                  and employee benefits
              
              
              287
              
              
              225
              
              
              169Legal
                  expense
              
              
              -
              
              
              -
              
              
              -Shareholder
                  expense
              
              
              407
              
              
              488
              
              
              458Other
              
              
              7
              
              
              1,548
              
              
              50Total
                  expense
              
              
              1,686
              
              
              2,982
              
              
              1,014Income
                  before income taxes
              
              
              5,099
              
              
              4,167
              
              
              7,332Income
                  tax expense
              
              
              1,329
              
              
              1,518
              
              
              2,493**Net
                  Income**
              
              $
              3,770
              
              $
              2,649
              
              $
              4,839






76




**CONDENSED
                  STATEMENTS OF CASH FLOWS****YEAR
                  ENDED MARCH 31,****2006**
              
              **2005**
              
              **2004****(In
                  thousands)****Cash
                  Flows From Operating Activities**Net
                  income
              
              $
              3,770
              
              $
              2,649
              
              $
              4,839Adjustments
                  to reconcile net loss to net cash(used
                  in) provided by operating activities:Equity
                  in net income of Subsidiaries
              
              
              (6,758
              )
              
              (7,119
              )
              
              (8,328
              )Income
                  taxes from the Bank
              
              
              1,329
              
              
              1,518
              
              
              2,493(Decrease)
                  increase in accounts payable to Bank
              
              
              (443
              )
              
              645
              
              
              21Increase
                  (decrease) in other liabilities
              
              
              40
              
              
              (14
              )
              
              131Other,
                  net
              
              
              299
              
              
              2,534
              
              
              1,772Net
                  cash (used in ) provided by operating activities
              
              
              (1,763
              )
              
              213
              
              
              928**Cash
                  Flows From Investing Activities**Dividends
                  Received from Bank
              
              
              850
              
              
              4,866
              
              
              -Additional
                  Investment in Bank & other subsidiaries
              
              
              -
              
              
              -
              
              
              (13,153
              )Proceeds
                  from sale of investment securities
              
              
              1,575
              
              
              -
              
              
              -Purchase
                  of investment securities
              
              
              -
              
              
              (3,074
              )
              
              (59
              )Net
                  cash provided by (used in) investing activities
              
              
              2,425
              
              
              1,792
              
              
              (13,212
              )**Cash
                  Flows From Financing Activities**Issuance
                  of Sub Debt
              
              
              -
              
              
              -
              
              
              13,144Purchase
                  of treasury stock, net
              
              
              (115
              )
              
              (1,021
              )
              
              (200
              )Dividends
                  paid
              
              
              (777
              )
              
              (788
              )
              
              (654
              )Net
                  cash (used in) provided by financing activities
              
              
              (892
              )
              
              (1,809
              )
              
              12,290Net
                  (decrease) increase in cash
              
              
              (230
              )
              
              196
              
              
              6Cash
                  and cash equivalents – beginning
              
              
              289
              
              
              93
              
              
              87Cash
                  and cash equivalents - ending
              
              $
              59
              
              $
              289
              
              $
              93






**NOTE
      16.    RECENT ACCOUNTING PRONOUNCEMENTS**




*Accounting
      for Servicing of Financial Assets*




In
      March,
      2006 FASB issued SFAS 156, *Accounting
      for Servicing of Financial Assets* ,
      which
      amends SFAS.140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* ,
      with
      respect to the accounting for separately recognized servicing assets and
      servicing liabilities. The Statement addresses the recognition and measurement
      of separately recognized servicing assets and liabilities and provides an
      approach to simplify efforts to obtain hedge-like (offset) accounting.




SFAS
      156
      is effective as of the beginning of the first fiscal year that begins after
      September 15, 2006. Earlier adoption is permitted as of the beginning of an
      entity’s fiscal year, provided the entity has not yet issued financial
      statements, including financial statements for any interim period for that
      fiscal year. *Carver* will
      adopt this pronouncement as of April 1, 2007 and it is not expected to have
      a
      material impact on the Company’s consolidated financial condition or results of
      operations.




*The
      Meaning of Other-Than-Temporary impairment and its Application to Certain
      Investments*




In
      November 2005, the FASB issued Staff Position No. FASB 115-1 and FAS 124-1, *“The
      Meaning of Other-Than-Temporary impairment and Its Application to Certain
      Investments” (FSP FAS 115-1 and FAS 124-1),* which
      amends FASB Statements No. 115, Accounting for Certain Investments in Debt
      and
      Equity Securities, and No. 124, Accounting for Certain Investments Held by
      Not-for-Profit Organizations, and APB Opinion No. 18, The Equity Method of
      Accounting for Investments in Common Stock. FSP FAS 115-1 and FAS 124-1
      addresses the determination of when an investment is considered impaired;
      whether the impairment is other than temporary; and how to measure an impairment
      loss and also addresses accounting considerations subsequent to the recognition
      of an other-than-temporary impairment on a debt security, and requires certain
      disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. Under FSP FAS 115-1 and FAS 124-1, impairment
      losses must be recognized in earnings equal to the entire difference between
      the
      security’s cost and it fair share value at the financial statement date, without






77




considering
      partial recoveries subsequent to that date. FSP FAS 115-1 and FAS 124-1 also
      requires that an investor recognize an other-than-temporary impairment loss
      when
      a decision to sell a security has been made and the investor does not expect
      the
      fair value of the security to fully recover prior to the expected time of sale.
      This pronouncement is effective for reporting periods beginning after December
      15, 2005. The Company does not expect application to have any impact on its
      financial condition, results of operations or financial statement
      disclosures.




*Accounting
      Changes and Error Corrections*




In
      May
      2005, the FASB issued SFAS No. 154, *“Accounting
      Changes and Error Corrections”(* SFAS
      No.
      154), which replaces APB Opinion No. 20, “Accounting Changes,” or APB No. 20,
      and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,”
and changes the requirements for the accounting for and reporting of a change
      in
      accounting principle. SFAS No. 154 applies to all voluntary changes in
      accounting principle and to changes required by an accounting pronouncement
      when
      the pronouncement does not include specific transaction provisions. SFAS No.
      154
      requires retrospective application of changes in accounting principle to prior
      periods’ financial statements unless it is impracticable to determine either the
      period-specific effects or the cumulative effect of the change. APB No. 20
      previously required that most voluntary changes in accounting principle be
      recognized by including the cumulative effect of the change in net income for
      the period of the change in accounting principle. SFAS No. 154 carries forward
      without change the guidance contained in APB No. 20 for reporting the correction
      of an error in previously issued financial statements and a change in accounting
      estimate. SFAS No. 154 also carries forward the guidance in APB No. 20 requiring
      justification of a change in accounting principle on the basis of preferability.
      SFAS No. 154 is effective for accounting changes and corrections of errors
      made
      in fiscal years beginning after December 15, 2005, with early adoption
      permitted. Carver will adopt this pronouncement as of April 1, 2006.




*Accounting
      for Stock Based Compensation*




In
      December 2004, the FASB issued SFAS 123R “ *Accounting
      for Stock Based Compensation, Share Based Payment”,* which
      replaces the guidance prescribed in SFAS 123. SFAS 123R requires that
      compensation cost relating to share-based payment transactions be recognized
      in
      the financial statements. The associated costs will be measured based on the
      fair value of the equity or liability instruments issued. SFAS 123R covers
      a
      wide range of share-based compensation arrangements including share options,
      restricted share plans, performance-based awards, share appreciation rights
      and
      employee share purchase plans. SFAS 123R is effective as of the first interim
      or
      annual reporting period beginning after June 15, 2005. Carver will
      adopt this pronouncement as of April 1, 2006 and it is not expected to have
      a
      material impact on the Company’s consolidated financial condition or results of
      operations.






**ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
      ON
      ACCOUNTING AND FINANCIAL DISCLOSURE.**




None.






**ITEM
      9A. CONTROLS AND PROCEDURES.**




The
      Company maintains controls and procedures designed to ensure that information
      required to be disclosed in the reports that the Company files or submits under
      the Exchange Act is recorded, processed, summarized and reported within the
      time
      periods specified in the rules and forms of the Securities
      and Exchange Commission (the
“SEC”). As of March
      31,
      2006 , the
      Company carried out an evaluation, under the supervision and with the
      participation of the Company’s management, including the Company’s Chief
      Executive Officer and Chief Financial Officer, of the effectiveness of the
      Company’s disclosure controls and procedures pursuant to Exchange Act Rule
      13a-15. Based on that evaluation, the Chief Executive Officer and Chief
      Financial Officer concluded that the Company’s disclosure controls and
      procedures were effective and timely in alerting them to material information
      relating to the Company (including its consolidated subsidiaries) required
      to be
      included in the Company’s periodic SEC filings.




Subsequent
      to the original filing of the March 31, 2006 10-K, the Company's management,
      including the Company's Chief Executive Officer and Chief Financial Officer,
      evaluated the effectiveness of the Company's disclosure controls and procedures
      (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) and the
      Company identified a material weakness in its internal control over financial
      reporting, which is a significant portion of its disclosure controls and
      procedures, which affected the Company's cash flow statement as of March 31,
      2006, 2005 and 2004. As a result of carrying out the remediation efforts
      described below, however, the Chief Executive Officer and Chief Financial
      Officer concluded that the Company's disclosure controls and procedures were
      effective as of the amendment date.




Material
      Weakness in Internal Control Over Financial Reporting




A
      material weakness is a significant deficiency, or combination of significant
      deficiencies, that results in more than a remote likelihood that a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected. A significant deficiency is a control deficiency, or combination
      of
      control deficiencies, that adversely affects the Company's ability to initiate,
      authorize, record, process, or report external financial information reliably
      in
      accordance with generally






78




accepted
      accounting principles such that there is more than a remote likelihood that
      a
      misstatement of the Company's annual or interim financial statements that is
      more than inconsequential will not be prevented or detected.




During
      the period covered by this annual report, the Company identified a material
      weakness, in internal control over financial reporting. Specifically, the
      Company’s controls intended to ensure the proper classification of cash flows
      related to certain mortgage loans that the Company had originated with the
      intent to sell and related to certain sales of loans that it originally intended
      for its portfolio were not effective as of March 31, 2006. As a result of this
      material weakness, the Company is amending this report on Form 10-K to restate
      its Consolidated Statements of Cash Flows for the fiscal years ended March
      31,
      2006, 2005 and 2004.




The
      restatements will solely affect the classification of these activities and
      subtotals of cash flows from operating and investing activities presented in
      the
      affected Consolidated Statement of Cash Flows and will have no impact on the
      net
      increase in total cash and cash equivalents as set forth in the Consolidated
      Statement of Cash Flows for any of the previously reported periods. The
      restatements will not affect the Company’s Consolidated Statements of Financial
      Condition, Consolidated Statement of Operations and Consolidated Statement
      of
      Changes in Stockholders Equity for the affected periods. Accordingly, the
      Company’s historical revenues, net income, earnings per share, total assets and
      regulatory capital remain unchanged.




Changes
      in Internal Control Over Financial Reporting




Since
      the
      Company identified the material weakness of internal control over financial
      reporting described above, it has engaged in the following remediation
      efforts.  The Company has completed an analysis of the components of the
      Consolidated Statements of Cash Flows which resulted in the above described
      restatements, and, as a result, it has redesigned and strengthened the internal
      control processes surrounding the preparation of the Consolidated Statements
      of
      Cash Flows.







**ITEM
      9B. OTHER INFORMATION**




None




**PART
      III**




**ITEM
      10. **DIRECTORS
      AND EXECUTIVE OFFICERS OF THE
      REGISTRANT.****


Information
      concerning Executive Officers of the Company which responds to this Item is
      incorporated by reference from the section entitled “Executive Officers and Key
      Managers of Carver and Carver Federal” in the Holding Company’s definitive proxy
      statement for the Annual Meeting of Stockholders for the fiscal year ended
      March
      31, 2006 (the “Proxy Statement”). The information that responds to this Item
      with respect to Directors is incorporated by reference from the section entitled
      “Election of Directors” in the Proxy Statement. Information with respect to
      compliance by the Company’s Directors and Executive Officers with Section 16(a)
      of the Exchange Act is incorporated by reference from the subsection entitled
      “Section 16 (a) Beneficial Ownership Reporting Compliance” in the Proxy
      Statement.




**Audit
      Committee Financial Expert**




Information
      regarding the audit committee of the Company’s Board of Directors, including
      information regarding audit committee financial experts serving on the audit
      committee, is presented under the heading “Corporate Governance” in the
      Company’s Proxy Statement and is incorporated herein by reference.






**ITEM
      11. EXECUTIVE COMPENSATION.**




The
      information required in response to this Item is incorporated by reference
      from
      the section entitled “Compensation of Directors and Executive Officers” in the
      Proxy Statement.






**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
      OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER MATTERS.**




The
      information required in response to this Item is incorporated by reference
      from
      the section entitled “Security Ownership of Certain Beneficial Owners and
      Management” in the Proxy Statement.







**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS.**




The
      information required in response to this Item is incorporated by reference
      from
      the section entitled “Transactions with Certain Related Persons” in the Proxy
      Statement.






79




**ITEM
      14. PRINCIPAL ACCOUNTING FEES AND
      SERVICES.**




The
      information required in response to this Item is incorporated by reference
      from
      the section entitled “Auditor Fee Information” in the Proxy
      Statement **.**






**PART
      IV**




**ITEM
      15. EXHIBITS, FINANCIAL STATEMENT
      SCHEDULES.**




(a) List
      of
      Documents Filed as Part of this Annual Report on Form 10-K




(2)
            The
                following consolidated financial statements are in Item 8 of this
                annual
                report:




·
            Report
                of Independent Registered Public Accounting
                Firm




·
            Consolidated
                Statement of Financial Condition as of March 31, 2006 and
                2005




·
            Consolidated
                Statements of Operations for the years ended as of March 31, 2006,
                2005
                and 2004




·
            Consolidated
                Statements of Changes in Stockholders’ Equity and Comprehensive Income for
                the years ended March 31, 2006, 2005 and
                2004




·
            Consolidated
                Statements of Cash Flows for the years ended March 31, 2006, 2005
                and
                2004




·
            Notes
                to Consolidated Financial
                Statements




(2)
            Financial
                Statement Schedules. All financial statement schedules have been
                omitted,
                as the required information is either inapplicable or included under
                Item
                8, “Financial Statement andSupplementary
                Data”.




(b) Exhibits
      required by Item 601 of Regulation S-K:




(1)
            See
                Index of Exhibits on page E-1.








80


SIGNATURES





Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, as amended, the Registrant has duly caused this report to be signed
        on its
        behalf by the undersigned, thereunto duly authorized.
  CARVER
                BANCORP,
                INC.February
                    28, 2007
              By:
 /s/
                Deborah C.
                WrightDeborah
                  C. WrightChairman,
                  President and Chief Executive Officer
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, as amended, this
        report has been signed below on February 28, 2007 by the following persons
        on
        behalf of the Registrant and in the capacities indicated.
  **/**s/
                  Deborah C. Wright
              
              Chairman,
                  President and Chief Executive OfficerDeborah
                  C. Wright
              
              (Principal
                  Executive Officer)/s/
                  Roy Swan
              
              Executive
                  Vice President and Chief Financial Officer (PrincipalRoy
                  Swan
              
              Financial
                and
                Accounting Officer)/s/
                  Carol Baldwin Moody
              
              DirectorCarol
                  Baldwin Moody/s/
                  David L. Hinds
              
              DirectorDavid
                  L. Hinds/s/
                  Pazel Jackson
              
              DirectorPazel
                G. Jackson,
                Jr./s/
                  Edward B. Ruggiero
              
              DirectorEdward
                  B. Ruggiero/s/
                  Strauss Zelnick
              
              DirectorStrauss
                  Zelnick/s/
                Robert R. Tarter
              
              DirectorRobert
                R.
                Tarter
   81




**EXHIBIT
      INDEX**





Exhibit
                Number
            
            Description2.2
            
            Agreement
                and Plan of Merger dated as of April 6, 2006 by and between
                CarverBancorp,
                Inc., Carver Federal Savings Bank and Community Capital
                Bank(2.2)3.1
            
            Certificate
                of Incorporation of Carver Bancorp, Inc. (1)3.2
            
            Amended
                and Restated Bylaws of Carver Bancorp, Inc. (12)4.1
            
            Stock
                Certificate of Carver Bancorp, Inc. (1)4.2
            
            Federal
                Stock Charter of Carver Federal Savings Bank (1)4.3
            
            Bylaws
                of Carver Federal Savings Bank (1)4.4
            
            Amendments
                to Bylaws of Carver Federal Savings Bank (2)4.5
            
            Certificate
                of Designations, Preferences and Rights of Series A Convertible Preferred
                Stock (4)4.6
            
            Certificate
                of Designations, Preferences and Rights of Series B Convertible Preferred
                Stock (4)10.1
            
            Carver
                Bancorp, Inc. 1995 Stock Option Plan, effective as of September 12,
                1995
                (1)10.2
            
            Carver
                Federal Savings Bank Retirement Income Plan, as amended and restated
                effective as of January 1, 1997 and as further amended through January
                1,
                2001 (9)10.3
            
            Carver
                Federal Savings Bank 401(k) Savings Plan in RSI Retirement Trust,
                as
                amended and restated effective as of January 1, 1997 and including
                provisions effective through January 1, 2002 (9)10.4
            
            Carver
                Bancorp, Inc. Employee Stock Ownership Plan, effective as of January
                1,
                1994, incorporating Amendment No. 1, incorporating Second Amendment,
                incorporating Amendment No. 2, incorporating Amendment No. 2A,
                incorporating Amendment No. 3 and incorporating Amendment No. 4
                (9)10.5
            
            Carver
                Federal Savings Bank Deferred Compensation Plan, effective as of
                August
                10, 1993 (1)10.6
            
            Carver
                Federal Savings Bank Retirement Plan for Nonemployee Directors, effective
                as of October 24, 1994 (1)10.7
            
            Carver
                Bancorp, Inc. Management Recognition Plan, effective as of September
                12,
                1995 (1)10.8
            
            Carver
                Bancorp, Inc. Incentive Compensative Plan, effective as of September
                12,
                1995 (1)10.9
            
            Employment
                Agreement by and between Carver Federal Savings Bank and Deborah
                C.
                Wright, entered into as of June 1, 1999 (3)10.10
            
            Employment
                Agreement by and between Carver Bancorp, Inc. and Deborah C. Wright,
                entered into as of June 1, 1999 (3)




E-1








Exhibit
                Number
            
            Description




10.11
            
            Securities
                Purchase Agreement by and among Carver Bancorp, Inc., Morgan Stanley
&
                Co. Incorporated and Provender Opportunities Fund L.P.
                (5)10.12
            
            Registration
                Rights Agreement by and among Carver Bancorp, Inc., Morgan Stanley
&
                Co. Incorporated and Provender Opportunities Fund L.P.
                (5)10.13
            
            Settlement
                Agreement and Mutual Release by and among BBC Capital Market, Inc.,
                The
                Boston Bank of Commerce, Kevin Cohee and Teri Williams; Carver Bancorp,
                Inc., Deborah C. Wright, David N. Dinkins, Linda H. Dunham, Robert
                J.
                Franz, Pazel G. Jackson, Jr., Herman Johnson and David R. Jones;
                Morgan
                Stanley & Co., Incorporated; and Provender Opportunities Fund, L.P.
                and Frederick O. Terrell (5)10.14
            
            Amendment
                to the Carver Bancorp, Inc. 1995 Stock Option Plan (6)10.15
            
            Amended
                and Restated Employment Agreement by and between Carver Federal Savings
                Bank and Deborah C. Wright, entered into as of June 1, 1999
                (7)10.16
            
            Amended
                and Restated Employment Agreement by and between Carver Bancorp,
                Inc. and
                Deborah C. Wright, entered into as of June 1, 1999 (7)10.17
            
            Form
                of Letter Employment Agreement between Executive Officers and Carver
                Bancorp, Inc. (7)10.18
            
            Employment
                Agreement by and between Carver Federal Savings Bank and Catherine
                A.
                Papayiannis, entered into as of April 22, 2002 (7)10.19
            
            Carver
                Bancorp, Inc. Compensation Plan for Non-Employee Directors
                (9)10.20
            
            Amendment
                Number One to Carver Federal Savings Bank Retirement Income Plan,
                as
                amended and restated effective as of January 1, 1997 and as further
                amended through January 1, 2001 (9)10.21
            
            First
                Amendment to the Restatement of the Carver Federal Savings Bank 401(k)
                Savings Plan (9)10.22
            
            Second
                Amendment to the Restatement of the Carver Federal Savings Bank 401(k)
                Savings Plan for EGTRRA (9)10.23
            
            Guarantee
                Agreement by and between Carver Bancorp, Inc. and U.S. Bank National
                Association, dated as of September 17, 2003 (8)10.24
            
            Amended
                and Restated Declaration of Trust by and among, U.S. Bank National
                Association, as Institutional Trustee, Carver Bancorp, Inc., as Sponsor,
                and Linda Dunn, William Gray and Deborah Wright, as Administrators,
                dated
                as of September 17, 2003 (8)10.25
            
            Indenture,
                dated as of September 17, 2003, between Carver Bancorp, Inc., as
                Issuer,
                and U.S. Bank National Association, as Trustee (8)10.26
            
            Second
                Amendment to the Carver Bancorp, Inc. Management Recognition Plan,
                effective as of September 23, 2003 (11)10.27
            
            Amended
                Share Voting Stipulation and Undertaking made by Carver Bancorp,
                Inc. in
                favor of the OTS, made as of April 22, 2004 (11)10.28
            
            Trust
                Agreement between Carver Bancorp, Inc. and American Stock & Transfer
                Trust Company, dated May 3, 2004 (11)10.29
            
            First
                Amendment to Employment Agreement by and between Carver Federal Savings
                Bank and Catherine A. Papayiannis, entered into as of May 27, 2004
                (11)




E-2






Exhibit
                  Number
              
              Description




10.30
            
            First
                Amendment to the Carver Bancorp, Inc. Retirement Income Plan, effective
                as
                of March 28, 2005 (12)10.31
            
            Sixth
                Amendment to the Carver Bancorp, Inc. Employee Stock Ownership Plan,
                effective as of March 28, 2005 (12)14
            
            Code
                of ethics (13)21.1
            
            Subsidiaries
                of the Registrant (11)23.2
            
            Consent
                of KPMG LLP (*)31.1
            
            Certifications
                of Chief Executive Officer (*)31.2
            
            Certifications
                of Chief Financial Officer (*)32.1
            
            Written
                Statement of Chief Executive Officer furnished pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
                (*)32.2
            
            Written
                Statement of Chief Financial Officer furnished pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
                (*)




(*)
              Filed
                  herewith.(1)
              Incorporated
                  herein by reference to Registration Statement No. 333-5559 on Form
                  S-4 of
                  the Registrant filed with the Securities and Exchange Commission
                  on June
                  7, 1996.(2)
              Incorporated
                  herein by reference to the Exhibits to the Registrant's Annual
                  Report on
                  Form 10-K for the fiscal year ended March 31, 1998.(2.2)
              Incorporated
                  herein by reference to the Exhibits to the Registrant's Report
                  on Form
                  8-K, dated April 6, 2006.(3)
              Incorporated
                  herein by reference to the Exhibits to the Registrant's Annual
                  Report on
                  Form 10-K for the fiscal year ended March 31, 1999.(4)
              Incorporated
                  herein by reference to the Exhibits to the Registrant's Report
                  on Form
                  8-K, dated January 14, 2000.(5)
              Incorporated
                  herein by reference to the Exhibits to the Registrant's Annual
                  Report on
                  Form 10-K for the fiscal year ended March 31, 2000.(6)
              Incorporated
                  herein by reference to the Registrant's Proxy Statement dated January
                  25,
                  2001.(7)
              Incorporated
                  herein by reference to the Exhibits to the Registrant's Annual
                  Report on
                  Form 10-K for the fiscal year ended March 31, 2002.(8)
              Incorporated
                  herein by reference to the Exhibits to the Registrant's Quarterly
                  Report
                  on Form 10-Q for the three months ended September 30, 2003.(9)
              Incorporated
                  herein by reference to the Exhibits to the Registrant’s Annual Report on
                  Form 10-K for the fiscal year ended March 31, 2003.(10)
              Incorporated
                  herein by reference to the Exhibits to the Registrant’s Report on Form
                  8-K, dated March 16, 2004.(11)
              Incorporated
                  herein by reference to the Exhibits to the Registrant’s Annual Report on
                  Form 10-K for the fiscal year ended March 31, 2004.(12)
              Incorporated
                  herein by reference to the Exhibits to the Registrant’s Annual Report on
                  Form 10-K for the fiscal year ended March 31, 2005.(13)
              Incorporated
                  herein by reference to the Exhibits to the Registrant's Annual
                  Report on
                  Form 10-K for the fiscal year ended March 31,
                  2006.






E-3