UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


_________________


FORM
10-K





FOR
ANNUAL AND TRANSITION REPORTS PURSUANT TO


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





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





For
the fiscal year ended March 31, 2008





OR





£
            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:1-13007





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 125th
      Street, New York, New York
            10027(Address
      of Principal Executive Offices)
            (Zip
      Code)





Registrant’s
telephone number, including area code:(718) 230-2900





Securities
Registered Pursuant to Section 12(b) of the Act:





Common
      Stock, par value $.01 per share
            NASDAQ
      Global Market(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  T
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  T
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.  T
Yes  £
No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) 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, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,” “accelerated
filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




o Large Accelerated
      Filer
            £
      Accelerated Filer
            o Non-accelerated
      Filer
            x Smaller
      Reporting Company




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





As of
June 20, 2008, there were 2,474,738 shares of common stock of the registrant
outstanding.  The aggregate market value of the Registrant’s common
stock held by non-affiliates, as of September 28, 2007, the last day of
registrant's most recently completed second fiscal quarter (based on the
closing sales price of $15.85 per share of the registrant’s common stock on
September 28, 2007) was approximately $39,319,444.













DOCUMENTS
INCORPORATED BY REFERENCE:





Portions
of registrant’s proxy statement for the Annual Meeting of stockholders for the
fiscal year ended March 31, 2008 are incorporated by reference into Part III of
this Form 10-K.











CARVER BANCORP, INC.


2008
ANNUAL REPORT ON FORM 10-K


TABLE
OF CONTENTS





Part
      I
            
            PageItem 1.
            Business
            2Item 1A.
            Risk Factors
            25Item 1B.
            Unresolved Staff Comments
            28Item 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, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
            30Item 6.
            Selected Financial Data
            34Item 7.
            Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
            35Item 7A.
            Quantitative and Qualitative Disclosures About Market
      Risk
            50Item 8.
            Financial Statements and Supplementary Data
            51Item 9.
            Changes in and Disagreements With Accountants on Accounting and
      Financial Disclosure
            84Item 9A.
            Controls and Procedures
            84Item 9B.
            Other Information
            85Part
      IIIItem 10.
            Directors, Executive Officers and Corporate
      Governance
            85Item 11.
            Executive Compensation
            85Item12.
            Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
            85Item 13.
            Certain Relationships and Related Transactions and Director
      Independence
            85Item 14.
            Principal Accounting Fees and Services
            85Part
      IVItem 15.
            Exhibits and Financial Statement
    Schedules
            86SIGNATURES
            87EXHIBIT INDEX
            E-1





Table of Contents





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 following:





·
            the
      Company's success in implementing its new business initiatives, including
      expanding its product line, adding new branches 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
      anticipated;





·
            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 business;





·
            changes
      in accounting principles, policies or guidelines which may cause
      conditions 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 to originate and purchase loans with attractive terms and
      acceptable credit quality;





·
            the
      ability to realize cost efficiencies;
and





·
            general
      economic conditions, either nationally or locally in some or all areas in
      which business is conducted, 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 on Form 10-K and in
any other public statements that 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.   The
forward-looking statements contained in this Annual Report on Form 10-K are made
as of the date of this Annual Report on Form 10-K, and the Company assumes no
obligation to, and expressly disclaims any obligation to, update these
forward-looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting such forward-looking statements or to update
the reasons why actual results could differ from those projected in the
forward-looking statements.   For a discussion of additional factors
that could adversely affect our future performance, see “Item 1A – Risk Factors”
and “Item 7 – Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”





1
 Table of Contents





PART
I





ITEM 1.  BUSINESS





OVERVIEW





Carver
Bancorp, Inc., a Delaware corporation (the “Holding Company”), is the holding
company for Carver Federal Savings Bank (“Carver Federal” or the “Bank”), a
federally chartered savings bank, and, on a parent-only basis, had minimal
results of operations.  The Holding Company is headquartered in New
York, New York.  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, Carver
Federal.  Carver Federal was founded in 1948 to serve African-American
communities whose residents, businesses and institutions had limited access to
mainstream financial services. The Bank remains headquartered in Harlem, and
predominantly all its ten branches and ten stand-alone 24/7 ATM Centers are
located in low- to moderate-income neighborhoods. Many of these historically
underserved communities are now experiencing unprecedented growth and
diversification of incomes, ethnicity and economic opportunity, after decades of
public and private investment.





Today,
Carver Federal is the largest African-American operated bank in the United
States. The Bank remains dedicated to expanding wealth enhancing opportunities
in the communities it serves by increasing access to capital and financial
advice for consumers, businesses and non-profit organizations, including
faith-based institutions. A measure of its progress in achieving this goal
includes the Bank's "Outstanding" rating, awarded by the Office of Thrift
Supervision following its most recent Community Reinvestment Act examination in
2006. The examination report noted that 95% of Carver’s loan originations were
within low- to moderate-income geographies, which far exceeded peer
institutions.  The Bank has approximately $796 million in assets as of
March 31, 2008 and employs approximately 187 employees as of May 31,
2008.





Carver
Federal engages in a wide range of consumer and commercial banking
services.  Carver Federal provides deposit products including demand,
savings and time deposits for consumers, businesses, and governmental and
quasi-governmental agencies in its local market area within New York
City.  In addition to deposit products, Carver Federal offers a number
of other consumer and commercial banking products and services, including debit
cards, online banking including online bill pay, and telephone
banking.  Through its affiliation with Merrill Lynch & Co.
(“Merrill Lynch”), Carver Federal offers a comprehensive range of wealth
management products.





Carver
Federal offers loan products covering a variety of asset classes, including
commercial and residential mortgages, construction loans and business
loans.  The Bank finances mortgage and loan products through deposit
operations or borrowings.  Funds not used to originate mortgages and
loans are invested primarily in U.S. government agency securities and
mortgage-backed securities.





The
Bank’s primary market area for deposits consists of areas currently served by
its ten branches.  The Bank’s branches are located in the Brooklyn,
Manhattan and Queens boroughs of New York City.  The neighborhoods in
which the Bank’s branches are located have historically been low- to
moderate-income areas.  However, the shortage of housing in New York
City, combined with population shifts from the suburbs into the city, has
contributed to stimulate significant real estate and commercial development in
the Bank’s market area.   The Bank believes that the demographics
of its primary market area are changing as a result of the increase in real
estate development in recent years.  The expected change in income
demographics supports the Bank’s strategy to provide commercial banking products
and, through its affiliation with Merrill Lynch & Co., wealth management
products.





The
Bank’s primary lending market includes Bronx, Kings, New York and Queens
Counties in New York City, and lower Westchester County, New
York.  Although the Bank’s branches are primarily located in areas
that were historically underserved by other financial institutions, the Bank is
facing increased competition for deposits and mortgage lending in its market
areas.  Management believes that this competition has become more
intense as a result of the improving economic conditions in the Bank’s market
area and an increased examination emphasis by federal banking regulators on
financial institutions’ fulfillment of their responsibilities under the
Community Reinvestment Act (“CRA”). The Bank’s competition for loans comes
principally from mortgage banking companies, commercial banks, and savings
institutions. The Bank’s most direct competition for deposits comes from
commercial banks, savings institutions and credit unions. Competition for
deposits also comes from money market mutual funds, corporate and government
securities funds, and financial intermediaries such as brokerage firms and
insurance companies. Many of the Bank’s competitors have substantially greater
resources and offer a wider array of financial services and
products.  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 the Bank faces in
expanding its current market share and growing its near term
profitability.





Carver
Federal’s long history in its market area, its community involvement and
relationships, targeted products and services and personal service consistent
with community banking, help the Bank compete with other competitors that have
entered its market.





In
addition, Carver Federal has successfully competed with larger financial
institutions in a number of competitions for government grants and other
awards.  In June 2006, Carver Federal won a $59 million New Markets
Tax Credit (“NMTC”) award.  That amount compared favorably with awards
won by U.S.-based global financial institutions.  Carver Federal
believes its strong lending and community financial literacy platforms position
the Bank well to compete for awards under this and other programs designed
to expand financial services in markets served by Carver Federal.





2
 Table of Contents





The NMTC
award is used to stimulate economic development in low- to moderate-income
communities.  The NMTC award enables the Bank to invest with community
and development partners in economic development projects with attractive terms
including, in some cases, below market interest rates, which may have the effect
of attracting capital to underserved communities and facilitating revitalization
of the community.  The NMTC award provides a credit to Carver Federal
against Federal income taxes when the Bank makes qualified
investments.  The credits are allocated over seven years from the time
of the qualified investment.  During the seven year period, assuming
the Bank meets compliance requirements, the Bank will receive a 39% tax credit
on the amount it invests directly in NMTC-qualifying projects (5% over each of
the first three years, and 6% over each of the next four
years).  Implementation of the Bank’s NMTC award began in December
2006 when the Bank invested $29.5 million, one-half of its $59 million
award.  In December 2007, the Bank invested an additional $10.5
million and transferred rights to $19.0 million to an investor in a NMTC
project.  As a result, the Bank’s NMTC allocation has now been fully
invested.  The Company expects to receive additional NMTC tax benefits
of 39% on the $40.0 million directly invested, or approximately $12.1 million,
over the next six years.





The
Bank’s subsidiary, Carver Community Development Corporation (“CCDC”), was formed
to facilitate its participation in local economic development and other
community-based activities.  As part of its operations,
CCDC monitors the portfolio of investments related to the $59 million NMTC
award.








GENERAL





Carver
Bancorp, Inc.





The
Holding Company is the holding company for Carver Federal and its other active
direct subsidiary, Carver Statutory Trust I (the “Trust”), a Delaware trust. The
Trust was formed in September 2003 for the sole purpose of issuing trust
preferred securities and investing the proceeds in an equivalent amount of
subordinated debentures of the Holding Company. 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.





On April
5, 2006, the Company entered into a definitive merger agreement to acquire
Community Capital Bank (“CCB”), a Brooklyn-based community bank, in a cash
transaction valued at $11.1 million, or $40.00 per CCB share.  On
September 29, 2006, the Bank acquired CCB, with approximately $165.4 million in
assets and two branches. The Bank incurred an additional $0.9 million in
transaction costs related to the acquisition.  The acquisition of CCB
and its award-winning small business lending platform has expanded the Company’s
ability to capitalize on substantial growth in the small business
market.  The Company continues to evaluate acquisition opportunities
as part of its strategic objective for long term growth.





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 was founded as an African- and
Caribbean-American operated institution to provide residents of underserved
communities with the ability to invest their savings and obtain
credit.  Carver Federal converted to a federal savings bank in 1986
and changed its name at that time to Carver Federal Savings
Bank.  None of the Bank’s employees is a member of a collective
bargaining agreement, and the Bank considers its relations with employees to be
satisfactory.





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, 2008, this subsidiary had $1.2 million in
total assets and a minimal net operating loss.  During the fourth
quarter of the fiscal year ended March 31, 2003, Carver Federal formed Carver
Asset Corporation (“CAC”), 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, 2008,
CAC owned mortgage loans carried at approximately $109.9 million and total
assets of $126.1 million.  On August 18, 2005, Carver Federal formed
CCDC, a wholly-owned community development entity whose purpose is to make
qualified loans or other investments in low- to moderate-income
communities.





On
October 5, 2006, Carver Federal established Carver Municipal Bank (“CMB”), a
wholly-owned, New York State chartered limited purpose commercial bank, with the
intention of expanding Carver Federal’s ability to compete for municipal and
state agency deposits and provide other fee income based services. The Bank
invested $2.0 million of capital into CMB at its formation. In the State of New
York, municipal entities may deposit funds only with commercial banks, other
than through limited exceptions, and CMB provided Carver Federal with a platform
to enter into this line of business.  As of March 31, 2008, Carver
Federal has discontinued the operations of CMB.  CMB is currently in
the process of being dissolved. The $2.0 million capital invested will revert
back to the Bank.





3
 Table of Contents





Available
Information





The
Company makes available on or through its internet website,
http://www.carverbank.com, its Annual Report 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 Securities 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 100 F Street N.E. Washington
D.C. 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 the Company's
Corporate Governance Principles, Code of Ethics, Code of Ethics for Senior
Financial Officers and the charters of the Company's Finance and Audit
Committee, Compensation Committee and Nominating/Corporate Governance Committee
and the date of the Company's annual meeting are posted on the Company's
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, New York 10027 or by e-mail at
corporatesecretary@carverbank.com.  The information on the Company's
website is not part of this annual report.





Lending
Activities





General.  Carver
Federal engages in a number of lending activities including the origination or
purchase of first mortgage loans for the purpose of purchasing or refinancing
one- to four-family residential, multifamily, and commercial properties; the
origination or participation in loans for the construction or renovation of
commercial properties and residential housing developments; permanent loan
financing subsequent to the completion of existing construction lending; and the
origination and participation in business loans primarily for small business
entities.  Occasionally, Carver Federal purchases loans as a
supplement to loan originations to achieve its loan growth
objectives.





Loan Portfolio
Composition.  Total loans receivable increased by $46.8
million, or 8.0%, to $632.8 million at March 31, 2008 compared to $586.0 million
at March 31, 2007.  Carver Federal’s total loans receivable, net, as a
percentage of total assets increased to 79.5% at March 31, 2008 compared to
78.5% at March 31, 2007.  One- to four-family mortgage loans totaled
$103.4 million, or 16.3% of Carver Federal’s total loans
receivable.  At March 31, 2008, the Bank had $1.5 million in subprime
loans, or 0.2% of its total loan portfolio.  All the Bank's subprime
loans are performing loans. Multifamily loans totaled $78.7 million, or 12.4% of
total loans receivable; non-residential real estate loans, which includes
commercial and church loans, totaled $238.5 million, or 37.6% of total loans
receivable; construction loans (net of committed but undisbursed funds), totaled
$158.9 million, or 25.1% of total loans receivable; business loans totaled $52.1
million, or 8.2% of total loans receivable; and consumer loans (credit card
loans, personal loans, and home improvement loans) totaled $1.7 million, or 0.3%
of total loans receivable.  For additional information regarding
Carver Federal’s loan portfolio, refer to Note 5 of Notes to Consolidated
Financial Statements, “Loans Receivable, Net.”





Carver
Federal, over the past years and to a lesser degree in fiscal 2008, 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 Federal paid on purchased loans decreased by $0.3 million, or 26.8%, to
$0.7 million at March 31, 2008 compared to $1.0 million at March 31,
2007.





Carver
Federal receives a discount when the effective yield on the loans being
purchased is less than the current market rate for comparable
loans.  Certain fees (net of origination expenses) on originated loans
are deferred and amortized over the life of the loan.  These discounts
and net deferred fees are amortized as the loan is repaid.  It is
possible that, in a rising interest rate environment, the rate or speed at which
loans repay may decrease which may have the effect of decelerating the
amortization of the discounts and net deferred fees and therefore reducing the
effective yield of the loan.  Total discounts and deferred fees
increased by $0.2 million, or 23.6%, to $1.2 million at March 31, 2008 compared
to $1.0 million at March 31, 2007.





Allowance
for loan losses decreased $0.5 million to $4.9 million at March 31, 2008
compared to $5.4 million at March 31, 2007.  During fiscal 2008, $0.8
million in net charge-offs were recorded, which were partially offset when the
Bank recorded a $0.2 million provision for loan losses during fiscal
2008.  See Note 5 of Notes to Consolidated Financial Statements,
“Loans Receivable, Net” and “—Asset Quality—Asset Classification and Allowance
for Losses.”





4
 Table of Contents





One- to Four-Family Residential
Lending.  Traditionally, Carver Federal’s lending activity has
been in part the origination and purchase of loans secured by first mortgages on
existing one- to four-family residences, although no one- to four-family loans
were purchased in fiscal 2008.  Carver Federal originates and
purchases one- to four-family residential mortgage loans in amounts that usually
range between $35,000 and $0.8 million.  Approximately 87% of the one-
to four-family residential mortgage loans maturing in greater than one year at
March 31, 2008 were adjustable rate and approximately 13% were
fixed-rate.  Beginning in fiscal 2007, Carver Federal shifted its
efforts from primarily originating and purchasing one- to four-family
residential loans to originations and participations in more profitable
non-residential and construction real estate loans.  One- to
four-family residential real estate loans increased $2.5 million to $103.4
million or 16.3% of the gross loan portfolio at March 31, 2008 compared to March
31, 2007.





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 mortgage insurance required on loans with LTV ratios in excess of
80%.  Under certain special loan programs, Carver Federal may
originate and sell 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 the 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, 2008, the
Bank, through its sub-servicers, serviced $44.5 million in loans for FNMA and
$7.5 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 in the secondary market. They are indexed to the weekly average rate on
one-year, three-year and five-year U.S. Treasury or Federal Home Loan Bank
(“FHLB”) 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.





As of
March 31, 2008, the Bank was finalizing plans to outsource its residential one-
to four- family mortgage origination operations.  We expect this
arrangement will expand our product base and improve customer service, while
reducing costs to the Company.





Multifamily Real Estate
Lending. Traditionally, Carver Federal in part originates and purchases
multifamily loans, although no multifamily loans were purchased in fiscal
2008.  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.  Carver Federal's multifamily loan portfolio decreased
$13.2 million in fiscal 2008, or 14.4% to $78.7 million, 12.4% of Carver
Federal’s gross loan portfolio at March 31, 2008.





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 1.15 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 occasionally
originates fixed rate loans with greater than five year terms.





5
 Table of Contents





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.  All commercial real estate loans are risk-rated internally at
the time of origination.  In addition, to evaluate changes in the
credit profile of the borrower and the underlying collateral, an independent
consulting firm reviews and prepares a written report for a sample of
multifamily real estate loan relationships of $250,000 to $2.0 million, and at
least semi-annually prepares a written report for all 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 1.20 on non-residential real estate loans.  The Bank also
requires the assignment of rents of all tenants’ leases in the mortgaged
property, which serves as additional security for the mortgage
loan.  At March 31, 2008, non-residential real estate mortgage loans
totaled $238.5 million, or 37.7% of the gross loan portfolio.  This
balance reflects a year-over-year increase of $35.3 million, which is consistent
with the Bank’s objective of investing in higher yielding loans.





Historically,
Carver Federal has been a New York City metropolitan area leader in the
origination of loans to churches.  At March 31, 2008, loans to
churches totaled $18.3 million, or 2.8% 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 28 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, 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.





6
 Table of Contents





At March
31, 2008, the Bank had $158.9 million (net of $74.9 million of committed but
undisbursed funds) in construction loans outstanding, comprising 25.0% of the
Bank’s gross loan portfolio.  The balance at March 31, 2008 reflects a
$21.2 million, or 15.4%, increase over fiscal 2007, consistent with the Bank’s
objective of investing in higher yielding loans.  Purchased
construction loans represent 84.5% of total construction loans in
portfolio.   The Bank’s primary source of construction loan
purchases is with Community Preservation Corporation, a private not-for-profit
corporation sponsored by more than 90 commercial banks, savings institutions and
insurance companies that provides mortgage, construction and other lending for
housing needs with the goal to revitalize low- and mixed-income
communities.





Business
Loans.  Carver Federal’s small business lending portfolio,
excluding the discount to fair market value at acquisition, increased by $0.9
million to $52.1 million or 8.2% of the Bank’s gross loan
portfolio.  Carver Federal provides revolving credit and term loan
facilities to small businesses with annual sales of approximately $1 million to
$25 million in manufacturing, services and wholesale segments.  During
the fourth quarter of the fiscal year ended March 31, 2005, Carver Federal’s
Board of Directors (the “Board”) authorized the Bank to provide back-up
liquidity for highly rated U.S. corporate commercial paper borrowers with a
minimum short term debt rating of A-1/P-1 (“CP Back-up”).  As of March
31, 2008, the Bank had entered into two CP back-up facilities, one for $9.0
million with a AAA rated U.S. corporate borrower and one for $6.0 million with
an A+ rated U.S. corporate borrower.  The facilities are not expected
to be drawn as they provide alternate liquidity to the borrowers.  The
Bank is paid a commitment fee for this product.





Consumer and other
Loans.  At March 31, 2008, the Bank had $1.7 million in
consumer and other loans, or 0.3% of the Bank’s gross loan
portfolio.  At March 31, 2008, $1.3 million, or 77.4%, of the Bank’s
consumer loans were unsecured loans, consisting of  consumer loans
other than loans secured by savings deposits, and $0.4 million, or 22.6%, were
secured by savings deposits.





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 unsecured 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.  All real estate, business and
unsecured loan applications are forwarded to the Bank’s Lending Department for
underwriting pursuant to standards established in Carver Federal’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 than 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).   Business loan applications are completed for all
business loans.  Most business loans are secured by real estate,
personal guarantees, and/or guarantees by the United States Small Business
Association (“SBA”) or Uniform Commercial Code (“UCC”) filings.  The
loan approval process considers the credit history of the applicant, collateral,
cash flows and purpose and stability of the business.





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 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.  Written
conformation of the guarantee for SBA loans and evidence of the UCC filing is
also required.





Loan
Approval.    Except for real estate and business
loans in excess of $6.0 million and $3.0 million, respectively, mortgage and
business loan approval authority has been delegated by the Bank’s 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 $3.0 million for real estate
loans, $2.0 million for business loans secured by real estate and $1.0 million
for all other business loans.  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.  Real estate and business loans above $6.0 million and $3.0
million,respectively,must be approved by the full
Board.  Purchased loans are subject to the same approval process as
originated loans.





7
 Table of Contents





Loans-to-One-Borrower.  Under
the loans-to-one-borrower limits of the United States 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, 2008, the maximum
loans-to-one-borrower under this test would be $9.7 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 occasionally funds 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, SONYMA or other third-party purchaser to provide the opportunity
for subsequent sale in the secondary market as desired to manage interest rate
risk exposure.





Loan Originations and
Purchases.  Loan originations, including originated for sale,
were $182.7 million in fiscal 2008 compared to $130.0 million in fiscal
2007.  These loan origination results in fiscal 2008 and fiscal 2007
can be attributed to strong market conditions and the Bank’s commitment to
maintain and increasing its market share.





During
fiscal 2008, in order to supplement its origination efforts, Carver Federal
purchased a total of $29.7 million of mortgage loans, consisting of performing
construction and non-residential mortgage loans.  This represented
14.0% of Carver Federal’s purchases and originations of its loan portfolio
during fiscal 2008.  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 business
loans, 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 decreased by $28.5 million, or 48.9%,
to $29.7 million for fiscal 2008 compared to $58.2 million for fiscal 2007,
primarily due to the Bank’s focus on origination of  higher yield
loans.





The
following table sets forth certain information with respect to Carver Federal’s
loan originations, purchases and sales for the fiscal years ended March 31 (in
thousands):





2008
            
            
            2007
            
            
            2006Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            PercentLoans
      Originated:One-
      to four-family
            
            $
            39,060
            
            
            
            18.38
            %
            
            $
            32,381
            
            
            
            17.21
            %
            
            $
            15,132
            
            
            
            7.29
            %Multifamily
            
            
            13,118
            
            
            
            6.17
            %
            
            
            8,657
            
            
            
            4.60
            %
            
            
            18,063
            
            
            
            8.71
            %Non-residential
            
            
            48,743
            
            
            
            22.94
            %
            
            
            31,108
            
            
            
            16.53
            %
            
            
            33,582
            
            
            
            16.18
            %Construction
            
            
            61,021
            
            
            
            28.72
            %
            
            
            56,834
            
            
            
            30.20
            %
            
            
            44,040
            
            
            
            21.23
            %Business
            
            
            18,982
            
            
            
            8.93
            %
            
            
            730
            
            
            
            0.39
            %
            
            
            -
            
            
            
            -
            %Consumer (1)
            
            
            1,804
            
            
            
            0.85
            %
            
            
            282
            
            
            
            0.15
            %
            
            
            532
            
            
            
            0.26
            %Total
      loans originated
            
            
            182,728
            
            
            
            86.00
            %
            
            
            129,992
            
            
            
            69.08
            %
            
            
            111,349
            
            
            
            53.67
            %Loans
      purchased (2)
            
            
            29,736
            
            
            
            14.00
            %
            
            
            58,191
            
            
            
            30.92
            %
            
            
            96,140
            
            
            
            46.33
            %Total
      loans originated and purchased
            
            
            212,464
            
            
            
            100.00
            %
            
            
            188,183
            
            
            
            100.00
            %
            
            
            207,489
            
            
            
            100.00
            %Loans
      sold (3)
            
            
            (17,716
            )
            
            
            
            
            
            
            (30,778
            )
            
            
            
            
            
            
            (22,543
            )Net
      additions to loan portfolio
            
            $
            194,748
            
            
            
            
            
            
            $
            157,405
            
            
            
            
            
            
            $
            184,946





(1)
Comprised of personal and credit card loans.


(2)
Comprised of primarily construction and non-residential mortgage loans and
business loans.


(3)
Comprised of primarily one- to four-family mortgage 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, with certain exceptions related to the seller’s
compliance with representations and warranties, 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.  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 markets will not deteriorate in the future,
resulting in increased loan delinquencies and loan losses among the loans
secured by property in these areas.  During fiscal 2008, the
properties securing purchased loans were concentrated primarily in the tri-state
New York area.





8
 Table of Contents





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
review of each purchased loan is conducted, and the Bank 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.Carver Federal determines the interest rates that it charges on loans
primarily by comparison of competitive loan rates offered in its market area and
by examining the minimum yield requirements for loans purchased by secondary
market sources.  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 “FRB”), the
general supply of money in the economy, tax policies and governmental budget
matters.





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
mortgage 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 affect on the demand for loans in the Bank’s market
area.  Carver Federal also receives fees for servicing SBA
loans.  Servicing activities include collection and processing of
payments, accounting for loan repayment funds and SBA servicing and reporting
requirements.





Loan Maturity
Schedule.  The following table sets forth information at March
31, 2008 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  (in thousands):





Loan Maturities<1 Yr.
            
            
            1-2 Yrs.
            
            
            2-3 Yrs.
            
            
            3-5 Yrs.
            
            
            5-10 Yrs.
            
            
            10-20 Yrs.
            
            
            20+ Yrs.
            
            
            TotalGross
      loans receivable:One
      to four-family
            
            $
            14
            
            
            $
            13
            
            
            $
            290
            
            
            $
            364
            
            
            $
            1,981
            
            
            $
            25,895
            
            
            $
            74,862
            
            
            $
            103,419Multifamily
            
            
            1,229
            
            
            
            1,183
            
            
            
            126
            
            
            
            9,927
            
            
            
            20,177
            
            
            
            27,645
            
            
            
            18,370
            
            
            
            78,657Non-residential
            
            
            3,031
            
            
            
            16,592
            
            
            
            10,741
            
            
            
            22,371
            
            
            
            94,767
            
            
            
            75,607
            
            
            
            15,399
            
            
            
            238,508Construction
            
            
            124,351
            
            
            
            33,126
            
            
            
            -
            
            
            
            -
            
            
            
            1,400
            
            
            
            -
            
            
            
            -
            
            
            
            158,877Business
            
            
            18,958
            
            
            
            9,153
            
            
            
            951
            
            
            
            5,128
            
            
            
            8,864
            
            
            
            6,391
            
            
            
            2,664
            
            
            
            52,109Consumer
            
            
            217
            
            
            
            44
            
            
            
            33
            
            
            
            945
            
            
            
            392
            
            
            
            88
            
            
            
            9
            
            
            
            1,728Total
            
            $
            147,800
            
            
            $
            60,111
            
            
            $
            12,141
            
            
            $
            38,735
            
            
            $
            127,581
            
            
            $
            135,626
            
            
            $
            111,304
            
            
            $
            633,298





The
following table sets forth as of March 31, 2008 amounts in each loan category
that are contractually due after March 31, 2009 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 rates on existing mortgage loans (in
thousands):





9
 Table of Contents




Due After March 31,
    2009Fixed
            
            
            Adjustable
            
            
            TotalGross
      loans receivable:One-
      to four-family
            
            $
            13,460
            
            
            $
            89,945
            
            
            $
            103,405Multifamily
            
            
            22,926
            
            
            
            54,502
            
            
            
            77,428Non-residential
            
            
            72,147
            
            
            
            163,330
            
            
            
            235,477Construction
            
            
            -
            
            
            
            34,526
            
            
            
            34,526Business
            
            
            7,741
            
            
            
            25,410
            
            
            
            33,151Consumer
            
            
            1,511
            
            
            
            -
            
            
            
            1,511Total
            
            $
            117,785
            
            
            $
            367,713
            
            
            $
            485,498





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 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), construction lending and business loans
(mostly secured by real estate and the SBA), 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 adequacy of the value of
the collateral securing 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 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.  In the case of business loans the collection process is
similar. The Bank may pursue foreclosure or other appropriate action for
business loans secured by real estate.  For business loans not secured
by real estate, the Bank may seek the SBA guarantee 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.  A late notice is mailed to the borrower
immediately and a late charge is imposed, if applicable, once the payment grace
period has expired (15 days after the due date).  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 continue after the loan is
charged off, except when a determination is made that collection efforts
have been exhausted or are not productive.





10
 Table of Contents





The
following table sets forth information with respect to Carver Federal’s
non-performing assets as of March 31 (dollars in thousands):





2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Loans
      accounted for on a non-accrual basis (1):Gross
      loans receivable:One-
      to four-family
            
            $
            567
            
            
            $
            173
            
            
            $
            1,098
            
            
            $
            149
            
            
            $
            558Multifamily
            
            
            -
            
            
            
            3,886
            
            
            
            763
            
            
            
            167
            
            
            
            1,532Non-residential
            
            
            522
            
            
            
            -
            
            
            
            -
            
            
            
            665
            
            
            
            -Construction
            
            
            -
            
            
            
            -
            
            
            
            865
            
            
            
            -
            
            
            
            23Business
            
            
            1,708
            
            
            
            439
            
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
            
            
            57
            
            
            
            12
            
            
            
            4
            
            
            
            17
            
            
            
            10Total
      non-accrual loans
            
            
            2,854
            
            
            
            4,510
            
            
            
            2,730
            
            
            
            998
            
            
            
            2,123Accruing
      loans contractually past due > 90 days
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      non-accrual & accruing loans past due > 90 days
            
            
            2,854
            
            
            
            4,510
            
            
            
            2,730
            
            
            
            998
            
            
            
            2,123Other
      non-performing assets (2):Real
      estate owned
            
            
            1,163
            
            
            
            28
            
            
            
            26
            
            
            
            -
            
            
            
            -Total
      other non-performing assets
            
            
            1,163
            
            
            
            28
            
            
            
            26
            
            
            
            -
            
            
            
            -Total
      non-performing assets (3)
            
            $
            4,017
            
            
            $
            4,538
            
            
            $
            2,756
            
            
            $
            998
            
            
            $
            2,123Non-performing
      loans to total loans
            
            
            0.43%
            
            
            
            0.74%
            
            
            
            0.55%
            
            
            
            0.23%
            
            
            
            0.60%Non-performing
      assets to total assets
            
            
            0.50%
            
            
            
            0.61%
            
            
            
            0.42%
            
            
            
            0.16%
            
            
            
            0.39%





(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.





(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).  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, 2008, total non-performing assets decreased by $0.5 million to $4.0 million,
compared to $4.5 million at March 31, 2007. At March 31, 2008, other
non-performing assets consisted of non-accrual and accruing loans, past due
greater than 90 days, of $2.9 million and other real estate owned of $1.2
million. Non-accrual loans consist of 18 small business and SBA loans, two
multi-family loans and two one- to four- family loans. All are relatively small
balance loans and collection efforts are progressing well. Other real estate
owned of $1.2 million reflects four properties in foreclosure. One property with
a loan value of $0.6 million is currently under contract to be sold and
another property with a loan value of $0.4 million will be repaid by a
private mortgage insurer.




Asset Classification and Allowances
for Losses.  Federal regulations and the Bank’s policies
require the classification of assets on the basis of credit 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.





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.  During the third
quarter of fiscal 2008, Carver changed its loan loss methodology to be
consistent with the Interagency Policy Statement on the Allowance for Loan and
Lease Losses (“ALLL”) (the “Interagency Policy Statement”) released by the
Federal Financial Regulatory Agencies on December 13, 2006.  The
change had an immaterial affect on the allowance for loan losses at March 31,
2008.  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.  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 the ALLL, 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.  For
additional information regarding Carver Federal’s ALLL policy, refer to Note 2
of Notes to Consolidated Financial Statements, “Summary of Significant
Accounting Policies.”





11
 Table of Contents





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 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,
providing the Bank did not provide the loan.





12
 Table of Contents





The
following table sets forth an analysis of Carver Federal’s allowance for loan
losses for the years ended March 31 (dollars in thousands):





2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Balance
      at beginning of year
            
            $
            5,409
            
            
            $
            4,015
            
            
            $
            4,097
            
            
            $
            4,125
            
            
            $
            4,158Less
      Charge-offs:One-
      to four-family
            
            
            22
            
            
            
            19
            
            
            
            17
            
            
            
            8
            
            
            
            6Business
            
            
            709
            
            
            
            50
            
            
            
            -
            
            
            
            -
            
            
            
            55Consumer
            
            
            174
            
            
            
            51
            
            
            
            100
            
            
            
            65
            
            
            
            264Total
      Charge-offs
            
            
            905
            
            
            
            120
            
            
            
            117
            
            
            
            73
            
            
            
            325Add
      Recoveries:One-
      to four-family
            
            
            -
            
            
            
            2
            
            
            
            5
            
            
            
            -
            
            
            
            107Non-residential
            
            
            -
            
            
            
            2
            
            
            
            -
            
            
            
            -
            
            
            
            -Business
            
            
            110
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10Consumer
            
            
            42
            
            
            
            43
            
            
            
            30
            
            
            
            45
            
            
            
            175Total
      Recoveries
            
            
            152
            
            
            
            47
            
            
            
            35
            
            
            
            45
            
            
            
            292Net
      loans charged-off
            
            
            753
            
            
            
            73
            
            
            
            82
            
            
            
            28
            
            
            
            33CCB
      acquisition allowance
            
            
            
            
            
            
            1,191
            
            
            
            -
            
            
            
            -
            
            
            
            -Provision
      for losses
            
            
            222
            
            
            
            276
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance
      at end of year
            
            $
            4,878
            
            
            $
            5,409
            
            
            $
            4,015
            
            
            $
            4,097
            
            
            $
            4,125Ratios:Net
      charge-offs to average loans outstanding
            
            
            0.17
            %
            
            
            0.02
            %
            
            
            0.02
            %
            
            
            0.01
            %
            
            
            0.01
            %Allowance
      to total loans
            
            
            0.74
            %
            
            
            0.89
            %
            
            
            0.81
            %
            
            
            0.96
            %
            
            
            1.16
            %Allowance
      to non-performing loans (1)
            
            
            170.89
            %
            
            
            119.93
            %
            
            
            147.07
            %
            
            
            410.65
            %
            
            
            194.30
            %





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








The
following table allocates the allowance for loan losses by asset category at
March 31 (dollars in thousands):





2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Amount
            
            
            % of Loans to Total Gross
    Loans
            
            
            Amount
            
            
            % of Loans to Total Gross
    Loans
            
            
            Amount
            
            
            % of Loans to Total Gross
    Loans
            
            
            Amount
            
            
            % of Loans to Total Gross
    Loans
            
            
            Amount
            
            
            % of Loans to Total Gross
    LoansAllowance
      for loan losses:One-to
      four-family
            
            $
            324
            
            
            
            6.6
            %
            
            $
            373
            
            
            
            17.2
            %
            
            $
            565
            
            
            
            28.9
            %
            
            $
            528
            
            
            
            36.7
            %
            
            $
            355
            
            
            
            27.8
            %Multifamily
            
            
            315
            
            
            
            6.5
            %
            
            
            1,414
            
            
            
            15.7
            %
            
            
            1,084
            
            
            
            21.1
            %
            
            
            898
            
            
            
            24.0
            %
            
            
            1,240
            
            
            
            33.9
            %Non-residential
            
            
            1,215
            
            
            
            24.9
            %
            
            
            1,487
            
            
            
            34.7
            %
            
            
            960
            
            
            
            31.0
            %
            
            
            1,129
            
            
            
            27.5
            %
            
            
            853
            
            
            
            28.9
            %Construction
            
            
            1,448
            
            
            
            29.7
            %
            
            
            951
            
            
            
            23.5
            %
            
            
            303
            
            
            
            18.7
            %
            
            
            212
            
            
            
            11.4
            %
            
            
            158
            
            
            
            7.7
            %Business
            
            
            1,124
            
            
            
            23.0
            %
            
            
            951
            
            
            
            8.7
            %
            
            
            22
            
            
            
            0.1
            %
            
            
            10
            
            
            
            0.1
            %
            
            
            92
            
            
            
            1.3
            %Consumer
            
            
            94
            
            
            
            1.9
            %
            
            
            234
            
            
            
            0.2
            %
            
            
            420
            
            
            
            0.2
            %
            
            
            544
            
            
            
            0.3
            %
            
            
            395
            
            
            
            0.4
            %Unallocated
            
            
            358
            
            
            
            7.3
            %
            
            
            -
            
            
            
            -
            
            
            
            661
            
            
            
            -
            
            
            
            776
            
            
            
            -
            
            
            
            1,032
            
            
            
            -Total
      Allowance
            
            $
            4,878
            
            
            
            100.0
            %
            
            $
            5,409
            
            
            
            100.0
            %
            
            $
            4,015
            
            
            
            100.0
            %
            
            $
            4,097
            
            
            
            100.0
            %
            
            $
            4,125
            
            
            
            100.0
            %





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.








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.





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, 2008, the Bank had no securities classified as
trading.  At March 31, 2008, $20.9 million, or 54.7% of the Bank’s
mortgage-backed and other investment securities, was classified as
available-for-sale.  The remaining $17.3 million, or 45.3%, was
classified as held-to-maturity.





13
 Table of Contents





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 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—Qualified Thrift Lender Test” and “—Federal and State
Taxation.”





At March
31, 2008, mortgage-backed securities constituted 4.8% of total assets, as
compared to 5.4% of total assets at March 31, 2007.  Carver Federal
maintains a 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 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, 2008, constituted $24.9 million,
or 66.2%, 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.  For additional information regarding Carver Federal’s
mortgage-backed securities portfolio and its maturities, refer to Note 4 of
Notes to Consolidated Financial Statements, “Securities.”





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 FHLB-NY,
certificates of deposit in federally insured institutions, certain bankers’
acceptances and federal funds.  The Bank may also invest, subject to
certain limitations, in 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 (See Note 4 of Notes
to Consolidated Financial Statements).





Other Earning Assets. Federal
regulations require the Bank to maintain an investment in FHLB-NY 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.”





Securities Impairment.The Bank’s
available-for-sale securities portfolio is carried at estimated fair value, with
any unrealized gains and losses, net of taxes, reported as accumulated other
comprehensive income/loss in stockholders’ equity.  Securities that
the Bank has the positive intent and ability to hold to maturity are classified
as held-to-maturity and are carried at amortized cost.  The fair
values of securities in portfolio are based on published or securities dealers’
market values and are affected by changes in interest rates.  The Bank
periodically reviews and evaluates the securities portfolio to determine if the
decline in the fair value of any security below its cost basis is
other-than-temporary.  The Bank generally views changes in fair value
caused by changes in interest rates as temporary, which is consistent with its
experience.  However, if such a decline is deemed to be
other-than-temporary, the security is written down to a new cost basis and the
resulting loss is charged to earnings.  At March 31, 2008, the Bank
carried no other than temporarily impaired securities.








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-NY and has borrowed funds through repurchase agreements and trust preferred
debt securities.





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Deposits.  Carver
Federal attracts deposits from consumers, local institutions and public entities
through its ten branches 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
branches.  Carver Federal also holds deposits from various
governmental agencies or authorities and corporations.





In fiscal
2008, the Bank opened an additional stand-alone ATM at 362 Myrtle Ave, Brooklyn.
In fiscal 2007, the Bank acquired two additional branches in Brooklyn, New York
and $144.5 million in deposits resulting from its acquisition of
CCB.  In fiscal 2006, the Bank opened one additional stand-alone ATM
in Bedford Stuyvesant, Brooklyn. During fiscal 2005 the Bank opened two branches
as well as two stand-alone ATMs.  The first branch and ATM were opened
in July 2004 at Atlantic Terminal in Fort Greene, Brooklyn.  A second
ATM at 116th Street
and a branch at 145th Street
in Harlem were opened in December 2004 and January 2005,
respectively.    The Bank’s branches on 116th Street
and 145th Street
in Harlem and in Jamaica operate in New York State designated Banking
Development Districts (“BDD”), which allows Carver Federal to participate in
BDD-related activities, including acquiring New York City and New York State
deposits.  As of March 31, 2008, Carver Federal held $119.1 million in
BDD deposits.  At March 31, 2008 the Bank held $63.0 million in
brokered deposits, specifically certificates of deposits.  Included in
brokered deposits are $25.0 million of deposits through CDARS (Certificates of
Deposit Account Registry Service).  The CDARS product offers customers
a convenient way to enjoy full federal deposit insurance on deposits up to $30
million.





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.  For additional information regarding Bank’s deposit
accounts and the related weighted average interest rates paid; and amount and
maturities of certificates of deposit in specified weighted average interest
rate categories refer to Note 8 of Notes to Consolidated Financial Statements,
“Deposits.”





Borrowed
Money.  While deposits are the primary source of funds for
Carver Federal’s lending, investment and general operating
activities.  Carver Federal is authorized to use advances and
securities sold under agreements to repurchase (“Repos”) from the FHLB-NY and
approved primary dealers to supplement its supply of funds and to meet deposit
withdrawal requirements.  The FHLB-NY 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-NY 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-NY are secured by Carver Federal’s
stock in the FHLB-NY and a pledge of Carver Federal’s mortgage loan and
mortgage-backed securities portfolios.





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 September 17, 2008 and have a mandatory redemption date of September 17,
2033.  Cash distributions on the trust preferred debt securities are
cumulative and payable at a floating rate per annum (reset quarterly) equal to
3.05% over 3-month LIBOR, with a rate at March 31, 2008 of 5.85%.  The
subordinated debt securities amounted to $13.3 million at March 31, 2008 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, 2008, Carver had outstanding $58.6 million in
total borrowed money, consisting of the subordinated debt securities and
advances from FHLB-NY.  For additional information regarding Bank’s
advances from the FHLB-New York and other borrowed money refer to Note 9 of
Notes to Consolidated Financial Statements, “Borrowed Money.”





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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 Deposit Insurance Fund (“DIF”), 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
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 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.





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 (“HOLA”), as amended, 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.





On
October 4, 2006, the OTS and other federal bank regulatory authorities published
the Interagency Guidance on Nontraditional Mortgage Product Risks, or the
Guidance. The Guidance describes sound practices for managing risk, as well as
marketing, originating and servicing nontraditional mortgage products, which
include, among other things, interest-only loans. The Guidance sets forth
supervisory expectations with respect to loan terms and underwriting standards,
portfolio and risk management practices and consumer protection. For example,
the Guidance indicates that originating interest-only loans with reduced
documentation is considered a layering of risk and that institutions are
expected to demonstrate mitigating factors to support their underwriting
decision and the borrower's repayment capacity. Specifically, the Guidance
indicates that a lender may accept a borrower's statement as to the borrower's
income without obtaining verification only if there are mitigating factors that
clearly minimize the need for direct verification of repayment capacity and
that, for many borrowers, institutions should be able to readily document
income.





On
December 14, 2006, the OTS published guidance entitled “Concentrations in
Commercial Real Estate Lending, Sound Risk Management Practices,” or the CRE
Guidance, to address concentrations of commercial real estate loans in savings
associations.  The CRE Guidance reinforces and enhances the OTS’s
existing regulations and guidelines for real estate lending and loan portfolio
management, but does not establish specific commercial real estate lending
limits.  The Bank has evaluated the CRE Guidance to determine its
compliance and, as necessary, modified its risk management practices,
underwriting guidelines and consumer protection standards.  See
"Lending Activities and Asset Quality” in Item 1, "Business” for discussions of
our loan product offerings and related underwriting standards.





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, 2008, the Bank’s limit on loans to one
borrower based on its unimpaired capital and surplus was
$9.5 million.





Qualified Thrift Lender 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-NY as promptly as
possible.  At March 31, 2008, the Bank maintained approximately 71.1%
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.





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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, 2008, the Bank exceeded each of its capital requirements with a
tangible capital ratio of 7.77%, leverage capital ratio of 7.79% and total
risk-based capital ratio of 10.28%.





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 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 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 interest rate risk component of the
risk-based capital requirement.  Pursuant to the amendment, the OTS
will continue to monitor the interest rate risk of individual institutions
through the OTS requirements for interest rate risk management, the ability of
the OTS to impose individual minimum capital requirements on institutions that
exhibit a high degree of interest rate risk, and the requirements of Thrift
Bulletin 13a, which provides guidance on the management of interest rate risk
and the responsibility of boards of directors in that area.  In
addition, the OTS monitors the interest rate risk 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 interest rate risk 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 institutions 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.





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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, 2008, 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.





Community
Reinvestment.  Under the CRA, as amended, 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 branches, 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 2006.





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.





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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 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.  At March 31, 2008, 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 fees for savings and loan holding
companies with semi-annual assessments. For fiscal 2008, Carver paid $0.2
million 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, 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
deposits of the Bank are insured up to applicable limits by the Depositors
Insurance Fund (“DIF”). The DIF is the successor to the Bank Insurance Fund and
the Savings Association Insurance Fund, which were merged in 2006. The FDIC
recently amended its risk-based assessment system for 2007 to implement
authority granted by the Federal Deposit Insurance Reform Act of 2005 (the
“Reform Act”). Under the revised system, insured institutions are assigned to
one of four risk categories based on supervisory evaluations, regulatory capital
levels and certain other factors. An institution’s assessment rate depends upon
the category to which it is assigned. Risk Category I, which contains the least
risky depository institutions, is expected to include more than 90% of all
institutions. Unlike the other categories, Risk Category I contains further risk
differentiation based on the FDIC’s analysis of financial ratios, examination
component ratings and other information. Assessment rates are determined
semi-annually by the FDIC and currently range from five to seven basis points
for the healthiest institutions (Risk Category I) to 43 basis points of
assessable deposits for the riskiest (Risk Category IV). The FDIC may adjust
rates uniformly from one quarter to the next, except that no single adjustment
can exceed three basis points.





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The
Reform Act also provided for a one-time credit for eligible institutions based
on their assessment base as of December 31, 1996.  Subject to certain
limitations with respect to institutions that are exhibiting weaknesses, credits
can be used to offset assessments until exhausted.  The Reform Act
also provided for the possibility that the FDIC may pay dividends to insured
institutions once the DIF reserve ratio equals or exceeds 1.35% of estimated
insured deposits.





In
addition to the assessment for deposit insurance, institutions are required to
make payments on bonds issued in the late 1980s by the Financing Corporation to
recapitalize a predecessor deposit insurance fund. This payment is established
quarterly, and during the calendar year ending December 31, 2007, averaged 1.18
basis points of assessable deposits.





The
Reform Act provided the FDIC with authority to adjust the DIF ratio to insured
deposits within a range of 1.15% to 1.50%, in contrast to the prior statutorily
fixed ratio of 1.25%. The ratio, which is viewed by the FDIC as the level that
the fund should achieve, was established by the agency at 1.25% for
2008.





The FDIC
has authority to increase insurance assessments. A significant increase in
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Bank.  Management cannot predict what
insurance assessment rates will be in the future.





Insurance
of deposits may be terminated by the FDIC upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC. The management of the Bank does not know
of any practice, condition or violation that might lead to termination of
deposit insurance.





The
Bank’s total expense in fiscal 2008 for FDIC assessment for Financing
Corporation (FICO) bonds interest payments was $0.1 million.  Due to
the Bank’s favorable assessment risk classification there was no deposit
insurance assessment on our deposits for fiscal 2008.





Federal Home Loan Bank
System.  The Bank is a member of the FHLB-NY, which is one of
the twelve regional banks composing the FHLB System.  Each regional
bank provides a central credit facility primarily for its member
institutions.  The Bank, as a FHLB-NY 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-NY) of its outstanding advances from the FHLB-NY.  The Bank was
in compliance with this requirement with an investment in the capital stock of
the FHLB-NY at March 31, 2008 of $1.6 million.  Any advances from the
FHLB-NY 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.





FHLB-NY
is 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 FHLB-NY can pay as dividends to its
members and could also result in the FHLB-NY imposing a higher rate of interest
on advances to its members.  If dividends were reduced, or interest on
future FHLB-NY advances increased, the Bank’s net interest income would be
adversely affected.  Dividends from FHLB-NY to the Bank amounted to
$0.2 million, $0.3 million and $0.3 million for fiscal years 2008, 2007 and
2006, respectively.  The dividend rate paid on FHLB-NY stock at March
31, 2008 was 7.8%.





Under the
Gramm-Leach-Bliley Act, as amended (“GLB”), 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.  GLB 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 Finance Board, as required by GLB, the FHLB
has adopted a capital plan that will change the foregoing minimum stock
ownership requirements for FHLB stock.  Under the new capital plan,
each member of the FHLB will have to maintain a minimum investment in FHLB
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.





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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 GLB.  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 GLB.  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.





GLB 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 the Holding Company, 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 GLB.  GLB 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;





(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.





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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 Laws and Regulations.On October 5,
2006, Carver Federal established a new subsidiary, CMB, as a state chartered
limited purpose commercial bank in New York, to accept deposits of
municipalities and other governmental entities in the State of New York. CMB is
subject to extensive regulation, examination and supervision by the New York
State Superintendent of Banks, as its primary regulator and the FDIC, as the
deposit insurer.  As of March 31, 2008, Carver Federal has
discontinued the operations of CMB.  CMB  is in the process
of dissolution.





In
addition to being a regulator of CMB, 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 United States Commodity Exchange Act of 1936, as
amended.





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
      record keeping 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 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.





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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, and to make,
within specified formula limits, annual additions to the reserve which are
deductible for purposes of computing the Bank’s taxable income.  Since
fiscal year 2004, the Bank has not been considered to be a small bank because
its total assets have 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 fiscal 2008 and 2007
was 8.63 % and 9.03%, respectively, (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.  Sixty percent 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 CAC are
eligible for the New York State dividends received
deduction.  However, the Holding Company was subject to a franchise
tax rate of 3.51% (including the Metropolitan Commuter Transportation District
Surcharge) for fiscal 2007 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 also 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.








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, 2008.  Each of the persons listed below is an
executive officer of the Holding Company and the Bank, holding the same office
in each.





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Deborah C. Wright, age 50, 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 44, is Executive
Vice President and Chief Financial Officer.  He joined Carver in May
2005 from Time Warner Inc., where he had been Vice President, Finance &
Administration since March 2003.  From March 1999 to March 2003, Mr.
Swan was a Principal and Vice President in Mergers & Acquisitions at
Hambrecht & Quist and successor firm J.P. Morgan
Securities.  Prior to that, Mr. Swan held positions at other
investment banks including Salomon Brothers and The First Boston Corporation,
and at the law firm of Skadden, Arps, Slate, Meagher & Flom.  Mr.
Swan was Chief Investment Officer of the Upper Manhattan Empowerment Zone
Corporation from May 1996 to April 1998, where Ms. Wright was President and
CEO.  Roy serves on the boards of The Dalton School, the Brick Church
School and the Partnership for After School Education (“PASE”).  He
earned an A.B. degree from Princeton University and a J.D. degree from Stanford
Law School.





Charles F. Koehler,age 64, is
the Executive Vice President of the Lending Department at Carver Federal Savings
Bank, effective September 30, 2006. Prior to this appointment, he served as the
President and CEO of Community Capital Bank since 1998. He has an extensive
background in many phases of banking with over 40 years experience primarily in
the credit arena. He is the Chairman of the Board of the Brooklyn Economic
Development Corporation, which has recently received an award from New York
State as the number one rated Non-Profit Organization. He also serves as a
Director of the Brooklyn Educational Opportunity Corporation, a Division of
SUNY.





Susan M. Ifill, age 48, is
Senior Vice President and Chief Retail Officer of Carver Federal Savings Bank
and joined the organization in January 2007 after 28 years at Bank of
America.  Prior to her current position, Ms. Ifill led a group of 23
Client Managers in the Premier Banking Division of Bank of
America.  Ms. Ifill has held numerous roles of increasing
responsibility, including Director of both the Trust Advisory Group and Client
Distribution Group, in the Private Bank, Director of Employee Banking Services,
and held various senior management roles in Corporate Learning &
Development, and the Retail Banking Division.  Ms. Ifill serves on the
Board of Directors for Association for Children of New Jersey and the Board of
Trustees for Cambridge College in Boston.  Ms. Ifill attended the
University of Massachusetts – Dartmouth for her undergraduate work and earned a
masters degree in Management and certification in Negotiation and Conflict
Resolution from Cambridge College.





James H. Bason, age 53, is
Senior Vice President and Chief Lending Officer.  He joined Carver in
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 when
The Bank of New York acquired Barclays Bank (where he had been employed since
1986).  At The Bank of New York he was responsible for developing and
maintaining relationships with developers, builders, real estate investors and
brokers to provide construction and permanent real estate
financing.  At Barclays, Mr. Bason began his career in residential
lending and eventually became the bank’s CRA officer.  Mr. Bason
earned a B.S. in Business Administration from the State University of New York
at Oswego.





Carmelo Felix, age 59, is
Senior Vice President and Chief Auditor.  Mr. Felix joined Carver in
January 2005.  He 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.  Mr. Felix earned a B.A. in Accounting from Pace
University.





Margaret D. Roberts,age 57,
is Senior Vice President and Chief Human Resources Officer.  Ms.
Roberts joined Carver in November 1999 as Senior Vice President and Chief
Administrative Officer from Deutsche Bank where she had served as a Compensation
Planning Consultant in Corporate Human Resources.  Prior to that, Ms.
Roberts was a Vice President and Senior Human Resources Generalist for Citibank
Global Asset Management.  Ms. Roberts also has 10 years of systems and
technology experience from various positions held at JP Morgan and Chase
Manhattan Bank.  Ms. Roberts earned a B.P.S. degree from Pace
University, an M.B.A. from Columbia University as a Citicorp Fellow, and has
been designated a Certified Compensation Professional (CCP) by the World at Work
Society of Certified Professionals and a Senior Professional Human Resources
(SPHR) by the Human Resource Certification Institute.





Michael A. Trinidad,age 51, is Senior Vice
President and Controller.  He joined Carver in June
2007.  Previously, Mr. Trinidad was First Vice President and Corporate
Accounting Manager at Independence Community Bank, a position he held since
1997.  Mr. Trinidad was employed at Independence Community Bank since
1989, where he held various managerial roles with increasing responsibilities in
the Corporate Accounting Group.  In 2006, Independence Community Bank
was acquired by Sovereign Bancorp Inc.  Prior to Independence, Mr.
Trinidad was employed by Greater New York Savings Bank (acquired by Astoria
Financial Corp. in 1997).  At Greater New York, Mr. Trinidad held
various managerial roles in Accounting, Lending and Information Technology
Groups.  Mr. Trinidad earned a B.B.A in Accounting Information Systems
from Pace University.





Blondel
A. Pinnock,age 40, is Senior Vice President, Carver Federal and
President of CCDC.  Ms. Pinnock joined Carver in April 2008. Prior to
joining Carver, Ms. Pinnock was Senior Vice President at Bank of America
where she was a community development lender and business development officer.
Ms. Pinnock has over a ten year experience in financing the development of
residential and commercial real estate projects located within low and moderate
income neighborhoods throughout New York City and outlying
areas.  Prior to her tenure at Bank of America, Ms. Pinnock worked as
counsel and deputy director for the New York City’s Housing, Preservation and
Development Department’s Tax Incentives Unit, where she assisted in the
implementation of the City's real estate tax programs for low, moderate and
market rate projects.  She earned a B. A. from Columbia College and a
J. D. from Hofstra University School of Law.





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ITEM
1A. 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, construction and business 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, construction and business
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 loan
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-NY.  More recently, the cost of deposits and
borrowings have become significantly higher with the rising interest rate
environment, which has negatively impacted net interest income.





During
fiscal 2008, the Federal Open Market Committee (“FOMC”) lowered the federal
funds rate six times (a total of 300 basis points).  U.S. Treasury
yields on five and ten year maturities continued to decline during fiscal 2008
from fiscal 2007; thirteen week maturities have also declined in fiscal 2008
from fiscal 2007.  This has resulted in a change in the U.S. Treasury
yield curve from a flat and at times inverted yield curve back to its typical
upward slope.  The Bank’s short-term borrowings, as well as its
deposits, are generally priced relative to short-term U.S. Treasury yields,
whereas its mortgage loans and mortgage-backed securities are generally priced
relative to medium-term (two-to-five years) U.S. Treasury or FHLB
yields.  A flat or inverted yield curve could cause the Company's net
interest income and net interest margin to contract, which could have a material
adverse effect on its net income and cash flows, and the value of its
assets.  Interest rates are expected to continue to fluctuate and the
Company cannot predictfuture Federal Reserve
Bank actions or other factors that will cause rates to change.





The
estimated fair value of the Company's 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.  There has been an improvement in
valuation of the Bank’s available for sale securities because interest rates
have declined in fiscal 2008.





Carver’s results of operations are
affected by economic conditions in the New Yorkmetropolitan
area.At March 31, 2008, a majority 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
mortgage or business 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.





During
fiscal 2008, the national real estate market in general has been in a decline
compared to fiscal 2007.  The slowdown in the general housing market
is evidenced by reports of reduced levels of new and existing home sales,
increasing inventories of houses on the market, stagnant to declining property
values and an increase in the length of time houses remain on the market.
However, Carver Federal’s direct local real estate markets have been stable,
which appears to be due in part to the limited availability of affordable
housing alternatives in the markets in which Carver Federal
operates.





No
assurance can be given that these conditions will improve or will not worsen or
that such conditions will not result in a decrease in our interest income or an
adverse impact on our loan losses.





Strong competition within the Bank’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 than Carver Federal and with greater
financial resources.  Additionally, various large out-of-state
financial institutions may 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.





25
 Table of Contents





The Bank’s increased emphasis on
non-residential, construction real estate lending and small business lending
maycreate increased
exposure to lending risks.At March 31, 2008, $397.4 million, or 62.7%,
of our total loans receivable portfolio consisted of non-residential and
construction real estate loans compared to $340.9 million, or 58.2%, at March
31, 2007.  Non-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 (see Note 5 of Notes
to Consolidated Financial Statements).





At March
31, 2008, $52.1 million, or 8.2%, of our total loans receivable consisted of
business loans as compared to $51.2 million, or 8.7%, at March 31,
2007.  The Bank increased its business loan portfolio during fiscal
2007 with the acquisition of CCB.  Business 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 business; repayment of such loans may
be affected by factors outside the borrower's control, such as adverse economic
conditions, increased competition or changes in government regulation (see Note
5 of Notes to Consolidated Financial Statements).





The Bankoperatesin a highly regulated industry,
which limits the manner and scope of our business
activities.Carver Federalis
subject to extensive supervision, regulation and examination by the OTS, the
FDIC, and, to a lesser extent, by the New York State Banking Department. As a
result, we are limited in the manner in which we conduct our business, undertake
new investments and activities and obtain financing. This regulatory structure
is designed primarily for the protection of the deposit insurance funds and our
depositors, and not to benefit our stockholders. This regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to capital levels, the timing and amount of dividend
payments, the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. In addition, we must comply with
significant anti-money laundering and anti-terrorism laws. Government agencies
have substantial discretion to impose significant monetary penalties on
institutions which fail to comply with these laws.





On
October 4, 2006, the OTS and other federal bank regulatory authorities published
the Interagency Guidance on Nontraditional Mortgage Product Risk, or the
Guidance. In general, the Guidance applies to all residential mortgage loan
products that allow borrowers to defer repayment of principal or interest. The
Guidance describes sound practices for managing risk, as well as marketing,
originating and servicing nontraditional mortgage products, which include, among
other things, interest-only loans. The Guidance sets forth supervisory
expectations with respect to loan terms and underwriting standards, portfolio
and risk management practices and consumer protection.  For example,
the Guidance indicates that originating interest-only loans with reduced
documentation is considered a layering of risk and that institutions are
expected to demonstrate mitigating factors to support their underwriting
decision and the borrower’s repayment capacity. Specifically, the Guidance
indicates that a lender may accept a borrower’s statement as to the borrower’s
income without obtaining verification only if there are mitigating factors that
clearly minimize the need for direct verification of repayment capacity and
that, for many borrowers, institutions should be able to readily document
income.





From
time to time, we may originate interest-only and interest-only reduced
documentation residential loans. We originate such loans for sale to investors,
such as the Federal National Mortgage Association, known as Fannie Mae. We do
not originate negative amortization or payment option loans. Reduced
documentation loans include stated income, full asset, or SIFA loans; stated
income, stated asset, or SISA loans; and Super Streamline loans. SIFA and SISA
loans require a prospective borrower to complete a standard mortgage loan
application while the Super Streamline product requires the completion of an
abbreviated application and is in effect considered a “no documentation” loan.
Each of these products requires the receipt of an appraisal of the real estate
used as collateral for the mortgage loan and a credit report on the prospective
borrower. The loans are priced according to our internal risk assessment of the
loan giving consideration to the loan-to-value ratio, the potential borrower’s
credit scores and various other credit criteria. SIFA loans require the
verification of a potential borrower’s asset information on the loan
application, but not the income information provided.





The Bank
has evaluated the Guidance for our compliance, risk management practices and
underwriting guidelines as they relate to originations and purchases of the
subject loans, or practices relating to communications with
consumers.   The Guidance has no impact on the Company's loan
origination and purchase volumes or the Company's underwriting procedures
currently or in future periods.





Effortsto comply with the Sarbanes-Oxley
Act involve significant expenditures, and non-compliance with the Sarbanes-Oxley
Act may adversely affect us.The Sarbanes-Oxley Act of 2002,
and the related rules and regulations promulgated by the SEC increase the scope,
complexity and cost of corporate governance, reporting, and disclosure
practice.  The Company has experienced, and expects to continue to
experience, greater compliance costs, including design, testing and audit costs
related to internal controls, as a result of the Sarbanes-Oxley
Act.  For example, under Section 404 of Sarbanes-Oxley, beginning with
this annual report on Form 10-K, the Company’s management is required to issue a
report on the Company's internal controls over financial
reporting.  Beginning with Carver's fiscal 2010, Carver's management
will also be required to file an auditors attestation report on the Company’s
internal controls over financial reporting.  The Company expects the
implementation of these new rules and regulations to continue to increase its
accounting, legal, and other costs, and to make some activities more difficult,
time consuming, and costly.  In the event that the Company is unable
to maintain or achieve compliance with the Sarbanes-Oxley Act and related rules,
Carver’s profitability and the market price of Carver’s stock may be adversely
affected.





26
 Table of Contents





In
addition, the rules adopted as a result of the Sarbanes-Oxley Act could make it
more difficult or more costly for us to obtain certain types of insurance,
including directors’ and officers’ liability insurance, which could make it more
difficult for us to attract and retain qualified persons to serve on our board
of directors or as executive officers.





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.





The Company is subject to certain
risks with respect to liquidity.''Liquidity'' refers to our ability to
generate sufficient cash flows to support our operations and to fulfill our
obligations, including commitments to originate loans, to repay our wholesale
borrowings, and to satisfy the withdrawal of deposits by our
customers.





Our
primary sources of liquidity are the cash flows generated through the repayment
of loans and securities; cash flows from the sale of loans and securities,
typically in connection with the post-merger repositioning of our balance sheet;
the deposits we acquire in connection with our acquisitions and those we gather
organically through our branch network; and borrowed funds, primarily in the
form of wholesale borrowings from the FHLB-NY.  In addition, and
depending on current market conditions, we have the ability to access the
capital markets from time to time.





Deposit
flows, calls of investment securities and wholesale borrowings, and prepayments
of loans and mortgage-related securities are strongly influenced by such
external factors as the direction of interest rates, whether actual or
perceived; local and national economic conditions; and competition for deposits
and loans in the markets we serve. Furthermore, changes to the FHLB-NY's
underwriting guidelines for wholesale borrowings may limit or restrict our
ability to borrow, and could therefore have a significant adverse impact on our
liquidity.





A decline in available funding could
adversely impact our ability to originate loans, invest in securities, and meet
our expenses, or to fulfill such obligations as repaying our borrowings or
meeting deposit withdrawal demands.





The Bank’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.





Carver’s income tax benefits
risk.  The Company’s receipt of the remaining New Markets Tax
Credits income tax benefits over approximately the next six years depends on its
ability to meet the NMTC compliance requirements and its ability to generate
sufficient taxable income to utilize the tax credits from the NMTC
investment.  For additional information regarding Carver’s NMTC, refer
to Item 7, “New Market Tax Credit Award.”





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, or that of the Company’s third
party service providers.  Also, the Company’s computer systems and
network infrastructure could be damaged by "hacking" and "identity theft" which
could adversely affect the results of Carver’s operations, or that of the
Company’s third party service providers.




We
may be required to record a charge to earnings if our goodwill or other
intangible assets become impaired. Our
balance sheet includes goodwill and other identifiable intangible
assets.  Under U.S. Generally Accepted Accounting Principles, if
impairment of our goodwill or other identifiable intangible assets is determined
we may be required to record a charge to earnings in the period of such
determination.


Our business could suffer if wefailto 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 which could adversely affect the
results of our operations.





27
 Table of Contents





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.  Such
disasters may also have an impact on collateral underlying the Bank’s
loans.  The Company may face higher insurance costs in the event of
such disasters.








ITEM
1B.  UNRESOLVED STAFF COMMENTS.





Not
Applicable.





28
 Table of Contents





ITEM2.PROPERTIES.





The Bank
currently conducts its business through two administrative offices and ten
branches (including the 125th Street
branch) and ten additional ATM locations.  Carver Federal entered into
a license agreement with Merrill Lynch on March 23, 2007, to operate Investment
Centers at the Bank’s Malcolm X Boulevard and Atlantic Terminal branches 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,
2008.  The Bank believes that such facilities are suitable and
adequate for its operational needs.





LeaseYear
            Owned
      or
            
            Expiration
            
            
            %
      SpaceBranches
            Address
            City/State
            Opened
            Leased
            
            Date
            
            
            UtilizedMain
      Branch
            75
      West 125th Street
            New
      York, NY
            1996
            Owned
            
            
            n/a
            
            
            
            100
            %Bedford-Stuyvesant
      Branch
            1281
      Fulton Street
            Brooklyn,
      NY
            1989
            Owned
            
            
            n/a
            
            
            
            70
            %Crown
      Heights Branch
            1009-1015
      Nostrand Avenue
            Brooklyn,
      NY
            1975
            Owned
            
            
            n/a
            
            
            
            100
            %St
      Albans Branch
            115-02
      Merrick Boulevard
            Jamaica,
      NY
            1996
            Leased
            
            
            02/2011
            
            
            
            75
            %Malcolm
      X Blvd. Branch
            142
      Malcolm X Boulevard
            New
      York, NY
            2001
            Leased
            
            
            04/2011
            
            
            
            100
            %Jamaica
      Center Branch
            158-45
      Archer Avenue
            Jamaica,
      New York
            2003
            Leased
            
            
            07/2018
            
            
            
            100
            %Atlantic
      Terminal Branch
            4
      Hanson Place
            Brooklyn,
      NY
            2004
            Leased
            
            
            07/2014
            
            
            
            100
            %Bradhurst
      Branch
            300
      West 145th Street
            New
      York, NY
            2004
            Leased
            
            
            12/2009
            
            
            
            100
            %Livingston
      Branch
            111
      Livingston Street
            Brooklyn,
      NY
            2004
            Leased
            
            
            01/2015
            
            
            
            100
            %Sunset
      Park Branch
            140
      58th Street
            Brooklyn,
      NY
            2004
            Leased
            
            
            10/2010
            
            
            
            100
            %ATM
      CentersWest
      125th Street
            503
      West 125th Street
            New
      York, NY
            2003
            Leased
            
            
            03/2013
            
            
            
            100
            %West
      137th Street
            601
      West 137th Street
            New
      York, NY
            2003
            Leased
            
            
            10/2013
            
            
            
            100
            %Hanson
      Place
            1
      Hanson Place
            New
      York, NY
            2004
            Leased
            
            
            07/2009
            
            
            
            100
            %5th
      Avenue
            1400
      5th Avenue
            New
      York, NY
            2004
            Leased
            
            
            08/2013
            
            
            
            100
            %Fulton
      Street
            1950
      Fulton Street
            New
      York, NY
            2005
            Leased
            
            
            01/2010
            
            
            
            100
            %Atlantic
      Avenue
            625
      Atlantic Avenue
            New
      York, NY
            2003
            Leased
            
            
            10/2013
            
            
            
            100
            %Myrtle
      Ave
            362
      Myrtle Ave
            Brooklyn,
      NY
            2007
            Leased
            
            
            03/2013
            
            
            
            100
            %ATM
      Machines*Bedford
      Avenue
            1650
      Bedford Avenue
            New
      York, NY1150
      Carroll Street
            1150
      Carroll Street
            New
      York, NYAirTrain
            93-40
      Sutphin Boulevard
            Jamaica,
      NYAdministrative
      OfficeMetroTech
      Center
            12  MetroTech
      Center
            Brooklyn,
      NY
            2007
            Leased
            
            
            03/2017
            
            
            
            100
            %





* Stand
alone ATMs, not under real estate lease agreements





29
 Table of Contents





ITEM3.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, 2008, 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.





ITEM4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.





During
the quarter ended March 31, 2008, no matters were submitted to a vote of our
security holders through the solicitation of proxies or otherwise.





PART
II





ITEM5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES.





The
Holding Company’s common stock has been listed on the
NASDAQ Global Market under the symbol “CARV” since July 10,
2007.  Before that, the Company's stock was listed on the American Stock
Exchange under the symbol “CNY.”  As of
June 20, 2008, there were 2,474,738 shares of common stock outstanding, held by
977 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
            
            
            DividendFiscal
      Year 2008
            
            
            
            
            
            
            
            
            
            Fiscal
      Year 2007June
      30, 2007
            
            $
            17.06
            
            
            $
            15.70
            
            
            $
            0.10
            
            June
      30, 2006
            
            $
            18.06
            
            
            $
            16.35
            
            
            $
            0.09September
      30, 2007
            
            $
            16.75
            
            
            $
            15.10
            
            
            $
            0.10
            
            September
      30, 2006
            
            $
            18.12
            
            
            $
            16.40
            
            
            $
            0.09December
      31, 2007
            
            $
            16.85
            
            
            $
            12.70
            
            
            $
            0.10
            
            December
      31, 2006
            
            $
            16.86
            
            
            $
            15.25
            
            
            $
            0.09March
      31, 2008
            
            $
            16.44
            
            
            $
            11.50
            
            
            $
            0.10
            
            March
      31, 2007
            
            $
            16.98
            
            
            $
            15.50
            
            
            $
            0.09








The Board
formerly paid dividends on an annual basis and initially established the payment
of a quarterly dividend to common shareholders on January 9,
2003.  Subsequently, each quarter the Board meets to determine the
dividend amount per share to be declared.  On May 29, 2008, the
Company’s Board of Directors declared a $0.10 cash dividend to shareholders for
the fourth quarter of fiscal 2008. This represents a $0.05 per share increase
from the $0.05 paid at inception of the Board establishing payment of a
quarterly dividend in the fourth quarter of the fiscal year ended March 31,
2003.  The Holding Company currently expects that comparable cash dividends
will continue to be paid in the future.





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 12 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.  As of March 31,
2008, 159,474 shares of its common stock have been repurchased in open market
transactions at an average price of $16.36 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 provides detail
of common stock repurchases made by the Holding Company during the fourth
quarter of fiscal 2008.





30
 Table of Contents




Total
      Number of Shares Purchased
            
            
            Average
      Price Paid per Share
            
            
            Total
      Number of Shares Purchased as part of Publicly Announced Plan
            
            
            Maximum
      Number of Shares that May Yet Be Purchased Under the PlanJanuary
      1, 2008 throughJanuary
      31, 2008
            
            
            4,600
            
            
            $
            14.51
            
            
            
            4600
            
            
            
            74,361February
      1, 2008 throughFebruary
      29, 2008
            
            
            1,200
            
            
            $
            15.58
            
            
            
            1200
            
            
            
            73,161March
      1, 2008 throughMarch
      31, 2008
            
            
            1,000
            
            
            $
            13.07
            
            
            
            1000
            
            
            
            72,1616,800
            
            
            $
            14.49
            
            
            
            6,800








Carver
has four equity compensation plans as follows:





(1) The
Management Recognition Plan (“MRP”) which provides for automatic grants of
restricted stock to certain employees and non-employee directors as of the date
the plan became effective in June of 1995.  Additionally, the MRP
makes provision for added discretionary grants of restricted stock to those
employees so selected by the Compensation Committee of the Board who administers
the plan.  There are no shares available for grant under the
MRP.





(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.  Carver terminated this plan in 2006 and there are no
grants outstanding under it.





(3) The
1995 Stock Option Plan provides for automatic option grants to certain employees
and directors as of the date the plan became effective in September of 1995, and
like the MRP, also makes provision for added discretionary option grants to
those employees so selected by the Compensation Committee.  The 1995
Stock Option Plan expired in 2005, however, options are still outstanding under
this plan.





(4) The
2006 Stock Incentive Plan became effective in September of 2006 and provides for
discretionary option grants, stock appreciation rights and restricted stock to
those employees and directors 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 (as defined below in Item
10).





31
 Table of Contents





Stock
Performance Graph





The graph
below compares Carver Bancorp, Inc.'s cumulative 5-year total shareholder return
on common stock with the cumulative total returns of the AMEX Composite index,
the NASDAQ Composite Index, AMEX Companies listed in SIC Code 6030-6039 and the
S&P Small Cap Thrifts & Mortgage Finance Index. The graph tracks the
performance of a $100 investment in our common stock, in each index and in each
of the peer groups (with the reinvestment of all dividends) from 3/31/2003 to
3/31/2008.











3/2003
            
            
            
            3/2004
            
            
            
            3/2005
            
            
            
            3/2006
            
            
            
            3/2007
            
            
            
            3/2008Carver
      Bancorp Inc.
            
            
            100.00
            
            
            
            169.67
            
            
            
            136.84
            
            
            
            127.22
            
            
            
            127.05
            
            
            
            90.65AMEX
      Composite
            
            
            100.00
            
            
            
            154.59
            
            
            
            181.53
            
            
            
            240.62
            
            
            
            271.66
            
            
            
            281.78NASDAQ
      Composite
            
            
            100.00
            
            
            
            151.01
            
            
            
            152.38
            
            
            
            181.06
            
            
            
            189.63
            
            
            
            177.49SIC
      Code 6030-6039 (AMEX STOCKS)
            
            
            100.00
            
            
            
            132.46
            
            
            
            150.40
            
            
            
            169.33
            
            
            
            164.84
            
            
            
            85.36S&P
      SmallCap Thrifts & Mortgage Finance
            
            
            100.00
            
            
            
            160.84
            
            
            
            161.36
            
            
            
            168.44
            
            
            
            143.61
            
            
            
            82.37





The
stock price performance included in this graph is not necessarily indicative of
future stock price performance.





32
 Table of Contents





The AMEX
listed companies in SIC Codes 6030-6039 are: Federal Trust Corp., Gouverneur
Bancorp Inc and Teche Holdings Company.  The companies listed in the
S&P Small Cap Thrifts & Mortgage Finance Index are Anchor Bancorp
Wisconsin, Bank Mutual Corp., Bankatlantic Bancorp Inc, Bankunited Financial
Corp., Brookline Bancorp Inc, Corus Bankshares Inc, Dime Community Bank shares,
Downey Financial Corp., First fed Financial Corp., Flagstar Bancorp Inc,
Franklin Bank Corp. Delaware, Guaranty Financial Group Inc, Triad Guaranty Inc
and Trustco Bank Corp. New York.





33
 Table of Contents





ITEM6.SELECTED FINANCIAL DATA





The
following selected consolidated financial and other data is as of and for the
years ended March 31 and is derived in part from, and should be read in
conjunction with the Company’s consolidated financial statements and related
notes (dollars in thousands):





2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Selected
      Financial Condition Data:Assets
            
            $
            796,443
            
            
            $
            739,952
            
            
            $
            661,396
            
            
            $
            626,377
            
            
            $
            538,830Loans
      held-for-sale
            
            
            23,767
            
            
            
            23,226
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      loans receivable, net
            
            
            627,916
            
            
            
            580,551
            
            
            
            493,432
            
            
            
            421,987
            
            
            
            351,900Securities
            
            
            38,172
            
            
            
            67,117
            
            
            
            108,286
            
            
            
            149,335
            
            
            
            139,877Cash
      and cash equivalents
            
            
            27,368
            
            
            
            17,350
            
            
            
            22,904
            
            
            
            20,420
            
            
            
            22,774Deposits
            
            
            654,663
            
            
            
            615,122
            
            
            
            504,638
            
            
            
            455,870
            
            
            
            375,519Borrowed
      funds
            
            
            58,625
            
            
            
            61,093
            
            
            
            93,792
            
            
            
            115,299
            
            
            
            104,282Stockholders'
      equity
            
            
            54,383
            
            
            
            51,627
            
            
            
            48,697
            
            
            
            45,801
            
            
            
            44,645Number
      of deposit accounts
            
            
            46,771
            
            
            
            46,034
            
            
            
            41,614
            
            
            
            40,199
            
            
            
            38,578Number
      of branches
            
            
            10
            
            
            
            10
            
            
            
            8
            
            
            
            8
            
            
            
            6Operating
      Data:Interest
      income
            
            $
            48,132
            
            
            $
            41,740
            
            
            $
            32,385
            
            
            $
            28,546
            
            
            $
            26,234Interest
      expense
            
            
            22,656
            
            
            
            19,234
            
            
            
            13,493
            
            
            
            9,758
            
            
            
            8,700Net
      interest income before provision for loan losses
            
            
            25,476
            
            
            
            22,506
            
            
            
            18,892
            
            
            
            18,788
            
            
            
            17,534Provision
      for loan losses
            
            
            222
            
            
            
            276
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      interest income after provision for loan losses
            
            
            25,254
            
            
            
            22,230
            
            
            
            18,892
            
            
            
            18,788
            
            
            
            17,534Non-interest
      income
            
            
            7,861
            
            
            
            2,869
            
            
            
            5,341
            
            
            
            4,075
            
            
            
            5,278Non-interest
      expense
            
            
            29,870
            
            
            
            23,339
            
            
            
            19,134
            
            
            
            18,696
            
            
            
            15,480Income
      before income taxes
            
            
            3,245
            
            
            
            1,760
            
            
            
            5,099
            
            
            
            4,167
            
            
            
            7,332Income
      tax (benefit) expense
            
            
            (881
            )
            
            
            (823
            )
            
            
            1,329
            
            
            
            1,518
            
            
            
            2,493Minority
      intereset, net of taxes
            
            
            146
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      income
            
            $
            3,980
            
            
            $
            2,583
            
            
            $
            3,770
            
            
            $
            2,649
            
            
            $
            4,839Basic
      earnings per common share
            
            $
            1.60
            
            
            $
            1.03
            
            
            $
            1.50
            
            
            $
            1.06
            
            
            $
            2.03Diluted
      earnings per common share
            
            $
            1.55
            
            
            $
            1.00
            
            
            $
            1.45
            
            
            $
            1.03
            
            
            $
            1.87Cash
      dividends per common share
            
            $
            0.40
            
            
            $
            0.35
            
            
            $
            0.31
            
            
            $
            0.26
            
            
            $
            0.2026Selected
      Statistical Data:Return
      on average assets (1)
            
            
            0.52
            %
            
            
            0.37
            %
            
            
            0.60
            %
            
            
            0.45
            %
            
            
            0.93
            %Return
      on average equity (2)
            
            
            7.23
            
            
            
            5.23
            
            
            
            7.93
            
            
            
            5.80
            
            
            
            11.40Net
      interest margin (3)
            
            
            3.62
            
            
            
            3.44
            
            
            
            2.97
            
            
            
            3.41
            
            
            
            3.56Average
      interest rate spread (4)
            
            
            3.34
            
            
            
            3.16
            
            
            
            3.18
            
            
            
            3.26
            
            
            
            3.40Efficiency
      ratio (5)
            
            
            90.31
            
            
            
            91.98
            
            
            
            78.96
            
            
            
            81.77
            
            
            
            67.86Operating
      expense to average assets (6)
            
            
            3.92
            
            
            
            3.34
            
            
            
            3.04
            
            
            
            3.21
            
            
            
            2.97Average
      equity to average assets
            
            
            7.16
            
            
            
            7.05
            
            
            
            7.54
            
            
            
            7.84
            
            
            
            8.13Dividend
      payout ratio (7)
            
            
            24.50
            
            
            
            34.04
            
            
            
            20.63
            
            
            
            24.64
            
            
            
            9.86Asset
      Quality Ratios:Non-performing
      assets to total assets (8)
            
            
            0.50
            %
            
            
            0.61
            %
            
            
            0.42
            %
            
            
            0.16
            %
            
            
            0.39
            %Non-performing
      loans to total loans receivable (8)
            
            
            0.43
            
            
            
            0.74
            
            
            
            0.55
            
            
            
            0.23
            
            
            
            0.60Allowance
      for loan losses to total loans receivable
            
            
            0.74
            
            
            
            0.89
            
            
            
            0.81
            
            
            
            0.96
            
            
            
            1.16





(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 divided by the sum of net interest income and non-interest
      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.





34
 Table of Contents





ITEM7. MANAGEMENT’SDISCUSSION 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 savings and loan holding company organized under the laws of
the state of Delaware.   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 ten branches in the New York City boroughs of Manhattan, Brooklyn
and Queens.





Fiscal
2008





Fiscal
2008 was a particularly challenging year for Carver, driven in part by the yield
curve and disruptions in credit markets, followed by the threat of
recession.  Nevertheless, Carver’s business held up well, as the
impact of national events has not been as apparent in our core
markets.  Carver was spared the brunt of the turbulent credit
environment, given our limited exposure to loan and investment products of
concern to the financial markets.  Although the
Company's local markets have not experienced in any material
respect the fallout impacting other regions across the nation, management
is intensely focused on any signs of weakening conditions.  The
Company believes its small business and real estate lending teams are well
positioned to source attractive opportunities, and Carver remains committed to
solid asset quality and accretive asset growth as top priorities.





Reported
earnings increased 54% from fiscal 2007, but were flat when removing the impact
of fiscal 2007’s acquisition and balance sheet restructuring.  The
Company’s net interest income grew to a record level of over $25 million,
following an increase in our net interest margin of 18 basis points to
3.62%.  This margin expansion resulted from a 7.8% increase in loans
and deposit growth of 6.4%, although consistent with peers, core deposits are
migrating to higher priced CDs.  Additionally, credit quality remained
strong with non-performing loans at 0.50% of total assets.  Securities
and borrowings portfolios decreased during fiscal 2008, which is consistent with
the Company’s strategy to reduce lower yielding securities and invest in higher
yielding mortgages and loans.  Carver’s fiscal 2008 performance was
driven by three primary factors: first, Carver’s lending business continued
to excel, and credit quality remained stable; second, Carver leveraged its New
Markets Tax Credit award to bolster bottom line performance; and third,
Carver’s asset/liability management eased margin pressure.





The
Bank’s non-interest income benefited from a significant New Markets Tax Credit
transaction generating a $1.7 million payment during the year, along with
increased lending and retail fee generation.  With this transaction,
the Bank’s $59 million award received in June 2006 has been fully
invested.  Carver’s NMTC award continues to provide a Federal
income tax benefit to the Company's bottom line.  The
Company expects to receive additional NMTC tax benefits of approximately $12.1
million from its $40.0 million investment over approximately the next six
years.





Asset
quality remained solid in fiscal 2008 notwithstanding the Bank’s loan portfolio
growth and diversification into small business lending.  The Company
believes that the Bank’s loan loss provision recorded in fiscal 2008 and the
Bank’s allowance for loan losses are adequate.





Expenses
grew year over year, largely based on substantial expansion of non-interest
expense of $3.6 million. The increase in expense falls into three categories:
regulatory requirements (preparation for compliance with Sarbanes-Oxley Act
Section 404 and recent Inter-Agency Guidance on Allowances for Loan Losses);
strengthening the Bank’s back office, including the accounting, lending and
retail operations departments, by adding new staff and providing temporary
expertise; and engaging consultants to assist the management team to analyze
significant opportunities to improve financial results. For example, the Bank
engaged consultants to conduct a rigorous business optimization review to help
management identify further improvements in our operations, in part through
greater systems integration.  While these investments impact near-term
results, they are fundamental to building the scale and infrastructure necessary
for the Company to grow profitably.  During fiscal 2009, management
expects to outline specific steps to improve efficiency and return on
equity.  The first step should occur in the second quarter of fiscal
2009 when the Bank expects to complete outsourcing of its residential lending
department. Management expects that this arrangement will expand the Bank’s
product base and improve customer service, while reducing costs to the
Company.





35
 Table of Contents





Fiscal
2009





The
industry economic environment in fiscal 2009 is expected to be characterized by
continued constraint in credit markets combined with the threat of
stagflation.  The credit issues relate to weaknesses in residential
and commercial real estate due to subprime issues and general economic
conditions.  Interest rates are expected to remain low in the near
term as the Federal Reserve lowered the Fed funds rate in efforts to stimulate
growth.  However, inflation fears may constrain the Federal Reserve's
ability to lower rates from current levels, and inflation concerns may have
the impact of steepening the yield curve and encouraging the Federal
Reserve to consider raising the Fed funds rate later this
year.





Thrifts,
many of which have business models primarily dependent on spread income from
real estate loans, have been especially hard hit in this
environment.  The thrift industry posted a record $5.2 billion loss in
the December 2007 quarter.  In calendar year 2008 (Carver’s fiscal
2009), industry analysts expect earnings shrinkage for the sector, and expect
smaller banks to suffer more than larger banks.  Carver Federal’s
credit quality has been stable because its neighborhood markets have not been as
severely impacted by the credit issues impacting the nation.





The
outlook for fiscal 2009 reflects many of the economic and competitive factors
that the Bank and the banking industry faced in fiscal 2008.  As a
result, the Bank expects the operating environment to remain
challenging.   In this challenging climate, the Bank will
continue to focus on growth in its traditional businesses, namely the expansion
of real estate loans and core deposits.  The Bank expects its new
business and marketing efforts to core customer groups including small business
owners, landlords, and churches and other non-profits, to drive the Bank’s
deposit gathering strategy.





Carver
expects its business performance in fiscal 2009 and thereafter will be propelled
by several factors.  First, the small business and non-residential
markets offer the opportunity for higher-yielding loans and lower costing
deposits.  Management believes serving these market niches is critical
to Carver’s growth and future profitability.  Second, Carver’s focus
on improving its back-office operations should pay dividends in the form of
efficiencies.  Third, Carver enjoys a venerable reputation in the
world of community development financial institutions, and management believes
that Carver may leverage that reputation to its business advantage by broadening
its new business efforts to target a broader institutional
audience.  Finally, management believes that growth and profitability
may be accelerated by a prudent merger and acquisition strategy.  The
importance of a strong and efficient operating platform has been amplified in
the current regulatory environment and Carver’s competitive
marketplace.





Acquisition
of Community Capital Bank





On
September 29, 2006, the Bank completed its acquisition of Community Capital
Bank, a Brooklyn-based New York State chartered commercial bank, with
approximately $165.4 million in assets and two branches, in a cash transaction
totaling approximately $11.1 million.  Under the terms of the merger
agreement, CCB’s shareholders were paid $40.00 per outstanding share (including
options which immediately vested with the consummation of the merger) and the
Bank incurred an additional $0.9 million in transaction related
costs.  The combined entities operate under Carver Federal’s thrift
charter and Carver Federal continues to be supervised by the Office of Thrift
Supervision.





The
transaction, which was accounted for under the purchase accounting method,
included the recognition of approximately $0.8 million of core deposit
intangibles and $5.1 million representing the excess of the purchase price over
the fair value of identifiable net assets (“goodwill”).  At March 31,
2008, goodwill relating to the transaction and subsequent additional purchase
accounting adjustments, primarily income taxes, sales tax assessment and
professional fees, totaled approximately $6.4 million.




New
Markets Tax Credit Award





In June
2006, Carver Federal was selected by the U.S. Department of Treasury to receive
an award of $59 million in New Markets Tax Credits.  The NMTC award is
used to stimulate economic development in low- to moderate-income
communities.  The NMTC award enables the Bank to invest with community
and development partners in economic development projects with attractive terms
including, in some cases, below market interest rates, which may have the effect
of attracting capital to underserved communities and facilitating the
revitalization of the community, pursuant to the goals of the NMTC
program.  The NMTC award provides a credit to Carver Federal against
Federal income taxes when the Bank makes qualified investments.  The
credits are allocated over seven years from the time of the qualified
investment.  Recognition of the Bank’s NMTC award began in December
2006 when the Bank invested $29.5 million, one-half of its $59 million
award.  In December 2007, the Bank invested an additional $10.5
million and transferred rights to $19.0 million to an investor in a NMTC
project.  The Bank’s NMTC allocation was fully invested as of December
31, 2007.  During the seven year period, assuming the Bank meets
compliance requirements, the Bank will receive 39% of the $40.0 million invested
award amount in tax benefits (5% over each of the first three years, and 6% over
each of the next four years).  The Company expects to receive the
remaining NMTC tax benefits of approximately $12.1 million from its $40.0
million investment over the next six years.





36
 Table of Contents





Critical
Accounting Policies





Various
elements of our accounting policies, by their nature, are inherently subject to
estimation techniques, valuation assumptions and other subjective
assessments.  Carver’s policy with respect to the methodologies used
to determine the allowance for loan losses is the most critical accounting
policy.  This policy is important to the presentation of Carver’s
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
2 of Notes to Consolidated Financial Statements for a description of our summary
of significant accounting policies, including those related to allowance for
loan losses, and an explanation of the methods and assumptions underlying their
application.





Securities
Impairment





The
Bank’s available-for-sale securities portfolio is carried at estimated fair
value, with any unrealized gains and losses, net of taxes, reported as
accumulated other comprehensive income/loss in stockholders’
equity.  Securities that the Bank has the positive intent and ability
to hold to maturity are classified as held-to-maturity and are carried at
amortized cost.  The fair values of securities in the portfolio are
based on published or securities dealers’ market values and are affected by
changes in interest rates.  The Bank periodically reviews and
evaluates the securities portfolio to determine if the decline in the fair value
of any security below its cost basis is other-than-temporary.  The
Bank generally views changes in fair value caused by changes in interest rates
as temporary, which is consistent with its experience.  However, if
such a decline is deemed to be other-than-temporary, the security is written
down to a new cost basis and the resulting loss is charged to
earnings.  At March 31, 2008, the Bank carried no other than
temporarily impaired securities.





Allowance
for Loan Losses





The
allowance for loan losses is maintained at a level considered adequate to
provide for probable loan losses inherent in the portfolio as of March 31,
2008.  During the third quarter of fiscal 2008, Carver changed
its loan loss methodology to be consistent with the Interagency Policy Statement
on the Allowance for Loan and Lease Losses released by the Federal Financial
Regulatory Agencies on December 13, 2006.  The change had an
immaterial affect on the allowance for loan losses at March 31,
2008.  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 includes 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 loan loss
      allowance amounts for all specifically identified criticized and
      classified loans that have been designated as requiring attention by
      management’s internal loan review process, bank regulatory examinations or
      Carver Federal’s external
auditors.





·
            An average loss factor, giving
      effect to historical loss experience over several years and other
      qualitative factors, is applied to all loans not subject to specific
      review.





·
            Evaluation of any changes in 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 performing this evaluation is the concentration of real
      estate related loans located in theNew York Citymetropolitan
      area.





All new
loan originations are assigned a credit risk grade which commences with loan
officers and underwriters grading the quality of their loans one to five under a
nine-category risk classification scale, the first five categories of which
represent performing loans.  Reserves are held based on actual loss
factors based on several years of loss experience and other qualitative factors
applied to the outstanding balances in each loan category.  All loans
are subject to continuous review and monitoring for changes in their credit
grading.   Grading that falls into criticized or classified
categories (credit grading six through nine) are further evaluated and reserved
amounts are established for each loan based on each loan’s potential for loss
and include consideration of the sufficiency of collateral.  Any
adverse trend in real estate markets could seriously affect underlying values
available to protect against loss.





37
 Table of Contents





Other
evidence used to support the amount of the allowance and its components
includes:





·
            Amount and trend of criticized
      loans;


·
            Actual
    losses;


·
            Peer comparisons with other
      financial institutions; and


·
            Economic data associated with the
      real estate market in the Company’s lending market
      areas.





A loan is
considered to be impaired, as defined by 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, are excluded from the scope of SFAS
114.  Impaired loans are required to be measured based upon (i) the
present value of expected future cash flows, discounted at the loan’s initial
effective interest rate, (ii) the loan’s market price, or (iii) 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 allowance must be
established for the difference.  The allowance is established by
either an allocation of the existing allowance for loan losses or by a provision
for loan losses, depending on various circumstances.  Allowances are
not needed when credit losses have been recorded so that the recorded investment
in an impaired loan is less than the loan valuation.





Asset/Liability
Management





The
Company’s primary earnings source is net interest income, which is affected by
changes in the level of interest rates, the relationship between the rates on
interest-earning assets and interest-bearing liabilities, the impact of interest
rate fluctuations on asset prepayments, the level and composition of deposits
and the credit quality of earning assets.  Management’s
asset/liability objectives are to maintain a strong, stable net interest margin,
to utilize its capital effectively without taking undue risks, to maintain
adequate liquidity and to manage its exposure to changes in interest
rates.





The
economic environment is uncertain regarding future interest rate
trends.  Management monitors the Company’s cumulative gap position,
which is the difference between the sensitivity to rate changes on the Company’s
interest-earning assets and interest-bearing liabilities.  In
addition, the Company uses various tools to monitor and manage interest rate
risk, such as a model that projects net interest income based on increasing or
decreasing interest rates.





Stock
Repurchase Program





Refer to
“ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.”








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
virtually all of the Company’s interest-bearing assets and liabilities are held
by the Bank, most of the Company’s interest rate risk exposure is retained by
the Bank.  As a result, all significant interest rate risk 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 interest rate risk 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 that 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 maturing or 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 12.47% of total rate sensitive assets at March 31,
2008.  As a result, Carver Federal’s net interest income could be
negatively affected by rising interest rates and positively affected by falling
interest rates.





38
 Table of Contents





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, 2008.  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 (dollars in thousands):





< 3 Mos.
            
            
            4-12 Mos.
            
            
            1-3 Yrs.
            
            
            3-5 Yrs.
            
            
            5-10 Yrs.
            
            
            10+ Yrs.
            
            
            TotalRate
      Sensitive Assets:Loans
            
            $
            171,827
            
            
            $
            65,102
            
            
            $
            113,724
            
            
            $
            127,919
            
            
            $
            70,390
            
            
            $
            107,599
            
            
            $
            656,561Mortgage
      Backed Securities
            
            
            5,265
            
            
            
            6,297
            
            
            
            8,728
            
            
            
            943
            
            
            
            2,823
            
            
            
            12,756
            
            
            
            36,812Federal
      Funds Sold
            
            
            10,500
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,500Investment
      Securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,360
            
            
            
            -
            
            
            
            1,360Total
      interest-earning assets
            
            
            187,592
            
            
            
            71,399
            
            
            
            122,452
            
            
            
            128,862
            
            
            
            74,573
            
            
            
            120,355
            
            
            
            705,233Rate
      Sensitive Liabilities:NOW
      accounts
            
            
            2,167
            
            
            
            2,500
            
            
            
            5,999
            
            
            
            5,086
            
            
            
            6,726
            
            
            
            5,689
            
            
            
            28,167Savings
      Accounts
            
            
            9,681
            
            
            
            11,168
            
            
            
            26,798
            
            
            
            22,719
            
            
            
            30,042
            
            
            
            25,411
            
            
            
            125,819Money
      market accounts
            
            
            3,502
            
            
            
            4,040
            
            
            
            9,694
            
            
            
            8,218
            
            
            
            10,867
            
            
            
            9,192
            
            
            
            45,513Certificate
      of Deposits
            
            
            136,426
            
            
            
            162,345
            
            
            
            25,690
            
            
            
            12,739
            
            
            
            399
            
            
            
            6
            
            
            
            337,604Borrowings
            
            
            1,000
            
            
            
            14,108
            
            
            
            -
            
            
            
            30,142
            
            
            
            -
            
            
            
            -
            
            
            
            45,250Total
      interest-bearing liabilities
            
            
            152,776
            
            
            
            194,161
            
            
            
            68,181
            
            
            
            78,904
            
            
            
            48,034
            
            
            
            40,298
            
            
            
            582,353Interest
      Sensitivity Gap
            
            $
            34,816
            
            
            $
            (122,762
            )
            
            $
            54,271
            
            
            $
            49,958
            
            
            $
            26,539
            
            
            $
            80,057
            
            
            $
            122,879Cumulative
      Interest Sensitivity Gap
            
            $
            34,816
            
            
            $
            (87,946
            )
            
            $
            (33,675
            )
            
            $
            16,283
            
            
            $
            42,822
            
            
            $
            122,879Ratio
      of Cumulative Gap to Total RateSensitive
      assets
            
            
            4.94
            %
            
            
            -12.47
            %
            
            
            -4.77
            %
            
            
            2.31
            %
            
            
            6.07
            %
            
            
            17.42
            %





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.  NPV is the present value of expected
net cash flows from existing assets less the present value of expected cash
flows from existing liabilities plus the present value of net expected cash
inflows from existing financial derivatives and off-balance-sheet
contracts.





Under
this methodology, interest rate risk exposure is assessed by reviewing the
estimated changes in NPV that would hypothetically occur if interest rates
rapidly rise or fall along the yield curve.  Projected values of 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.





39
 Table of Contents





Presented
below, as of March 31, 2008, is an analysis of the Bank’s interest rate risk as
measured by changes in NPV for instantaneous and sustained parallel shifts of
100 basis points and 50 basis points plus or minus changes 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 interest rate risk for
fiscal 2008, 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 interest rate risk exposure lies at the Bank
level, management believes the table below also similarly reflects an analysis
of the Company’s interest rate risk (dollars in thousands):





Net Portfolio Value
            
            
            NPV as % of PV of AssetsChange in Rate
            
            
            $ Amount
            
            
            $ Change
            
            
            % Change
            
            
            NPV Ratio
            
            
            Change+300
            bp
            
            
            99,028
            
            
            
            -15,954
            
            
            
            -14
            %
            
            
            12.27
            %
            
            
            -154
            bp+200
            bp
            
            
            102,962
            
            
            
            -12,020
            
            
            
            -10
            %
            
            
            12.65
            %
            
            
            -117
            bp+100
            bp
            
            
            108,631
            
            
            
            -6,351
            
            
            
            -6
            %
            
            
            13.21
            %
            
            
            -
      60
            bp+50
            bp
            
            
            111,870
            
            
            
            -3,112
            
            
            
            -3
            %
            
            
            13.52
            %
            
            
            -
      30
            bp0
            bp
            
            
            114,982
            
            
            
            --
            
            
            
            --
            
            
            
            13.82
            %
            
            
            --
            bp(50
            )
      bp
            
            
            117,979
            
            
            
            2,997
            
            
            
            3
            %
            
            
            14.10
            %
            
            
            28
            bp(100
            )
      bp
            
            
            120,788
            
            
            
            5,806
            
            
            
            5
            %
            
            
            14.36
            %
            
            
            54
            bp





March 31,2008Risk
      Measures: +200 BP Rate Shock:Pre-Shock
      NPV Ratio: NPV as % of PV of Assets
            
            
            13.82
            %Post-Shock
      NPV Ratio
            
            
            12.65
            %Sensitivity
      Measure: Decline in NPV Ratio
            
            
            -117
            bp





Certain
shortcomings are inherent in the methodology used in the above interest rate
risk 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 interest rate risk 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.





40
 Table of Contents





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
related yields for the years ended March 31.  The table also presents
information for the fiscal 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 (dollars in
thousands):





2008
            
            
            2007
            
            
            2006Interest
      Earning Assets:
            
            Average
      Balance
            
            
            Interest
            
            
            Average
      Yield/ Cost
            
            
            Average
      Balance
            
            
            Interest
            
            
            Average
      Yield/ Cost
            
            
            Average
      Balance
            
            
            Interest
            
            
            Average
      Yield/ CostLoans
            
            $
            639,583
            
            
            $
            44,499
            
            
            
            6.96
            %
            
            $
            558,058
            
            
            $
            37,278
            
            
            
            6.68
            %
            
            $
            443,461
            
            
            $
            26,563
            
            
            
            5.99
            %Mortgage-backed
      securities
            
            
            39,079
            
            
            
            2,071
            
            
            
            5.30
            %
            
            
            64,682
            
            
            
            2,877
            
            
            
            4.45
            %
            
            
            113,574
            
            
            
            4,439
            
            
            
            3.91
            %Investment
      securities
            
            
            22,902
            
            
            
            1,434
            
            
            
            6.26
            %
            
            
            27,161
            
            
            
            1,325
            
            
            
            4.88
            %
            
            
            25,698
            
            
            
            971
            
            
            
            3.78
            %Fed
      funds sold
            
            
            3,007
            
            
            
            128
            
            
            
            4.26
            %
            
            
            5,145
            
            
            
            261
            
            
            
            5.07
            %
            
            
            12,166
            
            
            
            412
            
            
            
            3.39
            %Total
      interest earning assets
            
            
            704,571
            
            
            
            48,132
            
            
            
            6.83
            %
            
            
            655,046
            
            
            
            41,741
            
            
            
            6.37
            %
            
            
            594,899
            
            
            
            32,385
            
            
            
            5.44
            %Non-interest
      earning assets
            
            
            63,440
            
            
            
            
            
            
            
            
            
            
            
            44,576
            
            
            
            
            
            
            
            
            
            
            
            35,198Total
      assets
            
            $
            768,011
            
            
            
            
            
            
            
            
            
            
            $
            699,622
            
            
            
            
            
            
            
            
            
            
            $
            630,097Interest
      Bearing Liabilities:Deposits:NOW
      demand
            
            $
            24,660
            
            
            
            138
            
            
            
            0.56
            %
            
            $
            25,313
            
            
            
            98
            
            
            
            0.39
            %
            
            $
            24,397
            
            
            
            74
            
            
            
            0.30
            %Savings
      and clubs
            
            
            131,627
            
            
            
            1,004
            
            
            
            0.76
            %
            
            
            136,785
            
            
            
            931
            
            
            
            0.68
            %
            
            
            137,934
            
            
            
            919
            
            
            
            0.67
            %Money
      market savings
            
            
            44,688
            
            
            
            1,193
            
            
            
            2.67
            %
            
            
            43,303
            
            
            
            1,133
            
            
            
            2.62
            %
            
            
            36,583
            
            
            
            601
            
            
            
            1.64
            %Certificates
      of deposit
            
            
            370,933
            
            
            
            16,489
            
            
            
            4.45
            %
            
            
            312,452
            
            
            
            13,036
            
            
            
            4.17
            %
            
            
            237,992
            
            
            
            7,297
            
            
            
            3.07
            %Mortgagors
      deposits
            
            
            2,687
            
            
            
            42
            
            
            
            1.56
            %
            
            
            2,154
            
            
            
            30
            
            
            
            1.39
            %
            
            
            2,044
            
            
            
            30
            
            
            
            1.47
            %Total
      deposits
            
            
            574,595
            
            
            
            18,866
            
            
            
            3.28
            %
            
            
            520,007
            
            
            
            15,228
            
            
            
            2.93
            %
            
            
            438,950
            
            
            
            8,921
            
            
            
            2.03
            %Borrowed
      money
            
            
            73,880
            
            
            
            3,790
            
            
            
            5.13
            %
            
            
            78,853
            
            
            
            4,007
            
            
            
            5.08
            %
            
            
            107,551
            
            
            
            4,572
            
            
            
            4.25
            %Total
      interest bearing liabilities
            
            
            648,475
            
            
            
            22,656
            
            
            
            3.49
            %
            
            
            598,860
            
            
            
            19,235
            
            
            
            3.21
            %
            
            
            546,501
            
            
            
            13,493
            
            
            
            2.47
            %Non-interest-bearing
      liabilities:Demand
            
            
            51,713
            
            
            
            
            
            
            
            
            
            
            
            40,676
            
            
            
            
            
            
            
            
            
            
            
            29,079Other
      liabilities
            
            
            12,803
            
            
            
            
            
            
            
            
            
            
            
            10,739
            
            
            
            
            
            
            
            
            
            
            
            6,980Total
      liabilities
            
            
            712,991
            
            
            
            
            
            
            
            
            
            
            
            650,275
            
            
            
            
            
            
            
            
            
            
            
            582,560Stockholders'
      equity
            
            
            55,020
            
            
            
            
            
            
            
            
            
            
            
            49,347
            
            
            
            
            
            
            
            
            
            
            
            47,537Total
      liabilities and stockholders' equity
            
            $
            768,011
            
            
            
            
            
            
            
            
            
            
            $
            699,622
            
            
            
            
            
            
            
            
            
            
            $
            630,097Net
      interest income
            
            
            
            
            
            $
            25,476
            
            
            
            
            
            
            
            
            
            
            $
            22,506
            
            
            
            
            
            
            
            
            
            
            $
            18,892Average
      interest rate spread
            
            
            
            
            
            
            
            
            
            
            3.34
            %
            
            
            
            
            
            
            
            
            
            
            3.16
            %
            
            
            
            
            
            
            
            
            
            
            2.97
            %Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            3.62
            %
            
            
            
            
            
            
            
            
            
            
            3.44
            %
            
            
            
            
            
            
            
            
            
            
            3.18
            %Ratio
      of average interest-earning assets to  interest-bearing
      liabilities
            
            
            
            
            
            
            
            
            
            
            108.65
            %
            
            
            
            
            
            
            
            
            
            
            109.38
            %
            
            
            
            
            
            
            
            
            
            
            108.86
            %





41
 Table of Contents





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 fiscal
years ended March 31 (in thousands):




2008
      vs. 2007
              
              
              2007
      vs. 2006Increase
      (Decrease) due to
              
              
              Increase
      (Decrease) due toVolume
              
              
              Rate
              
              
              Total
              
              
              Volume
              
              
              Rate
              
              
              TotalInterest
      Earning Assets:Loans
              
              $
              5,626
              
              
              $
              1,595
              
              
              $
              7,221
              
              
              $
              6,864
              
              
              $
              3,060
              
              
              $
              9,924Investment
      securities
              
              
              (248
              )
              
              
              357
              
              
              
              109
              
              
              
              1,473
              
              
              
              172
              
              
              
              1,645Mortgage-backed
      securities
              
              
              (1,289
              )
              
              
              483
              
              
              
              (806
              )
              
              
              (3,377
              )
              
              
              1,102
              
              
              
              (2,276
              )Fed
      funds sold, FHLB stock & other
              
              
              (101
              )
              
              
              (32
              )
              
              
              (133
              )
              
              
              (238
              )
              
              
              205
              
              
              
              (33
              )Total
      interest earning assets
              
              
              3,988
              
              
              
              2,403
              
              
              
              6,391
              
              
              
              4,722
              
              
              
              4,539
              
              
              
              9,260Interest
      Bearing Liabilities:DepositsNOW
      demand
              
              
              (4
              )
              
              
              44
              
              
              
              40
              
              
              
              3
              
              
              
              20
              
              
              
              23Savings
      and clubs
              
              
              (39
              )
              
              
              112
              
              
              
              73
              
              
              
              (8
              )
              
              
              20
              
              
              
              12Money
      market savings
              
              
              37
              
              
              
              23
              
              
              
              60
              
              
              
              110
              
              
              
              356
              
              
              
              467Certificates
      of deposit
              
              
              2,580
              
              
              
              873
              
              
              
              3,453
              
              
              
              2,283
              
              
              
              2,632
              
              
              
              4,915Mortgagors
      deposits
              
              
              8
              
              
              
              4
              
              
              
              12
              
              
              
              2
              
              
              
              (2
              )
              
              
              0Total
      deposits
              
              
              2,582
              
              
              
              1,056
              
              
              
              3,638
              
              
              
              2,390
              
              
              
              3,026
              
              
              
              5,417Borrowed
      money
              
              
              (255
              )
              
              
              38
              
              
              
              (217
              )
              
              
              (1,220
              )
              
              
              893
              
              
              
              (327
              )Total
      interest bearing liabilities
              
              
              2,327
              
              
              
              1,094
              
              
              
              3,421
              
              
              
              1,170
              
              
              
              3,919
              
              
              
              5,090Net
      change in interest income
              
              $
              1,661
              
              
              $
              1,309
              
              
              $
              2,970
              
              
              $
              3,552
              
              
              $
              620
              
              
              $
              4,170




For each
category of interest-earning assets and interest-bearing liabilities,
information is provided for changes attributable to: (1) changes in volume
(changes in volume multiplied by prior rate); (2) changes in rate (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.





Comparison
of Financial Condition at March 31, 2008 and 2007





Assets





At March
31, 2008, total assets increased $56.4 million,or 7.6%, to $796.4 million
compared to $740.0 million at March 31, 2007, primarily the result of increases
in loans receivable and loans held-for-sale of $47.4 million, other assets of
$27.4 million and cash and cash equivalents of $10.0 million, partially offset
by decreases in investment securities of $28.9 million and FHLB-NY stock of
$1.6 million.





Total
loans receivable, including loans held-for-sale, increased $47.4 million,
or 7.8%, to $656.6 million at March 31, 2008 compared to $609.2 million at March
31, 2007.  The increase was primarily the result of an increase in
commercial real estate loans of $35.3 million and an increase in construction
loans of $21.2 million, offset by a decrease of multi-family loans of $13.2
million. The Bank continues to grow its loan portfolio through focusing on
the origination of loans in the markets it serves and will continue to augment
these originations with loan purchases.





At March
31, 2008, construction loans represented 25.1% of the loan
portfolio.  Approximately 67.5% of the Bank’s construction loans are
participations in loans originated by Community Preservation
Corporation.  CPC is a non-profit mortgage lender whose mission is to
enhance the quality and quantity of affordable housing in the New York, New
Jersey, and Connecticut tri-state area.  The Bank’s construction
lending activity is concentrated in the New York City market.  At this
time, the New York City real estate market has been resilient relative to the
real estate downturn impacting other parts of the U.S.  The economic
environment is expected to be characterized by continued constraint in credit
markets for affordable housing.  The credit issues relate to
weaknesses in residential and commercial real estate due to subprime issues and
general economic conditions.  Based on recent reports, various factors
including continuing demand, relatively low proportion of subprime loans,
interest from international buyers, and a lack of affordable housing supply
contribute to New York City real estate’s continuing
strength.  Despite those favorable factors, the Bank will continue to
closely monitor trends.





42
 Table of Contents





Other
assets increased $27.4 million, or 191.4%, to $41.7 million at March 31,
2008 compared to $14.3 million at March 31, 2007, primarily due to a $19.0
million NMTC transaction on December 31, 2007, which increased both other assets
and minority interest.  Additionally, other assets consisted of a
settlement receivable of $7.6 million from the sale of certain
investments.





Cash and
cash equivalents increased $10.0 million, or 57.7%, to $27.4 million at March
31, 2008 compared to $17.4 million at March 31, 2007, primarily due to
a $9.2 million increase in Federal funds sold and a $1.3 million increase in
cash and due from banks.  Office properties and equipment on a
net basis increased by $1.2 million, or 7.9%, to $15.8 million at March 31,
2008 compared to $14.6 million at March 31, 2007, primarily the result
of leasing  new office space to consolidate back-office operations and
the opening of a new ATM center.





Total
securities decreased $28.9 million, or 43.1%, to $38.2 million at March 31, 2008
compared to $67.1 million at March 31, 2007, reflecting a decline of $27.1
million in available-for-sale securities and a $1.8 million decrease in
held-to-maturity securities.  The decrease in total securities is
primarily due to collection of normal principal repayments, maturities of
securities and the Bank’s strategy of reducing lower yielding securities and
replacing them with higher yielding loans.  However, the Bank may
invest in securities from time to time to help diversify its asset portfolio,
manage liquidity and satisfy collateral requirements for certain deposits. There
were $15.3 million purchases of securities during the fiscal
2008.  Total securities also declined due to an increase in the net
unrealized loss on securities of $0.2 million resulting from the mark-to-market
of the available for sale securities portfolio.





The
Bank’s investment in FHLB-NY stock decreased by $1.6 million, or 49.8%, to $1.6
million at March 31, 2008 compared to $3.2 million at March 31,
2007.  The FHLB-NY requires banks to own membership stock as well as
borrowing activity-based stock.  The decrease in investment in FHLB-NY
stock was the result of the repayment of FHLB-NY borrowings, resulting in the
net redemption of stock during the period.





Liabilities
and Stockholders’ Equity





Liabilities





At March
31, 2008, total liabilities increased $34.7 million, or 5.1%, to $723.1 million
at March 31, 2008 compared to $688.3 million at March 31, 2007.  The
increase in total liabilities was primarily the result of $39.5 million of
additional customer deposits, offset by decreases of $2.5 million in advances
and borrowed money and $2.3 million of other liabilities.





Deposits
increased $39.5 million, or 6.4%, to $654.7 million at March 31, 2008 compared
to $615.1 million at March 31, 2007.  The increase in deposit balances
was primarily the result of an increase in certificates of deposit of $52.8
million, which were offset by decreases of $12.1 million in savings and $1.5
million in money market accounts.  At March 31, 2008, the Bank had
$63.0 million in brokered deposits.





Advances
from the FHLB-NY and other borrowed money decreased $2.5 million, or 4.0%, to
$58.6 million at March 31, 2008 compared to $61.1 million at March 31,
2007.  The decrease in advances and borrowed money was primarily
the result of a reduction of $32.5 million in FHLB advances, offset by an
increase in repurchase obligations of $30.0 million at March 31, 2008 compared
to no repurchase obligations at March 31, 2007.  Other liabilities
decreased $2.3 million, or 19.3%, to $9.8 million at March 31, 2008 compared to
$12.1 million at March 31, 2007, primarily due to a decrease of $1.5 million in
retail liabilities.





On
December 31, 2007, CCDC received an equity investment of $19.0 million related
to a New Markets Tax Credit transaction.  On consolidation, this
transaction is reflected as a $19.0 million increase in other assets and
minority interest.





Stockholders’
Equity





Total
stockholders’ equity increased $2.8 million, or 5.3%, to $54.4 million at March
31, 2008 compared to $51.6 million at March 31, 2007. The increase in total
stockholders’ equity was primarily attributable to net income for fiscal 2008
totaling $4.0 million, partially offset by dividends paid of $1.0 million, the
repurchase of common stock totaling $0.4 million in accordance with the
Company's stock repurchase program and a favorable pension valuation
adjustment of $0.2 million.  The Bank’s capital levels meet regulatory
requirements of a well-capitalized financial institution.





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 Table of Contents





Comparison
of Operating Results for the Years Ended March 31, 2008 and 2007





Net
Income





The
Company reported net income of $4.0 million and diluted earnings per share of
$1.55 for fiscal 2008 compared to net income of $2.6 million and diluted
earnings per share of $1.00 for fiscal 2007.  Net income rose $1.4
million, or 54.1%, to $4.0 million, primarily reflecting increases in net
interest income of $3.0 million and non-interest income of $5.0 million, offset
by an increase in non-interest expense of $6.5 million.  The prior
year period included special pre-tax charges of $1.3 million related to CCB
acquisition costs and $1.3 million related to the balance sheet
repositioning.





Interest
Income





Interest
income increased by $6.4 million, or 15.3%, to $48.1 million for fiscal 2008
compared to $41.7 million for fiscal 2007.  Interest income increased as a result
of an increase in total average balances of interest-earning assets of
$49.5 million, which includes an increase in average loan balances of $81.5
million offset by decreases in average balances of mortgage-backed securities of
$25.6 million, investment securities of $4.3 million and Federal funds sold of
$2.1 million.  Interest income increased as a result of an increase in
average loan balances, acquisition of CCB’s higher yielding portfolio and
origination of higher yielding loans. Additionally, these results were pursuant to the
Bank’s asset/liability strategy of increasing the average loan balances and its
higher yields offset by a decline in average balances of mortgage-backed
securities and investment securities.Yields on
interest-earning assets increased 46 basis points to 6.83% for fiscal 2008
compared to 6.37% for the prior year period, reflecting increases in yields on
loans of 28 basis points, mortgage-backed securities of 85 basis points and
investment securities of 138 basis points, offset by a decrease in yields on
Federal funds sold of 81 basis points.





Interest
income on loans increased by $7.2 million, or 19.4%, to $44.5 million for fiscal
2008 compared to $37.3 million for fiscal 2007.  These results were
primarily driven by an increase in average loan balances of $81.5 million to
$639.6 million for fiscal 2008 compared to $558.1 million for fiscal 2007,
partly a reflection of the full year impact of the CCB
acquisition.  In addition, yield increased 28 basis points to 6.96%
for fiscal 2008 compared to 6.68% for fiscal 2007, primarily due to growth in
higher yielding construction and small business loans.





Interest
income on securities decreased by $0.7 million, or 16.6%, to $3.5 million for
fiscal 2008 compared to $4.2 million for fiscal 2007.  Interest income
on mortgage-backed securities decreased by $0.8 million, or 28.0%, to $2.1
million for fiscal 2008 compared to $2.9 million for fiscal 2007.  The
decrease in interest income on mortgage-backed securities for fiscal 2008 was
primarily the result of a $25.6 million, or 39.68%, reduction in the average
balances of mortgage-backed securities to $39.1 million, compared to $64.7
million for fiscal 2007.  The net decrease in the average balance of
such securities demonstrates Management’s commitment to invest proceeds received
from the cash flows from the repayment of securities into higher yielding assets
and the sale of lower yielding securities to reposition the balance
sheet.  The mortgage-backed securities yield increased by 85 basis
points to 5.30%, compared to 4.45% in fiscal 2007.





Additionally,
the decrease in interest income on mortgage-backed securities was partially
offset by an increase in investment securities interest of $0.1 million, or
8.2%, to $1.4 million for fiscal 2008 compared to $1.3 million for fiscal
2007.  The increase was primarily the result of an increase in the
yield on investment securities by 138 basis points to 6.26% compared to 4.88% in
fiscal 2007, as adjustable rate securities in the portfolio repriced to higher
coupon rates.  The increase in interest income on investment
securities was offset by a reduction of $4.3 million, or 15.7%, in the average
balances of investment securities to $22.9 million compared to $27.2 million for
fiscal 2007.





Interest
income on federal funds decreased by $0.2 million, or 51.0%, to $0.1 million for
fiscal 2008 compared to $0.3 million for fiscal 2007. The decrease is primarily
the result of $2.1 million decrease in the average balance of Federal funds year
over year and an 81 basis point decrease in the average rate earned on federal
funds.  This decrease in the average rate earned on federal funds was
realized as the FRB lowered the federal funds rate.





Interest Expense





Interest
expense increased by $3.5 million, or 17.8%, to $22.7 million for fiscal 2008
compared to $19.2 million for fiscal 2007.  The increase in interest
expense reflects a 28 basis point increase in the average cost of
interest-bearing liabilities to 3.49% in fiscal 2008 compared to 3.21% in fiscal
2007 and growth in the average balance of interest-bearing liabilities of $49.6
million, or 8.3%, to $648.5 million for fiscal 2008 compared to $598.9 million
for fiscal 2007.  The increase in interest expense was primarily the
result of growth in the average balance of certificates of deposit of $58.5
million over fiscal 2007 to $370.9 million.





Interest
expense on deposits increased $3.7 million, or 10.5%, to $18.9 million for
fiscal 2008 compared to $15.2 million for fiscal 2007.  This increase
was primarily the result of growth in the average balance of certificates of
deposit of $58.4 million, or 18.7%, to $370.9 million for fiscal 2008 compared
to $312.5 million for fiscal 2007.  Interest paid on certificates of
deposit increased $3.5 million, or 10.2%, to $16.5 million for fiscal 2008
compared to 13.0 million for fiscal 2007.  Additionally, a 35 basis
point increase in the rate paid on deposits to 3.28% in fiscal 2008 compared to
2.93% in fiscal 2007 contributed to the increase.  Historically, the
Bank’s customer deposits have provided a relatively low cost funding source from
which its net interest income and net interest margin have
benefited.  In addition, the Bank’s relationship with various
government entities has been a source of relatively stable and low cost
funding.





44
 Table of Contents





Interest
expense on advances and other borrowed money decreased $0.2 million, or 5.4%, to
$3.8 million for fiscal 2008 compared to $4.0 million for fiscal
2007.  The average balance of total borrowed money outstanding
declined, primarily as a result of a $5.0 million decrease in the average
balance of outstanding borrowings to $73.9 million for fiscal 2008 compared to
$78.9 million in fiscal 2007.  Partially offsetting the decrease in
interest expense was a 5 basis point increase in the cost of borrowed money to
5.13% in fiscal 2008 compared to 5.08% in fiscal 2007.  This was
partially offset by an increased cost of debt service on the $13.0 million in
floating rate junior subordinated notes issued by the Company in connection with
issuance of trust preferred securities by Carver Statutory Trust I in September
2003.  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 the 3-month LIBOR, with a rate at March 31, 2008 of
5.85%.





Net
Interest Income Before Provision for Loan Losses





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 $3.0 million, or
13.2%, to $25.5 million for fiscal 2008 compared to $22.5 million for fiscal
2007.  This increase was achieved as a result of an increase in both
the average balance and the yield on average interest-earning assets of $49.5
million and 46 basis points, respectively.  Offsetting the increase in
net interest income was an increase in the average balance and cost of
interest-bearing liabilities of $49.6 million and 28 basis points,
respectively.  The result was a 18 basis point increase in the
interest rate spread to 3.34% for fiscal 2008 compared to 3.16% for fiscal 2007.
The net interest margin also increased to 3.62% for fiscal 2008 compared to
3.44% for fiscal 2007.





Provision
for Loan Losses and Asset Quality





The Bank
provided $0.2 million in provision for loan losses for fiscal 2008 compared to
$0.3 million for fiscal 2007, a
decrease of $0.1 million.  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, trends in
the local and national economy and trends in the real estate
market.





The Bank
had net charge-offs of $0.8 million for fiscal 2008 compared to $0.1 million for
fiscal 2007.  At March
31, 2008 and 2007, the Bank’s allowance for loan losses was $4.9 million and
$5.4 million, respectively.  The ratio of the allowance for loan
losses to non-performing loans was170.89% at March 31, 2008 compared to
119.9% at March 31, 2007.  The ratio of the allowance for loan losses
to total loans was 0.74% at March 31, 2008 compared to 0.89% at March 31,
2007.  Additionally, at a 0.43% ratio, the level of
non-performing loans to total loans receivable remains within the range the Bank
has experienced over the trailing twelve quarters.  The Bank’s future
levels of non-performing loans will be influenced by economic conditions,
including the impact of those conditions on the Bank’s customers, interest rates
and other internal and external factors existing at the time.  The
Bank believes its reported allowance for loan losses at March 31, 2008 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.





Subprime
Loans





On July
10, 2007, the OTS and other Federal bank regulatory authorities (the “Agencies”)
published the final Interagency Statement on Subprime Lending (the “Statement”)
to address emerging issues and questions relating to certain subprime mortgage
lending practices.  Although the Agencies did not provide a specific
definition of a “subprime” loan in the Statement, the Statement did highlight
the Agencies’ concerns with certain adjustable-rate mortgage products offered to
subprime borrowers that have one or more of the following
characteristics:





·
            Low
      initial payments based on a fixed introductory rate that expires after a
      short period and then adjusts to a variable index rate plus a margin for
      the remaining term of the loan;





·
            Very
      high or no limits on how much the payment amount or the interest rate may
      increase (“payment or rate caps”) on reset
  dates;





45
 Table of Contents





·
            Limited
      or no documentation of borrowers’
income;





·
            Product
      features likely to result in frequent refinancing to maintain an
      affordable monthly payment; and/or





·
            Substantial
      prepayment penalties and/or prepayment penalties that extend beyond the
      initial fixed interest rate period.





In the
2001 Expanded Guidance for Subprime Lending Programs, the Agencies determined
that, generally, subprime borrowers will display a range of credit risk
characteristics that may include one or more of the following:





·
            Two
      or more 30-day delinquencies in the last 12 months, or one or more 60-day
      delinquencies in the last 24
months;





·
            Judgment,
      foreclosure, repossession, or charge-off in the prior 24
      months;





·
            Bankruptcy
      in the last 5 years;





·
            Relatively
      high default probability as evidenced by, for example, a credit bureau
      risk score (FICO) of 660 or below (depending on the product/collateral),
      or other bureau or proprietary scores with an equivalent default
      probability likelihood; and/or





·
            Debt
      service-to-income ratio of 50% or greater, or otherwise limited ability to
      cover family living expenses after deducting total monthly debt-service
      requirements from monthly income.





The Bank
has minimal exposure to the subprime loan market and, therefore, we do not
expect the Statement to have a material impact on the Company.  At
March 31, 2008, the Bank’s loan portfolio contained $1.5 million in subprime
loans, all of which were performing loans.





Non-Interest
Income





Non-interest
income is comprised of depository fees and charges, 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 other non-interest
income.  Non-interest income increased by $5.0 million, or 174.0%, to
$7.9 million for fiscal 2008 compared to $2.9 for fiscal 2007.  The
increase was primarily due to a NMTC transfer fee of $1.7 million, gain on sale
of securities of $1.1 million, write-down for the prior year period of loans
held for sale of $0.7 million, other income of $0.7 million and an increase in
loan fees and service charges of $0.4 million.  The Bank will receive
additional non-interest income over approximately the next eight years from this
transaction.  Further, as a result of the NMTC transaction, other
income increased by $0.2 million reflecting consolidation of income from
minority interest.  In addition, the prior year period included a $1.3
million charge associated with a balance sheet restructuring implemented to
improve margins.





Non-Interest
Expense





Non-interest
expense increased by $6.5 million, or 28.0%, to $29.9 million for fiscal 2008
compared to $23.3 million for fiscal 2007.  The increase was primarily
due to increases in employee compensation and benefits of $2.9 million,
consulting expense of $2.2 million, other expenses of $1.4 million and net
occupancy expense of $0.9 million.  The increase in employee
compensation and benefits is primarily due to the Community Capital Bank
acquisition and investments in new talent in the retail, lending and accounting
units.  The $2.2 million increase in consulting expense falls into
three categories: regulatory requirements (preparation for compliance with
Sarbanes-Oxley Act Section 404 and recent Inter-Agency Guidance on Allowances
for Loan Losses); strengthening our back office, including the accounting,
lending and retail operations departments, by adding new staff and providing
temporary expertise; and engaging consultants to assist the management team to
analyze significant opportunities to improve financial results. For example, the
Bank engaged consultants to conduct a rigorous business optimization review to
help management identify further potential improvements in the Bank’s
operations, in part through greater systems integration.  The $1.4
million increase in other expense primarily consists of the cost of
sub-servicing of loans, ATM expenses, charge-offs and regulatory reporting
costs.  The fiscal 2007 expense included $1.3 million in merger
related expenses.





Income
Tax Expense





Income
tax benefit increased by $0.1 million, or 7.0%, to $0.9 million for fiscal 2008
compared to $0.8 million for fiscal 2007, resulting in a net tax benefit of $0.9
million, which includes a minority interest tax expense of $0.1
million.  The increase in tax benefit reflects income before income
taxes of $3.2 million for fiscal 2008 compared to $1.8 million for fiscal
2007.  The income tax expense of $1.0 million for fiscal 2008 was
offset by the tax benefit generated by the NMTC investment totaling $2.0million.  The
Bank’s NMTC award received in June 2006 has been fully invested.  The
Company expects to receive additional NMTC tax benefits of approximately $12.1
million from its $40.0 million investment over approximately the next six
years.





46
 Table of Contents





Comparison
of Operating Results for the Years Ended March 31, 2007 and 2006





Net
Income





For
fiscal 2007, the Company recorded net income of $2.6 million, or $1.00 per
diluted common share, compared to $3.8 million, or $1.45 per diluted common
share, for fiscal 2006.  The $1.2 million decrease is primarily due to
an increase of $4.2 million in non-interest expense and a decrease of $2.5
million in non-interest income, partially offset by an increase of $3.3 million
in net interest income after provision for loan losses, and a decrease of $2.2
million in the Company’s income tax provision compared to fiscal
2006.





Interest
Income





Interest
income increased in fiscal 2007 by $9.4 million from fiscal 2006, or 28.9%, to
$41.7 million.  The average balance of interest-earning assets
increased to $655.0 million for fiscal 2007 from $594.9 million for fiscal
2006.  Adding to the increase was a rise in the average yield on
interest-earning assets to 6.37% for fiscal 2007 compared to 5.44% for fiscal
2006.





Interest
income on loans increased by $10.7 million, or 40.3%, to $37.3 million for
fiscal 2007 compared to $26.6 million for fiscal 2006. The increase in
interest income from loans was primarily the result of a $114.7 million increase
in average loan balances to $558.1 million for fiscal 2007 compared to $443.5
million for fiscal 2006, coupled with the effects of a 69 basis point increase
in the average rate earned on loans to 6.68% for fiscal 2007 from 5.99% for
fiscal 2006.  The increase in the average balance of loans reflects
the acquisition of the CCB loan portfolio.  The increase in the
average rate earned on loans was principally due to the acquisition of the
higher yielding CCB business loan portfolio and an increase in the average rate
on mortgage loans.





Interest
income on mortgage-backed securities decreased by $1.6 million, or 35.2%, to
$2.9 million for fiscal 2007 compared to $4.4 million for fiscal 2006,
reflecting a decrease of $48.9 million in the average balance of mortgage-backed
securities to $64.7 million for fiscal 2007 compared to $113.6 million for
fiscal 2006.  The decrease in the average balance was partially offset
by the CCB acquisition.  Partially offsetting the decline in income
was a 54 basis point increase in the average rate earned on mortgage-backed
securities to 4.45% for fiscal 2007 from 3.91% for fiscal 2006.  The
net decrease in the average balance of such securities demonstrates Management’s
commitment to invest proceeds received from the cash flows from the repayment of
securities into higher yielding assets and the sale of lower yielding securities
to reposition the balance sheet.





Interest
income on investment securities increased by approximately $0.3 million, or
36.5%, to $1.3 million for fiscal 2007 compared to $1.0 million for fiscal
2006.  The increase in interest income on investment securities
reflects a 71 basis point increase in the average rate earned on investment
securities to 4.67% for fiscal 2007 from 3.78% for fiscal 2006 and an increase
of $1.5 million in the average balance of investment securities to $27.2 million
for fiscal 2007 compared to $25.7 million for fiscal 2006.   The
increase in the average balance results from the acquisition of CCB, partially
offset by maturities and the sale of securities with the repositioning of the
balance sheet.





Interest
income on federal funds decreased $0.1 million, or 36.6%, to $0.3 for fiscal
2007 compared to $0.4 million for fiscal 2006. The decrease is primarily
attributable to a $7.0 million decrease in the average balance of federal funds
year over year partially offset by a 169 basis point increase in the average
rate earned on federal funds.  This large increase in the average rate
earned on federal funds was realized as the FRB raised the federal funds
rate.





Interest Expense





Interest
expense increased by $5.7 million, or 42.6%, to $19.2 million for fiscal 2007
compared to $13.5 million for fiscal 2006.  The increase in interest
expense reflects an increase of $52.4 million in the average balance of
interest-bearing liabilities to $598.9 million in fiscal 2007 from $546.5
million in fiscal 2006.  Additionally, the total cost of
interest-bearing liabilities increased 74 basis points to 3.21% in fiscal 2007
compared to 2.47% in fiscal 2006.  The increase in the average balance
of interest-bearing liabilities in fiscal 2007 compared to fiscal 2006 was
primarily due to the acquisition of CCB partially offset by a decrease in
borrowed funds and the repayment of certain higher costing deposits with the
repositioning of the balance sheet.





Interest
expense on deposits increased $6.3 million, or 70.7%, to $15.2 million for
fiscal 2007 compared to $8.9 million for fiscal 2006.  This increase
is attributable to an $81.1 million, or 18.5%, increase in the average balance
of interest-bearing deposits to $520.0 million for fiscal 2007 compared to
$439.0 million for fiscal 2006 coupled with a 90 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 the
acquisition of CCB.  The increase in the average rate paid on deposits
was principally due to the rise in the interest rate environment throughout
fiscal 2007.





Interest
expense on advances and other borrowed money decreased by $0.6 million, or
12.4%, to $4.0 million for fiscal 2007 compared to $4.6 million for fiscal 2006.
The decrease in interest expense on borrowed money for fiscal 2007 reflects a
$28.7 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.  Partially
offsetting the decrease was a rise of 83 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.





47
 Table of Contents





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 $3.6 million, or
19.1%, to $22.5 million for fiscal 2007 compared to $18.9 million for fiscal
2006. This increase was achieved as a result of an increase in both the average
balance and the yield on average interest-earning assets of $60.3 million and 93
basis points, respectively.  Offsetting the increase in net interest
income was an increase in the average balance and cost of interest-bearing
liabilities of $52.0 million and 74 basis points, respectively.  The
result was a 19 basis point increase in the interest rate spread to 3.16% for
fiscal 2007 compared to 2.97% for fiscal 2006. The net interest margin also
increased to 3.44% for fiscal 2007 compared to 3.18% for fiscal
2006.





Provision
for Loan Losses





During
fiscal 2007 a $0.3 million 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, trends in the local and
national economy and trends in the real estate market.





During
fiscal 2007, the Bank had net charge-offs of $73,000 compared to $82,000 for
fiscal 2006. At March 31, 2007, non-performing loans totaled $4.5 million,
or 0.74% of total loans, compared to $2.7 million, or 0.55% of total loans, at
March 31, 2006.  At March 31, 2007, the Bank’s allowance for loan
losses was $5.4 million compared to $4.0 million at March 31, 2006, resulting in
a ratio of the allowance to non-performing assets of 119.9% at March 31, 2007
compared to 147.1% at March 31, 2006, and a ratio of allowance for possible loan
losses to total loans of 0.89% and 0.81% at March 31, 2007 and March 31, 2006,
respectively.  The Bank believes its reported allowance for loan
losses at March 31, 2007 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 decreased $2.5 million, or 46.3%, to $2.9 million for fiscal 2007
compared to $5.3 million for fiscal 2006.  The decline in non-interest
income was comprised primarily of a decrease of $1.0 million in loan fees and
service charges due primarily to lower loan prepayment penalty income, $0.6
million in losses associated with the repositioning of the balance sheet, $0.7
million in the write-down of loans held for sale, a decrease of $0.2 million in
the gain on the sale of loans and $0.1 million loss on the sale of real estate
owned.  Partially offsetting these decreases were increases in other
non-interest income and deposit fees and charges of $0.1 million and $18,000,
respectively.    The decline in the gain on the sale of
loans was primarily attributable to a gain on a bulk sale of loans during fiscal
2006.





Non-Interest Expense





Non-interest
expense increased by $4.2 million, or 22.0%, to $23.3 million for fiscal 2007
compared to $19.1 million for fiscal 2006.  The increase in
non-interest expense was primarily attributable to the acquisition of CCB and
the resulting operating and non-recurring merger related
expenses.  Non-recurring merger related expenses represented $1.3
million of the increase, and employee compensation and benefits, net occupancy
expense, equipment, net, and other non-interest expense increased $1.0 million,
$0.4 million, $0.1 million and $1.5 million, respectively.





48
 Table of Contents





Income Tax Expense





Income
tax benefit was $0.8 million for fiscal 2007, as compared to an income tax
expense of $1.3 million for fiscal 2006.  The Bank recognized a $1.5
million benefit in fiscal 2007 from the NMTC program and pre-tax income was $3.3
million less in fiscal 2007 compared to fiscal 2006. The two items account for
the $2.2 million change in taxes from fiscal 2007 to fiscal 2006.





Liquidity
and Capital Resources





Liquidity
is a measure of the Bank’s ability to generate adequate cash to meet its
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 ongoing operating expenses.  The Bank’s
primary sources of funds are deposits, borrowed funds and principal and interest
payments on loans, mortgage-backed securities and investment
securities.  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.





Carver
Federal monitors its liquidity utilizing guidelines that are contained in a
policy developed by its management and approved by its Board of
Directors.  Carver Federal’s several liquidity measurements are
evaluated on a frequent basis.  The Bank was in compliance with this
policy as of March 31, 2008.  Management believes Carver Federal’s
short-term assets have sufficient liquidity to cover loan demand, potential
fluctuations in deposit accounts and to meet other anticipated cash
requirements.  Additionally, Carver Federal has other sources of
liquidity including the ability to borrow from the FHLB-NY utilizing unpledged
mortgage-backed securities and certain mortgage loans, the sale of
available-for-sale securities and the sale of certain mortgage
loans.  At March 31, 2008, based on available collateral held at the
FHLB-NY, Carver Federal had the ability to borrow from the FHLB-NY an additional
$29.4 million on a secured basis, utilizing mortgage-related loans and
securities as collateral.





Congress
eliminated the statutory liquidity requirement that 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, 2008 and 2007, assets qualifying for short-term
liquidity, including cash and short-term investments, totaled $27.9 million and
$21.9 million, respectively.





The
levels of Carver Federal’s short-term liquid assets are dependent on Carver
Federal’s operating, investing and financing activities during any given
period.  The most significant liquidity challenge the Bank faces is
variability in its cash flows as a result of mortgage refinance
activity.  When mortgage interest rates decline, customers’ refinance
activities tend to accelerate, causing the cash flow from both the mortgage loan
portfolio and the mortgage-backed securities portfolio to
accelerate.  In contrast, when mortgage interest rates increase,
refinance activities tend to slow, causing a reduction of
liquidity.  However, in a rising rate environment, customers generally
tend to prefer fixed rate mortgage loan products over variable rate
products.  Because Carver Federal generally sells its one- to four-
family 15-year and 30-year fixed rate loan production into the secondary
mortgage market, the origination of such products for sale does not
significantly reduce Carver Federal’s liquidity.





The OTS
requires that the Bank meet minimum capital requirements.  Capital
adequacy is one of the most important factors used to determine the safety and
soundness of individual banks and the banking system.  At March 31,
2008, the Bank exceeded all regulatory minimum capital requirements and
qualified, under OTS regulations, as a well-capitalized institution. See “–Regulatory Capital
Position” below for certain information relating to the Bank’s regulatory
capital compliance at March 31, 2008.





The
Consolidated Statements of Cash Flows present the change in cash from operating,
investing and financing activities. During fiscal 2008, total cash and cash
equivalents increased by $10.0 million reflecting cash provided by financing
activities of $54.7 million, offset by cash used in operating of $26.6 million
and investing activities of $18.1 million.
 
 Net cash
provided by financing activities was $54.7 million, primarily resulting from
increased deposits of $39.5 million and consolidation of minority interest in a
NMTC transaction of $19.0 million, offset partially by reductions in borrowings
of $2.5 million and the payment of common dividends of $1.0 million. Net cash
used in operating activities during this period was $26.6 million, primarily
representing funds used in originations of loans held-for-sale of $20.2 million,
an increase in other assets of $29.5 million (primarily resulting from a NMTC
transaction), offset partially by proceeds from sales of loans held-for-sale
$20.0 million. Net cash used in investing activities was $18.1 million,
primarily representing cash disbursed to fund mortgage loan originations of
$162.6 million, loans purchased from third parties of $29.7 million and
purchases of available-for-sale securities of $15.3 million, offset partially by
principal collections on loans of $145.5 million, proceeds from sale of
available-for-sale securities of $36.1 million and proceeds from principal
payments/maturities/calls of securities of $9.2
million.




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 theconsolidated financial statements.  Such instruments primarily
include lending commitments.





49
 Table of Contents





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.  See Note 14 of Notes to Consolidated Financial Statements for
the Bank’s outstanding lending commitments and contractual obligations at March
31, 2008.





The Bank has contractual obligations at
March 31, 2008 as follows (in thousands):





Payments due by periodContractual
      Obligations
            
            Total
            
            
            Less
      than 1 year
            
            
            1
      - 3 years
            
            
            3
      - 5 years
            
            
            More
      than 5 yearsLong
      term debt obligations:FHLB
      advances
            
            $
            15,249
            
            
            $
            15,107
            
            
            $
            -
            
            
            $
            142
            
            
            $
            -Repo
      Borrowings
            
            
            30,141
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            30,141Guaranteed
      preferred beneficial interest in junior subordinated
      debentures
            
            
            13,375
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            13,375Total
      long term debt obligations
            
            
            58,765
            
            
            
            15,107
            
            
            
            -
            
            
            
            142
            
            
            
            43,516Operating
      lease obligations:Lease
      obligations for rental properties
            
            
            11,456
            
            
            
            1,517
            
            
            
            3,014
            
            
            
            2,262
            
            
            
            4,663Total
      contractual obligations
            
            $
            70,221
            
            
            $
            16,624
            
            
            $
            3,014
            
            
            $
            2,404
            
            
            $
            48,179





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, 2008, the Bank had tangible equity ratio,
core capital ratio, and total risk-based capital ratio of 7.8%, 7.8% and 10.3%,
respectively, and was considered well capitalized.  For additional
information regarding Carver Federal’s Regulatory Capital and Ratios, refer to
Note 12 of Notes to Consolidated Financial Statements, “Stockholders’
Equity.”





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.  The Company believes that there has been no material
change in the Company’s market risk at March 31, 2008 as compared to March 31,
2007.





50
 Table of Contents





ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.











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, 2008 and 2007, 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, 2008.  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.





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, 2008 and 2007, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 2008, in conformity with U.S. generally accepted accounting
principles.











/s/ KPMG
LLP


New York,
New York


July 1,
2008





51
 Table of Contents





CARVER
BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION


(In
thousands, except per share data)





March 31,
            
            
            March 31,2008
            
            
            2007ASSETSCash
      and cash equivalents:Cash
      and due from banks
            
            $
            15,920
            
            
            $
            14,619Federal
      funds sold
            
            
            10,500
            
            
            
            1,300Interest
      earning deposits
            
            
            948
            
            
            
            1,431Total
      cash and cash equivalents
            
            
            27,368
            
            
            
            17,350Securities:Available-for-sale,
      at fair value (including pledged as collateral of $20,621 and $34,649 at
      March 31, 2008 and 2007, respectively)
            
            
            20,865
            
            
            
            47,980Held-to-maturity,
      at amortized cost (including pledged as collateral of $16,643 and $18,581
      at March 31, 2008 and 2007, respectively; fair value of $17,167 and
      $19,005 at March 31,2008 and 2007, respectively)
            
            
            17,307
            
            
            
            19,137Total
      securities
            
            
            38,172
            
            
            
            67,117Loans
      held-for-sale
            
            
            23,767
            
            
            
            23,226Loans
      receivable:Real
      estate mortgage loans
            
            
            578,957
            
            
            
            533,667Commercial
      business loans
            
            
            52,109
            
            
            
            51,226Consumer
      loans
            
            
            1,728
            
            
            
            1,067Allowance
      for loan losses
            
            
            (4,878
            )
            
            
            (5,409
            )Total
      loans receivable, net
            
            
            627,916
            
            
            
            580,551Office
      properties and equipment, net
            
            
            15,780
            
            
            
            14,626Federal
      Home Loan Bank of New York stock, at cost
            
            
            1,625
            
            
            
            3,239Bank
      owned life insurance
            
            
            9,141
            
            
            
            8,795Accrued
      interest receivable
            
            
            4,063
            
            
            
            4,335Goodwill
            
            
            6,370
            
            
            
            5,716Core
      deposit intangibles, net
            
            
            532
            
            
            
            684Other
      assets
            
            
            41,709
            
            
            
            14,313Total
      assets
            
            $
            796,443
            
            
            $
            739,952LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilities:Deposits
            
            $
            654,663
            
            
            $
            615,122Advances
      from the FHLB-New York and other borrowed money
            
            
            58,625
            
            
            
            61,093Other
      liabilities
            
            
            9,772
            
            
            
            12,110Total
      liabilities
            
            
            723,060
            
            
            
            688,325Minority
      interest
            
            
            19,000
            
            
            
            -Stockholders'
      equity:Common
      stock (par value $0.01 per share: 10,000,000 shares authorized; 2,524,691
      shares issued; 2,481,706 and 2,507,985 shares outstanding at March 31,
      2008 and 2007, respectively)
            
            
            25
            
            
            
            25Additional
      paid-in capital
            
            
            24,113
            
            
            
            23,996Retained
      earnings
            
            
            30,490
            
            
            
            27,436Unamortized
      awards of common stock under ESOP
            
            
            -
            
            
            
            (4
            )Treasury
      stock, at cost (42,985 and 16,706 shares at March 31, 2008 and 2007,
      respectively)
            
            
            (670
            )
            
            
            (277
            )Accumulated
      other comprehensive income
            
            
            425
            
            
            
            451Total
      stockholders' equity
            
            
            54,383
            
            
            
            51,627Total
      liabilities and stockholders' equity
            
            $
            796,443
            
            
            $
            739,952





See
accompanying notes to consolidated financial statements





52
 Table of Contents





CARVER
BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME


(In
thousands, except per share data)





Years
      EndedMarch 31,2008
            
            
            2007
            
            
            2006Interest
      Income:Loans
            
            $
            44,499
            
            
            $
            37,277
            
            
            $
            26,563Mortgage-backed
      securities
            
            
            2,071
            
            
            
            2,877
            
            
            
            4,439Investment
      securities
            
            
            1,434
            
            
            
            1,325
            
            
            
            971Federal
      funds sold
            
            
            128
            
            
            
            261
            
            
            
            412Total
      interest income
            
            
            48,132
            
            
            
            41,740
            
            
            
            32,385Interest
      expense:Deposits
            
            
            18,866
            
            
            
            15,227
            
            
            
            8,921Advances
      and other borrowed money
            
            
            3,790
            
            
            
            4,007
            
            
            
            4,572Total
      interest expense
            
            
            22,656
            
            
            
            19,234
            
            
            
            13,493Net
      interest income
            
            
            25,476
            
            
            
            22,506
            
            
            
            18,892Provision
      for loan losses
            
            
            222
            
            
            
            276
            
            
            
            -Net
      interest income after provision for loan losses
            
            
            25,254
            
            
            
            22,230
            
            
            
            18,892Non-interest
      income:Depository
      fees and charges
            
            
            2,669
            
            
            
            2,476
            
            
            
            2,458Loan
      fees and service charges
            
            
            1,628
            
            
            
            1,238
            
            
            
            2,231Write-down
      of loans held for sale
            
            
            -
            
            
            
            (702
            )
            
            
            -Gain
      (loss) on sale of securities
            
            
            431
            
            
            
            (624
            )
            
            
            -Gain
      on sale of loans
            
            
            323
            
            
            
            192
            
            
            
            351Loss
      on sale of real estate owned
            
            
            -
            
            
            
            (108
            )
            
            
            -New
      Market Tax Credit Transfer Fee
            
            
            1,700
            
            
            
            -
            
            
            
            -Other
            
            
            1,110
            
            
            
            397
            
            
            
            301Total
      non-interest income
            
            
            7,861
            
            
            
            2,869
            
            
            
            5,341Non-interest
      expense:Employee
      compensation and benefits
            
            
            13,323
            
            
            
            10,470
            
            
            
            9,512Net
      occupancy expense
            
            
            3,590
            
            
            
            2,667
            
            
            
            2,284Equipment,
      net
            
            
            2,451
            
            
            
            2,071
            
            
            
            1,939Merger
      related expenses
            
            
            -
            
            
            
            1,258
            
            
            
            -Consulting
      Expense
            
            
            2,733
            
            
            
            496
            
            
            
            307Other
            
            
            7,773
            
            
            
            6,377
            
            
            
            5,092Total
      non-interest expense
            
            
            29,870
            
            
            
            23,339
            
            
            
            19,134Income
      before income taxes and minority interest
            
            
            3,245
            
            
            
            1,760
            
            
            
            5,099Income
      tax (benefit) expense
            
            
            (881
            )
            
            
            (823
            )
            
            
            1,329Minority
      interest, net of taxes
            
            
            146
            
            
            
            -
            
            
            
            -Net
      income
            
            $
            3,980
            
            
            $
            2,583
            
            
            $
            3,770Earnings
      per common share:Basic
            
            $
            1.60
            
            
            $
            1.03
            
            
            $
            1.50Diluted
            
            $
            1.55
            
            
            $
            1.00
            
            
            $
            1.45





See
accompanying notes to consolidated financial statements





53
 Table of Contents





CARVER
BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME


(In
thousands)




Common
      Stock
              
              
              Additional
      Paid In Capital
              
              
              Treasury
      Stock
              
              
              Common
      Stock Acquired By ESOP
              
              
              Common
      Stock Acquired By MRP
              
              
              Retained
      Earnings
              
              
              Accumulated
      Other Comprehensive Income (Loss)
              
              
              Total
      Stock-Holders' EquityBalance—
      March 31, 2005
              
              $
              25
              
              
              $
              23,937
              
              
              $
              (420
              )
              
              $
              (126
              )
              
              $
              (128
              )
              
              $
              22,748
              
              
              $
              (235
              )
              
              $
              45,801Net
      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:
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,770
              
              
              
              (439
              )
              
              
              3,331Dividends
      paid
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (782
              )
              
              
              -
              
              
              
              (782
              )Treasury
      stock activity
              
              
              -
              
              
              
              (2
              )
              
              
              117
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              115Allocation
      of ESOP Stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              116
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              116Purchase
      of shares for MRP
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              116
              
              
              
              -
              
              
              
              -
              
              
              
              116Balance—
      March 31, 2006
              
              
              25
              
              
              
              23,935
              
              
              
              (303
              )
              
              
              (10
              )
              
              
              (12
              )
              
              
              25,736
              
              
              
              (674
              )
              
              
              48,697Adjustment
      to initially implement SFAS 158
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              281
              
              
              
              281Balance
      post implementation of SFAS 158
              
              
              25
              
              
              
              23,935
              
              
              
              (303
              )
              
              
              (10
              )
              
              
              (12
              )
              
              
              25,736
              
              
              
              (393
              )
              
              
              48,978Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,583
              
              
              
              -
              
              
              
              2,583Minimum
      pension liability adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              79
              
              
              
              79Change
      in net unrealized loss on available-for-sale securities, net of
      taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              765
              
              
              
              765Comprehensive
      income, net of taxes:
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,583
              
              
              
              844
              
              
              
              3,427Dividends
      paid
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (883
              )
              
              
              -
              
              
              
              (883
              )Treasury
      stock activity
              
              
              -
              
              
              
              61
              
              
              
              26
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              87Allocation
      of ESOP Stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6Purchase
      of shares for MRP
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              12
              
              
              
              -
              
              
              
              -
              
              
              
              12Balance—
      March 31, 2007
              
              
              25
              
              
              
              23,996
              
              
              
              (277
              )
              
              
              (4
              )
              
              
              -
              
              
              
              27,436
              
              
              
              451
              
              
              
              51,627Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,980
              
              
              
              -
              
              
              
              3,980Minimum
      pension liability adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              195
              
              
              
              195Change
      in net unrealized loss on available-for-sale securities, net of
      taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (221
              )
              
              
              (221
              )Comprehensive
      income, net of taxes:
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,980
              
              
              
              (26
              )
              
              
              3,954Adjustment
      to initially implement SFAS 156
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              49
              
              
              
              -
              
              
              
              49Dividends
      paid
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (975
              )
              
              
              -
              
              
              
              (975
              )Treasury
      stock activity
              
              
              -
              
              
              
              117
              
              
              
              (393
              )
              
              
              4
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (272
              )Allocation
      of ESOP Stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Purchase
      of shares for MRP
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balance—
      March 31, 2008
              
              $
              25
              
              
              $
              24,113
              
              
              $
              (670
              )
              
              $
              -
              
              
              $
              -
              
              
              $
              30,490
              
              
              $
              425
              
              
              $
              54,383




See
accompanying notes to consolidated financial statements





54
 Table of Contents





CARVER
BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)




Years
      Ended March 31,2008
              
              
              2007
              
              
              2006Cash
      flows from operating activities:Net
      income
              
              $
              3,980
              
              
              $
              2,583
              
              
              $
              3,770Adjustments
      to reconcile net income to net cash from operating
    activities:Provision
      for loan losses
              
              
              222
              
              
              
              276
              
              
              
              -Stock
      based compensation expense
              
              
              272
              
              
              
              426
              
              
              
              233Depreciation
      and amortization expense
              
              
              1,709
              
              
              
              1,581
              
              
              
              1,546Amortization
      of premiums and discounts
              
              
              (250
              )
              
              
              (1,145
              )
              
              
              863(Gain)
      Loss from sale of securities
              
              
              (431
              )
              
              
              624
              
              
              
              -Gain
      on sale of loans
              
              
              (323
              )
              
              
              (192
              )
              
              
              (351
              )Writedown
      on loans held-for-sale
              
              
              -
              
              
              
              702
              
              
              
              -Loss
      on sale of real estate owned
              
              
              -
              
              
              
              108
              
              
              
              -Originations
      of loans held-for-sale
              
              
              (20,172
              )
              
              
              (24,708
              )
              
              
              (12,646
              )Principal
      Collections and Proceeds from sale of loans held-for-sale
              
              
              19,953
              
              
              
              14,422
              
              
              
              12,197Changes
      in assets and liabilities:Decrease
      (increase) in accrued interest receivable
              
              
              272
              
              
              
              (1,365
              )
              
              
              (268
              )Increase
      in other assets
              
              
              (29,541
              )
              
              
              (2,662
              )
              
              
              (2,430
              )(Decrease)
      increase in other liabilities
              
              
              (2,311
              )
              
              
              (4,330
              )
              
              
              4,249Net
      cash (used in) provided by operating activities
              
              
              (26,620
              )
              
              
              (13,680
              )
              
              
              7,163Cash
      flows from investing activities:Purchases
      of securities:Available-for-sale
              
              
              (15,265
              )
              
              
              -
              
              
              
              (26,811
              )Held-to-maturity
              
              
              -
              
              
              
              -
              
              
              
              (19
              )Proceeds
      from principal payments, maturities and calls of
    securities:Available-for-sale
              
              
              7,358
              
              
              
              26,539
              
              
              
              60,645Held-to-maturity
              
              
              1,803
              
              
              
              7,185
              
              
              
              4,816Proceeds
      from sales of available- for-sale securities
              
              
              36,116
              
              
              
              57,942
              
              
              
              1,575Originations
      of loans held-for-investment
              
              
              (162,556
              )
              
              
              (105,284
              )
              
              
              (98,704
              )Loans
      purchased from third parties
              
              
              (29,736
              )
              
              
              (58,191
              )
              
              
              (96,140
              )Principal
      collections on loans
              
              
              145,458
              
              
              
              146,410
              
              
              
              113,482Proceeds
      from sales of loan originations held-for-investment
              
              
              -
              
              
              
              16,548
              
              
              
              10,697Redemption
      of FHLB-NY stock
              
              
              1,614
              
              
              
              1,388
              
              
              
              498Additions
      to premises and equipment
              
              
              (2,862
              )
              
              
              (1,869
              )
              
              
              (1,082
              )Proceeds
      from sale of real estate owned
              
              
              -
              
              
              
              404
              
              
              
              -Payments
      for acquisition, net of cash acquired
              
              
              -
              
              
              
              (2,425
              )
              
              
              -Net
      cash (used in) provided by investing activities
              
              
              (18,070
              )
              
              
              88,647
              
              
              
              (31,043
              )Cash
      flows from financing activities:Net
      (decrease) increase in deposits
              
              
              39,541
              
              
              
              (33,657
              )
              
              
              48,768Net
      repayment of FHLB advances and other borrowings
              
              
              (2,527
              )
              
              
              (45,660
              )
              
              
              (21,507
              )Capital
      contribution by minority interest
              
              
              19,000
              
              
              
              -
              
              
              
              -Common
      stock repurchased
              
              
              (331
              )
              
              
              (321
              )
              
              
              (115
              )Dividends
      paid
              
              
              (975
              )
              
              
              (883
              )
              
              
              (782
              )Net
      cash provided by (used in) financing activities
              
              
              54,708
              
              
              
              (80,521
              )
              
              
              26,364Net
      increase (decrease) in cash and cash equivalents
              
              
              10,018
              
              
              
              (5,554
              )
              
              
              2,484Cash
      and cash equivalents at beginning of period
              
              
              17,350
              
              
              
              22,904
              
              
              
              20,420Cash
      and cash equivalents at end of period
              
              $
              27,368
              
              
              $
              17,350
              
              
              $
              22,904Supplemental
      information:Noncash
      Transfers-Change
      in unrealized loss on valuation of available-for-sale investments,
      net
              
              $
              221
              
              
              $
              765
              
              
              $
              (158
              )Cash
      paid for-Interest
              
              $
              21,973
              
              
              $
              19,510
              
              
              $
              13,502Income
      taxes
              
              $
              922
              
              
              $
              652
              
              
              $
              2,107


See
accompanying notes to consolidated financial statements





55
 Table of Contents





CARVER
BANCORP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1.  ORGANIZATION





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”) ”), Alhambra Holding
Corp., an inactive Delaware corporation, and Carver Federal’s wholly-owned
subsidiaries, CFSB Realty Corp., Carver Municipal Bank (“CMB”), Carver Community
Development Corp. (“CCDC”) and CFSB Credit Corp. which is currently
inactive.  The Bank has a majority owned interest in Carver Asset
Corporation, a real estate investment trust formed in February
2004.





“Carver,”
the “Company,” “we,” “us” or “our” refers to the Holding Company along with its
consolidated subsidiaries.  The Bank was chartered in 1948 and began
operations in 1949 as Carver Federal Savings and Loan Association, a federally
chartered mutual savings and loan association.  The Bank converted to
a federal savings bank in 1986.  On October 24, 1994, the Bank
converted from 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.  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.”





In
September 2003, the Holding Company formed Carver Statutory Trust I (the
“Trust”) for the sole purpose of issuing trust preferred securities and
investing the proceeds in an equivalent amount of floating rate junior
subordinated debentures of the Holding Company.  In accordance with
Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51, Carver Statutory Trust I is
not consolidated for financial reporting purposes.  In December 2007,
Carver Federal’s subsidiary CCDC entered into a NMTC venture in which it exerts
a controlling influence.





On
October 5, 2006, Carver Federal established Carver Municipal Bank (“CMB”), a
wholly-owned, New York State chartered limited purpose commercial bank, with the
intention of expanding Carver Federal’s ability to compete for municipal and
state agency deposits and provide other fee income based services. The Bank
invested $2.0 million of capital into CMB at its formation. In the State of New
York, municipal entities may deposit funds only with commercial banks, other
than except through limited exceptions, and CMB provided Carver Federal with a
platform to enter into this line of business.  As of March 31,
2008, Carver Federal has discontinued the operations of CMB and is in the
process of dissolution.  The $2.0 million capital invested will revert back
to the Bank.





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





NOTE
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis
of consolidated financial statement presentation





The
consolidated financial statements include the accounts of the Holding Company,
the Bank and the Bank’s wholly-owned or majority owned subsidiaries, Carver
Asset Corporation, CFSB Realty Corp., CMB, Carver Community Development
Corporation, 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.  Amounts subject to significant estimates and assumptions are
items such as the allowance for loan losses, goodwill and intangibles, pensions
and the fair value of financial instruments.  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 has extended mortgages and other credit instruments.
 Actual results could differ significantly from those
assumptions.





In
addition, the Office of Thrift Supervision (“OTS”), Carver Federal’s 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.





56
 Table of Contents





In June
2005, the Emerging Issues Task Force (“EITF”) of the FASB reached final
consensus on Issue No. 04-5, Determining Whether a General Partner, or General
Partners as a Group, controls a Limited Partnership or Similar Entity When the
Limited Partners Have Certain Rights (“EITF Issue No. 04-5”).  EITF
Issue No. 04-5 set forth the criteria to determine whether partnerships are to
be consolidated for financial statement purposes or reported using the Equity
Method.  In accordance with guidance set forth in EITF Issue No. 04-5,
Carver CDC-Subsdiary CDE 10, LLC has been consolidated for financial reporting
purposes.





Cash
and cash equivalents





For the
purpose of reporting cash flows, cash and cash equivalents include cash, amounts
due from depository institutions, federal funds sold and other short-term
instruments with original maturities of three months or less.  Federal
funds sold 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 reserve
requirement is zero since the Bank’s vault cash satisfies cash reserve
requirements for deposits.





Securities





When
purchased, securities are designated as either securities held-to-maturity or
securities available-for-sale.  Securities are 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.  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.





If not
classified as held-to-maturity, securities are classified as 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.  Estimated fair values of securities are based on either
published or security dealers’ market value.  Unrealized holding gains
or losses for securities available-for-sale are excluded from earnings and
reported net of deferred income taxes as a separate component of accumulated
other comprehensive income (loss), 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 2008, 2007 or
2006.  Gains or losses on sales of securities of all classifications
are recognized based on the specific identification method.





Loans
Held-for-Sale





Loans
held-for-sale are carried at the lower of cost or market value as determined on
an aggregate loan basis. Premiums paid and discounts obtained on such loans
held-for-sale are deferred as an adjustment to the carrying value of the loans
until the loans are sold.





Loans
Receivable





Loans
receivable are carried at unpaid principal balances plus unamortized premiums,
purchase accounting mark-to-market adjustments, certain deferred direct loan
origination costs and deferred loan origination fees and discounts, less the
allowance for loan losses.





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, of the related
loans, adjusted for prepayments when applicable, 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





The
allowance for loan losses is maintained at a level considered adequate to
provide for probable loan losses inherent in the portfolio as of March 31,
2008.  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.





57
 Table of Contents





Carver
Federal maintains a loan review system, which calls 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 loan loss
      allowance amounts for all specifically identified criticized and
      classified loans that have been designated as requiring attention by
      management’s internal loan review process, bank regulatory examinations or
      Carver Federal’s external
auditors.





·
            An average loss factor, giving
      effect to historical loss experience over several years and other
      qualitative factors, is applied to all loans not subject to specific
      review.





·
            Evaluation of any changes in 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 performing this evaluation is the concentration of real
      estate related loans located in theNew York Citymetropolitan
      area.





All new
loan originations are assigned a credit risk grade which commences with loan
officers and underwriters grading the quality of their loans one to five under a
nine-category risk classification scale, the first five categories of which
represent performing loans.  Reserves are held based on actual loss
factors based on several years of loss experience and other qualitative factors
applied to the outstanding balances.  All loans are subject to
continuous review and monitoring for changes in their credit
grading.   Grading that falls into criticized or classified
categories (credit grading six through nine) are further evaluated and reserved
amounts are established for each loan based on each loan’s potential for loss
and includes consideration of the sufficiency of collateral.  Any
adverse trend in 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
includes:





·
            Amount and trend of criticized
      loans;


·
            Actual
    losses;


·
            Peer comparisons with other
      financial institutions; and


·
            Economic data associated with the
      real estate market in the Company’s lending market
      areas.





A loan is
considered to be impaired, as defined by 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, are
excluded from the scope of SFAS 114.  Impaired loans are required to
be measured based upon (i) the present value of expected future cash flows,
discounted at the loan’s initial effective interest rate, (ii) the loan’s market
price, or (iii) 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 allowance must be established for the difference.  The
allowance is established by either an allocation of the existing allowance for
loan losses or by a provision for loan losses, depending on various
circumstances.  Allowances are not needed when credit losses have been
recorded so that the recorded investment in an impaired loan is less than the
loan valuation.





Segment
Reporting





In
accordance with Statement of Financial Accounting Standard No. 131, “Disclosures about Segments of an
Enterprise and Related Information”, the Company has determined that all
of its activities constitute one reportable operating segment.





58
 Table of Contents





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 New York
City.  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.





Office
Properties and Equipment





Office
properties 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





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





Federal
Home Loan Bank Stock





The
Federal Home Loan Bank of New York (“FHLB-NY”) has assigned to the Bank a
mandated membership stock purchase, based on the Bank’s asset size. In addition,
for all borrowing activity, the Bank is required to purchase shares of FHLB-NY
non-marketable capital stock at par. Such shares are redeemed by FHLB-NY at par
with reductions in the Bank’s borrowing levels. The Bank carries this investment
at historical cost.





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 in income.  Returns on the BOLI
assets are added to the carrying value and included as non-interest income in
the consolidated statement of income.  Any receipt of benefit proceeds
is recorded as a reduction to the carrying value of the BOLI
asset.  At March 31, 2008, Carver held no policy loans against its
BOLI cash surrender values or restrictions on the use of the
proceeds.





Mortgage
Servicing Rights





Mortgageservicing rights on
originated loans that have been sold are capitalized by allocating the total
cost of the mortgage loans between the mortgage servicing rights and the loans
based on their relative fair values. Mortgage servicing rights are carried at
the lower of the initial carrying value, adjusted for amortization, or fair
value, and are amortized in proportion to, and over the period of, estimated net
servicing income using a discounted analysis of future cash flows, incorporating
numerous assumptions including servicing income, servicing costs, market
discount rates, prepayment speeds and default rates.  Mortgage
servicing rights are evaluated quarterly for impairment based on the difference
between the carrying amount and current fair value.  If it is
determined that impairment exists, the resulting loss is charged against
earnings.





Real
Estate Owned





Real estateacquired 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.





Identifiable
Intangible Assets





In
accordance with Statement of Financial Accounting Standards No.142, “Goodwill
and Other Intangible Assets” goodwill and intangible assets with
indefinite useful lives are no longer amortized, rather they are assessed, at
least annually, for impairment (See Note 3).




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




Effective April 1, 2007,
the Company adopted SFAS, No. 156, Accounting
for Servicing of Financial Assets - an amendment of FASB Statement No.
140.  SFAS No. 156 requires all separately recognized servicing
assets and servicing liabilities to be initially measured at fair value, if
practicable.  For subsequent measurements, entities are permitted to choose
either the amortization method, which is consistent with the prior requirements
of SFAS No. 140, or the fair value method.  Upon adoption of SFAS No. 156,
the Company elected to adopt the fair value method for measurements of mortgage
servicing rights (MSR). The adoption of SFAS No. 156 did not have a
material impact on the Company's financial statements.




The Company recognizes as
separate assets the rights to service mortgage loans and such assets
are included in other assets in the statements of financial
condition.




59
 Table of Contents





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.




Effective
January 1, 2007, the Company adopted the provisions of FIN 48, "Accounting
for Uncertainty in Income Taxes- An Interpretation of FASB Statement No 109."
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
entity's financial statements in accordance with SFAS No. 109, Accounting for
Income Taxes. FIN 48 also prescribes a specified recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The new
interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. The
adoption of FIN 48 did not have a material impact on the Company's financial
statements.




Securities
Impairment





The
Bank’s available-for-sale securities portfolio is carried at estimated fair
value, with any unrealized gains and losses, net of taxes, reported as
accumulated other comprehensive income/loss in stockholders’
equity.  Securities that the Bank has the positive intent and ability
to hold to maturity are classified as held-to-maturity and are carried at
amortized cost.  The fair values of securities in portfolio are based
on published or securities dealers’ market values and are affected by changes in
interest rates.  The Bank periodically reviews and evaluates the
securities portfolio to determine if the decline in the fair value of any
security below its cost basis is other-than-temporary.  The Bank
generally views changes in fair value caused by changes in interest rates as
temporary, which is consistent with its experience.  However, if such
a decline is deemed to be other-than-temporary, the security is written down to
a new cost basis and the resulting loss is charged to earnings.  At
March 31, 2008, the Bank carried no other than temporarily impaired
securities.





Earnings
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 common shares were issued (e.g., outstanding share
awards under the Company’s stock option plans).  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





The
Company’s pension benefit and post-retirement health and welfare benefit
obligations, and the related costs, are calculated using actuarial concepts,
within the framework of SFAS No. 87, “Employers’ Accounting for Pensions”
and SFAS No. 106, “Employers’ Accounting for Post-retirement Benefits Other
than Pensions,” respectively. The measurement of such obligations and expenses
requires that certain assumptions be made regarding several factors, most
notably including the discount rate and the expected return on plan assets. The
Company evaluates these critical assumptions on an annual basis. Other factors
considered by the Company include retirement patterns, mortality, turnover, and
the rate of compensation increase.





Under
Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for
Defined Benefits Pensionand
Other Post-retirement Plans- an amendment of SFAS Statement Nos. 87, 88, 106 and
132(R)”, actuarial gain and losses, prior services cost or credits, and
any remaining transition assets or obligations that have not been recognized
under previous accounting standards must be recognized in “accumulated other
comprehensive income or loss”, net of taxes effects, until they are amortized as
a component of net of periodic benefit cost.  In addition, under SFAS
No. 158 the measurement date (i.e., the date at which plan assets and the
benefit obligation are measured for financial reporting purposes) is required to
be the company’s fiscal year end. The company presently uses a December 31
measurement date for its pension, as permitted by SFAS Nos. 87 and
106.  In accordance with SFAS No. 158, the Company will adopt a fiscal
year-end measurement date on March 31, 2009.





Stock-Based
Compensation Plans





Effective
April 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123R, “Share-Based Payment,” (“SFAS No. 123R”). This statement replaces
Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation,” and supersedes Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued
to Employees,”
(“APB No. 25”).  SFAS No. 123R requires that all stock-based
compensation be recognized as an expense in the financial statements and that
such cost be measured at the fair value of the award. This statement was adopted
using the modified prospective method of application, which requires the Company
to recognize compensation expense on a prospective basis. Therefore, prior
period financial statements have not been restated. Under this method, in
addition to reflecting compensation expense for new share-based awards, expense
is also recognized to reflect the remaining service period of awards that had
been included in pro forma disclosures in prior periods. SFAS No. 123R also
requires that excess tax benefits related to stock option exercises be reflected
as financing cash inflows instead of operating cash inflows.





60
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Prior to
the adoption of SFAS No. 123R on April 1, 2006, the Company applied APB No. 25
and related interpretations in accounting for its stock option plans. As each
granted stock option entitled the holder to purchase shares of the Company’s
common stock at an exercise price equal to 100% of the fair market value of the
stock on the date of grant, no compensation cost for such options was
recognized. Had compensation cost for the stock option plans been determined,
using a Black-Scholes option-pricing model, based on the fair value at the date
of grant for awards made under those plans, consistent with the method set forth
in SFAS No. 123, “Accounting for Stock-based Compensation,” as amended by
Statement of Financial Accounting Standards No. 148, “Accounting for Stock-based
Compensation – Transition and Disclosure,” (“SFAS No. 148”), the
Company’s pro forma net income in the year ended March 31, 2006 would have been
as follows:





2006Net
      Income available to common shareholders:As
      reported
            
            $
            3,770Total
      stock-based employee compensation expense determined under fair value
      based methods for all awards, net of related tax effects
            
            
            (105
            )Pro
      forma
            
            $
            3,665Basic
      earnings per share:As
      reported
            
            $
            1.50Pro
      forma
            
            
            1.46Diluted
      earnings per share:As
      reported
            
            $
            1.45Pro
      forma
            
            
            1.43Weighted
      average number of shares outstanding
            
            
            2,506,029





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
Company grants “incentive stock options” only to its employees and grants
“nonqualified stock options” to employees and non-employee
directors.  All options granted, vested and unexercised as of March
31, 2006 will still be accounted for under APB No. 25. 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.





Immaterial
Restatement





The March
31, 2006 Consolidated Statement of Financial Condition reflects an immaterial
restatement to correctly deconsolidate Carver’s Statutory Trust I subsidiary,
amounting to an increase in other assets and other borrowed money of $0.4
million.  The outstanding number of unvested shares granted under the
Company’s Management Recognition Plan (“MRP”) had not been included as
potentially dilutive shares when calculating the diluted EPS for the past
several years. For fiscal years ended March 31, 2007 and 2006, the outstanding
number of unvested MRP shares was 26,539.  Taking these potentially
dilutive shares into account, the diluted EPS would have been $1.45 and $1.00
for 2006 and 2007, respectively, compared to reported diluted EPS of $1.47 and
$1.01.  Management believes these misstatements to be
immaterial.





Reclassifications





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






NOTE
3.  IMPAIRMENT AND GOODWILL





The Company annually evaluates
long-lived assets, certain identifiable intangibles and deferred costs for
indication of impairment in value.  When required, asset impairment
will be recorded as an expense in the current period





61
 Table of Contents





Goodwill
is presumed to have an indefinite useful life, not amortized and is tested for
impairment at least once annually at the reporting unit
level.  Impairment exists when the carrying amount of goodwill exceeds
its implied fair value.  If the fair value of a reporting unit exceeds
its carrying amount at the time of testing, the goodwill of the reporting unit
is not considered impaired.  According to SFAS No. 142, “Goodwill and
Other Intangible Assets,” quoted market prices in active markets are the best
evidence of fair value and are to be used as the basis for measurement, when
available.  Other acceptable valuation methods included present-value
measurements based on multiples of earnings or revenues, or similar performance
measures.  Differences in the identification of reporting units and in
valuation techniques could result in materially different evaluations of
impairment.





The
Company performed the annual goodwill impairment test as of January 31, 2008,
and determined that the fair value of the reporting unit was in excess of its
carrying value, using the guideline company and guideline transaction
methodologies.  There was no indication of goodwill impairment as of
the annual impairment test date.





NOTE
4.  SECURITIES





The
following is a summary of securities at March 31, 2008 (in
thousands):





Amortized
              
              
              Gross
      Unrealized
              
              
              EstimatedCost
              
              
              Gains
              
              
              Losses
              
              
              Fair-ValueAvailable-for-Sale:Mortgage-backed
      securities:Government
      National Mortgage Association
              
              $
              8,303
              
              
              $
              -
              
              
              $
              (123
              )
              
              $
              8,180Federal
      Home Loan Mortgage Corporation
              
              
              4,077
              
              
              
              19
              
              
              
              -
              
              
              
              4,096Federal
      National Mortgage Association
              
              
              6,748
              
              
              
              107
              
              
              
              -
              
              
              
              6,855Other
              
              
              205
              
              
              
              4
              
              
              
              -
              
              
              
              209Total
      mortgage-backed securities
              
              
              19,333
              
              
              
              130
              
              
              
              (123
              )
              
              
              19,340U.S.
      Government Agency Securities
              
              
              1,473
              
              
              
              52
              
              
              
              -
              
              
              
              1,525Total
      available-for-sale
              
              
              20,806
              
              
              
              182
              
              
              
              (123
              )
              
              
              20,865Held
      -to -Maturity:Mortgage-backed
      securities:Government
      National Mortgage Association
              
              
              573
              
              
              
              34
              
              
              
              -
              
              
              
              607Federal
      Home Loan Mortgage Corporation
              
              
              12,343
              
              
              
              11
              
              
              
              (230
              )
              
              
              12,124Federal
      National Mortgage Association
              
              
              4,216
              
              
              
              78
              
              
              
              (32
              )
              
              
              4,262Total
      mortgage-backed securities
              
              
              17,132
              
              
              
              123
              
              
              
              (262
              )
              
              
              16,993Other
              
              
              175
              
              
              
              -
              
              
              
              (1
              )
              
              
              174Total
      held-to-maturity
              
              
              17,307
              
              
              
              123
              
              
              
              (263
              )
              
              
              17,167Total
      securities
              
              $
              38,113
              
              
              $
              305
              
              
              $
              (386
              )
              
              $
              38,032





62
 Table of Contents





The
following is a summary of securities at March 31, 2007 (in
thousands):





Amortized
            
            
            Gross Unrealized
            
            
            EstimatedCost
            
            
            Gains
            
            
            Losses
            
            
            Fair-ValueAvailable-for-Sale:Mortgage-backed
      securities:Government
      National Mortgage Association
            
            $
            13,637
            
            
            $
            47
            
            
            $
            (65
            )
            
            $
            13,619Federal
      Home Loan Mortgage Corporation
            
            
            1,116
            
            
            
            12
            
            
            
            (3
            )
            
            
            1,125Federal
      National Mortgage Association
            
            
            5,905
            
            
            
            30
            
            
            
            (40
            )
            
            
            5,895Other
            
            
            517
            
            
            
            20
            
            
            
            -
            
            
            
            537Total
      mortgage-backed securities
            
            
            21,175
            
            
            
            109
            
            
            
            (108
            )
            
            
            21,176U.S.
      Government Agency Securities
            
            
            26,417
            
            
            
            387
            
            
            
            -
            
            
            
            26,804Total
      available-for-sale
            
            
            47,592
            
            
            
            496
            
            
            
            (108
            )
            
            
            47,980Held-to-Maturity:Mortgage-backed
      securities:Government
      National Mortgage Association
            
            
            727
            
            
            
            25
            
            
            
            -
            
            
            
            752Federal
      Home Loan Mortgage Corporation
            
            
            13,308
            
            
            
            9
            
            
            
            (166
            )
            
            
            13,151Federal
      National Mortgage Association
            
            
            4,792
            
            
            
            53
            
            
            
            (50
            )
            
            
            4,795Other
            
            
            120
            
            
            
            -
            
            
            
            -
            
            
            
            120Total
      mortgage-backed securities
            
            
            18,947
            
            
            
            87
            
            
            
            (216
            )
            
            
            18,818Other
            
            
            190
            
            
            
            -
            
            
            
            (3
            )
            
            
            187Total
      held-to-maturity
            
            
            19,137
            
            
            
            87
            
            
            
            (219
            )
            
            
            19,005Total
      securities
            
            $
            66,729
            
            
            $
            583
            
            
            $
            (327
            )
            
            $
            66,985







The following is a summary
regarding securities and/or calls of available-for-sale portfolio at March 31,
2008 (in thousands):




2008
              
              
              2007
              
              
              2006Available-for-SaleProceeds
              
              $
              22,428
              
              
              $
              14,422
              
              
              $
              12,197Gross
      gains
              
              
              431
              
              
              
              22
              
              
              
              -Gross
      losses
              
              
              -
              
              
              
              646
              
              
              
              -




The net
unrealized gain on available-for-sale securities was $0.1 million ($36,000 after
taxes) at March 31, 2008 and net unrealized gain of $0.4 million ($0.2 million
after taxes) at March 31, 2007.  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
$0.5 million 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, 2008 the carrying value of these securities
was $8.8 million and a related net unrealized gain of $0.1 million continues to
be reported.  There was a loss of $0.6 million resulting from the sale
of available-for-sale securities in fiscal 2007.  At March 31, 2008
the Bank pledged securities of $9.7 million as collateral for advances from the
FHLB-NY.





The
following is a summary of the carrying value (amortized cost) and fair value of
securities at March 31, 2008, 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 theirobligations.  The
table below does not consider the effects of possible prepayments or unscheduled
repayments.





63
 Table of Contents




Amortized Cost
            
            
            Fair Value
            
            
            Weighted Avg RateAvailable-for-SaleLess
      than one year
            
            $
            42
            
            
            $
            42
            
            
            
            5.44
            %One
      through five years
            
            
            181
            
            
            
            188
            
            
            
            5.31
            %Five
      through ten years
            
            
            6,706
            
            
            
            6,264
            
            
            
            5.42
            %After
      ten years
            
            
            14,280
            
            
            
            14,370
            
            
            
            5.02
            %$
            20,679
            
            
            
            20,865
            
            
            
            5.13
            %Held-to-maturityOne
      through five years
            
            $
            11
            
            
            $
            11
            
            
            
            5.15
            %Five
      through ten years
            
            
            493
            
            
            
            486
            
            
            
            5.00
            %After
      ten years
            
            
            16,803
            
            
            
            16,670
            
            
            
            5.78
            %$
            17,307
            
            
            
            17,167
            
            
            
            5.76
            %





The
unrealized losses and fair value of securities in an unrealized loss position at
March 31, 2008 for less than 12 months and 12 months or longer were as follows
(in thousands):





Less than 12 months
            
            
            12 months or longer
            
            
            TotalUnrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            FairLosses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            ValueAvailable-for-Sale:Mortgage-backed
      securities
            
            $
            (33
            )
            
            $
            3,857
            
            
            $
            (90
            )
            
            $
            4,033
            
            
            $
            (123
            )
            
            $
            7,890Total
      available-for-sale
            
            
            (33
            )
            
            
            3,857
            
            
            
            (90
            )
            
            
            4,033
            
            
            
            (123
            )
            
            
            7,890Held-to-Maturity:Mortgage-backed
      securities
            
            
            (7
            )
            
            
            451
            
            
            
            (255
            )
            
            
            13,800
            
            
            
            (262
            )
            
            
            14,251U.S.
      Government Agency Securities
            
            
            -
            
            
            
            -
            
            
            
            (1
            )
            
            
            174
            
            
            
            (1
            )
            
            
            174Total
      held-to-maturity
            
            
            (7
            )
            
            
            451
            
            
            
            (256
            )
            
            
            13,974
            
            
            
            (263
            )
            
            
            14,425Total
      securities
            
            $
            (40
            )
            
            $
            4,308
            
            
            $
            (346
            )
            
            $
            18,007
            
            
            $
            (386
            )
            
            $
            22,315





The
unrealized losses and fair value of securities in an unrealized loss position at
March 31, 2007 were as follows (in thousands):





Less than 12 months
            
            
            12 months or longer
            
            
            TotalUnrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            FairLosses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            ValueAvailable-for-Sale:Mortgage-backed
      securities
            
            $
            (108
            )
            
            $
            9,498
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (108
            )
            
            $
            9,498Total
      available-for-sale
            
            
            (108
            )
            
            
            9,498
            
            
            
            -
            
            
            
            -
            
            
            
            (108
            )
            
            
            9,498Held-to-Maturity:Mortgage-backed
      securities
            
            
            (216
            )
            
            
            15,241
            
            
            
            -
            
            
            
            -
            
            
            
            (216
            )
            
            
            15,241U.S.
      Government Agency Securities
            
            
            (3
            )
            
            
            187
            
            
            
            -
            
            
            
            -
            
            
            
            (3
            )
            
            
            187Total
      held-to-maturity
            
            
            (219
            )
            
            
            15,428
            
            
            
            -
            
            
            
            -
            
            
            
            (219
            )
            
            
            15,428Total
      securities
            
            $
            (327
            )
            
            $
            24,926
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (327
            )
            
            $
            24,926





A total
of 29 securities had an unrealized loss at March 31, 2008 compared to 24 at
March 31, 2007.  Based on estimated fair value, all the securities in
an unrealized loss position were United States government agency-backed
securities, which represents 32.4% and 20.3% of total securities at March 31,
2008 and 2007, respectively.  The cause
of the temporary impairment is directly related to the change in interest
rates.  In general, as interest rates decline, the fair value of
securities will rise, and conversely as interest rates rise, the fair value of
securities will decline.  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 rise in fair value to movements in
interest rates, the life of the investments and their high credit
quality.




64
 Table of Contents





NOTE
5.  LOANS RECEIVABLE, NET





The
following is a summary of loans receivable, net of allowance for loan losses at
March 31 (dollars in thousands):





2008
            
            
            2007Amount
            
            
            Percent
            
            
            Amount
            
            
            PercentGross
      loans receivable:One-
      to four-family
            
            $
            103,419
            
            
            
            16.33
            %
            
            $
            100,910
            
            
            
            17.22
            %Multifamily
            
            
            78,657
            
            
            
            12.42
            %
            
            
            91,877
            
            
            
            15.68
            %Non-residential
            
            
            238,508
            
            
            
            37.66
            %
            
            
            203,187
            
            
            
            34.68
            %Construction
            
            
            158,877
            
            
            
            25.09
            %
            
            
            137,697
            
            
            
            23.50
            %Business
            
            
            52,109
            
            
            
            8.23
            %
            
            
            51,226
            
            
            
            8.74
            %Consumer
      and other (1)
            
            
            1,728
            
            
            
            0.27
            %
            
            
            1,067
            
            
            
            0.18
            %Total
      loans receivable
            
            
            633,298
            
            
            
            100.00
            %
            
            
            585,964
            
            
            
            100.00
            %Add:Premium
      on loans
            
            
            725
            
            
            
            
            
            
            
            990Less:Deferred
      fees and loan discounts
            
            
            (1,229
            )
            
            
            
            
            
            
            (994
            )Allowance
      for loan losses
            
            
            (4,878
            )
            
            
            
            
            
            
            (5,409
            )Total
      loans receivable, net
            
            $
            627,916
            
            
            
            
            
            
            $
            580,551





(1)Includes personal, credit card, and home improvement





At March
31, 2008 and 2007, 89.3% and 89.9%, respectively, of the Bank’s real estate
loans receivable was principally secured by properties located in New York
City.





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
$52.0 million, $38.8 million and $33.2 million at March 31, 2008, 2007, and
2006, respectively.  Custodial escrow balances, maintained in
connection with the above-mentioned loan servicing, were approximately $0.2
million, $0.1 million and $0.1 million at March 31, 2008, 2007 and 2006,
respectively.  During the years ended March 31, 2008, 2007 and 2006,
the Bank recognized gains on the sale of loans of $0.3 million, $0.2 million and
$0.4 million, respectively.





At March
31, 2008 the Bank pledged $187.9 million in total mortgage loans as collateral
for advances from the FHLB-NY.





The
following is an analysis of the allowance for loan losses for the years ended
March 31 (in thousands):





2008
            
            
            2007
            
            
            2006Balance
      at beginning of the year
            
            $
            5,409
            
            
            $
            4,015
            
            
            $
            4,097Provision
      charged to operations
            
            
            222
            
            
            
            276
            
            
            
            -Recoveries
      of amounts previously charged-off
            
            
            153
            
            
            
            47
            
            
            
            35Charge-offs
      of loans
            
            
            (906
            )
            
            
            (120
            )
            
            
            (117
            )Acquisition
      of CCB
            
            
            -
            
            
            
            1,191
            
            
            
            -Balance
      at end of the year
            
            $
            4,878
            
            
            $
            5,409
            
            
            $
            4,015





Non-accrual
loans consist of loans for which the accrual of interest has been discontinued
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, 2008, 2007 and 2006, the recorded investment in impaired loans was $2.9
million, $4.5 million and $2.8 million, respectively, all of which represented
non-accrual loans.  The related allowance for loan losses for these
impaired loans was approximately $0.3 million, $0.8 million and $0.3 million at
March 31, 2008, 2007 and 2006, respectively.  The impaired loan
portfolio is primarily collateral dependent.  The average recorded
investment in impaired loans during the fiscal years ended March 31, 2008, 2007
and 2006 was approximately $4.7 million, $3.6 million and $2.2 million,
respectively.  For the fiscal years ended March 31, 2008, 2007 and
2006, the Company did not recognize any interest income on these impaired
loans.  Interest income of $0.6 million, $0.3 million, and $0.1
million, for the fiscal years ended March 31, 2008, 2007 and 2006,
respectively,  would have been recorded on impaired loans had they
performed in accordance with their original terms.





65
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At March
31, 2008, other non-performing assets totaled $4.0 million which consists of
non-performing loans of $2.9 million and other real estate owned of $1.2
million.  Other non-performing loans of $2.9 million consist of 18
small business and SBA loans, two multi-family loans and two 1-4 family
loans.  All are relatively small balance loans.  Other real
estate owned of $1.2 million reflects four
foreclosed properties.





At March
31, 2008 and 2007, there were no loans to officers or directors of the
Company.





NOTE
6.  OFFICE PROPERTIES AND EQUIPMENT, NET





The
detail of office properties and equipment as of March 31 is as follows (in
thousands):








2008
            
            
            2007Land
            
            $
            415
            
            
            $
            415Building
      and improvements
            
            
            9,874
            
            
            
            9,834Leasehold
      improvements
            
            
            6,041
            
            
            
            5,262Furniture
      and equipment
            
            
            12,079
            
            
            
            10,03928,409
            
            
            
            25,550Less
      accumulated depreciation and amortization
            
            
            (12,629
            )
            
            
            (10,924
            )Office
      properties and equipment, net
            
            $
            15,780
            
            
            $
            14,626








Depreciation
and amortization charged to operations for the fiscal years ended March 31,
2008, 2007 and 2006 amounted to $1.7 million, $1.6 million and $1.5 million,
respectively.





NOTE
7. ACCRUED INTEREST RECEIVABLE





The
detail of accrued interest receivable as of March 31 is as follows (in
thousands):





2008
            
            
            2007Loans
      receivable
            
            $
            3,751
            
            
            $
            3,689Mortgage-backed
      securities
            
            
            273
            
            
            
            590Investments
      and other interest bearing assets
            
            
            39
            
            
            
            56Total
      accrued interest receivable
            
            $
            4,063
            
            
            $
            4,335





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NOTE
8.  DEPOSITS





Deposit
balances and weighted average stated interest rates as of March 31 are as
follows (dollars in thousands):





2008
            
            
            2007Amount
            
            
            Percent of Total Deposits
            
            
            Weighted Average Rate
            
            
            Amount
            
            
            Percent of Total Deposits
            
            
            Weighted Average RateNon-interest-bearing
      demand
            
            $
            51,736
            
            
            
            7.90
            %
            
            
            0.00
            %
            
            $
            50,891
            
            
            
            8.27
            %
            
            
            0.00
            %NOW
      accounts
            
            
            28,168
            
            
            
            4.30
            %
            
            
            0.20
            %
            
            
            28,910
            
            
            
            4.70
            %
            
            
            0.31
            %Savings
      and club
            
            
            125,819
            
            
            
            19.22
            %
            
            
            0.53
            %
            
            
            137,960
            
            
            
            22.43
            %
            
            
            0.78
            %Money
      market savings account
            
            
            45,514
            
            
            
            6.95
            %
            
            
            2.94
            %
            
            
            46,996
            
            
            
            7.64
            %
            
            
            2.18
            %Certificates
      of deposit
            
            
            400,587
            
            
            
            61.20
            %
            
            
            4.10
            %
            
            
            347,753
            
            
            
            56.53
            %
            
            
            4.28
            %Other
            
            
            2,839
            
            
            
            0.43
            %
            
            
            1.51
            %
            
            
            2,612
            
            
            
            0.43
            %
            
            
            1.39
            %Total
            
            $
            654,663
            
            
            
            100.00
            %
            
            
            2.83
            %
            
            $
            615,122
            
            
            
            100.00
            %
            
            
            2.78
            %





Scheduled
maturities of certificates of deposit are as follows for the year ended March
31, 2008 (in thousands):





Period to MaturityTotal
            
            
            PercentRate
            
            
            < 1 Yr.
            
            
            1-2 Yrs.
            
            
            2-3 Yrs.
            
            
            3+ Yrs.
            
            
            2007
            
            
            of Total0%
      - 0.99
            %
            
            $
            2,993
            
            
            $
            389
            
            
            $
            48
            
            
            $
            231
            
            
            $
            3,661
            
            
            
            0.91
            %1%
      - 1.99
            %
            
            
            27,640
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            27,640
            
            
            
            6.90
            %2%
      - 3.99
            %
            
            
            98,003
            
            
            
            9,577
            
            
            
            4,202
            
            
            
            1,743
            
            
            
            113,525
            
            
            
            28.34
            %4%
      and over
            
            
            
            231,542
            
            
            
            9,054
            
            
            
            3,995
            
            
            
            11,170
            
            
            
            255,761
            
            
            
            63.85
            %Total
            
            
            $
            360,178
            
            
            $
            19,020
            
            
            $
            8,245
            
            
            $
            13,144
            
            
            $
            400,587
            
            
            
            100.00
            %





The
aggregate amount of certificates of deposit with minimum denominations of
$100,000 or more was approximately $229.7 million at March 31, 2008 compared to
$217.4 million at March 31, 2007.  As of March 31, 2008 the Bank had
pledged $1.3 million of investment securities as collateral for certain large
deposits.





Interest
expense on deposits is as follows for the years ended March 31 (in
thousands):





2008
            
            
            2007
            
            
            2006NOW
      demand
            
            $
            138
            
            
            $
            98
            
            
            $
            74Savings
      and clubs
            
            
            1,004
            
            
            
            931
            
            
            
            919Money
      market savings
            
            
            1,193
            
            
            
            1,133
            
            
            
            601Certificates
      of deposit
            
            
            16,522
            
            
            
            13,079
            
            
            
            7,321Mortgagors
      deposits
            
            
            42
            
            
            
            30
            
            
            
            3018,899
            
            
            
            15,270
            
            
            
            8,945Penalty
      for early withdrawal of certificates of deposit
            
            
            (33
            )
            
            
            (43
            )
            
            
            (24
            )Total
      interest expense
            
            $
            18,866
            
            
            $
            15,227
            
            
            $
            8,921





NOTE
9.  BORROWED MONEY





Federal Home Loan Bank Advances and
Repurchase agreements.FHLB-NY advances and repurchase agreements
weighted average interest rates by remaining period to maturity at March 31 are
as follows (dollars in thousands):





Maturing
            
            2008
            
            
            2007Year
      Ended
            
            Weighted
            
            
            
            
            
            WeightedMarch 31,
            
            Average Rate
            
            
            Amount
            
            
            Average Rate
            
            
            Amount2008
            
            
            -
            
            
            $
            -
            
            
            
            4.58
            %
            
            $
            32,5002009
            
            
            3.77
            %
            
            
            15,107
            
            
            
            3.78
            %
            
            
            15,1072012
            
            
            4.63
            %
            
            
            30,143
            
            
            
            3.50
            %
            
            
            1684.34
            %
            
            $
            45,250
            
            
            
            4.32
            %
            
            $
            47,775





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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 $199.0 million at March 31, 2008.  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, 2008, advances were secured by pledges of the
Bank’s investment in the capital stock of the FHLB-NY totaling $1.6 million and
a blanket assignment of the Bank’s unpledged qualifying mortgage loans of $187.9
million and mortgage-backed and investment securities of $9.7
million.  The Bank has sufficient collateral at the FHLB-NY to be able
to borrow an additional $29.4 million from the FHLB-NY at March 31,
2008.





Repurchase agreements.Repurchase agreements
(“REPO”) are contracts for the sale of securities owned or borrowed by the Bank
with an agreement to repurchase those securities at an agreed-upon price and
date. The Banks’ repurchase agreements are primarily collateralized by $30.0
million obligations and other mortgage-related securities, and are entered into
with either the Federal Home Loan Bank of New York (the “FHLB-NY”) or selected
brokerage firms.  Repurchase agreements totaled $30.0 million at March
31, 2008.  At March 31, 2008, the accrued interest on repurchase
agreements amounted to $0.2 million and the interest expense was $1.1 million
for the year ended March 31, 2008. The Bank had no repurchase agreements at
March 31, 2007 and no related interest expense for fiscal 2007.





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 of $13.0 million, and proceeds from the sale of the trust's
common securities of $0.4 million, were used to purchase approximately $13.4
million aggregate principal amount of the Holding Company's floating rate junior
subordinated debt securities due 2033.  The trust preferred debt
securities are redeemable at par quarterly at the option of the Company
beginning on or after September 17, 2008 and have a mandatory redemption date of
September 17, 2033. Cash distributions on the trust preferred debt securities
are cumulative and payable at a floating rate per annum resetting quarterly with
a margin of 3.05% over the three-month LIBOR.





The
following table sets forth certain information regarding Carver Federal’s
borrowings as of and for the years ended March 31 (dollars in
thousands):





2008
            
            
            2007
            
            
            2006Amounts
      outstanding at the end of year:FHLB
      advances
            
            $
            15,250
            
            
            $
            47,775
            
            
            $
            80,935Guaranteed
      preferred beneficial interest in junior subordinated
      debentures
            
            $
            13,375
            
            
            $
            13,318
            
            
            $
            13,260Rate
      paid at year end:FHLB
      advances
            
            
            3.77
            %
            
            
            4.32
            %
            
            
            4.13
            %Guaranteed
      preferred beneficial interest in junior subordinated
      debentures
            
            
            5.85
            %
            
            
            8.40
            %
            
            
            7.97
            %Maximum
      amount of borrowing outstanding at any month end:FHLB
      advances
            
            $
            60,874
            
            
            $
            93,975
            
            
            $
            112,488Guaranteed
      preferred beneficial interest in junior subordinated
      debentures
            
            $
            13,375
            
            
            $
            13,318
            
            
            $
            13,260Approximate
      average amounts outstanding for year:FHLB
      advances
            
            $
            36,724
            
            
            $
            65,567
            
            
            $
            94,798Guaranteed
      preferred beneficial interest in junior subordinated
      debentures
            
            $
            13,344
            
            
            $
            13,286
            
            
            $
            13,230Approximate
      weighted average rate paid during year:FHLB
      advances
            
            
            5.18
            %
            
            
            4.36
            %
            
            
            3.81
            %Guaranteed
      preferred beneficial interest in junior subordinated
      debentures
            
            
            7.76
            %
            
            
            8.33
            %
            
            
            7.50
            %





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NOTE
10. INCOME TAXES





The
components of income tax (benefit) expense for the years ended March 31 are as
follow (in thousands):





2008
            
            
            2007
            
            
            2006Federal
      income tax expense (benefit):Current
            
            $
            79
            
            
            $
            1,887
            
            
            $
            1,155Deferred
            
            
            (1,107
            )
            
            
            (3,018
            )
            
            
            35(1,028
            )
            
            
            (1,131
            )
            
            
            1,190State
      and local income tax expense:Current
            
            
            171
            
            
            
            313
            
            
            
            196Deferred
            
            
            (24
            )
            
            
            (5
            )
            
            
            (57
            )147
            
            
            
            308
            
            
            
            139Total
      provision for income tax (benefit) expense
            
            $
            (881
            )
            
            $
            (823
            )
            
            $
            1,329





The
following is a reconciliation of the expected Federal income tax rate to the
consolidated effective tax rate for the years ended March 31 (dollars in
thousands):





2008
            
            
            2007
            
            
            2006Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            PercentStatutory
      Federal income tax
            
            $
            1,103
            
            
            
            34.0
            %
            
            $
            598
            
            
            
            34.0
            %
            
            $
            1,734
            
            
            
            34.0
            %State
      and local income taxes, net of Federal tax benefit
            
            
            88
            
            
            
            2.7
            %
            
            
            204
            
            
            
            11.6
            %
            
            
            92
            
            
            
            1.8
            %New
      markets tax credit
            
            
            (2,000
            )
            
            
            -61.6
            %
            
            
            (1,475
            )
            
            
            -83.8
            %
            
            
            -
            
            
            
            -General
      business credit
            
            
            (41
            )
            
            
            -1.3
            %
            
            
            (69
            )
            
            
            -3.9
            %
            
            
            (73
            )
            
            
            -1.5
            %Release
      of  contingency reserve
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (500
            )
            
            
            -9.8
            %Other
            
            
            (31
            )
            
            
            -1.0
            %
            
            
            (81
            )
            
            
            -4.6
            %
            
            
            76
            
            
            
            1.5
            %Total
      income tax (benefit) expense
            
            $
            (881
            )
            
            
            -27.2
            %
            
            $
            (823
            )
            
            
            -46.7
            %
            
            $
            1,329
            
            
            
            26.0
            %





Carver
Federal’s stockholders’ equity includes approximately $2.8 million at the end of
each year ended March 31, 2008, 2007 and 2006, 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.





69
 Table of Contents





Tax
effects of existing temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities are included in other assets
at March 31 are as follows (in thousands):





2,008
            
            
            2007Deferred
      Tax Assets:Income
      from affiliate
            
            $
            -
            
            
            $
            1,876Allowance
      for loan losses
            
            
            1,427
            
            
            
            1,839Deferred
      loan fees
            
            
            461
            
            
            
            371Compensation
      and benefits
            
            
            102
            
            
            
            109Non-accrual
      loan interest
            
            
            579
            
            
            
            587Capital
      loss carryforward
            
            
            591
            
            
            
            591Deferred
      rent
            
            
            111
            
            
            
            111Purchase
      accounting adjustment
            
            
            159
            
            
            
            702Net
      operating loss carry forward
            
            
            2,072
            
            
            
            -New
      markets tax credit
            
            
            3,227
            
            
            
            1,242Depreciation
            
            
            330
            
            
            
            -Other
            
            
            28
            
            
            
            2Total
      Deferred Tax Assets
            
            
            9,087
            
            
            
            7,430Deferred
      Tax Liabilities:Depreciation
            
            
            -
            
            
            
            128Income
      from affiliate
            
            
            690
            
            
            
            -Minimum
      pension liability
            
            
            170
            
            
            
            50Unrealized
      gain on available-for-sale securities
            
            
            92
            
            
            
            228Total
      Deferred Tax Liabilities
            
            
            952
            
            
            
            406Net
      Deferred Tax Assets
            
            $
            8,135
            
            
            $
            7,024





In June
2006, Carver Federal was selected by the U.S. Department of Treasury to receive
an award of $59 million in New Markets Tax Credits.  The NMTC award is
used to stimulate economic development in low- to moderate-income
communities.  The NMTC award enables the Bank to invest with community
and development partners in economic development projects with attractive terms
including, in some cases, below market interest rates, which may have the effect
of attracting capital to underserved communities and facilitating the
revitalization of the community, pursuant to the goals of the NMTC
program.  The NMTC award provides a credit to Carver Federal against
Federal income taxes when the Bank makes qualified investments.  The
credits are allocated over seven years from the time of the qualified
investment.  Recognition of the Bank’s NMTC award began in December
2006 when the Bank invested $29.5 million, one-half of its $59 million
award.  In December 2007, the Bank invested an additional $10.5
million and transferred rights to $19.0 million of its $59 million NMTC award to
an investor pursuant to its investment in a NMTC project.  The Bank’s
NMTC allocation has been fully invested as of December 31, 2007. During the
seven year period, assuming the Bank meets compliance requirements, the Bank
will receive 39% of the $40.0 million invested award amount (5% over each of the
first three years, and 6% over each of the next four years).  The
Company expects to receive additional NMTC tax benefits of approximately $12.1
million from its $40.0 million investment over approximately six
years.





A
valuation allowance against the deferred tax asset at March 31, 2008 and 2007
was not required since it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the deferred tax
asset.




The Company has no uncertain tax
positions.  The Company and its subsidiaries are subject to U.S.
federal, New York State and New York City income taxation.  The
Company is no longer subject to examination by taxing authorities for years
before March 31, 2005.  CCB, a subsidiary of the Holding Company, which was
purchased in 2006, is currently subject to a New York State examination by the
taxing authorities for tax years 2003 and 2004.
 
 The Company adopted FASB Interpretation
48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as of April 1,
2007.  A tax position is recognized as a benefit only if it is “more
likely than not” that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur.  The amount recognized
is the largest amount of tax benefit that is greater than 50% likely of being
realized on examination.  For tax positions not meeting the “more
likely than not” test, no tax benefit is recorded.  FIN 48 had no
affect on the Company’s financial statements.


NOTE
11. 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 years ended March 31 (in
thousands):





2008
            
            
            2007
            
            
            2006Net
      income - basic and diluted
            
            $
            3,980
            
            
            $
            2,583
            
            
            $
            3,770Weighted
      average common shares outstanding – basic
            
            
            2,492
            
            
            
            2,511
            
            
            
            2,506Effect
      of dilutive options
            
            
            50
            
            
            
            57
            
            
            
            59Effect
      of dilutive MRP shares
            
            
            19
            
            
            
            18
            
            
            
            27Weighted
      average common shares outstanding – diluted
            
            
            2,561
            
            
            
            2,586
            
            
            
            2,592





70
 Table of Contents





NOTE
12. 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 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.





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 (“FDICIA”), as amended, stipulates
that an institution with less than 4.0% core capital is deemed undercapitalized.
At March 31, 2008 and 2007, the Bank exceeded all of its regulatory capital
requirements.





The
following is a summary of the Bank’s actual capital amounts as of March 31, 2008
compared to the OTS requirements for minimum capital adequacy and for
classification as a well-capitalized institution (in thousands):





GAAP
      Capital
            
            
            Tangible
      Equity
            
            
            Leverage
      Capital
            
            
            Risk-Based
      CapitalStockholders'
      Equity at March 31, 2008 (1)
            
            $
            68,669
            
            
            $
            68,669
            
            
            $
            68,669
            
            
            $
            68,669Add:General
      valuation allowances
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            4,878Deduct:Unrealized
      gains on securities available-for-sale, net
            
            
            
            
            
            
            (151
            )
            
            
            (151
            )
            
            
            (151
            )Goodwill
      and qualifying intangible assets, net
            
            
            
            
            
            
            6,902
            
            
            
            6,902
            
            
            
            6,902Other
            
            
            
            
            
            
            (33
            )
            
            
            (33
            )
            
            
            (33
            )Regulatory
      Capital
            
            
            
            
            
            
            61,583
            
            
            
            61,583
            
            
            
            66,461Minimum
      Capital requirement
            
            
            
            
            
            
            14,641
            
            
            
            31,293
            
            
            
            51,707Regulatory
      Capital Excess
            
            
            
            
            
            $
            46,942
            
            
            $
            30,290
            
            
            $
            14,754





(1) Carver
Federal 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 2008, 2007 and
2006 in the Consolidated Statements of Changes in Stockholders’ Equity and
Comprehensive Income.  Carver Federal’s accumulated other
comprehensive income or loss included net unrealized losses on securities at
March 31, 2008 and 2007 was $0.2 million and $0.4 million,
respectively.  Included in the amounts at March 31, 2006 were
unrealized gains of $0.2 million 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 at March 31, 2008 and 2007 was gains on the Bank’s pension
plan liabilities of $0.3 million and $0.1 million, net of taxes,
respectively.  At March 31, 2006, there was a loss on the Bank’s
employee pension plan liability of $0.3 million, net of taxes, included in
accumulated other comprehensive loss.





NOTE
13. EMPLOYEE BENEFIT AND STOCK COMPENSATION PLANS





Pension
Plan.  Carver Federal has a non-contributory defined benefit
pension plan covering all who were participants prior to curtailment of the
plan. The benefits are based on each employee’s term of service through the date
of curtailment. 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.





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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 (in thousands):





2008
            
            
            2007Change
      in projected benefit obligation during the yearProjected
      benefit obligation at the beginning of year
            
            $
            2,887
            
            
            $
            2,892Interest
      cost
            
            
            163
            
            
            
            159Actuarial
      (gain) loss
            
            
            (308
            )
            
            
            55Benefits
      paid
            
            
            (170
            )
            
            
            (219
            )Settlements
            
            
            (173
            )
            
            
            -Projected
      benefit obligation at end of year
            
            $
            2,399
            
            
            $
            2,887Change
      in fair value of plan assets during the yearFair
      value of plan assets at beginning of year
            
            $
            2,877
            
            
            $
            2,870Actual
      return on plan assets
            
            
            232
            
            
            
            226Benefits
      paid
            
            
            (170
            )
            
            
            (219
            )Settlements
            
            
            (173
            )
            
            
            -Fair
      value of plan assets at end of year
            
            $
            2,766
            
            
            $
            2,877Funded
      status
            
            $
            367
            
            
            $
            (10
            )Unrecognized
      loss
            
            
            -
            
            
            
            -Accrued
      pension cost
            
            $
            367
            
            
            $
            (10
            )





Net
periodic pension benefit includes the following components for the years ended
March 31 (in thousands):





2008
            
            
            2007
            
            
            2006Interest
      cost
            
            $
            163
            
            
            $
            159
            
            
            $
            163Expected
      return on plan assets
            
            
            (221
            )
            
            
            (220
            )
            
            
            (227
            )Net
      periodic pension (benefit)
            
            $
            (58
            )
            
            $
            (61
            )
            
            $
            (64
            )





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





2008
            
            
            2007
            
            
            2006Annual
      salary increase (1)
            
            
            -
            
            
            
            -
            
            
            
            -Expected
      long-term return on assets
            
            
            8.00
            %
            
            
            8.00
            %
            
            
            8.00
            %Discount
      rate used in measurement of benefit obligations
            
            
            6.50
            %
            
            
            5.88
            %
            
            
            5.75
            %





(1) The
annual salary increase rate is not applicable as the plan is frozen and no new
benefits accrue.





72
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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 through the date
of curtailment. 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 (in
thousands):





2008
            
            
            2007Change
      in projected benefit obligation during the year:Projected
      benefit obligation at beginning of year
            
            $
            36
            
            
            $
            102Interest
      cost
            
            
            2
            
            
            
            5Actuarial
      gain
            
            
            -
            
            
            
            (50
            )Benefits
      paid
            
            
            (13
            )
            
            
            (21
            )Projected
      benefit obligation at end of year
            
            $
            25
            
            
            $
            36Change
      in fair value of plan assets during the yearFair
      value of plan assets at beginning of year
            
            $
            -
            
            
            $
            -Employer
      contributions
            
            
            13
            
            
            
            21Benefits
      paid
            
            
            (13
            )
            
            
            (21
            )Fair
      value of plan assets at end of year
            
            $
            -
            
            
            $
            -Funded
      status
            
            $
            (25
            )
            
            $
            (36
            )Unrecognized
      (gain)
            
            
            -
            
            
            
            -Accrued
      pension cost
            
            $
            (25
            )
            
            $
            (36
            )





Savings Incentive Plan.
Carver has a savings incentive plan, pursuant to Section 401(k) of the Code, for
all eligible employees of the Bank. The Bank matches contributions to the 401(k)
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 are fully vested and non-forfeitable at all times regardless of
the years of service with the Bank. Under the profit-sharing feature, if the
Bank achieves a minimum of 70% of its net income goal as mentioned previously,
the Compensation Committee may authorize 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 contribution may be
made regardless of whether the employee makes a contribution to the 401(k) Plan.
Non-elective Bank contributions, if awarded, vest 20% each year for the first
five years of employment and are fully vested thereafter. To be eligible for the
matching contribution, the employee must be 21 years of age and have completed
at least one year of service. To be eligible for the non-elective Carver
contribution, the employee must also be employed as of the last day of the plan
year. Total savings incentive plan expenses for the years ended March 31, 2008,
2007 and 2006 were $0.1 million, $0.2 million and $0.2 million,
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, 2008 the Consolidated Statement of Conditions
reflects a net cash surrender value of $9.1 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
provided for grants of restricted stock to certain employees at 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
but the Compensation Committee may accelerate vesting at any
time.  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.  There are no shares available to
grant under the MRP.  Pursuant to the MRP, the Bank recognized
$155,000, $118,000 and $134,000 as expense for the years ended March 31, 2008,
2007and 2006, respectively.





Employee Stock Ownership Plan.Effective upon conversion, an ESOP was established for all eligible
employees. The ESOP used $1,821,000 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. Each year until the loan paid off in June of 2004, the
Bank made discretionary contributions to the ESOP, which was 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.  In
May 2006, Carver amended the ESOP so that no new participants are eligible to
enter after December 31, 2006 and the Compensation Committee voted to cease
discretionary contributions after the 2006 allocation. ESOP compensation expense
was $0.1 million, $0.1 million and $0.2 million for the years ended March 31,
2008, 2007 and 2006, respectively.





73
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The ESOP
shares at March 31 are as follows (in thousands):





2008
            
            
            2007Allocated
      shares
            
            
            69
            
            
            
            73Unallocated
      shares
            
            
            -
            
            
            
            -Total
      ESOP shares
            
            
            69
            
            
            
            73Fair
      value of unallocated shares
            
            $
            3
            
            
            $
            10





Stock Option Plans.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 was 338,862.  The 1995
plan expired by its term and no new options may be granted under it, however,
stock options granted under the 1995 Plan continue in accordance with their
terms.  At March 31, 2008, there were 237,182 options outstanding and
198,088 were exercisable.  Options are granted at the fair market
value of Carver Federal common stock at the time of the grant for a period not
to exceed ten years.  Under the 1995 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, but the Committee may
accelerate vesting at any time. All options are exercisable immediately upon a
participant’s disability, death or a change in control, as defined in the
Plan.





In
September 2006, Carver stockholders approved the 2006 Stock Incentive Plan which
provides for the grant of stock options, stock appreciation rights and
restricted stock to employees and directors who are selected to receive awards
by the Committee.  The 2006 Incentive Plan authorizes Carver to grant
awards with respect to 300,000 shares, but no more than 150,000 shares of
restricted stock may be granted. Options are granted at a price not less than
fair market value of Carver Federal common stock at the time of the grant for a
period not to exceed 10 years.  Shares generally vest in 20%
increments over 5 years, however, the Committee may specify a different vesting
schedule.  At March 31, 2008, there were 32,447 options
outstanding under the 2006 Incentive Plan and none were
exercisable.    All options are exercisable immediately upon
a participant’s disability, death or a change in control, as defined in the
Plan, if the person is employed on that date.





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





2008
            
            
            2007
            
            
            2006Options
            
            
            Weighted
      Average Exercise Price
            
            
            Options
            
            
            Weighted
      Average Exercise Price
            
            
            Options
            
            
            Weighted
      Average Exercise PriceOutstanding,
      beginning of year
            
            
            240,087
            
            
            $
            13.24
            
            
            
            238,061
            
            
            $
            12.90
            
            
            
            225,292
            
            
            $
            12.37Granted
            
            
            15,978
            
            
            
            16.93
            
            
            
            21,019
            
            
            
            16.50
            
            
            
            35,277
            
            
            
            16.98Exercised
            
            
            (3,475
            )
            
            
            11.58
            
            
            
            (11,776
            )
            
            
            9.57
            
            
            
            (9,903
            )
            
            
            9.57Forfeited
            
            
            (15,408
            )
            
            
            17.72
            
            
            
            (7,217
            )
            
            
            17.44
            
            
            
            (12,605
            )
            
            
            17.44Outstanding,
      end of year
            
            
            237,182
            
            
            $
            13.22
            
            
            
            240,087
            
            
            $
            13.24
            
            
            
            238,061
            
            
            $
            12.90Exercisable,
      at year end
            
            
            198,088
            
            
            
            
            
            
            
            192,110
            
            
            
            
            
            
            
            144,836





74
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Information
regarding stock options as of and for the year ended March 31, 2008 is as
follows :





Options Outstanding
            
            
            Options ExercisableRange
      of Exercise Prices
            
            
            Shares
            
            Weighted
      Average Remaining Life
            
            Weighted
      Average Exercise Price
            
            
            Shares
            
            
            Weighted
      Average Exercise Price$
            8.00
            
            
            $
            8.99
            
            
            
            60,000
            
            2
      years
            
            $
            8.17
            
            
            
            60,000
            
            
            $
            8.179.00
            
            
            
            9.99
            
            
            
            32,000
            
            3
      years
            
            
            9.93
            
            
            
            32,000
            
            
            
            9.9310.00
            
            
            
            10.99
            
            
            
            2,000
            
            2
      years
            
            
            10.38
            
            
            
            2,000
            
            
            
            10.3812.00
            
            
            
            12.99
            
            
            
            37,400
            
            4
      years
            
            
            12.10
            
            
            
            37,400
            
            
            
            12.1016.00
            
            
            
            16.99
            
            
            
            54,721
            
            7
      years
            
            
            16.59
            
            
            
            38,252
            
            
            
            16.5917.00
            
            
            
            17.99
            
            
            
            29,033
            
            6
      years
            
            
            17.18
            
            
            
            6,408
            
            
            
            17.1819.00
            
            
            
            19.99
            
            
            
            20,918
            
            6
      years
            
            
            19.66
            
            
            
            20,918
            
            
            
            19.6620.00
            
            
            
            20.99
            
            
            
            729
            
            7
      years
            
            
            20.00
            
            
            
            729
            
            
            
            20.0021.00
            
            
            
            21.99
            
            
            
            381
            
            6
      years
            
            
            21.76
            
            
            
            381
            
            
            
            21.76Total
            
            
            
            
            
            
            
            237,182
            
            
            
            
            
            
            
            
            198,088





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 for the years ended March 31:





2008
            
            
            2007
            
            
            2006Risk-free
      interest rate
            
            
            4.3%
            
            
            
            4.5%
            
            
            
            3.5%Volatility
            
            
            31.2%
            
            
            
            19.0%
            
            
            
            35.0%Annual
      dividends
            
            $
            0.29
            
            
            $
            0.32
            
            
            $
            0.28Expected
      life of option grants
            
            7
      yrs
            
            
            7
      yrs
            
            
            7
      yrs





Under the
provisions of SFAS No. 123R, the Company recorded compensation expense of $0.3
million during the year ended March 31, 2008.  As of March 31, 2008, the
total remaining unrecognized compensation cost related to stock options granted
under the Company’s plan was $0.1 million, which is expected to be recognized
over a weighted-average vesting period of 1.3 years.





Performance Compensation
Plan.In 2006, Carver adopted the Performance Compensation
Plan of Carver Bancorp, Inc.  This plan provides for cash payments to
officers or employees designated by the Compensation Committee, which also
determines the amount awarded to such participants.  Vesting is
generally 20% a year over 5 years and awards are fully vested on a change in
control (as defined), or termination of employment by death or disability, but
the Committee may accelerate vesting at any time.  Payments are made
as soon as practicable after the end of the fiscal year in which amounts
vest.  In fiscal year 2007, the Company granted its first awards under
the new Plan.  The total fair value of options granted was $0.4
million. The amount of compensation expense recognized in fiscal year 2008 was
$0.1 million.





NOTE
14.  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.





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 Table of Contents





The Bank
had outstanding commitments at March 31 as follows (in thousands):





2008
            
            
            2007Commitments
      to originate mortgage loans
            
            $
            81,754
            
            
            $
            107,115Commitments
      to originate commercial and consumer loans
            
            
            4,236
            
            
            
            214Lines
      of credit
            
            
            24,518
            
            
            
            300Letters
      of credit
            
            
            4,518
            
            
            
            -Total
            
            $
            115,026
            
            
            $
            107,629





At March
31, 2008, of the $115.0 million in outstanding commitments to originate loans,
$74.9 million represented construction loans at a weighted average rate of
6.44%, $37.3 million represented commitments to originate non-residential
mortgage loans at a weighted average rate of 6.03% and $2.8 million represented
one- to four-family residential loans at a weighted average rate of
6.24%.





The
balance of commitments on commercial and consumer loans at March 31, 2008 is
primarily undisbursed funds from approved unsecured commercial lines of
credit.  All such lines carry adjustable rates mainly tied to
prime.





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 under long term operating leases for
certain branches aggregated approximately $1.4 million, $0.9 million and $0.7
million for the years ended March 31, 2008, 2007 and 2006, respectively. As of
March 31, 2008, minimum rental commitments under all noncancellable leases with
initial or remaining terms of more than one year and expiring through 2018
follow (in thousands):





Year
      Ending March 31,
            
            Minimum
      Rental2009
            
            $
            1,5172010
            
            
            1,5562011
            
            
            1,4582012
            
            
            1,1372013
            
            
            1,125Thereafter
            
            
            4,663$
            11,456





The Bank
also has, in the normal course of business, commitments for services and
supplies.





Legal
Proceedings.  From time to time, Carver Federal is a party to
various legal proceedings incidental 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, 2008, 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
15. 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 instruments 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 available data and estimation
methodology suitable for each such category of financial
instruments.  For those loans and deposits with floating interest
rates, it is presumed that estimated fair values generally approximate their
recorded carrying value. The estimation methodologies used and the estimated
fair values and carrying values of the Bank’s financial instruments are set
forth below:





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 Table of Contents





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 and loan held-for-sale





The fair
value of loans receivable and held-for-sale 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 determined by discounting the present value of estimated future
servicing cash flows using current market assumptions for prepayments, servicing
costs and other factors.





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 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, 2008 approximates the fees
received.  The fair value is not considered material.





The
carrying amounts and estimated fair values of the Bank’s financial instruments
at March 31 are as follows (in thousands):





2008
            
            
            2007Carrying
      Amount
            
            
            Estimated
      Fair Value
            
            
            Carrying
      Amount
            
            
            Estimated
      Fair ValueFinancial
      Assets:Cash
      and cash equivalents
            
            $
            27,368
            
            
            $
            27,368
            
            
            $
            17,350
            
            
            $
            17,350Investment
      securities available-for-sale
            
            
            1,735
            
            
            
            1,525
            
            
            
            26,804
            
            
            
            26,804Mortgage
      backed securities available-for-sale
            
            
            19,130
            
            
            
            19,340
            
            
            
            21,176
            
            
            
            21,176Mortgage
      backed securities held-to-maturity
            
            
            17,307
            
            
            
            17,167
            
            
            
            19,137
            
            
            
            19,005Loans
      receivable
            
            
            627,916
            
            
            
            645,387
            
            
            
            580,551
            
            
            
            580,854Loans
      held-for-sale
            
            
            23,767
            
            
            
            24,084
            
            
            
            23,226
            
            
            
            23,226Accrued
      interest receivable
            
            
            4,063
            
            
            
            4,063
            
            
            
            4,335
            
            
            
            4,335Mortgage
      servicing rights
            
            
            605
            
            
            
            605
            
            
            
            388
            
            
            
            467Financial
      Liabilities:Deposits
            
            $
            654,663
            
            
            $
            660,813
            
            
            $
            615,122
            
            
            $
            614,199Advances
      from FHLB of New York
            
            
            15,249
            
            
            
            15,191
            
            
            
            47,775
            
            
            
            47,307Other
      borrowed money
            
            
            43,375
            
            
            
            44,984
            
            
            
            13,318
            
            
            
            13,318





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.





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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. 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
16. QUARTERLY FINANCIAL DATA (UNAUDITED)





The
following is a summary of unaudited quarterly financial data for fiscal years
ended March 31, 2008 and 2007 (in thousands, except per share
data):





June 30
            
            
            September 30
            
            
            December 30
            
            
            March 31Fiscal
      2008Interest
      income
            
            $
            11,968
            
            
            $
            12,088
            
            
            $
            12,309
            
            
            $
            11,767Interest
      expense
            
            
            (5,315)
            
            
            
            (5,625)
            
            
            
            (5,992)
            
            
            
            (5,724)Net
      interest income
            
            
            6,653
            
            
            
            6,463
            
            
            
            6,317
            
            
            
            6,043Provision
      for loan losses
            
            
            -
            
            
            
            -
            
            
            
            (222)
            
            
            
            -Non-interest
      income
            
            
            1,137
            
            
            
            1,453
            
            
            
            3,178
            
            
            
            2,093Non-interest
      expense
            
            
            (6,504)
            
            
            
            (7,196)
            
            
            
            (7,963)
            
            
            
            (8,207)Income
      tax benefit (expense)
            
            
            (143)
            
            
            
            44
            
            
            
            268
            
            
            
            712Minority
      interest, net of taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (146)Net
      income
            
            $
            1,143
            
            
            $
            764
            
            
            $
            1,578
            
            
            $
            495Earnings
      per common shareBasic
            
            $
            0.46
            
            
            $
            0.31
            
            
            $
            0.63
            
            
            $
            0.20Diluted
            
            $
            0.44
            
            
            $
            0.30
            
            
            $
            0.62
            
            
            $
            0.20Fiscal
      2007Interest
      income
            
            $
            9,120
            
            
            $
            9,380
            
            
            $
            11,770
            
            
            $
            11,470Interest
      expense
            
            
            (4,085)
            
            
            
            (4,169)
            
            
            
            (5,643)
            
            
            
            (5,337)Net
      interest income
            
            
            5,035
            
            
            
            5,211
            
            
            
            6,127
            
            
            
            6,133Provision
      for loan losses
            
            
            -
            
            
            
            -
            
            
            
            (120)
            
            
            
            (156)Non-interest
      income
            
            
            945
            
            
            
            (337)
            
            
            
            966
            
            
            
            1,295Non-interest
      expense
            
            
            (4,733)
            
            
            
            (6,242)
            
            
            
            (5,884)
            
            
            
            (6,479)Income
      tax benefit (expense)
            
            
            (445)
            
            
            
            464
            
            
            
            311
            
            
            
            493Net
      income (loss)
            
            $
            802
            
            
            $
            (904)
            
            
            $
            1,400
            
            
            $
            1,286Earnings
      (loss) per common shareBasic
            
            $
            0.32
            
            
            $
            (0.36)
            
            
            $
            0.56
            
            
            $
            0.51Diluted
            
            $
            0.31
            
            
            $
            (0.35)
            
            
            $
            0.54
            
            
            $
            0.50





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NOTE
17. CARVER BANCORP, INC.  - PARENT COMPANY ONLY





CONDENSED
STATEMENTS OF FINANCIAL CONDITION (in thousands):





As of March 31,2008
            
            
            2007AssetsCash
      on deposit with subsidiaries
            
            $
            384
            
            
            $
            399Investment
      in subsidiaries
            
            
            69,401
            
            
            
            64,996Other
      assets
            
            
            32
            
            
            
            16Total
      Assets
            
            $
            69,817
            
            
            $
            65,411Liabilities
      and Stockholders' EquityBorrowings
            
            $
            13,376
            
            
            $
            13,318Accounts
      payable to subsidiaries
            
            
            1,945
            
            
            
            291Other
      liabilities
            
            
            113
            
            
            
            175Total
      liabilities
            
            $
            15,434
            
            
            $
            13,784Stockholders’
      equity
            
            
            54,383
            
            
            
            51,627Total
      Liabilities and Stockholders’ Equity
            
            $
            69,817
            
            
            $
            65,411





CONDENSED
STATEMENTS OF INCOME (in thousands):





Years Ended March 31,2008
            
            
            2007
            
            
            2006IncomeEquity
      in net income from subsidiaries
            
            $
            -
            
            
            $
            3,551
            
            
            $
            6,758Interest
      income from deposit with subsidiaries
            
            
            5,089
            
            
            
            -
            
            
            
            5Other
      income
            
            
            34
            
            
            
            34
            
            
            
            22Total
      income
            
            
            5,123
            
            
            
            3,585
            
            
            
            6,785ExpensesInterest
      Expense on Borrowings
            
            
            1,185
            
            
            
            1,196
            
            
            
            985Salaries
      and employee benefits
            
            
            157
            
            
            
            180
            
            
            
            287Shareholder
      expense
            
            
            664
            
            
            
            439
            
            
            
            407Other
            
            
            18
            
            
            
            10
            
            
            
            7Total
      expense
            
            
            2,024
            
            
            
            1,825
            
            
            
            1,686Income
      before income taxes
            
            
            3,099
            
            
            
            1,760
            
            
            
            5,099Income
      tax (benefit) expense
            
            
            (881)
            
            
            
            (823)
            
            
            
            1,329Net
      Income
            
            $
            3,980
            
            
            $
            2,583
            
            
            $
            3,770





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Years
      Ended March 31,2008
              
              
              2007
              
              
              2006Cash
      Flows From Operating ActivitiesNet
      income
              
              $
              3,980
              
              
              $
              2,583
              
              
              $
              3,770Adjustments
      to reconcile net income to net cash from operating
    activities:Equity
      in net income of Subsidiaries
              
              
              (5,224
              )
              
              
              (3,551
              )
              
              
              (6,758
              )Income
      taxes from the Bank
              
              
              (881
              )
              
              
              (823
              )
              
              
              1,329Increase
      in other assets
              
              
              (16
              )Increase
      (decrease) in accounts payable to subsidiaries
              
              
              1,654
              
              
              
              225
              
              
              
              (443
              )(Decrease)
      increase in other liabilities
              
              
              (62
              )
              
              
              (83
              )
              
              
              40Other,
      net
              
              
              140
              
              
              
              (13
              )
              
              
              299Net
      cash used in operating activities
              
              
              (409
              )
              
              
              (1,662
              )
              
              
              (1,763
              )Cash
      Flows From Investing ActivitiesDividends
      received from Bank
              
              
              1,700
              
              
              
              3,201
              
              
              
              850Proceeds
      from sale of investment securities
              
              
              -
              
              
              
              -
              
              
              
              1,575Net
      cash provided by investing activities
              
              
              1,700
              
              
              
              3,201
              
              
              
              2,425Cash
      Flows From Financing ActivitiesPurchase
      of treasury stock, net
              
              
              (331
              )
              
              
              (321
              )
              
              
              (115
              )Dividends
      paid
              
              
              (975
              )
              
              
              (878
              )
              
              
              (777
              )Net
      cash used in financing activities
              
              
              (1,306
              )
              
              
              (1,199
              )
              
              
              (892
              )Net
      (decrease) increase in cash
              
              
              (15
              )
              
              
              340
              
              
              
              (230
              )Cash
      and cash equivalents - beginning
              
              
              399
              
              
              
              59
              
              
              
              289Cash
      and cash equivalents - ending
              
              $
              384
              
              
              $
              399
              
              
              $
              59





NOTE
18.  RECENT ACCOUNTING PRONOUNCEMENTS





Accounting for Certain
Hybrid Financial Instruments





In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments”. This statement amends FASB Statements No. 133,
“Accounting for Derivative Instruments and Hedging Activities”, and No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities”. This statement resolves issues addressed in “Statement 133
Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest
in Securitized Financial Assets”.  SFAS No. 155 is effective for
fiscal years beginning after September 15, 2006.  The adoption of SFAS
No. 155 had no material impact on the Company’s financial position or its
results of operations for fiscal 2008.





Accounting for Servicing of
Financial Assets





In March
2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets – an Amendment of FASB Statement No. 140 (“SFAS No.
156”), which amends SFAS No. 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.  SFAS No. 156 requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair
value, if practicable, and permits an entity to choose either the amortization
or fair value measurement method for subsequent measurements.  The
Company determines the fair value of its mortgage servicing rights on the basis
of a third party market valuation of the Company’s servicing portfolio
stratified by predominant risk characteristics – loan type and
coupon.  The valuation of the Company’s mortgage servicing rights
utilizes market derived assumptions for discount rates, servicing costs, escrow
earnings rate, and prepayments.  The Company, upon adoption of SFAS
No. 156 as of April 1, 2007, recorded a cumulative effect adjustment of $49,000
to retained earnings (net of tax) as of the beginning of fiscal 2008 for the
difference between the mortgage servicing rights fair value and its carrying
amount as reflected in the consolidated statement of changes in stockholders’
equity.  At March 31, 2008, the fair value of mortgage servicing
rights totaled $0.6 million.





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Fair Value
Measurements





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”).  The Statement establishes a single definition of
fair value, sets up a framework for measuring it, and requires additional
disclosures about the use of fair value to measure assets and
liabilities.  SFAS No. 157 also emphasizes that fair value is a
market-based measurement by establishing a three level “fair value hierarchy”
that ranks the quality and reliability of inputs used in valuation models, i.e.,
the lower the level, the more reliable the input.  The hierarchy
provides the basis for the Statement’s new disclosure requirements which are
dependent upon the frequency of an item’s measurement (recurring versus
nonrecurring).  SFAS No. 157 is effective for fair-value measures
already required or permitted by other standards for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years.  Its provisions will generally be applied
prospectively.  The adoption of SFAS No. 157 had no material impact on
the Company’s financial position or its results of operations for fiscal
2008.





The Fair Value Option for
Financial Assets and Liabilities





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities— including an amendment of FASB Statements No.
115 (“SFAS No. 159”).  SFAS No. 159 permits entities to choose
to measure financial instruments and certain other items at fair value that are
not currently required to be measured at fair value.   This
Statement is effective as of the beginning of an entity’s first fiscal year
beginning after November 15, 2007.   Carver is currently
assessing the impact of this pronouncement.





Accounting for Uncertainty
in Income Taxes





In June
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109 (“FIN
48”).  FIN 48 clarifies Statement 109 by establishing a criterion that
an individual tax position would have to meet in order for some or all of the
associated benefit to be recognized in an entity’s financial
statements.  The Interpretation applies to all tax positions within
the scope of Statement 109.  In applying FIN 48, an entity is required
to evaluate each individual tax position using a two
step-process.  First, the entity should determine whether the tax
position is recognizable in its financial statements by assessing whether it is
“more-likely-than-not” that the position would be sustained by the taxing
authority on examination.  The term “more-likely-than-not” means “a
likelihood of more than 50 percent.”  Second, the entity should
measure the amount of benefit to recognize in its financial statements by
determining the largest amount of tax benefit that is greater than 50 percent
likely of being realized upon ultimate settlement with the taxing
authority.  Each tax position must be re-evaluated at the end of each
reporting period to determine whether recognition or derecognition is
warranted.  The liability resulting from the difference between the
tax return position and the amount recognized and measured under FIN 48 should
be classified as current or non-current depending on the anticipated timing of
settlement.  An entity should also accrue interest and penalties on
unrecognized tax benefits in a manner consistent with the tax
law.  The Company’s Federal, New York State and City tax filings for
years 2003 through the present are subject to examination.





FIN 48
requires significant new annual disclosures in the notes to an entity’s
financial statements that include a tabular roll-forward of the beginning to
ending balances of an entity’s unrecognized tax benefits.  The
Interpretation is effective for fiscal years beginning after December 15, 2006
and the cumulative effect of applying FIN 48 should be reported as an adjustment
to retained earnings at the beginning of the period in which it is
adopted.  The adoption and evaluation under FAS 109 and FIN 48 had no
material impact on the Company’s financial position or its results of operations
for fiscal 2008.





Accounting for Purchases of
Life Insurance





In
September 2006, the Emerging Issues Task Force ("EITF") of the FASB issued EITF
No. 06-5, Accounting for
Purchases of Life Insurance – Determining the Amount That Could Be Realized in
Accordance with FASB Technical Bulletin  No. 85-4 ("FTB No.
85-4”), Accounting for
Purchases of Life Insurance (“EITF No. 06-5”).  EITF No. 06-5
explains how to determine “the amount that could be realized” from a life
insurance contract, which is the measurement amount for the asset in accordance
with FTB No. 85-4.  EITF No. 06-5 would require all amounts that would
ultimately be realized by a policyholder upon the assumed surrender of a final
policy to be included in the amount that could be realized under the insurance
contract.  Thus, contractual provisions that limit the amount that
could be realized in specified circumstances would be considered if it is
probable that those circumstances would occur.  The consensus on EITF
No. 06-5 is effective for fiscal years beginning after December 15, 2006 and
would be recognized through a cumulative-effect adjustment to retained earnings
as of the beginning of the year of adoption.  The adoption of EITF No.
06-5 had no material impact on the Company’s financial position or its results
of operations for fiscal 2008.





Prior Year
Misstatements





In
September 2006, the SEC Staff issued Staff Accounting Bulletin (“SAB”) No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, which addresses how the
effects of prior year uncorrected misstatements should be considered when
quantifying misstatements in current year financial statements. SAB No. 108 will
require registrants to quantify misstatements using both the balance sheet and
income-statement approaches and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. When the effect of initial adoption is determined to be
material, SAB No. 108 allows registrants to record that effect as a cumulative
effect adjustment to beginning retained earnings. The requirements are effective
for the Company beginning April 1, 2007. Carver has evaluated the requirements
of SAB No. 108 and determined that it did not have a material effect on its
financial condition or results of operations.





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Application of Accounting
Principles to Loan Commitments





In
November 2007, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 109 (SAB 109). SAB 109 supersedes Staff Accounting
Bulletin No. 105 (SAB 105), "Application of Accounting Principles
to Loan Commitments." It clarifies that the expected net future cash
flows related to the associated servicing of a loan should be included in the
measurement of all written loan commitments that are accounted for at fair value
through earnings. However, it retains the guidance in SAB 105 that
internally-developed intangible assets should not be recorded as part of the
fair value of a derivative loan commitment. The guidance is effective on a
prospective basis to derivative loan commitments issued or modified in fiscal
quarters beginning after December 15, 2007. In conjunction with the adoption of
SFAS 157 and SFAS 159, this guidance generally would result in higher fair
values being recorded upon initial recognition of derivative loan commitments.
The adoption of SAB 109 is not expected to have a material impact on the Bank’s
financial condition or results of operations.





Business
Combinations





In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations (revised
2007).” SFAS No. 141R improves reporting by creating greater consistency
in the accounting and financial reporting of business combinations, resulting in
more complete, comparable, and relevant information for investors and other
users of financial statements. To achieve this goal, the new standard requires
the acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose the information
necessary to evaluate and understand the nature and financial effect of the
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first fiscal year that commences after December 15, 2008.





Non-controlling Interests in
Consolidated Financial Statements





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements.” SFAS No. 160 improves the relevance,
comparability, and transparency of financial information provided to investors
by requiring all entities to report non-controlling (minority) interests in
subsidiaries in the same way, i.e., as equity in the consolidated financial
statements. In addition, SFAS No. 160 eliminates the diversity that currently
exists in accounting for transactions between an entity and non-controlling
interests by requiring that they be treated as equity transactions. SFAS No. 160
is effective for fiscal years beginning after December 15, 2008 and is not
expected to have a material impact on the Bank’s financial condition or results
of operations.





Sale with Repurchase
Financing Agreements





In
February 2008, the FASB issued FASB Staff Position (FSP) FAS 140-3, “Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions.” The objective of
this FSP is to provide implementation guidance on whether the security transfer
and contemporaneous repurchase financing involving the transferred financial
asset must be evaluated as one linked transaction or two separate de-linked
transactions.





Current
practice records the transfer as a sale and the repurchase agreement as a
financing. The FSP requires the recognition of the transfer and the repurchase
agreement as one linked transaction, unless all of the following criteria are
met: (1) the initial transfer and the repurchase financing are not contractually
contingent on one another; (2) the initial transferor has full recourse upon
default, and the repurchase agreement’s price is fixed and not at fair value;
(3) the financial asset is readily obtainable in the marketplace and the
transfer and repurchase financing are executed at market rates; and (4) the
maturity of the repurchase financing is before the maturity of the financial
asset. The scope of this FSP is limited to transfers and subsequent repurchase
financings that are entered into contemporaneously or in contemplation of one
another.  The FSP will be effective for the Carver on March 31,
2009.  Early adoption is prohibited. The Company is currently
evaluating the impact of adopting this FSP.





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Disclosures about Derivative
Instruments and Hedging Activities





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (SFAS 161), an amendment of SFAS 133.
The standard requires enhanced disclosures about derivative instruments and
hedged items that are accounted for under SFAS 133 and related
interpretations.  The standard will be effective for all of the
Company’s interim and annual financial statements for periods beginning after
November 15, 2008, with early adoption permitted.  The standard
expands the disclosure requirements for derivatives and hedged items and has no
impact on how Carver accounts for these instruments.  The Bank is
currently assessing the impact of this pronouncement.





Elimination of QSPEs and
Changes in the FIN 46(R) Consolidation Model





In April
of 2008, the FASB voted to eliminate Qualifying Special Purpose Entities (QSPEs)
from the guidance in SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." While
the revised standard has not been finalized and the proposals will be subject to
a public comment period, this change may have a significant impact on Carver's
consolidated financial statements as the Company may lose sales treatment for
future assets sales to a QSPE. This proposed revision could be effective as
early as April 2009.





In
connection with the proposed changes to SFAS 140, the FASB also is proposing
three key changes to the consolidation model in FIN 46(R). First, former QSPEs
would now be included in the scope of FIN 46(R). In addition, the FASB
supports amending FIN 46(R) to change the method of analyzing which party to a
variable interest entity (VIE) should consolidate the VIE to a primarily
qualitative determination of control instead of today's risks and rewards model.
Finally, the proposed amendment is expected to require all VIEs and their
primary beneficiaries to be reevaluated quarterly. The previous rules required
reconsideration only when specified reconsideration events
occurred.





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ITEM9. CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.





None.





ITEM9A.  DISCLOSURE CONTROLS AND PROCEDURES.





(a)
Evaluation of Disclosure 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.  As of March 31, 2008, the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, has 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), as of the end
of the period covered by this annual report.  Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective as of the
end of the period covered by this annual report.





Disclosure
controls and procedures are the controls and other procedures that are 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 SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
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 accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.





(b)
Management's Report on Internal Control Over Financial Reporting





Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. Our system of internal control is designed
under the supervision of management, including our Chief Executive Officer and
Chief Financial Officer, to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of the Company's
financial statements for external reporting purposes in accordance with U.S.
Generally Accepted Accounting Principles ("GAAP").





Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect transactions and dispositions of assets; provide reasonable
assurances that transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP, and that receipts and expenditures
are made only in accordance with the authorization of management and the Boards
of Directors of the Parent Company and the subsidiary banks; and provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company's assets that could have a
material effect on our financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions or that the degree of compliance
with policies and procedures may deteriorate.





As of
March 31,2008, management assessed the effectiveness of the Company's internal
control over financial reporting based upon the framework established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based upon its assessment,
management believes that the Company's internal control over financial reporting
as of March 31, 2008 is effective using these criteria.





This
annual report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management's report in this annual
report.





(c)
Changes in Internal Control over Financial Reporting





There
have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.





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ITEM9B.  OTHERINFORMATION.





None.





PART
III





ITEM10.  DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND
CORPORATE GOVERNANCE.





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 to be filed in connection with the 2008 Annual Meeting of Stockholders
(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.





ITEM12.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.





ITEM13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS
DIRECTOR INDEPENDENCE.





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.





ITEM14. 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.





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PART
IV





ITEM15.EXHIBITS, FINANCIAL STATEMENT
SCHEDULES.





I.
            List
      of Documents Filed as Part of this Annual Report on Form
    10-K





A.
            The
      following consolidated financial statements are included in Item 8 of this
      annual report:





1.
            Report
      of Independent Registered Public Accounting
Firm





2.
            Consolidated
      Statement of Financial Condition as of March 31, 2008 and
    2007





3.
            Consolidated
      Statements of Income for the years ended as of March 31, 2008, 2007 and
      2006





4.
            Consolidated
      Statements of Changes in Stockholders’ Equity and Comprehensive Income for
      the years ended March 31, 2008, 2007 and
2006





5.
            Consolidated
      Statements of Cash Flows for the years ended March 31, 2008, 2007 and
      2006





6.
            Notes
      to Consolidated Financial
Statements.





B.
            Financial
      Statement Schedules. All financial statement schedules have been omitted,
      as the required information is either inapplicable or included under Item
      8, “Financial Statement and Supplementary
Data”.





II.
            Exhibits
      required by Item 601 of Regulation
S-K:





A.
            See
      Index of Exhibits on page E-1.





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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.July
      1, 2008
            By
            /s/ Deborah C.
      WrightDeborah
      C. WrightChairman
      and Chief Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below on June 30, 2008 by the following persons on behalf
of the Registrant and in the capacities indicated.





/s/ Deborah C.
      Wright
            Chairman
      and Chief Executive OfficerDeborah
      C. Wright
            (Principal
      Executive Officer)/s/ Roy
      Swan
            Executive
      Vice President and Chief Financial OfficerRoy
      Swan
            (Principal
      Financial and Accounting Officer)/s/ Carol Baldwin
      Moody
            DirectorCarol
      Baldwin Moody/s/ Dr. Samuel J.
      Daniel
            DirectorSamuel J. Daniel/s/ David L.
      Hinds
            DirectorDavid L. Hinds/s/ Robert Holland,
      Jr.
            Lead
      DirectorRobert
      Holland, Jr./s/ Pazel
      Jackson
            DirectorPazel
      G. Jackson, Jr./s/ Edward B.
      Ruggiero
            DirectorEdward
      B. Ruggiero/s/ Robert R.
      Tarter
            DirectorRobert R. Tarter





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EXHIBIT INDEX





Exhibit
      Number
            
            Description2.2
            
            Agreement
      and Plan of Merger dated as of April 5, 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
            
            Second
      Amended and Restated Bylaws of Carver Bancorp, Inc.
(10)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 Compensation 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-2
 Table of Contents




Exhibit
      Number
            
            Description10.11
            
            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
            
            Carver
      Bancorp, Inc. Compensation Plan for Non-Employee Directors (9)
      (*)10.19
            
            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)10.20
            
            First
      Amendment to the Restatement of the Carver Federal Savings Bank 401(k)
      Savings Plan (9) (*)10.21
            
            Second
      Amendment to the Restatement of the Carver Federal Savings Bank 401(k)
      Savings Plan for EGTRRA (9) (*)10.22
            
            Guarantee
      Agreement by and between Carver Bancorp, Inc. and U.S. Bank National
      Association, dated as of September 17, 2003 (8)10.23
            
            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)10.24
            
            Indenture,
      dated as of September 17, 2003, between Carver Bancorp, Inc., as Issuer,
      and U.S. Bank National Association, as Trustee (8)10.25
            
            Second
      Amendment to the Carver Bancorp, Inc. Management Recognition Plan,
      effective as of September 23, 2003 (11) (*)10.26
            
            Amended
      Share Voting Stipulation and Undertaking made by Carver Bancorp, Inc. in
      favor of the OTS, made as of April 22, 2004 (11)10.27
            
            Trust
      Agreement between Carver Bancorp, Inc. and American Stock & Transfer
      Trust Company, dated May 3, 2004
(11)





E-3
 Table of Contents




Exhibit
      Number
            
            Description10.28
            
            First
      Amendment to the Carver Bancorp, Inc. Retirement Income Plan, effective as
      of March 28, 2005 (12) (*)10.29
            
            Sixth
      Amendment to the Carver Bancorp, Inc. Employee Stock Ownership Plan,
      effective as of March 28, 2005 (12) (*)10.30
            
            Carver
      Bancorp, Inc. 2006 Stock Incentive Plan, effective as of September 12,
      2006 (14) (*)10.31
            
            Performance
      Compensation Plan of Carver Bancorp, Inc. effective as of December 14,
      2006 ( *)14
            
            Code
      of ethics (13)21.1
            
            Subsidiaries
      of the Registrant (11)31.1
            
            Certifications
      of Chief Executive Officer31.2
            
            Certifications
      of Chief Financial Officer32.1
            
            Written
      Statement of Chief Executive Officer furnished pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 135032.2
            
            Written
      Statement of Chief Financial Officer furnished pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
  1350











(*)
            Management
      Contract or Compensatory Plan.




(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, 2001.





E-4
 Table of Contents





(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 December 19, 2007.





(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.





(14)
            Incorporated
      herein by reference to the Exhibits to the Registrant’s Definitive Proxy
      Statement on Form 14A filed with the Securities and Exchange Commission on
      July 31, 2006.






E-5