**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**_________________________________**





**FORM
      10-Q**





(Mark
      One)





[X]
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934


**For
      the quarterly period ended September 30, 2006**





[_]         
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT
      OF 1934


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





Commission
      File Number: **0-21487**





**CARVER BANCORP, INC.**


(Exact
      name of registrant as specified in its charter)








**Delaware**
            
            **13-3904174**(State
                or Other Jurisdiction of
              Incorporation
                or Organization)
            
            (I.R.S.
                Employer
              Identification
                No.)**75
                West 125****th****Street, New York, New York**
            
            **10027**(Address
                of Principal Executive Offices)
            
            (Zip
                Code)





**Registrant’s
      Telephone Number, Including Area Code:** **(718)
      230-2900**





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.




Yes X No
      ___





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.




Large
      Accelerated Filer ___    Accelerated Filer ___   
Non-Accelerated Filer X




Indicate
      by check mark whether the registrant is a shell company (as defined in rule
      12b-2 of the Exchange Act).




Yes
      ___    No X





Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date.





**Common
                Stock, par value $.01**
            
            **2,508,947**Class
            
            Outstanding
                at October 31, 2006












**TABLE
      OF**  **CONTENTS**





Page


PART
                  I.FINANCIAL
                  INFORMATIONItem
                  1. Financial StatementsConsolidated
                    Statements of Financial Condition as ofSeptember 30, 2006
                    (unaudited) and March 31, 2006
              1Consolidated
                    Statements of Income for the Three and Six MonthsEnded September
                    30, 2006 and 2005 (unaudited)
              2Consolidated
                    Statement of Changes in Stockholders’ Equity andComprehensive
                    Income for the Six Months Ended September 30, 2006 (unaudited)
              3Consolidated
                    Statements of Cash Flows for the Six Months Ended September
                    30, 2006 and 2005 (unaudited)
              4Notes
                  to Consolidated Financial Statements (unaudited)
              
              5Item
                    2.Management’s
                    Discussion and Analysis of Financial Conditionand Results of
                    Operations
              8Item
                  3.Quantitative
                  and Qualitative Disclosures About Market Risk
              20Item
                  4.Controls
                  and Procedures
              20PART
                  II.OTHER
                  INFORMATIONItem
                  1.Legal
                  Proceedings
              21Item
                  1A. Risk Factors
              
              21Item
                  2.Unregistered
                  Sales of Equity Securities and Use of Proceeds
              21Item
                  3.Defaults
                  Upon Senior Securities
              21Item
                  4.Submission
                  of Matters to a Vote of Security Holders
              21Item
                  5.Other
                  Information
              21Item
                  6.Exhibits
              21SIGNATURES
              
              22EXHIBITS
              
              E-1














**PART
      I.**  **FINANCIAL
      INFORMATION**


**ITEM
      1.**  **Financial
      Statements**


**CARVER
                  BANCORP, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF FINANCIAL CONDITION****(In
                  thousands, except share
                  data)**
  **September
                  30,**
              
              **March
                  31,****2006**
              
              **2006****(Unaudited)****ASSETS**Cash
                  and cash equivalents:Cash
                  and due from banks
              
              $
              19,508
              
              $
              13,604Federal
                  funds sold
              
              
              4,800
              
              
              8,700Interest
                  Earning Deposits
              
              
              1,828
              
              
              600Total
                  cash and cash equivalents
              
              
              26,136
              
              
              22,904Securities:Available-for-sale,
                  at fair value (including pledged as collateral of $36,947 and $79,211**at
                  September 30,**2006
                  and March 31, 2006, respectively)
              
              
              68,153
              
              
              81,882Held-to-maturity,
                  at amortized cost (including pledged as collateral of $20,601 and
                  $26,039at
                  September 30, 2006 and March 31, 2006, respectively; fair value
                  of $20,378
                  and $25,880at
                  September 30, 2006 and March 31, 2006, respectively)
              
              
              20,921
              
              
              26,404Total
                  securities
              
              
              89,074
              
              
              108,286Loans
                  held-for-sale, net
              
              
              29,887
              
              
              -Loans
                  receivable:Real
                  estate mortgage loans
              
              
              524,224
              
              
              495,994Consumer
                  and commercial business loans
              
              
              66,696
              
              
              1,453Allowance
                  for loan losses
              
              
              (5,222
              )
              
              (4,015
              )Total
                  loans receivable, net
              
              
              585,698
              
              
              493,432Office
                  properties and equipment, net
              
              
              14,326
              
              
              13,194Federal
                  Home Loan Bank of New York stock, at cost
              
              
              4,679
              
              
              4,627Bank
                  owned life insurance
              
              
              8,635
              
              
              8,479Accrued
                  interest receivable
              
              
              4,135
              
              
              2,970Goodwill
              
              
              5,066
              
              
              -Core
                  Deposit Intangible
              
              
              760
              
              
              -Other
                  assets
              
              
              11,200
              
              
              7,101Total
                  assets
              
              $
              779,596
              
              $
              660,993**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Liabilities:Deposits
              
              $
              623,627
              
              $
              504,638Advances
                  from the Federal Home Loan Bank of New York and other borrowed
                  money
              
              
              92,658
              
              
              93,792Other
                  liabilities
              
              
              14,543
              
              
              13,866Total
                  liabilities
              
              
              730,828
              
              
              612,296Stockholders'
                  equity:Common
                  stock (par value $0.01 per share: 10,000,000 shares authorized;
                  2,524,691
                  shares issued;2,511,347
                  and 2,506,822 outstanding at September 30, 2006 and March 31, 2006,
                  respectively)
              
              
              25
              
              
              25Additional
                  paid-in capital
              
              
              24,037
              
              
              23,935Retained
                  earnings
              
              
              25,204
              
              
              25,736Unamortized
                  awards of common stock under ESOP and management recognition plan
                  ("MRP")
              
              
              (10
              )
              
              (22
              )Treasury
                  stock, at cost (13,344 shares at September 30, 2006 and 17,869
                  shares at
                  March 31, 2006)
              
              
              (226
              )
              
              (303
              )Accumulated
                  other comprehensive loss
              
              
              (262
              )
              
              (674
              )Total
                  stockholders' equity
              
              
              48,768
              
              
              48,697Total
                  liabilities and stockholders' equity
              
              $
              779,596
              
              $
              660,993






See
      accompanying notes to consolidated financial statements.




1






**CARVER
                  BANCORP, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF INCOME****(In
                  thousands, except per share data)****(Unaudited)**
  **Three
                  Months Ended**
              
              **Six
                  Months Ended****September
                  30,**
              
              **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Interest
                  Income:Loans
              
              $
              8,317
              
              $
              6,214
              
              $
              16,208
              
              $
              12,421Mortgage-backed
                  securities
              
              
              842
              
              
              1,135
              
              
              1,775
              
              
              2,260Investment
                  securities
              
              
              168
              
              
              277
              
              
              349
              
              
              551Federal
                  funds sold
              
              
              53
              
              
              122
              
              
              169
              
              
              268Total
                  interest income
              
              
              9,380
              
              
              7,748
              
              
              18,501
              
              
              15,500Interest
                  expense:Deposits
              
              
              3,026
              
              
              2,096
              
              
              6,021
              
              
              3,966Advances
                  and other borrowed money
              
              
              1,143
              
              
              1,117
              
              
              2,233
              
              
              2,298Total
                  interest expense
              
              
              4,169
              
              
              3,213
              
              
              8,254
              
              
              6,264Net
                  interest income
              
              
              5,211
              
              
              4,535
              
              
              10,247
              
              
              9,236Provision
                  for loan losses
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  interest income after provision for loan losses
              
              
              5,211
              
              
              4,535
              
              
              10,247
              
              
              9,236Non-interest
                  income:Depository
                  fees and charges
              
              
              601
              
              
              668
              
              
              1,210
              
              
              1,297Loan
                  fees and service charges
              
              
              245
              
              
              302
              
              
              490
              
              
              960Write-down
                  of loans held for sale
              
              
              (702
              )
              
              -
              
              
              (702
              )
              
              -Loss
                  on sale of securities
              
              
              (645
              )
              
              -
              
              
              (645
              )
              
              -Gain
                  on sale of loans
              
              
              76
              
              
              47
              
              
              88
              
              
              73Gain
                  on sale of fixed assets
              
              
              3
              
              
              -
              
              
              3
              
              
              -Other
              
              
              85
              
              
              14
              
              
              163
              
              
              99Total
                  non-interest income
              
              
              (337
              )
              
              1,031
              
              
              607
              
              
              2,429Non-interest
                  expense:Employee
                  compensation and benefits
              
              
              2,326
              
              
              2,330
              
              
              4,611
              
              
              4,854Net
                  occupancy expense
              
              
              610
              
              
              578
              
              
              1,194
              
              
              1,079Equipment,
                  net
              
              
              514
              
              
              488
              
              
              991
              
              
              929Merger
                  related expenses**
              
              
              1,256
              
              
              -
              
              
              1,258
              
              
              -Other
              
              
              1,536
              
              
              1,240
              
              
              2,921
              
              
              2,568Total
                  non-interest expense
              
              
              6,242
              
              
              4,636
              
              
              10,975
              
              
              9,430(Loss)
                  income before income taxes
              
              
              (1,368
              )
              
              930
              
              
              (121
              )
              
              2,235Income
                  tax (benefit) provision
              
              
              (464
              )
              
              329
              
              
              (19
              )
              
              793Net
                  (loss) income
              
              $
              (904
              )
              $
              601
              
              $
              (102
              )
              $
              1,442(Loss)
                  earnings per common share:Basic
              
              $
              (0.36
              )
              $
              0.24
              
              $
              (0.04
              )
              $
              0.58Diluted
              
              $
              (0.36
              )
              $
              0.23
              
              $
              (0.04
              )
              $
              0.56


See
        accompanying notes to consolidated financial statements.


2







**CARVER
      BANCORP, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**


**AND
      COMPREHENSIVE INCOME**


**FOR
      THE SIX MONTHS ENDED SEPTEMBER 30, 2006**


**(In
      thousands)**


**(Unaudited)**




**COMMON
                  STOCK**
              
              **ADDITIONAL
                  PAID-IN CAPITAL**
              
              **RETAINED
                  EARNINGS**
              
              **TREASURY
                  STOCK**
              
              **ACCUMULATED
                  OTHER COMPREHENSIVE INCOME**
              
              **COMMON
                  STOCK ACQUIRED BY ESOP**
              
              **COMMON
                  STOCK ACQUIRED BY MRP**
              
              **TOTAL
                  STOCK-HOLDERS’ EQUITY****Balance—March
                  31, 2006**
              
              **$
                  25**
              
              **$
                  23,935**
              
              **$
                  25,736**
              
              **$
                  (303)**
              
              **$
                  (674)**
              
              **$
                  (11)**
              
              **$
                  (11)**
              
              **$
                  48,697**Comprehensive
                  income :Net
                  income (loss)
              
              -
              
              -
              
              (102)
              
              -
              
              -
              
              -
              
              -
              
              (102)Change
                  in net unrealized loss on available-for-sale securities, net of
                  taxes
              
              -
              
              -
              
              -
              
              -
              
              412
              
              -
              
              -
              
              412Comprehensive
                  income, net of taxes:
              
              -
              
              -
              
              (102)
              
              -
              
              412
              
              -
              
              -
              
              310Dividends
                  paid
              
              -
              
              -
              
              (430)
              
              -
              
              
              
              -
              
              -
              
              (430)Stock
                  based compensation activity, net
              
              -
              
              102
              
              -
              
              169
              
              -
              
              7
              
              -
              
              278Treasury
                  stock activity
              
              -
              
              -
              
              -
              
              (92)
              
              -
              
              -
              
              5
              
              (87)**Balance—September
                  30, 2006**
              
              **$25**
              
              **$24,037**
              
              **$25,204**
              
              **($226)**
              
              **($262)**
              
              **($4)**
              
              **($6)**
              
              **$48,768**


See
        accompanying notes to consolidated financial statements.






3




**CARVER
      BANCORP, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(In
      thousands)**


**(Unaudited)**




**Six
                  Months Ended September 30,****2006**
              
              **2005**Cash
                  flows from operating activities:Net
                  income (loss)
              
              $
              (102
              )
              $
              1,442Adjustments
                  to reconcile net income (loss) to net cash providedby
                  operating activities:Provision
                  for loan losses
              
              
              -
              
              
              -ESOP
                  and MRP expense
              
              
              125
              
              
              217Depreciation
                  and amortization expense
              
              
              802
              
              
              770Other
                  amortization
              
              
              (28
              )
              
              (259
              )Loss
                  from sale of securities
              
              
              645
              
              
              -Gain
                  on sale of loans
              
              
              (88
              )
              
              (73
              )Write-down
                  of loans held for sale
              
              
              702Proceeds
                  from loans sold
              
              
              6,394
              
              
              5,072Changes
                  in assets and liabilities:Increase
                  in accrued interest receivable
              
              
              (175
              )
              
              (210
              )Decrease
                  (increase) in other assets
              
              
              (214
              )
              
              (5,265
              )Decrease
                  in other liabilities
              
              
              (732
              )
              
              (2,380
              )Net
                  cash provided by (used in) operating activities
              
              
              7,329
              
              
              (686
              )Cash
                  flows from investing activities:Purchases
                  of securities:Available-for-sale
              
              
              -
              
              
              (26,811
              )Proceeds
                  from principal payments, maturities and calls of
                  securities:Available-for-sale
              
              
              17,225
              
              
              35,166Held-to-maturity
              
              
              5,358
              
              
              3,403Proceeds
                  from sales of available-for-sale securities
              
              
              46,425
              
              
              1,575Disbursements
                  for loan originations
              
              
              (60,363
              )
              
              (52,663
              )Loans
                  purchased from third parties
              
              
              (40,242
              )
              
              (41,512
              )Principal
                  collections on loans
              
              
              69,423
              
              
              60,192Redemption
                  (purchase) of FHLB-NY stock
              
              
              601
              
              
              (499
              )Additions
                  to premises and equipment
              
              
              (702
              )
              
              (830
              )Payments
                  for acquisition, net of cash acquired
              
              
              (2,425
              )
              
              -Net
                  cash provided by (used in) investing activities
              
              
              35,300
              
              
              (21,979
              )Cash
                  flows from financing activities:Net
                  (decrease) increase in deposits
              
              
              (25,153
              )
              
              12,401Net
                  (repayment of) proceeds from FHLB advances
              
              
              (13,662
              )
              
              9,988Common
                  stock repurchased
              
              
              (152
              )
              
              -Dividends
                  paid
              
              
              (430
              )
              
              (376
              )Net
                  cash (used in)provided by financing activities
              
              
              (39,397
              )
              
              22,013Net
                  increase(decrease) in cash and cash equivalents
              
              
              3,232
              
              
              (652
              )Cash
                  and cash equivalents at beginning of the period
              
              
              22,904
              
              
              20,420Cash
                  and cash equivalents at end of the period
              
              $
              26,136
              
              $
              19,768Supplemental
                  information:Noncash
                  Transfers-Change
                  in unrealized (loss) gain on valuation of
                  available-for-saleinvestments,
                  net
              
              $
              413
              
              $
              182Cash
                  paid for-Interest
              
              $
              8,156
              
              $
              6,261Income
                  taxes
              
              $
              1,726
              
              $
              2,092










See
      accompanying notes to consolidated financial statements.


4




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**





(1)  BASIS
      OF
      PRESENTATION




The
      accompanying unaudited consolidated financial statements of Carver Bancorp,
      Inc.
      (the “Holding Company”) have been prepared in accordance with United States
      generally accepted accounting principles (“US-GAAP”) for interim financial
      information and with the instructions to Form 10-Q and Article 10 of Regulation
      S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly,
      they do not include all of the information and footnotes required by GAAP for
      complete consolidated financial statements. Certain information and note
      disclosures normally included in financial statements prepared in accordance
      with GAAP have been condensed or omitted pursuant to the rules and regulations
      of the SEC. In the opinion of management, all adjustments (consisting of only
      normal recurring adjustments) necessary for a fair presentation of the financial
      condition, results of operations, changes in stockholders’ equity and cash flows
      of the Holding Company and its subsidiaries on a consolidated basis as of and
      for the periods shown have been included.




The
      unaudited consolidated financial statements presented herein should be read
      in
      conjunction with the consolidated financial statements and notes thereto
      included in the Holding Company’s Annual Report on Form 10-K for the fiscal year
      ended March 31, 2006 (“2006 10-K”) previously filed with the SEC. The
      consolidated results of operations and other data for the six-month period
      ended
      September 30, 2006 are not necessarily indicative of results that may be
      expected for the entire fiscal year ending March 31, 2007 (“fiscal
      2007”).




The
      accompanying unaudited consolidated financial statements include the accounts
      of
      the Holding Company and its wholly owned subsidiaries, Carver Federal Savings
      Bank (the “Bank” or “Carver Federal”), Alhambra Holding Corp., an inactive
      Delaware corporation, and the Bank’s wholly-owned subsidiaries, CFSB Realty
      Corp. and CFSB Credit Corp., and the Bank’s majority owned subsidiary, Carver
      Asset Corporation. On August 18, 2005 Carver Federal formed Carver Community
      Development Corp. (“CCDC”), a wholly owned community development entity whose
      purpose is to make qualified business loans in low-income communities. The
      Holding Company and its consolidated subsidiaries are referred to herein
      collectively as “Carver” or the “Company.” All significant inter-company
      accounts and transactions have been eliminated in consolidation.




In
      addition, the Holding Company has a subsidiary, Carver Statutory Trust I, which
      is not consolidated with Carver for financial reporting purposes as a result
      of
      our adoption of Financial Accounting Standards Board (“FASB”), revised
      Interpretation No. 46, *“Consolidation
      of Variable Interest Entities, and Interpretation of Accounting Research
      Bulletin No. 51” (“FIN46R”)* ,
      effective January 1, 2004. Carver Statutory Trust I was formed in 2003 for
      the
      purpose of issuing 13,000 shares, liquidation amount $1,000 per share, of
      floating rate capital securities (“trust preferred securities”). Gross proceeds
      from the sale of these trust preferred 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 junior subordinated debt securities which are included in other borrowed
      money on the consolidated statements of financial condition, are repayable
      quarterly at the option of the Holding Company, beginning on or after July
      7,
      2007, and have a mandatory repayment date of September 17, 2033. Interest on
      the
      junior subordinated debt securities is cumulative and payable at a floating
      rate
      per annum (reset quarterly) equal to 3.05% over three-month LIBOR, with a rate
      of 8.44% as of September 30, 2006. The Holding Company has fully and
      unconditionally guaranteed the obligations of Carver Statutory Trust I to
      the trust's capital security holders.


(2)  RECLASSIFICATIONS
  Certain
        reclassifications have been made to prior year financial information to conform
        to the September 30, 2006 presentation.
  (3)  EARNINGS
        (LOSS) PER COMMON SHARE
  Basic
        earnings (loss) per common share is computed by dividing income (loss) available
        to common stockholders by the weighted-average number of common shares
        outstanding over the period of determination. Diluted earnings (loss) per
        common
        share include any additional common shares as if all potentially dilutive
        common
        shares were issued (for instance, stock options with an exercise price that
        is
        less than the average market price of the common shares for the periods stated).
        For the purpose of these calculations, unreleased ESOP shares are not considered
        to be outstanding. For the three-month periods ended September 30, 2006 and
        2005, 60,914 and 62,679 shares of common stock were potentially issuable
        from
        the exercise of stock options with an exercise price that is less than the
        average market price of the common shares for the three-months ended September
        30, 2006 and 2005, respectively. For the six-month periods ended September
        30,
        2006 and 2005, 61,503 and 65,070 shares of common stock were potentially
        issuable from the exercise of stock options with an exercise price that is
        less
        than the average market price of the common shares for the six-months ended
        September 30, 2006 and 2005, respectively. The effects of these potentially
        dilutive common shares were considered in determining the diluted earnings
        (loss) per common share.







5









(4)
            STOCK
                OPTION PLAN




*Accounting
      for Stock Based Compensation*




The
      Holding Company grants “incentive stock options” only to its employees and
      grants “nonqualified stock options” to employees and non-employee directors.
      Effective April 1, 2006, the Company adopted revised Statement of Financial
      Accounting Standards, or SFAS, No. 123, “Share-Based Payment,” or SFAS No. 123R,
      which requires compensation costs related to share-based payment transactions
      be
      recognized in the financial statements. SFAS No. 123R applies to all awards
      granted after April 1, 2006 and to awards modified, repurchased or cancelled
      after that date. Additionally, beginning April 1, 2006, the Company recognized
      compensation cost for the portion of outstanding awards for which the requisite
      service has not yet been rendered, based on the grant-date fair value of those
      awards calculated under SFAS No. 123 for pro forma disclosures. Stock-based
      compensation expense recognized for the three months ended September 30, 2006
      totaled $41,000.




Prior
      to
      April 1, 2006, the Company applied the intrinsic value method of Accounting
      Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and
      related interpretations in accounting for stock incentive plans. Accordingly,
      no
      stock-based compensation cost was reflected in net income for stock option
      grants, as all options granted under our stock incentive plans had an exercise
      price equal to the market value of the underlying common stock on the date
      of
      grant.




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


**September
                  30,**
              
              **September
                  30,****2006**
              
              **2005**Net
                  income (loss) available to common shareholders:As
                  reported
              ($904)
              
              $601Add:     
                   Stock-based employee compensation includedin
                  reported net income (loss), net of tax effects
              41
              
              -Less:
              Total
                  stock-based employee compensationexpense
                  determined under fair value basedmethods
                  for all awards, net of tax effects
              (41)
              
              (14)Pro
                  forma
              ($904)
              
              $587Basic
                  earnings per share:As
                  reported
              ($0.36)
              
              $0.24Pro
                  forma
              (0.36)
              
              0.23Diluted
                  earnings per share:As
                  reported
              ($0.36)
              
              $0.23Pro
                  forma
              (0.36)
              
              0.23


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 quarter ended September 30, 2005: risk-free interest rates
      of 4.15%, volatility of 24.24%, expected dividend yield was 1.09% and an
      expected life of ten years was used for all option grants.







(5)
            EMPLOYEE
                BENEFIT PLANS




*Employee
      Pension Plan*




Carver
      Federal has a non-contributory defined benefit pension plan covering all
      eligible employees. The benefits are based on each employee’s term of service.
      Carver Federal’s policy was to fund the plan with contributions which equal the
      maximum amount deductible for federal income tax purposes. The pension plan
      was
      curtailed and future benefit accruals ceased as of December 31,
      2000.







6









*Directors’
      Retirement Plan*




Concurrent
      with the conversion to a stock form of ownership, Carver Federal adopted a
      retirement plan for non-employee directors. The benefits are payable based
      on
      the term of service as a director. The directors’ retirement plan was curtailed
      during the fiscal year ended March 31, 2001.





The
      following table sets forth the components of net periodic pension expense for
      the pension plan and directors’ retirement plan for the three months ended
      September 30, of the calendar years indicated.


**Employee
                  Pension Plan**
              
              
              
              **Non-Employee
                  Directors' Plan****2006**
              
              **2005**
              
              
              
              **2006**
              
              **2005****(In
                  thousands)**Interest
                  Cost
              
              $
              40
              
              $
              42
              
              
              
              
              $
              1
              
              $
              2Expected
                  Return on Assets
              
              
              (55
              )
              
              (59
              )
              
              
              
              
              -
              
              
              -Unrecognized
                  (Gain)/Loss
              
              
              4
              
              
              -
              
              
              
              
              
              (1
              )
              
              -Net
                  Periodic Benefit Expense / (Credit)
              
              $
              (11
              )
              $
              (17
              )
              
              
              
              $
              -
              
              $
              2






(6)
            COMMON
                STOCK DIVIDEND





On
      November 7, 2006, the Board of Directors of the Holding Company declared, for
      the quarter ended September 30, 2006, a cash dividend of nine cents ($0.09)
      per
      common share outstanding. The dividend is payable on December 5, 2006 to
      stockholders of record at the close of business on November 21,
      2006.






(7)
            RECENT
                ACCOUNTING PRONOUNCEMENTS




*Accounting
      for 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 is not expected to have a material impact on our
      consolidated financial statements.




*Accounting
      for Employers’ Accounting for Defined Benefit Pension and Other Postretirement
      Plans*




In
      September 2006, the FASB issued SFAS No. 158, *“Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans - an
      amendment of FASB Statements No. 87, 88, 106, and 132(R)”* (“SFAS
      No. 158”). SFAS No. 158 requires a calendar year-end company with publicly
      traded equity securities that sponsors a postretirement benefit plan to fully
      recognize the overfunded or underfunded status of it benefit plan in its 2006
      year-end balance sheet. For all other entities, this provision is effective
      for
      fiscal years ending after June 15, 2007. The Statement also requires a company
      to measure its plan assets and benefit obligations as of its year-end balance
      sheet date, eliminating the use of earlier measurement dates currently
      permissible. This provision is effective for fiscal years ending after December
      15, 2008. At this time, we do not anticipate the adoption of SFAS No.
      158 will have any impact on our consolidated financial
      statements.




*Considering
      the Effects of Prior Year Misstatements When Quantifying Misstatements in
      Current Year Financial Statements*




In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108, codified
      as SAB Topic 1.N, *“Considering
      the Effects of Prior Year Misstatements When Quantifying Misstatements in
      Current Year Financial Statements”* (“SAB
      108”). SAB 108 states that registrants should use both a balance sheet and an
      income






7








statement
      approach when quantifying and evaluating the materiality of a misstatement.
      It
      also contains guidance on correcting errors under this dual approach and
      provides transition guidance for correcting errors that existed in prior years.
      SAB 108 is effective for annual financial statements covering the first fiscal
      year ending after November 15, 2006. Earlier application is encouraged for
      any
      interim period of the first fiscal year ending after November 15, 2006 and
      filed
      after September 13, 2006. We do not anticipate the adoption of SAB 108 to have
      a
      material impact on our consolidated financial statements.




*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/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 noncurrent 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.
      FIN 48 requires significant new annual disclosures in the notes to the 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 Company
      will
      adopt this pronouncement as of April 1, 2007 and has not yet determined the
      effect on the consolidated financial condition or results of
      operations.




*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* ,”
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. Additionally, at its
      initial adoption, SFAS No. 156 permits a one-time reclassification of
      available-for-sale securities to trading securities by entities with recognized
      servicing rights, without calling into question the treatment of other
      available-for-sale securities, provided that the securities are identified
      in
      some manner as offsetting the entity’s exposure to changes in the fair value of
      servicing assets or servicing liabilities that a servicer elects to subsequently
      measure at fair value. SFAS No. 156 is effective as of the beginning of the
      first fiscal year that begins after September 15, 2006. Carver will adopt this
      pronouncement as of April 1, 2007 and intends to apply the amortization method
      for measurements of mortgage servicing rights, and does not expect the adoption
      of SFAS No. 156 to have a material impact on the Company’s consolidated
      financial condition or results of operations.




*Accounting
      for Certain Hybrid Financial Instruments*




In
      February 2006, the FASB issued SFAS No. 155, *“Accounting
      for Certain Hybrid Financial Instruments - an Amendment of FASB Statements
      No.
      133 and 140,”* which
      amends SFAS No. 133, *“Accounting
      for Derivative Instruments and Hedging Activities,* ”
and
      SFAS No. 140 and allows an entity to re-measure at fair value a hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation from the host, if the holder irrevocably elects to account for
      the
      whole instrument on a fair value basis. SFAS No. 155 is effective for all
      financial instruments acquired or issued after the beginning of an entity’s
      first fiscal year that begins after September 15, 2006. Any difference between
      the total carrying amount of the individual components of the existing
      bifurcated hybrid financial instrument and the fair value of the combined hybrid
      financial instrument should be recognized as a cumulative-effect adjustment
      to
      beginning retained earnings. Carver does not expect the adoption of SFAS No.
      155
      to have any impact on the Company’s consolidated financial condition or results
      of operations.








8






whether
      the impairment is other than temporary; and how to measure an impairment loss
      and also addresses accounting considerations subsequent to the recognition
      of an
      other-than-temporary impairment on a debt security, and requires certain
      disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. Under FSP FAS 115-1 and FAS 124-1, impairment
      losses must be recognized in earnings equal to the entire difference between
      the
      security’s cost and it fair share value at the financial statement date, without
      considering partial recoveries subsequent to that date. FSP FAS 115-1 and FAS
      124-1 also requires that an investor recognize an other-than-temporary
      impairment loss when a decision to sell a security has been made and the
      investor does not expect the fair value of the security to fully recover prior
      to the expected time of sale. This pronouncement is effective for reporting
      periods beginning after December 15, 2005. The adoption of FSP FAS 115-1 and
      FAS
      124-1 did not have any impact on the Company’s financial condition, results of
      operations or financial statement disclosures.




** (8)  BUSINESS
        COMBINATIONS
  On
        September 29, 2006, the Bank consummated its acquisition of Community Capital
        Bank (“CCB”), contributing an additional $165.4 million in assets to its balance
        sheet. Under the terms of the merger agreement, CCB’s shareholders were paid $40
        per share. Together with deal costs of $879,000, the total transaction cost
        was
        $11.9 million. Also in connection with the acquisition, the Bank recorded
        a one
        time charge of $1.3 million for acquisition-related charges which are primarily
        related to severance, early vendor contract termination fees, and systems
        integration and conversion fees. As a result of the acquisition, the Bank’s
        balance sheet reflects goodwill and a core deposit intangible of $5.1 million
        and $760,000, respectively.
  As
        the
        transaction closed at the end of the quarter, the Company’s results of
        operations do not reflect the operations of CCB for the current quarter or
        prior
        periods.
  The
        preliminary allocation of the total transaction cost for the acquisition
        of CCB
        is as follows:


Goodwill
              
              $
              5,066Other
                  intangible assets
              
              
              760Tangible
                  assets acquired and liabilities assumed :Cash
                  and due from banks
              
              
              9,496Securities
              
              
              50,707Loans
                  receivable, net
              
              
              98,805Other
                  assets
              
              
              6,412Deposits
              
              
              (144,142
              )Borrowings
              
              
              (12,500
              )Other
                  liabilities
              
              
              (2,683
              )Total
                  purchase price
              
              
              11,921Less
                  cash acquired from acquisition
              
              
              (9,496
              )Net
                  cash used in acquisition
              
              $
              2,425




The
        allocation of the transaction cost is based on a preliminary estimate and
        is
        subject to change.








9






(9)  SIGNIFICANT
      EVENTS


In
        the
        second quarter, Carver Federal took steps to accelerate its ongoing efforts
        to
        improve margins and reduce exposure to interest-only one-to-four family
        residential loans. These actions include the reduction of higher cost borrowings
        and deposits and lower yielding investments, and the sale of a portion of
        the
        Bank’s portfolio of interest-only one-to-four-family residential loans.
        Specifically, the Bank sold $47.1 million in available-for-sale agency
        mortgage-backed securities and reclassified from held-for-investment to
        held-for-sale $23.1 million in interest-only one-to-four family loans with
        the
        intention of selling the loans. Although the loan sale transaction is expected
        to close in mid-November, anticipated losses related to the loan sale are
        reflected in the second quarter statement of operations as the loans were
        reclassified from held-for-investment to held-for-sale. The total pre-tax
        charge
        for these activities is $1.3 million.




**ITEM
      2.**  **Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations**




**Forward-Looking
      Statements**




Statements
      contained in this Quarterly Report on Form 10-Q, which are not historical facts,
      are “forward-looking statements” within the meaning of Section 27A of the
      Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of
      the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In
      addition, senior management may make forward-looking statements orally to
      analysts, investors, the media and others. These forward-looking statements
      may
      be identified by the use of such words as “believe,” “expect,” “anticipate,”
“intend,” “should,” “will,” “would,” “could,” “may,” “planned,” “estimated,”
“potential,” “outlook,” “predict,” “project” and similar terms and phrases,
      including references to assumptions. Forward-looking statements are based on
      various assumptions and analyses made by the Company in light of the
      management's experience and its perception of historical trends, current
      conditions and expected future developments, as well as other factors believed
      to be appropriate under the circumstances. These statements are not guarantees
      of future performance and are subject to risks, uncertainties and other factors,
      many of which are beyond the Company’s control that could cause actual results
      to differ materially from future results expressed or implied by such
      forward-looking statements. Factors which could result in material variations
      include, without limitation, the Company's success in implementing its
      initiatives, including expanding its product line, adding new branches and
      ATM
      centers, successfully re-branding its image and achieving greater operating
      efficiencies; increases in competitive pressure among financial institutions
      or
      non-financial institutions; legislative or regulatory changes which may
      adversely affect the Company’s business or the cost of doing business;
      technological changes which may be more difficult or expensive than we
      anticipate; changes in interest rates which may reduce net interest margins
      and
      net interest income; changes in deposit flows, loan demand or real estate values
      which may adversely affect the Company’s business; changes in accounting
      principles, policies or guidelines which may cause the Company’s condition to be
      perceived differently; litigation or other matters before regulatory agencies,
      whether currently existing or commencing in the future, which may delay the
      occurrence or non-occurrence of events longer than anticipated; the ability
      of
      the Company to originate and purchase loans with attractive terms and acceptable
      credit quality; and general economic conditions, either nationally or locally
      in
      some or all areas in which the Company does business, or conditions in the
      securities markets or the banking industry which could affect liquidity in
      the
      capital markets, the volume of loan origination, deposit flows, real estate
      values, the levels of non-interest income and the amount of loan losses.




The
      forward-looking statements contained herein are made as of the date of this
      Form
      10-Q, 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. You should
      consider these risks and uncertainties in evaluating forward-looking statements
      and you should not place undue reliance on these statements.




As
      used
      in this Form 10-Q, “we,” “us” and “our” refer to the Holding Company and its
      consolidated subsidiaries, unless the context otherwise requires.




**Overview**




The
      following should be read in conjunction with the audited Consolidated Financial
      Statements, the notes thereto and other financial information included in the
      Company’s 2006 10-K.




The
        Holding Company, a Delaware corporation, is the holding company for Carver
        Federal, 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. The Bank is
        focused on successfully building its core business by providing superior
        customer service while offering a wide range of financial products. As of September
        30, 2006, the Bank operated ten full-service banking locations, four 24/7
        ATM
        centers and four 24/7 stand-alone ATM locations in the New York City boroughs
        of
        Brooklyn, Queens and Manhattan, including two branches and one 24/7 stand-alone
        ATM acquired with CCB.






10




As
      the
      largest African- and Caribbean- American operated bank in the United States,
      we
      are well positioned to address the diverse financial opportunities in urban
      markets. Our goal is to build a solid banking franchise while enhancing
      shareholder value. We continually focus on expanding our principal businesses
      of
      mortgage lending and retail banking while maintaining superior asset quality
      and
      controlling operating expenses. Carver Federal’s net income, like others in the
      thrift industry, is dependent primarily on net interest income, which is the
      difference between interest income earned on its interest-earning assets such
      as
      loans, investment and mortgage-backed securities portfolios and the interest
      paid on its interest-bearing liabilities, such as deposits and borrowings.
      The
      Bank’s earnings are also affected by general economic and competitive
      conditions, particularly changes in market interest rates and government and
      regulatory policies. Additionally, net income is affected by any incremental
      provision for loan losses, as well as non-interest income and operating
      expenses.


On
        September 29, 2006, Carver Federal completed its acquisition of CCB, a
        Brooklyn-based New York State chartered commercial bank with two branches
        and
        $165.4 million in total assets. With the acquisition, the Bank gained a business
        lending platform, with particular focus on the small business lending area.
        Carver Federal acquired Community Capital Bank for $11.9 million in cash,
        which
        represented $40.00 for each CCB share outstanding and an additional $879,000
        in
        transaction related costs. During the quarter, the Bank accrued $1.3 million
        in
        certain merger related expenses associated with the acquisition including
        severance, early vendor contract termination fees, and systems integration
        and
        conversion fees.
 
 During
        the three months ended September 30, 2006, the local real estate markets
        remained strong and continued to support new and existing lending opportunities.
        The Federal Open Market Committee (“FOMC”) paused its policy of monetary
        tightening and did not increase the federal funds rate during the quarter.
        Previous tightening has resulted in a significantly flattened U.S. Treasury
        yield curve. As a result of the rate environment that prevailed throughout
        fiscal 2006 and continues in fiscal 2007, Carver Federal pursued a strategy
        of
        using proceeds from the repayment and maturities of our lower earning investment
        portfolio and the growth in deposits to fund higher yielding commercial real
        estate and construction loans while at the same time allowing for the repayment
        of higher cost borrowings. During September 2006, Carver Federal accelerated
        this strategy and executed a series of transactions designed to hasten the
        repositioning and deleveraging of the Bank’s balance sheet. The Bank sold $47.1
        million in lower yielding investments and used the proceeds to repay certain
        higher cost deposits and borrowings. In addition, the Bank reclassified
        approximately $23.1 million of interest-only one-to-four- family loans from
        held-for-investment to held-for-sale with the intention of liquidating the
        loans
        and using the proceeds to reduce borrowings further. Carver Federal expects
        that
        these transactions will improve the Bank’s net interest margin, enhance its
        interest rate risk and liquidity profiles, and reduce its exposure to
        interest-only one-to-four family loans. Additionally, these transactions
        are
        expected to be accretive to earnings and thus improve the Bank’s earnings
        quality and capital ratios from what they would otherwise be in the absence
        of
        the repositioning initiative. As a result of these transactions, the Bank
        recognized a $1.3 million pre-tax charge during the quarter ending September
        30,
        2006. While the objective of this strategy is to improve our net interest
        income
        and net income in future periods through an enhanced net interest margin,
        there
        is no assurance that this strategy will succeed.
  Not
        including net assets acquired from CCB, our total loan portfolio increased
        during the three months ended September 30, 2006. The increase in total loans
        receivable, net, is primarily the result of increases in construction,
        commercial mortgage and business loans, partially offset by decreases in
        one-to-four family and multifamily residential loans. Total deposits decreased
        during the three months ended September 30, 2006. The decline was primarily
        the
        result of the Bank’s decision to repay some of its maturing higher cost
        deposits. The decrease in our securities and borrowings portfolios during
        the
        three months ended September 30, 2006 is consistent with our strategy of
        reducing these portfolios in response to the continued flat U.S. Treasury
        yield
        curve and the sale of lower yielding investment securities.
  We
        incurred a net loss for the three months ended September 30, 2006 compared
        to
        net income for the three months ended September 30, 2005. The decline in
        quarterly results was primarily due to the previously discussed charges
        related to the Bank’s acquisition of CCB and
        the
        balance sheet repositioning. Net interest income increased as a result of
        the
        Bank’s strategy of reducing lower yielding securities and replacing them with
        higher yielding loans, while replacing higher cost borrowings with lower
        cost
        deposits, resulting in an increase in interest income, partially offset by
        an
        increase in interest expense. Non-interest income decreased primarily due
        to
        charges related to the previously described balance sheet repositioning.
        Non-interest expense increased primarily due to acquisition-related charges
        for
        CCB, and to a lesser extent, increases in ATM expense, charge-offs from retail
        banking operations, consulting expenses and loan servicing expenses.
  Net
        interest margin and net interest rate spread increased for the three months
        ended September 30, 2006, compared to the three months ended September 30,
        2005.
        These increases were primarily due to the yield on our interest-earning assets
        rising more rapidly than the cost of our interest-bearing liabilities as
        a
        result of the positive momentum achieved from our previously discussed balance
        sheet strategy.
  We
        expect
        the operating environment to remain challenging throughout fiscal 2007 as
        a flat
        to inverted yield curve has exerted pressure on our net interest margin and
        has
        dampened the volume of loan prepayments and therefore lowered pre-payment
        penalty income. As a result, we expect to continue our strategy of using
        the
        proceeds from the reductions in the securities portfolio through normal cash
        flow and the growth in deposits to fund higher yielding real estate and
        commercial loans and repay borrowings. Additionally, we understand that scale
        is
        relevant to our performance growth. As such, we will continue to pursue prudent
        acquisitions and alliances that leverage organic growth and accelerate our
        expansion strategy.




11






**Acquisition
      of Community Capital Bank**


On
        September 29, 2006, the Bank acquired CCB, a Brooklyn-based New York State
        chartered commercial bank with approximately $165.4 million in assets and
        two
        branches in a cash transaction of $11.9 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 on the
        merger)
        and the Bank incurred an additional $879,000 in transaction costs related
        to
        this acquisition. The combined entity will operate under Carver Federal’s thrift
        charter and Carver Federal will continue to be supervised by the Office of
        Thrift Supervision (“OTS”). The transaction, which was accounted for under the
        purchase accounting method, included the recognition of approximately $760,000
        of identifiable intangible assets, or core deposit intangible, and excess
        of
        purchase price over the fair value of identifiable net assets (“goodwill”) of
        $5.1 million. The goodwill and intangible assets from this transaction are
        not
        deductible for tax purposes.
  **Formation
        of Carver Municipal Bank**
  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
        infused $2.0 million of capital into CMB at its formation. In the State of
        New
        York, certain municipal entities may deposit funds only with commercial banks,
        and CMB provides Carver Federal with a platform to enter into this new line
        of
        business.




**New
      Markets Tax Credit Allocation**


On
        June
        1, 2006 the Bank was awarded a $59.0 million allocation under the New Markets
        Tax Credits (“NMTC”) program from the Community Development Financial
        Institution Fund (“CDFI”) of the Department of the Treasury. The award, the
        first allocation Carver has received under this highly competitive initiative,
        is designed to attract private-sector investment to help finance community
        development projects, stimulate economic growth and create jobs in lower
        income
        communities by providing tax credits to private enterprises who participate.
  The
        NMTC
        program, established by Congress in December 2000 and administered by the
        Department of the Treasury’s CDFI Fund, permits certain entities to receive a
        credit against federal income taxes for making qualified investments to help
        stimulate growth and create jobs in selected communities. The allocation
        was
        awarded to Carver Community Development Corporation (“CCDC”), a for-profit
        subsidiary created by the Bank to administer the initiative. The credit provided
        to the Company totals 39% of the award or approximately $23.0 million in
        tax
        credits, and is to be received over a seven-year period, consistent with
        CCDC’s
        ability to make loans and other investments meeting CDFI guidelines and subject
        to agreements with the CDFI. A portion of the benefit of the tax credit will
        be
        shared with the community and developers through a variety of means, including
        loan pricing and loan products. Tax benefits will begin to accrue after the
        agreements are signed and qualifying projects are identified and
        funded.




**Critical
      Accounting Policies**




Note
      1 to
      our audited Consolidated Financial Statements for fiscal 2006 included in our
      2006 10-K, as supplemented by this report, contains a summary of our significant
      accounting policies and is incorporated herein. We believe our policies with
      respect to the methodology for our determination of the allowance for loan
      losses and asset impairment judgments, including other than temporary declines
      in the value of our securities, involve a high degree of complexity and require
      management to make subjective judgments which often require assumptions or
      estimates about highly uncertain matters. Changes in these judgments,
      assumptions or estimates could cause reported results to differ materially.
      The
      following description of these policies should be read in conjunction with
      the
      corresponding section of our 2006 10-K.




***Securities
      Impairment***





Carver
      Federal’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 loss/income in stockholders’ equity. Securities,
      which 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 our portfolio, which are primarily adjustable rate
      mortgage-backed securities at September 30, 2006, are based on published or
      securities dealers’ market values and are affected by changes in interest rates.
      The Bank periodically reviews






12






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 September 30, 2006, the Bank
      carried no permanently impaired securities.





***Allowance
      for Loan Losses***




Allowance
      for loan losses are maintained at a level considered adequate to provide for
      probable loan losses inherent in the portfolio as of September 30, 2006.
      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 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 reserve amounts for all specifically identified criticized loans
                that
                have been designated as requiring attention by management’s internal loan
                review program, bank regulatory examinations or the Bank’s external
                auditors.




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




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


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




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




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




·  Regulatory
      examinations




·  Amount
      and trend of criticized loans




·  Actual
      losses




·  Peer
      comparisons with other financial institutions






13






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




·  Opportunities
      to dispose of marginally performing loans for cash consideration




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 the present value of expected future cash flows, discounted at the
      loan’s initial effective interest rate, or at the loan’s market price or fair
      value of the collateral if the loan is collateral dependent. If the loan
      valuation is less than the recorded value of the loan, an allowance must be
      established for the difference. The allowance is established by either an
      allocation of the existing allowance for credit losses or by a provision for
      credit 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.




At
      September 30, 2006, including the $1.2 million allowance for loan losses
      acquired from CCB, the Bank considers its allowance to be adequate.




**Stock
      Repurchase Program**




In
      August
      2002, Carver’s Board of Directors authorized a stock repurchase program to
      acquire up to 231,635 shares of the Company’s outstanding common stock, or
      approximately 10 percent of the then outstanding shares. On October 25, 2005,
      the Board of Directors approved accelerating the repurchase of the remaining
      148,051 shares under the 2002 stock repurchase program, or up to a $2.5 million
      total investment, to take place over the following 18 months. The acceleration
      is intended to return capital to shareholders and capitalize on current trading
      values, and continue funding stock-based benefit and compensation plans. As
      of
      September 30, 2006 the Company has purchased a total of 100,274 shares at an
      average price of $16.90. Purchases for the stock repurchase program may be
      made
      from time to time on the open market and in privately negotiated transactions.
      The timing and actual number of shares repurchased under the plan depends on
      a
      variety of factors including price, corporate and regulatory requirements,
      and
      other market conditions.




**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 cover ongoing operating expenses. The Company’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.




The
      Bank
      monitors its liquidity utilizing guidelines that are contained in a policy
      developed by management of the Bank and approved by the Bank’s Board of
      Directors. The Bank’s several liquidity measurements are evaluated on a frequent
      basis. Management believes the Bank’s short-term assets have sufficient
      liquidity to cover loan demand, potential fluctuations in deposit accounts
      and
      to meet other anticipated cash requirements. Additionally, the Bank has other
      sources of liquidity including the ability to borrow from the Federal Home
      Loan
      Bank of New York (“FHLB-NY”) utilizing unpledged mortgage-backed securities and
      certain mortgage loans, the sale of available-for-sale securities and the sale
      of loans. At September 30, 2006, based on available collateral held at the
      FHLB-NY the Bank had the ability to borrow from the FHLB-NY an additional $41.1
      million on a
      secured basis, utilizing mortgage-related loans and securities as collateral.




The
      unaudited Consolidated Statements of Cash Flows present the change in cash
      from
      operating, investing and financing activities. During the six months ended
      September 30, 2006, total cash and cash equivalents increased by $3.2 million
      reflecting cash provided by operating and investing activities offset by cash
      used in financing activities. Net cash provided by operating activities during
      this period was $7.3  million,
      primarily representing proceeds from the sale of loans originated for sale,
      cash
      provided from operations and satisfaction of receivables included in other
      assets offset in part by cash used in the satisfaction of other liabilities
      and
      cash due from accrued interest receivable on certain assets. Net cash provided
      by investing activities was $35.3 million, primarily representing cash received
      from principal collections on loans, sale of available-for-sale investment
      securities and repayment of principal on securities, partially offset by
      disbursements to fund mortgage loan originations, purchases of loans and net
      cash used in the acquisition of CCB. Net cash used in financing activities
      was
      $39.4 million, primarily representing net deposit outflows, net repayments
      of
      advances from the FHLB-NY, the payment of common dividends and repurchases
      of
      the Company’s common stock. See “Comparison of Financial Condition at September
      30, 2006 and March 31, 2006” for a discussion of the changes in securities,
      loans, deposits and FHLB-NY borrowings.






14






The
      levels of the Bank’s short-term liquid assets are dependent on the Bank’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. Since the Bank generally
      sells its 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 the Bank’s liquidity.




Over
      the
      past two years, the FOMC raised the federal funds rate fourteen consecutive
      times. Although short-term rates have increased, mortgage loans and
      mortgage-backed securities are typically tied to longer-term rates which have
      either not increased as dramatically or remained relatively flat. When mortgage
      interest rates increase, customers’ refinance activities tend to decelerate,
      causing the cash flow from both the mortgage loan portfolio and the
      mortgage-backed securities portfolio to decline.




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 September 30, 2006, the Bank
      exceeded all regulatory minimum capital requirements and qualified, under OTS
      regulations, as an adequately-capitalized institution.




The
      table
      below presents certain information relating to the Bank’s capital compliance at
      September 30, 2006.




**REGULATORY
                  CAPITAL****At
                  September 30, 2006****(dollars
                  in thousands)**
  Amount
              
              %
                  of AssetsTotal
                  capital (to risk-weighted assets):Capital
                  level
              
              $
              61,322
              
              
              9.79
              %Less
                  requirement
              
              
              50,097
              
              
              8.00Excess
              
              $
              11,225
              
              
              1.79Tier
                  1 capital (to risk-weighted assets):Capital
                  level
              
              $
              56,100
              
              
              8.96
              %Less
                  requirement
              
              
              25,048
              
              
              4.00Excess
              
              $
              31,052
              
              
              4.96Tier
                  1 Leverage capital (to adjusted total assets):Capital
                  level
              
              $
              56,100
              
              
              7.24
              %Less
                  requirement
              
              
              30,976
              
              
              4.00Excess
              
              $
              25,124
              
              
              3.24
              %








**Comparison
      of Financial Condition at September 30, 2006 and March 31,
      2006**




***Assets***


Total
        assets increased $118.6 million, or 17.9%, to $779.6 million at September
        30,
        2006 compared to $661.0 million at March 31, 2006. The increase in total
        assets
        was primarily the result of the acquisition of $165.4 million of CCB assets, partially
        offset by decreases in securities resulting primarily from the sale of $47.1
        million of securities in conjunction with the balance sheet
        repositioning.




Cash
      and
      cash equivalents for the six months ended September 30, 2006 increased $3.2
      million or 14.1%, to $26.1 million, compared to $22.9 million at March 31,
      2006.
      The increase was primarily a result of the Bank acquiring an additional $9.5
      million in cash and due from banks balances from CCB.




Total
      securities decreased $19.2 million, or 17.7%, to $89.1 million at September
      30,
      2006 from $108.3 million at March 31, 2006 primarily
      from the sale of $47.1 million of securities in conjunction with the balance
      sheet repositioning and to a
      lesser extent as the portfolio continues to decline from normal cash flows
      as a
      result of security repayments and maturities. There








15








were
      no
      new purchases of securities during the quarter. Partially offsetting the
      decrease was the $50.7 million of securities acquired with the CCB
      acquisition.




Total
      loans receivable, net, increased $92.3 million, or 18.7%, to $585.7 million
      at
      September 30, 2006 from $493.4 million at March 31, 2006. The increase resulted
      primarily from $98.8 million of loans acquired from CCB. The acquired loans
      consist primarily of $55.3 million in business loans and $44.7 million in
      commercial real estate non-residential, including construction loans, net of
      a
      related $1.2 million in general allowance for loan losses. In addition loan
      originations and purchases of $100.6 million exceeded the
      $69.4
      million in
      repayments during the six months ending September 2006. Loan originations
      for the period total $60.4 million and were comprised of
      $25.4
      million in
      construction, $15.8 million
      in non-residential, $14.6
      million in
      one-to-four family, $ 3.6 million
      in multifamily, $642,000 in commercial business loans and $261,000 in
      consumer loans. Management continues to evaluate yields and loan quality in
      the
      competitive New York metropolitan area market and in certain instances has
      decided to purchase loans to supplement internal originations. Total loan
      purchases for the same period last year amounted to $ 40.2 million
      of which $13.5
      million were
      construction ,
      $9.7
      million were
      non-residential real estate, $10.2 million
      were commercial business and $6.8 were one-to-four family loans. Management
      has
      reclassified approximately $23.1 million
      in one-to-four family loans from held-for-investment to held-for-sale as part
      of
      the balance sheet repositioning and anticipates liquidating these loans in
      the
      next fiscal quarter. During the period the Bank sold $6.3 million in loans
      held-for-sale at a gain of $88,000. The commercial business loan purchases
      were
      primarily comprised of New York City taxi medallion loans. Management
      also assesses yields and economic risk in determining the balance of
      interest-earning assets allocated to loan originations and purchases compared
      to
      additional purchases of mortgage-backed securities.




The
      Bank’s investment in FHLB-NY stock increased by $52,000, or 1.1%, to $4.7
      million compared to $4.6 million at March 31, 2006. The increase includes an
      additional $653,000 from the CCB acquisition offset in part by redemptions
      of
      $601,000 of the Bank’s previous holdings. FHLB-NY requires banks to own
      membership stock as well as borrowing activity-based stock. The repayment of
      FHLB-NY borrowings resulted in the redemption of stock during the
      period.




At
      September 30, 2006 the Bank reflected preliminary goodwill and core deposit
      intangibles of $5.1 million and $760,000, respectively.




Office
      property and equipment increased $1.1 million, or 8.6% to $14.3 million at
      September 30, 2006 compared to $13.2 million at last fiscal year end. The
      acquisition of CCB accounted for $1.2 million of the increase and was partially
      offset by depreciation of Carver’s assets held.




Consistent
      with increases in loan and securities balances, the Bank's accrued interest
      receivable also increased $1.2 million or 39.2% to $4.1 million at September
      30,
      2006 compared to $3.0 million at March 31, 2006. The increase is primarily
      attributed to $990,000 in accrued interest receivable acquired from
      CCB.




Other
      assets increased $4.1 million, or 57.7%, to $11.2 million at September 30,
      2006
      from $7.1 million at March 31, 2006. The increase is primarily the result of
      $2.6 million in other assets acquired from CCB. These other assets accounts
      consist primarily of deferred tax assets of $822,000, tax receivable of
      $512,000, prepaid expenses of $390,000, accounts receivable of $194,000 and
      various unposted items accounts totaling $673,000. Also contributing to the
      increase in other assets is a $1.2 million current tax receivable the Bank
      held
      at the end of the reporting period.






**Liabilities
      and Stockholders’ Equity**




***Liabilities***




At
      September 30, 2006, total liabilities increased by $118.5 million, or 19.4%,
      to
      $730.8 million compared to $612.3 million at March 31, 2006. The increase in
      total liabilities was primarily
      the result of the $159.3 million of liabilities acquired with CCB partially
      offset by the reduction in deposits and borrowings resulting primarily from
      the
      repositioning of the balance sheet.


Deposits
        increased $119.0 million or 23.6% to $623.6 million at September 30, 2006
        from
        $504.6 at March 31, 2006. The increase resulted primarily from $144.1 million
        of
        deposits acquired with CCB. The acquired deposits consist primarily of $113.2
        million in certificates of deposit of which $31.7 million are brokered deposits,
        $16.2 million in checking accounts, $9.2 million in money market deposits,
        $5.1
        million in savings accounts and $589,000 in other deposits. Excluding acquired
        deposits, at September 30, 2006, the Bank had net outflows of deposits of
        $25.2
        of which $10.1 million were certificates of deposit, $6.5 million in savings
        accounts, $6.4 million in checking accounts and $2.6 million in money market
        accounts. The outflow in certificates of deposit primarily resulted from
        the
        $20.0 million reduction of higher costing deposits as part of the balance
        sheet
        repositioning.




At
      September 30, 2006, the Bank managed ten branches, four 24/7 ATM centers and
      four 24/7 stand-alone ATM locations. Management believes that deposits will
      grow
      as the Bank continues to capitalize on its investment in franchise expansions,
      customer service and the offering of a wider array of financial
      products.






16






Advances
      from the FHLB-NY and other borrowed money decreased $1.1 million, or 1.2% to
      $92.7 million at September 30, 2006 compared to $93.8 million at March 31,
      2006.
      This decrease is primarily the result of the repayment of four matured FHLB-NY
      advances: a $13.3 million advance with a cost of 4.94%, a $3.6 million advance
      with a cost of 2.54%, a $6.0 million advance with a cost of 3.56% and a $10.0
      million advance with a cost of 5.47% partially offset by two new short-term
      advances for $7.5 million at a cost of 5.35% and $11.8 million at a cost of
      5.57%. The Bank acquired an additional $12.5 million in advances with the
      acquisition of CCB. Management, with its commitment to manage the impact of
      margin compression, elected to repay these borrowings with available excess
      liquidity some of which resulted from the balance sheet repositioning.
      Management anticipates selling approximately
      $22.4 million in
      one-to-four family loans and utilizing the proceeds to further reduce
      borrowings.


Other
        liabilities increased $677,000, or 4.9%, to $14.5 million at September 30,
        2006
        from $13.9 million at March 31, 2006. The increase was primarily attributable
        to the
        $2.7
        million in other liabilities acquired through the CCB acquisition and a
        $944,000 increase in accrued interest payable on deposits partially offset by a $1.7
        million payment
        of income taxes, $887,000 in net payments made on previously outstanding
        accounts payable checks and $310,000 reduction in liabilities related to
        loan
        servicing .




***Stockholders’
      Equity*** **


Total
        stockholders’ equity increased $71,000 or 0.2%, to $48.8 million at September
        30, 2006 compared to $48.7 million at March 31, 2006. The increase in total
        stockholders’ equity was primarily attributable to a decrease of $412,000 in
        accumulated other comprehensive loss, the decreases of $77,000 in holding
        of
        treasury stock and an increase in additional paid in capital of $102,000.
        The
        decrease in accumulated other comprehensive loss related to the mark-to-market
        of the Bank’s available-for-sale securities, as required by SFAS No. 115
“ *Accounting
        for Certain Investments in Debt and Equity Securities”.* Securities
        accounted for as held-to-maturity are carried at cost while such securities
        designated as available-for-sale are carried at market with any adjustments
        made
        directly to stockholders’ equity, net of taxes, and does not impact the
        Consolidated Statements of Income. The
        improvement in ** accumulated
        other comprehensive loss resulted primarily from the sale of securities as
        part
        of the balance sheet repositioning where the loss recognized in results of
        operations. Treasury stock decreased primarily from the distribution of stock
        in
        for certain compensation plans, net of the purchase an additional 3,700 shares
        of its common stock under its stock repurchase program. Partially offsetting
        the
        increase is a decrease of $532,000 in retained earnings principally resulting
        from $102,000 in net loss for the six months ended September 30, 2006 and
        dividends of $430,000 paid during the same period.




**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 fluctuation 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
      Company’s Asset/Liability and Interest Rate Risk Committee, comprised of members
      of the Board of Directors, meets periodically with senior management to evaluate
      the impact of changes in market interest rates on assets and liabilities, net
      interest margin, capital and liquidity. Risk assessments are governed by Board
      policies and limits.




The
      economic environment is uncertain regarding future interest rate trends.
      Management regularly monitors the Company’s cumulative gap position, which is
      the difference between the sensitivity to rate changes on our 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.




**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 and
      in
      connection with its overall investment strategy. These instruments involve,
      to
      varying degrees, elements of credit, interest rate and liquidity risk. In
      accordance with GAAP, these instruments are not recorded in the consolidated
      financial statements. Such instruments primarily include lending commitments.


Lending
        obligations include commitments to originate mortgage and consumer loans
        and to
        fund unused lines of credit. Additionally, the Bank has contingent liabilities
        related to letters of credit.






17




As
        of
        September 30, 2006, the Bank has outstanding loan commitments and seven letters
        of credit as follows:




**Outstanding****Commitments****(In
                thousands)**Commitments
                to fund construction mortgage loans
            
            $
            70,900Commitments
                to originate other mortgage loans
            
            
            35,545Commitments
                to originate/fund consumer and business loans
            
            
            13,452Letters
                of credit
            
            
            2,056Total
            
            $
            121,953








At
      the
      end of September the Bank was in contract to sell $23.1 million in one-to-four
      family loans to a third party.






The
      Bank
      also has contractual obligations related to long-term debt obligations and
      operating leases. As of September 30, 2006, the Bank has contractual obligations
      as follows:


**Payments
                  due by period****Contractual**
              
              
              
              **Less
                  than**
              
              **1
                  - 3**
              
              **3
                  - 5**
              
              **More
                  than****Obligations**
              
              **Total**
              
              **1
                  year**
              
              **years**
              
              **years**
              
              **5
                  years****(In
                  thousands)**Long
                  term debt obligations:FHLB
                  advances
              
              $
              79,772
              
              $
              50,784
              
              $
              28,807
              
              $
              -
              
              $
              181Guaranteed
                  preferred beneficial interest injunior
                  subordinated debentures
              
              
              12,886
              
              
              -
              
              
              -
              
              
              -
              
              
              12,886Total
                  long term debt obligations
              
              
              92,658
              
              
              50,784
              
              
              28,807
              
              
              -
              
              
              13,067Operating
                  lease obligations:Lease
                  obligations for rental properties
              
              
              7,146
              
              
              523
              
              
              2,121
              
              
              2,036
              
              
              2,466Total
                  contractual obligations
              
              $
              99,804
              
              $
              51,307
              
              $
              30,928
              
              $
              2,036
              
              $
              15,533




**Analysis
      of Earnings**




The
      Company’s profitability is primarily dependent upon net interest income and
      further affected by provisions for loan losses, non-interest income,
      non-interest expense and income taxes. The earnings of the Company, which are
      principally earnings of the Bank, are significantly affected by general economic
      and competitive conditions, particularly changes in market interest rates,
      and
      to a lesser extent by government policies and actions of regulatory
      authorities.




The
      following table sets forth, for the periods indicated, certain information
      relating to Carver’s average interest-earning assets, average interest-bearing
      liabilities, net interest income, interest rate spread and interest rate margin.
      It reflects the average yield on assets and the average cost of liabilities.
      Such yields and costs are derived by dividing annualized income or expense
      by
      the average balances of assets or liabilities, respectively, for the periods
      shown. Average balances are derived from daily or month-end balances as
      available. Management does not believe that the use of average monthly balances
      instead of average daily balances represents a material difference in
      information presented. The average balance of loans includes loans on which
      the
      Company has discontinued accruing interest. The yield and cost include fees,
      which are considered adjustments to yields.







18







**CARVER
                  BANCORP, INC. AND SUBSIDIARIES****CONSOLIDATED
                  AVERAGE BALANCES****(Dollars
                  in thousands)****(Unaudited)**
  **Three
                  months ended September 30,****2006**
              
              **2005****Average**
              
              
              
              **Average**
              
              **Average**
              
              
              
              **Average****Interest
                  Earning Assets:**
              
              **Balance**
              
              **Interest**
              
              **Yield/Cost**
              
              **Balance**
              
              **Interest**
              
              **Yield/Cost****(Dollars
                  in thousands)**Loans
                  (1)
              
              $
              507,492
              
              $
              8,317
              
              
              6.56
              %
              $
              424,882
              
              $
              6,214
              
              
              5.85
              %Total
                  securities (2)
              
              
              95,664
              
              
              1,010
              
              
              4.22
              %
              
              146,781
              
              
              1,412
              
              
              3.85
              %Fed
                  funds sold
              
              
              3,927
              
              
              53
              
              
              5.35
              %
              
              14,639
              
              
              122
              
              
              3.31
              %Total
                  interest earning assets
              
              
              607,083
              
              
              9,380
              
              
              6.18
              %
              
              586,302
              
              
              7,748
              
              
              5.29
              %Non-interest
                  earning assets
              
              
              37,927
              
              
              
              
              
              
              
              
              37,090Total
                  assets
              
              $
              645,010
              
              
              
              
              
              
              
              $
              623,392**Interest
                  Bearing Liabilities:**Deposits:Checking
              
              $
              23,198
              
              
              16
              
              
              0.27
              %
              $
              24,028
              
              
              18
              
              
              0.30
              %Savings
                  and clubs
              
              
              135,629
              
              
              220
              
              
              0.64
              %
              
              137,562
              
              
              226
              
              
              0.65
              %Money
                  market accounts
              
              
              38,584
              
              
              235
              
              
              2.42
              %
              
              40,573
              
              
              160
              
              
              1.56
              %Certificates
                  of deposit
              
              
              266,942
              
              
              2,549
              
              
              3.79
              %
              
              229,670
              
              
              1,684
              
              
              2.91
              %Mortgagor's
                  deposit
              
              
              1,571
              
              
              6
              
              
              1.52
              %
              
              1,989
              
              
              8
              
              
              1.60
              %Total
                  deposits
              
              
              465,924
              
              
              3,026
              
              
              2.58
              %
              
              433,822
              
              
              2,096
              
              
              1.92
              %Borrowed
                  money
              
              
              89,531
              
              
              1,143
              
              
              5.06
              %
              
              107,508
              
              
              1,117
              
              
              4.12
              %Total
                  interest bearing liabilities
              
              
              555,455
              
              
              4,169
              
              
              2.98
              %
              
              541,330
              
              
              3,213
              
              
              2.35
              %Non-interest-bearing
                  liabilities:Demand
              
              
              31,977
              
              
              
              
              
              
              
              
              27,888Other
                  Liabilities
              
              
              9,116
              
              
              
              
              
              
              
              
              7,049Total
                  liabilities
              
              
              596,548
              
              
              
              
              
              
              
              
              576,267Stockholders'
                  equity
              
              
              48,462
              
              
              
              
              
              
              
              
              47,125Total
                  liabilities and stockholders' equity
              
              $
              645,010
              
              
              
              
              
              
              
              $
              623,392Net
                  interest income
              
              
              
              
              $
              5,211
              
              
              
              
              
              
              
              $
              4,535Average
                  interest rate spread
              
              
              
              
              
              
              
              
              3.20
              %
              
              
              
              
              
              
              
              2.94
              %Net
                  interest margin
              
              
              
              
              
              
              
              
              3.46
              %
              
              
              
              
              
              
              
              3.11
              %
  (1)
                  Includes non-accrual loans(2)
                  Includes FHLB-NY stock






19




**CARVER
                  BANCORP, INC. AND SUBSIDIARIES****CONSOLIDATED
                  AVERAGE BALANCES****(Dollars
                  in thousands)****(Unaudited)**
  **Six
                  months ended September 30,****2006**
              
              **2005****Average**
              
              
              
              **Average**
              
              **Average**
              
              
              
              **Average****Interest
                  Earning Assets:**
              
              **Balance**
              
              **Interest**
              
              **Yield/Cost**
              
              **Balance**
              
              **Interest**
              
              **Yield/Cost****(Dollars
                  in thousands)**Loans
                  (1)
              
              $
              500,515
              
              $
              16,208
              
              
              6.48
              %
              $
              421,895
              
              $
              12,421
              
              
              5.89
              %Total
                  securities (2)
              
              
              102,610
              
              
              2,124
              
              
              4.14
              %
              
              150,594
              
              
              2,811
              
              
              3.73
              %Fed
                  funds sold
              
              
              6,821
              
              
              169
              
              
              4.94
              %
              
              17,347
              
              
              268
              
              
              3.08
              %Total
                  interest earning assets
              
              
              609,946
              
              
              18,501
              
              
              6.07
              %
              
              589,836
              
              
              15,500
              
              
              5.26
              %Non-interest
                  earning assets
              
              
              37,673
              
              
              
              
              
              
              
              
              36,372Total
                  assets
              
              $
              647,619
              
              
              
              
              
              
              
              $
              626,208**Interest
                  Bearing Liabilities:**Deposits:Checking
              
              $
              24,943
              
              
              39
              
              
              0.31
              %
              $
              24,858
              
              
              38
              
              
              0.30
              %Savings
                  and clubs
              
              
              137,542
              
              
              443
              
              
              0.64
              %
              
              138,695
              
              
              449
              
              
              0.65
              %Money
                  market accounts
              
              
              39,164
              
              
              477
              
              
              2.43
              %
              
              38,635
              
              
              285
              
              
              1.47
              %Certificates
                  of deposit
              
              
              264,516
              
              
              5,048
              
              
              3.81
              %
              
              228,540
              
              
              3,177
              
              
              2.77
              %Mortgagor's
                  deposit
              
              
              1,870
              
              
              14
              
              
              1.49
              %
              
              2,290
              
              
              17
              
              
              1.48
              %Total
                  deposits
              
              
              468,035
              
              
              6,021
              
              
              2.57
              %
              
              433,018
              
              
              3,966
              
              
              1.83
              %Borrowed
                  money
              
              
              89,708
              
              
              2,233
              
              
              4.96
              %
              
              110,907
              
              
              2,298
              
              
              4.13
              %Total
                  interest bearing liabilities
              
              
              557,743
              
              
              8,254
              
              
              2.95
              %
              
              543,925
              
              
              6,264
              
              
              2.30
              %Non-interest-bearing
                  liabilities:Demand
              
              
              31,562
              
              
              
              
              
              
              
              
              27,660Other
                  Liabilities
              
              
              10,075
              
              
              
              
              
              
              
              
              7,767Total
                  liabilities
              
              
              599,380
              
              
              
              
              
              
              
              
              579,352Stockholders'
                  equity
              
              
              48,239
              
              
              
              
              
              
              
              
              46,856Total
                  liabilities and stockholders' equity
              
              $
              647,619
              
              
              
              
              
              
              
              $
              626,208Net
                  interest income
              
              
              
              
              $
              10,247
              
              
              
              
              
              
              
              $
              9,236Average
                  interest rate spread
              
              
              
              
              
              
              
              
              3.12
              %
              
              
              
              
              
              
              
              2.96
              %Net
                  interest margin
              
              
              
              
              
              
              
              
              3.37
              %
              
              
              
              
              
              
              
              3.14
              %
  (1)
                  Includes non-accrual loans(2)
                  Includes FHLB-NY stock





20







**Comparison
      of Operating Results for the Three and Six Months Ended September 30, 2006
      and
      2005**


**Overview.** For the
        quarter ended September 30, 2006, the Company reported consolidated net
        loss  available  to
        common
        stockholders of $904,000, or $0.36 per diluted share compared to net income
        of
        $601,000, or $0.24 per diluted share for the same period last year. For the
        six
        months ended September 30, 2006 the Company reported a net loss of $102,000,
        or
        $0.04 per diluted share compared to net income of $1.4 million, or $0.56
        per
        diluted share for the six month period ended September 30, 2005. The three
        month
        period results reflect an increase in non-interest expense of $1.6 million
        and a
        decrease in non-interest income of $1.4 million. For the quarter ended September
        30, 2006 net interest income increased $676,000 and the income tax provision
        decreased $793,000 compared to the September 30, 2005 period.  For
        the
        six month period, the change reflects an increase in non-interest expense
        of
        $1.5 million and a decrease in non-interest income of $1.8 million. Partially
        offsetting these decreases to results of operations is an increase of $1.0
        million in net interest income and a reduction of income tax provision of
        $812,000.




Selected
      operating ratios for the three and six months ended September 30, 2006 and
      2005
      are set forth in the table below and the following analysis discusses the
      changes in components of operating results.


**CARVER
                  BANCORP, INC. AND SUBSIDIARIES****SELECTED
                  KEY RATIOS****(Unaudited)**
  **Three
                  Months Ended**
              
              **Six
                  Months Ended****Selected
                  Financial Data:**
              
              **September
                  30,**
              
              **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Return
                  on average assets (1)
              
              -0.56
              %
              0.39
              %
              -0.03
              %
              0.46
              %Return
                  on average equity (2)
              
              -7.46
              
              5.10
              
              -0.42
              
              6.12Interest
                  rate spread (3)
              
              3.20
              
              2.94
              
              3.12
              
              2.96Net
                  interest margin (4)
              
              3.46
              
              3.11
              
              3.37
              
              3.14Operating
                  expenses to average assets (5)
              
              3.87
              
              2.97
              
              3.40
              
              3.03Efficiency
                  ratio (6)
              
              128.07
              
              83.29
              
              101.11
              
              80.84Equity-to-assets
                  (7)
              
              6.26
              
              7.33
              
              6.26
              
              7.33Average
                  interest-earning assets tointerest-bearing
                  liabilities
              
              1.09
              x
              1.08
              x
              1.09
              x
              1.08
              x
  (1)
                   Net income (loss) divided by average total assets,
                  annualized.(2)
                   Net income (loss) divided by average total equity,
                  annualized.(3)
                   Combined weighted average interest rate earned less combined
                  weighted average interest rate cost.(4)
                   Net interest income divided by average interest-earning assets,
                  annualized.(5)
                   Non-interest expenses less loss on real estate owned divided by
                  average total assets, annualized.(6)
                   Operating expenses divided by sum of net interest income after
                  provision plus non-interest income.(7)
                   Total equity divided by assets at period end.
  **Interest
          Income.** During
          the three months ended September 30, 2006, interest income increased by
          $1.6
          million, or 33.8%, to $9.4 million for the three months ended September
          30,
          2006, compared to $7.7 million in the prior year period. The increase in
          interest income is primarily a result of higher average loan balances and
          yields
          this fiscal period compared to the prior year period. The increase in interest
          income was partially offset by a decline in interest income on total securities.
          While the average balance of the securities portfolio declined mainly from
          the
          sale of held-for-sale securities during the quarter, the yield earned on
          the
          portfolio increased as a result of the current rate environment. Overall,
          the
          increase in interest income resulted from an increase of 89 basis points
          in the
          annualized average yield on total interest-earning assets to 6.18% for
          the three
          months ended September 30, 2006 compared to 5.29% for the prior year period,
          reflecting increases in yields on federal funds, loans and total securities
          of
          204 basis points, 71 basis points and 37 basis points, respectively.
          Additionally, the average balance of total interest earning assets increased
          $20.8 million. While CCB’s balances are included in average balance calculations
          the effect is not material as the merger was consummated on the last day
          of the
          quarter.




For
      the
      six month period ending September 30, 2006, interest income increased $3.0
      million, or 19.4% to $18.5 million, compared to $15.5 million for the same
      period last year. The rise in interest income was primarily due to an increase
      in both yields






21






and
      average balances of interest-earning assets of 81 basis points and $20.1
      million, respectively. As in the three month results these increases were
      primarily driven by increases in yields on federal funds, loans and securities
      of 186 basis points, 59 basis points and 41 basis points, respectively. For
      the
      six month period ending September 30, 2006, there was also an increase in
      average loan balances of $78.6 million, however, total securities and federal
      funds balances decreased by $48.0 million and $10.5 million,
      respectively.




Interest
      income on loans increased by $2.1 million, or 33.8%, to $8.3 million for the
      three months ended September 30, 2006 compared to $6.2 million for the prior
      year period. The change was primarily due to an increase in the average mortgage
      loan balances for the quarter of $82.6 million to $507.5 million compared to
      $424.9 million for the prior year period. The increase was amplified by a 71
      basis points increase in the annualized average yield on loans for the three
      months ended September 30, 2006 to 6.56% compared to 5.85% for the prior year
      period. Similarly, for the six month period ending September 30, 2006, interest
      income on loans increased $3.8 million, or 30.5%, to $16.2 million from $12.4
      million for the comparable period last year. This increase was again driven
      by
      increases of $78.6 million in average balances and 59 basis points in yields.
      The year over year growth in loan balance is reflective of management’s
      commitment to grow assets primarily through originations and purchases of high
      quality mortgage and construction loans for its portfolio at a level that
      exceeds loan repayments. The increase in loan yields is reflective of the
      current mix of our loan portfolio. For the three- and six- months ended
      September 30, 2006, the average balances of commercial real estate and
      construction loans were higher compared to the prior year period when
      one-to-four and multifamily residential loans were predominant.




Interest
      income on total securities decreased by $402,000, or 2.8%, to $1.0 million
      for
      the three month period ended September 30, 2006 compared to $1.4 million for
      the
      prior year period. For the six month period ending September 30, 2006, total
      interest income on securities decreased $687,000, or 2.4%, to $2.1 million
      from
      $2.8 million for the same period last year. The decrease in interest income
      on
      securities for the quarter and the year-to-date was primarily the effect of
      a
      reduction in the average balance of total securities of $51.1 million and $48.0
      million for the periods, respectively. The decline in average balances is
      attributable to the sale of $47.1 million in available-for-sale investment
      securities during the quarter. Also contributing to the decline in the average
      balances of securities are normal run-offs due to maturities and repayments
      on
      securities during the year. For both the three- and six- month periods, the
      effect of the decrease in the balance of securities was partially offset by
      a
      rise in annualized average yield on securities of 37 basis points and 41 basis
      points, respectively.




Interest
      income on federal funds sold decreased by $69,000 and $99,000 for the three-
      and
      six- months ended September 30, 2006 compared to the same prior year periods.
      The decline was primarily attributable to a decrease in the average balance
      of
      federal funds for the periods partially offset by an increase in the annualized
      yields on federal funds sold for the same periods. The reduction in the average
      balance of federal funds sold is a result of using excess liquidity to fund
      loan
      growth and repay borrowings. Yields on federal funds increased year over year
      for both periods as the FOMC consistently raised the federal funds rate during
      that time.




**Interest
      Expense.** For
      the
      three month period
      ended September 30, 2006, total interest expense increased by $956,000, or
      29.8%, to $4.2 million, compared to $3.2 million for the prior year period.
      The
      rise resulted primarily from a higher annualized average cost of
      interest-bearing liabilities of 63 basis points to 2.98% from 2.35% for the
      prior year period. Additionally, the average balance of interest-bearing
      liabilities increased $14.1 million, or 2.6%, to $555.5 million from $541.3
      million during the prior year period.


During
        the six month period ended September 30, 2006, total interest expense increased
        by $2.0 million, or 31.8%, to $8.3 million compared to $6.3 million for the
        corresponding prior year period. The increase in interest expense is due
        to
        growth in the average balance of interest-bearing liabilities of $13.8 million,
        or 2.5%, to $557.7 million from $543.9 million for the corresponding prior
        year
        period. Also contributing to the increase in total interest expense was an
        increase in the annualized average cost of interest-bearing liabilities of
        65
        basis points to 2.95% from 2.30% for the corresponding prior year period.




Interest
      expense on deposits increased $930,000 or 44.4%, to $3.0 million for the three
      months ended September 30, 2006, compared to $2.1 million for the prior year
      period. The increase in interest expense on deposits was due primarily to a
      $32.1 million, or 7.4%, increase in the average balance of interest-bearing
      deposits to $465.9 million for the current quarter from $433.8 million for
      the
      prior year period. Additionally, a 66 basis point rise in the rate paid on
      deposits to 2.58% compared to 1.92% for the prior year period added to the
      increase. Customer deposits have historically provided Carver with a relatively
      low cost funding source from which its net interest income and net interest
      margin have benefited.




The
      same
      trend continues for the six month comparison on interest cost on deposits.
      For
      the six month period ended September 30, 2006 interest expense on deposits
      increased $2.1 million or 51.8%, to $6.0 million compared to $4.0 million for
      the prior year period. The increase in interest expense on deposits was due
      primarily to a $35.0 million, or 8.1%, increase in the average balance of
      interest-bearing deposits to $468.0 million from $433.0 million for the prior
      year period. Additionally, a 74 basis point rise in the rate paid on deposits
      to
      2.57% compared to 1.83% for the prior year period added to the increase. Year
      over year, rates on deposits have increased with the rise in short-term rates,
      thus impacting the Bank’s net interest margin.




Interest expense
      on advances and other borrowed money increased $26,000, to $1.1 million for
      the
      three months ended






22








September
      30, 2006 which was virtually unchanged compared to the prior year period. For
      the six month period interest expense on advances and borrowed money showed
      a
      modest decline of $65,000 to $2.2 million from $2.3 million for the prior year
      period. In both the three and six month periods ended September 30, 2006, the
      average balance of total borrowed money outstanding declined, however, that
      decline was offset by increases in the rates paid on these borrowings.
      Consistent with balance sheet re-positioning strategy, the Bank’s management has
      used opportunities as they arise and liquidity permits to replace matured
      FHLB-NY advances with lower cost deposits. The increase in yields for both
      the
      three and six month periods ending September 30, 2006, is mainly related to
      the
      cost of debt service of the $13 million in floating rate junior subordinated
      notes raised by the Company through an issuance of trust preferred securities
      by
      Carver Statutory Trust I in September 2003 which has increased to a rate of
      8.44% at September 30, 2006 from 6.94% a year earlier.




**Net
      Interest Income Before Provision for Loan Losses.** Net
      interest income before the provision for loan losses increased by $676,000,
      or
      14.9%, to $5.2 million for the three months ended September 30, 2006, compared
      to $4.5 million for the prior year period. For the six month period ending
      September 30, 2006, net interest income before the provision for loan losses
      increased by $1.0 million, or 10.9%, to $10.2 million, compared to $9.2 million
      for the prior year period. The Company’s annualized average interest rate spread
      for the three months ended September 30, 2006 increased by 26 basis points
      to
      3.20% compared to 2.94% in the prior year period. For the six month period
      ending September 30, 2006, the Company’s annualized average interest rate spread
      increased by 16 basis points to 3.12% compared to 2.96% in the prior year
      period. Net interest margin, represented by annualized net interest income
      divided by average total interest-earning assets, increased 35 basis points
      to
      3.46% for the three months ended September 30, 2006 from 3.11% in the prior
      year
      period. For the six month period ending September 30, 2006, net interest margin
      increased 23 basis points to 3.37% from 3.14% in the prior year period.


**Provision
        for Loan Losses and Asset Quality.** The
        Company did not provide for additional loan losses reserves as the Company
        considers its allowance for loan losses to be adequate for the entire loan
        portfolio. During the second quarter of fiscal 2007, the Company recorded
        net
        recoveries of $5,000 compared to net charge-offs of $17,000 for the prior
        year
        period. On a year over year basis, Carver recorded net recoveries of $15,000
        at
        September 30, 2006 compared to net charge-offs of $34,000 year-to-date on
        September 30, 2005. At September 30, 2006, the Bank’s allowance for loan losses
        was $5.2 million, compared to $4.0 million at March 31, 2006 reflecting the
        $1.2
        million allowance for loan losses acquired from CCB. For the six month period
        the ratio of the allowance for loan losses to non-performing loans was 154.9%
        at
        September 30, 2006 compared to 147.1% at March 31, 2006. The ratio of the
        allowance for loan losses to total loans receivable was 0.88% at September
        30,
        2006, compared to 0.81% at March 31, 2006. The Bank plans to continue to
        grow
        its commercial real estate loan portfolio and expand the business loan portfolio
        acquired from CCB. Accordingly, it anticipates provision of additional allowance
        for loan losses on an ongoing basis in the future.




At September 30, 2006, non-performing assets totaled $3.9 million, or 0.66% of
      total loans receivable compared to $2.8 million, or 0.55% of total loans
      receivable, at March 31, 2006. Non-performing assets include loans 90 days
      past
      due, non-accrual loans and other real estate owned. The increase in total
      non-performing assets was primarily attributable to the acquisition of $1.4
      million of nonperforming loans from CCB. As of September 30, 2006, the Bank
      held
      two real estate owned properties totaling $540,000. Future levels of
      non-performing assets will be influenced by economic conditions, including
      the
      impact of those conditions on our customers, interest rates and other internal
      and external factors existing at the time.


**Non-Interest
        Income.** For
        the
        three month period ended September 30, 2006, non-interest income decreased
        $1.4
        million, or 132.7%, to a loss of $337,000 compared to income of $1.0 million
        for
        the same period last year. Non-interest income declined primarily as a result
        of
        a $702,000 unrealized loss for the lower-of-cost-or-market adjustment taken
        on
        the Bank’s held-for-sale loans and a $645,000 recognized loss on the sale of
        certain available-for-sale investment securities, both related to initiatives
        to
        restructure the Company’s balance sheet to improve the net interest margin.
        Also, for the six month period ended September 30, 2006, non-interest income
        decreased by $1.8 million to $607,000 from $2.4 million for the prior
        year-to-date resulting primarily from the $1.3 million charge taken in the
        second quarter related to the balance sheet re-positioning. Additionally
        for the
        six month period, there was a $470,000 decrease in loan fees and service
        charges
        compared to the same period last year, mainly from reduced prepayment penalties
        on loans as the refinancing market slows.
  **Non-Interest
        Expense.** For
        the
        three month period ended September 30, 2006, non-interest expense increased
        $1.6
        million or 34.6%, to $6.2 million compared to $4.6 million for the same period
        last year. The increase in non-interest expense was primarily due to the
        establishment of a $1.3 million merger expenses related to the CCB acquisition.
        Other non-interest expenses also increased primarily due to costs associated
        with outsourcing certain internal audit, additional consulting expenses,
        loan
        expenses and increased telecommunication costs. During the six month period
        ended September 30, 2006 non-interest expense increased $1.5 million, or
        16.4%
        to $11.0 million compared to $9.4 million for the same period last year.
        The
        increase is also primarily attributable to the merger-related expenses taken
        in
        the quarter. While the Company’s efficiency ratio exceeds its peers, it reflects
        investment in the franchise that the Company believes will result in higher
        earnings going forward. In addition, management continues to conduct reviews
        of
        costs to improve the Company’s efficiency ratio.




23


**Income
        Tax Expense.** For the
        three months ended September 30, 2006, the Company recorded a loss before
        taxes
        of $904,000 compared to income of $601,000 for the same period last year.
        At the
        end of the six month period ended September 30, 2006, the Company recorded
        a net
        loss of $102,000 compared to income of $1.4 million for the same period a
        year
        earlier. The quarter and year-to-date loss has resulted in income tax benefits
        of $464,000 and $19,000, respectively, compared to a tax expense for the
        same
        periods last year of $329,000 and $793,000, respectively. The
        Company will be required to adopt FIN48 as
        of
        April 1, 2007 and has not yet determined the effect on the consolidated
        financial condition or results of operations. For additional disclosure
        regarding FIN48 see Notes to Consolidated Financial Statements, Note 6, “Recent
        Accounting Pronouncements.”




**ITEM
          3.** **Quantitative
          and Qualitative Disclosure about Market Risk**




Quantitative
      and qualitative disclosure about market risk is presented at March 31, 2006
      in
      Item 7A of the Company’s 2006 10-K and is incorporated herein by reference. The
      Company believes that there has been no material changes in the Company’s market
      risk at September 30, 2006 compared to March 31, 2006.






**ITEM
      4.**  **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 Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed,
      summarized and reported within the time periods specified in the rules and
      forms
      of the SEC. As of September 30,
      2006 , the
      Company carried out an evaluation, under the supervision and with the
      participation of the Company’s management, including the Company’s Chief
      Executive Officer and Chief Financial Officer (the Company’s principal executive
      officer and principal financial officer, respectively), of the effectiveness
      of
      the Company’s disclosure controls and procedures pursuant to Exchange Act Rule
      13a-15. Based on that evaluation, the Chief Executive Officer and Chief
      Financial Officer concluded that the Company’s disclosure controls and
      procedures were
      effective to ensure that information required to be disclosed in the reports
      we
      file and submit under the Exchange Act is recorded, processed, summarized and
      reported as and when required and that such information is accumulated and
      communicated to our management as appropriate to allow timely decisions
      regarding required disclosure.




There
      were no changes in our internal control over financial reporting that occurred
      during the period covered by this report that has materially affected, or is
      reasonably likely to materially affect, our internal control over financial
      reporting.






**PART
      II.**  **OTHER
      INFORMATION**




**ITEM
          1.** **Legal
          Proceedings**




Disclosure
      regarding legal proceedings that the Company is a party to is presented in
      Note
      13 to our audited Consolidated Financial Statements in the 2006 10-K and is
      incorporated herein by reference. There have been no material changes with
      regard to such legal proceedings since the filing of the 2006 10-K.







**ITEM
          1A.** **Risk
          Factors**




***Changes
      in interest rates may reduce our net income.***





Our
      earnings depend largely on the relationship between the yield on our
      interest-earning assets, primarily our mortgage loans and mortgage-backed
      securities, and the cost of our 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 our products and services. We are subject to interest rate
      risk to the degree that our interest-bearing liabilities reprice or mature
      more
      slowly or more rapidly or on a different basis than our interest-earning
      assets.





In
      addition, the actual amount of time before mortgage loans and mortgage-backed
      securities are repaid can be significantly impacted by changes in mortgage
      prepayment rates and 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 assumability of the underlying mortgages. However, the major factors
      affecting prepayment rates are prevailing interest rates, related mortgage
      refinancing opportunities and competition.






24




The
        FOMC’s policy of monetary tightening through seventeen consecutive Federal Funds
        rate increases from June 2004 through June 2006, resulted in a significant
        flattening of the U.S. Treasury yield curve in 2005 and a flat-to-inverted
        yield
        curve throughout 2006. The pause in Federal Funds rate hikes since June 2006
        has
        reversed the trend of rising U.S. Treasury yields and resulted in a further
        inversion of the yield curve throughout the quarter ended September 30, 2006.
        This continued pattern of interest yield curve inversion limits our growth
        opportunities and continues to put pressure on our net interest margin. As
        a
        result, we have continued to pursue our strategy of repositioning the balance
        sheet through reduction low yielding securities and high interest-bearing
        borrowings while emphasizing deposit and loan growth. Generally, the reduction
        in securities and borrowings will occur through maturities of securities
        and
        repayments of borrowings through normal cash flow.


We
      expect
      the operating environment to remain very challenging as a result of the
      prolonged flat-to-inverted U.S. Treasury yield curve that continues to exert
      pressure on our net interest margin and earnings and limits opportunities for
      profitable growth. We will, as a result, continue our strategy of reducing
      the
      investment portfolio through reductions in securities and borrowings, while
      we
      emphasize deposit and loan growth, all of which should continue to improve
      both
      the quality of the balance sheet and earnings. While growth opportunities remain
      limited, we will continue to focus on the repurchase of our stock as a desirable
      use of capital. These strategies should better position us to take advantage
      of
      more profitable asset growth opportunities when the yield curve
      steepens.





Interest
      rates do and will continue to fluctuate, and we cannot predict future Federal
      Reserve Board actions or other factors that will cause rates to change.
      Accordingly, no assurance can be given that the yield curve will not remain
      inverted and that our net interest margin and net interest income will not
      remain under pressure through 2007.





***Our
      results of operations are affected by economic conditions in the New York
      metropolitan area and other areas.***





Our
      retail banking and a significant portion of our lending business are
      concentrated in the New York metropolitan area. As a result of this geographic
      concentration, our results of operations largely depend upon economic conditions
      in this area as well as other areas.





Decreases
      in real estate values could adversely affect the value of property used as
      collateral for our loans. 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 our borrowers to make timely loan payments,
      which would have an adverse impact on our earnings. Consequently, a
      deterioration in economic conditions, particularly in the New York metropolitan
      area, could have a material adverse impact on the quality of our loan portfolio,
      which could result in an increase in delinquencies, causing a decrease in our
      interest income as well as an adverse impact on our loan loss experience, which
      would cause an increase in our allowance for loan losses. Such a deterioration
      also could adversely impact the demand for our products and services and,
      accordingly, our results of operations.


During
        the first half of 2006, the real estate market in general was somewhat weaker
        than a year ago but continued to support new and existing home sales at albeit
        reduced levels. 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 exhibit continuing signs of strength, which
        appears to be due in part to the limited availability of affordable housing
        alternatives in the markets 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.




***We
      operate in a highly regulated industry, which limits the manner and scope of
      our
      business activities.***





We
      are
      subject to extensive supervision, regulation and examination by the OTS, by
      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.




25


On
        October 4, 2006, the OTS and other federal bank regulatory authorities published
        the Interagency Guidance on Nontraditional Mortgage Product Risks, 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 and purchase both 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.




During
        the six months ended September 30, 2006, the Bank did not originate or purchase
        any interest only loans for investment portfolio.  At September 30, 2006,
        our mortgage loan portfolio included $58.6 million of one-to-four family
        interest only loans, of which the Bank has contracted to sell $23.1 million
        subject to standard secondary market due diligence.  The Bank had no
        multi-family or commercial real estate interest only loans at September 30,
        2006.  Non-performing interest only loans totaled $401,000 at September 30,
        2006.




We
      are
      currently evaluating the Guidance to determine our compliance and whether or
      not
      we need to modify our risk management practices and underwriting guidelines
      as
      they relate to originations and purchases of the subject loans, or practices
      relating to communications with consumers. Therefore, at this time, we cannot
      predict the impact the Guidance may have, if any, on our loan origination and
      purchase volumes or our underwriting procedures in future periods.




***Carver
      Federal May Fail to Realize the Anticipated Benefits of the Acquisition.***




The
      success of Carver Federal’s acquisition of CCB will depend on, among other
      things, Carver Federal’s ability to realize anticipated cost savings and to
      combine the businesses of Carver Federal and CCB in a manner that does not
      materially disrupt the existing customer relationships of Carver Federal or
      CCB
      or result in decreased revenues from any loss of customers. If Carver Federal
      is
      not able to successfully achieve these objectives, the anticipated benefits
      of
      the merger may not be realized fully or at all or may take longer to realize
      than expected.




Carver
      Federal and CCB expect to be fully integrated by fiscal year end. It is possible
      that the integration process could result in the loss of key employees, the
      disruption of Carver Federal’s or CCB’s ongoing businesses or inconsistencies in
      standards, controls, procedures and policies that adversely affect the ability
      of Carver Federal to maintain relationships with customers and employees or
      to
      achieve the anticipated benefits of the merger.




For
      a
      summary of other risk factors relevant to our operations, see Part I, Item
      1A,
“Risk Factors,” in our 2006 10-K. There are no other material changes in risk
      factors relevant to our operations since March 31, 2006 except as discussed
      above.







**ITEM
          2.** **Unregistered
          Sales of Equity Securities and Use of Proceeds**




During
      the quarter ended September 30, 2006, the Holding Company purchased an
      additional 3,700 shares of its common stock under its stock repurchase program.
      To date, Carver has purchased a total of 100,274 shares of the total 231,635
      approved under the program which leaves the number of shares yet to be
      repurchased at 131,361. Based on the closing price of Carver’s common stock on
      September 30, 2006 of $16.70, the approximate value of the 131,361 shares was
      $2,193,729.






26





**ISSUER
                  PURCHASES OF EQUITY SECURITIES**
  Period
              Total
                  number of
                shares
                  purchased
              
              Average
                  price paid
                per
                  share
              
              Total
                  number of shares
                as
                  part of publicly announced plan
              
              Maximum
                  number of shares that may yet be purchased under the
                  planJuly
                  1, 2006 to July 31, 2006
              900
              
              17.47
              
              900
              
              134,161August
                  1, 2006 to August 31, 2006
              2,000
              
              16.86
              
              2,000
              
              132,161September
                  1, 2006 to September 30, 2006
              800
              
              16.70
              
              800
              
              131,361




**ITEM
      3.**  **Defaults
      Upon Senior Securities**




Not
      applicable.






**ITEM
      4.**  **Submission
      of Matters to a Vote of Security Holders**




The
      Holding Company held its Annual Meeting on September 12, 2006 for the fiscal
      year ended March 31, 2006.




The
      purpose of the Annual Meeting was to vote on the following
      proposals:




1.
            the
                election of three directors for terms of three years each;




2.
            the
                ratification of the appointment of KPMG LLP as independent auditors
                of the
                Holding Company for the fiscal year ending March 31, 2007;
                and




3.
            the
                approval of adoption of the Carver Bancorp, Inc. 2006 Stock Incentive
                Plan.




The
      results of voting were as follows:





Proposal
                1:
            Election
                of Directors:Holding
                Company NomineesDr.
                Samuel J. Daniel
            For
            2,214,090Withheld
            121,097Robert
                Holland, Jr.
            For
            2,213,465Withheld
            121,722Robert
                R. Tarter
            For
            2,213,690Withheld
            121,497Proposal
                2:
            Ratification
                of Appointment of Independent Auditors
            For
            2,206,541Against
            31,743Abstain
            96,903Proposal
                3:
            Approval
                of Adoption of Stock Incentive Plan*(1*)
            For
            1,437,054Against
            581,830Abstain
            4,107





*(1)* There
      were 312,196 broker held non-voted shares with respect to this
      matter.






27







In
      addition to the nominees elected at the Annual Meeting, the following persons’
terms of office as directors continued after the Annual Meeting: David L. Hinds,
      Pazel Jackson, Jr., Carol Baldwin Moody, Edward Ruggiero, Strauss Zelnick and
      Deborah C. Wright.







**ITEM
      5.**  **Other
      Information**




Not
      applicable.







**ITEM
      6.**  **Exhibits**




The
                following exhibits are submitted with this
                report:




Exhibit
      11.  Computation
      of Earnings (Loss) Per Share.




Exhibit
      31.1  Certification
      of Chief Executive Officer.




Exhibit
      31.2  Certification
      of Chief Financial Officer.




Exhibit
      32.1(*)  Written
      Statement of Chief Executive Officer furnished pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.




Exhibit
      32.2(*)  Written
      Statement of Chief Financial Officer furnished pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.




*
      Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of
      Section 18 of the Exchange Act or be otherwise subject to the liability of
      that
      section.




28





**SIGNATURES**








Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.





CARVER
      BANCORP, INC.








Date:
      November 14,
      2006     /s/
      Deborah C. Wright


Deborah
      C. Wright


Chairman
      and Chief Executive Officer











Date:
      November 14,
      2006     /s/
      William C. Gray


William
      C. Gray


Senior
      Vice President and Chief Financial Officer







29