UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q








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





For
the quarterly period ended December 31, 2008





OR





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





For
the transition period from _________ to _________





Commission
File Number:1-13007





CARVER
BANCORP, INC.


(Exact
name of registrant as specified in its charter)





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





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








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








Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):





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





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





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 $0.01
              
              2,470,037Class
              
              Outstanding
      at February 11, 2009










TABLE OF CONTENTS





PagePART
      I.
                          
                          FINANCIAL INFORMATIONItem
      1.
                          
                          Financial
      StatementsConsolidated Statements of Financial Condition as of December
      31, 2008  and March 31, 2008 (unaudited)
                          2Consolidated Statements of Operations for the Three and Nine
      Months  Ended December 31, 2008 and 2007
      (unaudited)
                          3Consolidated Statements of Cash Flows for the Nine Months
      Ended December 31, 2008 and 2007 (unaudited)
                          4Consolidated Statement of Changes in Stockholders’ Equity and
      Comprehensive Income for the Nine Months Ended December 31, 2008
      (unaudited)
                          5Notes to Consolidated Financial Statements
      (unaudited)
                          6Item
      2.
                          
                          Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                          14Item
      3.
                          
                          Quantitative and Qualitative Disclosures About Market
      Risk
                          32Item
      4.
                          
                          Controls and Procedures
                          32PART
      II.
                          
                          OTHER INFORMATIONItem
      1.
                          
                          Legal Proceedings
                          33Item
      1A.
                          
                          Risk Factors
                          33Item
      2.
                          
                          Issuer Purchases of Equity Securities
                          34Item
      3.
                          
                          Defaults Upon Senior Securities
                          34Item
      4.
                          
                          Submission of Matters to a Vote of Security
      Holders
                          34Item
      5.
                          
                          Other Information
                          34Item
      6.
                          
                          Exhibits
                          35SIGNATURES
                          36EXHIBITS
                          35


1
 Table of Contents




ITEM
      1.
              Financial
      Statements


CARVER
      BANCORP, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITION(In
      thousands, except per share data)(unaudited)December
      31,
                        
                        
                        March
      31,2008
                        
                        
                        2008(As
      Restated)ASSETSCash
      and cash equivalents:Cash
      and due from banks
                        
                        $
                        20,954
                        
                        
                        $
                        15,920Federal
      funds sold
                        
                        
                        -
                        
                        
                        
                        10,500Interest
      earning deposits
                        
                        
                        947
                        
                        
                        
                        948Total
      cash and cash equivalents
                        
                        
                        21,901
                        
                        
                        
                        27,368Securities:Available-for-sale,
      at fair value (including pledged as collateral of $29,397 and $20,621
      at  December 31 and March 31, 2008,
respectively)
                        
                        
                        29,442
                        
                        
                        
                        20,865Held-to-maturity,
      at amortized cost (including pledged as collateral of $15,525 and $16,643
      at  December 31 and March 31, 2008, respectively; fair value of
      $15,912 and $17,167 at  December 31 and March 31, 2008,
      respectively)
                        
                        
                        16,169
                        
                        
                        
                        17,307Total
      securities
                        
                        
                        45,611
                        
                        
                        
                        38,172Loans
      held-for-sale
                        
                        
                        21,563
                        
                        
                        
                        23,767Loans
      receivable:Real
      estate mortgage loans
                        
                        
                        579,309
                        
                        
                        
                        578,957Commercial
      business loans
                        
                        
                        55,554
                        
                        
                        
                        52,109Consumer
      loans
                        
                        
                        1,793
                        
                        
                        
                        1,728Allowance
      for loan losses
                        
                        
                        (5,512
                        )
                        
                        
                        (4,878
                        )Total
      loans receivable, net
                        
                        
                        631,144
                        
                        
                        
                        627,916Office
      properties and equipment, net
                        
                        
                        15,621
                        
                        
                        
                        15,780Federal
      Home Loan Bank of New York stock, at cost
                        
                        
                        3,117
                        
                        
                        
                        1,625Bank
      owned life insurance
                        
                        
                        9,400
                        
                        
                        
                        9,141Accrued
      interest receivable
                        
                        
                        3,645
                        
                        
                        
                        4,063Goodwill
                        
                        
                        -
                        
                        
                        
                        6,370Core
      deposit intangibles, net
                        
                        
                        418
                        
                        
                        
                        532Other
      assets
                        
                        
                        37,484
                        
                        
                        
                        41,437Total
      assets
                        
                        $
                        789,904
                        
                        
                        $
                        796,171LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilities:Deposits
                        
                        $
                        621,534
                        
                        
                        $
                        654,663Advances
      from the FHLB-New York and other borrowed money
                        
                        
                        91,524
                        
                        
                        
                        58,625Other
      liabilities
                        
                        
                        9,561
                        
                        
                        
                        9,835Total
      liabilities
                        
                        
                        722,619
                        
                        
                        
                        723,123Minority
      interest
                        
                        
                        19,150
                        
                        
                        
                        19,150Stockholders'
      equity:Common
      stock (par value $0.01 per share: 10,000,000 shares authorized; 2,524,691
      shares issued;  2,475,037 and 2,481,706 shares outstanding at
      December 31 and March 31, 2008, respectively)
                        
                        
                        25
                        
                        
                        
                        25Additional
      paid-in capital
                        
                        
                        24,188
                        
                        
                        
                        24,113Retained
      earnings
                        
                        
                        24,085
                        
                        
                        
                        30,005Treasury
      stock, at cost (49,654 and 42,985 shares at December 31 and March 31,
      2008, respectively)
                        
                        
                        (760
                        )
                        
                        
                        (670
                        )Accumulated
      other comprehensive income
                        
                        
                        597
                        
                        
                        
                        425Total
      stockholders' equity
                        
                        
                        48,135
                        
                        
                        
                        53,898Total
      liabilities and stockholders' equity
                        
                        $
                        789,904
                        
                        
                        $
                        796,171





See
accompanying notes to consolidated financial statements


2
 Table of Contents


CARVER
BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands, except per share data)


(Unaudited)








Three
      Months Ended
                
                
                Nine
      Months EndedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007Interest
      Income:Loans
                
                $
                9,800
                
                
                $
                11,403
                
                
                $
                30,093
                
                
                $
                33,579Mortgage-backed
      securities
                
                
                578
                
                
                
                518
                
                
                
                1,742
                
                
                
                1,494Investment
      securities
                
                
                39
                
                
                
                328
                
                
                
                209
                
                
                
                1,183Federal
      funds sold
                
                
                4
                
                
                
                68
                
                
                
                44
                
                
                
                109Total
      interest income
                
                
                10,421
                
                
                
                12,317
                
                
                
                32,088
                
                
                
                36,365Interest
      expense:Deposits
                
                
                3,016
                
                
                
                5,069
                
                
                
                10,516
                
                
                
                13,970Advances
      and other borrowed money
                
                
                991
                
                
                
                932
                
                
                
                2,699
                
                
                
                2,962Total
      interest expense
                
                
                4,007
                
                
                
                6,001
                
                
                
                13,215
                
                
                
                16,932Net
      interest income before provision for loan losses
                
                
                6,414
                
                
                
                6,316
                
                
                
                18,873
                
                
                
                19,433Provision
      for loan losses
                
                
                431
                
                
                
                222
                
                
                
                770
                
                
                
                222Net
      interest income after provision for loan losses
                
                
                5,983
                
                
                
                6,094
                
                
                
                18,103
                
                
                
                19,211Non-interest
      income:Depository
      fees and charges
                
                
                732
                
                
                
                666
                
                
                
                2,114
                
                
                
                1,981Loan
      fees and service charges
                
                
                264
                
                
                
                327
                
                
                
                1,070
                
                
                
                1,218Write-down
      of loans held for sale
                
                
                -
                
                
                
                -
                
                
                
                (16
                )
                
                
                -Gain
      on sale of securities
                
                
                -
                
                
                
                102
                
                
                
                -
                
                
                
                181Gain
      (loss) on loans
                
                
                (208
                )
                
                
                75
                
                
                
                38
                
                
                
                103Other
                
                
                407
                
                
                
                2,008
                
                
                
                1,309
                
                
                
                2,284Total
      non-interest income
                
                
                1,195
                
                
                
                3,178
                
                
                
                4,515
                
                
                
                5,767Non-interest
      expense:Employee
      compensation and benefits
                
                
                2,968
                
                
                
                3,413
                
                
                
                9,998
                
                
                
                9,731Net
      occupancy expense
                
                
                1,223
                
                
                
                908
                
                
                
                3,142
                
                
                
                2,673Equipment,
      net
                
                
                794
                
                
                
                827
                
                
                
                2,103
                
                
                
                1,931Federal
      deposit insurance premiums
                
                
                233
                
                
                
                18
                
                
                
                389
                
                
                
                56Other
                
                
                2,515
                
                
                
                2,797
                
                
                
                6,740
                
                
                
                7,271Goodwill
      Impairment
                
                
                6,370
                
                
                
                -
                
                
                
                6,370
                
                
                
                -Total
      non-interest expense
                
                
                14,103
                
                
                
                7,963
                
                
                
                28,742
                
                
                
                21,662Income
      (loss) before income taxes
                
                
                (6,925
                )
                
                
                1,309
                
                
                
                (6,124
                )
                
                
                3,316Income
      tax benefit
                
                
                (550
                )
                
                
                (268
                )
                
                
                (1,293
                )
                
                
                (168
                )Minority
      Interest
                
                
                124
                
                
                
                -
                
                
                
                361
                
                
                
                -Net
      income (loss)
                
                $
                (6,499
                )
                
                $
                1,577
                
                
                $
                (5,192
                )
                
                $
                3,484Earnings
      (loss) per common share:Basic
                
                $
                (2.63
                )
                
                $
                0.63
                
                
                $
                (2.10
                )
                
                $
                1.40Diluted
                
                $
                (2.63
                )
                
                $
                0.62
                
                
                $
                (2.10
                )
                
                $
                1.36







3
 Table of Contents




CARVER
      BANCORP, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(in
      thousands)(Unaudited)Nine
      Months Ended December 31,2008
                      
                      
                      2007OPERATIONSNet
      income (loss)
                      
                      $
                      (5,192
                      )
                      
                      $
                      3,484Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Provision
      for loan losses
                      
                      
                      770
                      
                      
                      
                      222Provision
      for REO losses
                      
                      
                      53
                      
                      
                      
                      -Goodwill
      impairment charge
                      
                      
                      6,370
                      
                      
                      
                      -Stock
      based compensation expense
                      
                      
                      3
                      
                      
                      
                      97Depreciation
      and amortization expense
                      
                      
                      1,340
                      
                      
                      
                      1,264Amortization
      of other intangibles
                      
                      
                      141
                      
                      
                      
                      157Gain
      on sale of securities
                      
                      
                      -
                      
                      
                      
                      (181
                      )Gain
      on loans
                      
                      
                      (38
                      )
                      
                      
                      (103
                      )Originations
      of loans held-for-sale
                      
                      
                      (9,097
                      )
                      
                      
                      (14,546
                      )Proceeds
      from sale of loans held-for-sale
                      
                      
                      10,600
                      
                      
                      
                      12,506Changes
      in assets and liabilities:Decrease
      in loan premiums and discounts and deferred charges
                      
                      
                      174
                      
                      
                      
                      170Increase
      (Decrease) in premiums and discounts - securities
                      
                      
                      4
                      
                      
                      
                      (429
                      )Decrease
      (Increase) in accrued interest receivable
                      
                      
                      418
                      
                      
                      
                      (173
                      )Decrease
      (Increase) in other assets
                      
                      
                      3,201
                      
                      
                      
                      (22,571
                      )Decrease
      (Increase) in other liabilities
                      
                      
                      (231
                      )
                      
                      
                      2,848Net
      cash provided by (used in)  operating activities
                      
                      
                      8,516
                      
                      
                      
                      (17,255
                      )INVESTING
      ACTIVITIESPurchases
      of securities:Available-for-sale
      securites
                      
                      
                      (12,446
                      )
                      
                      
                      (11,728
                      )Proceeds
      from principal payments, maturities and calls of
    securities:Available-for-sale
                      
                      
                      4,153
                      
                      
                      
                      7,358Held-to-maturity
                      
                      
                      1,107
                      
                      
                      
                      1,497Proceeds
      from sale of available for sale securities
                      
                      
                      -
                      
                      
                      
                      16,396Originations
      of loans held-for-investment
                      
                      
                      (103,290
                      )
                      
                      
                      (134,856
                      )Loans
      purchased from third parties
                      
                      
                      -
                      
                      
                      
                      (17,455
                      )Principal
      collections on loans
                      
                      
                      99,374
                      
                      
                      
                      101,468(Purchase)
      redemption of FHLB-NY stock
                      
                      
                      (1,492
                      )
                      
                      
                      1,002Additions
      to premises and equipment
                      
                      
                      (1,181
                      )
                      
                      
                      (1,808
                      )Proceeds
      from sale of real estate owned
                      
                      
                      949
                      
                      
                      
                      -Net
      cash used in investing activities
                      
                      
                      (12,826
                      )
                      
                      
                      (38,126
                      )FINANCING
      ACTIVITIESNet
      (decrease) increase in deposits
                      
                      
                      (33,129
                      )
                      
                      
                      27,321Net
      borrowing of  FHLB advances and other borrowings
                      
                      
                      32,872
                      
                      
                      
                      11,080Capital
      contribution by minority interest
                      
                      
                      -
                      
                      
                      
                      19,150Common
      stock repurchased
                      
                      
                      (159
                      )
                      
                      
                      (254
                      )Dividends
      paid
                      
                      
                      (741
                      )
                      
                      
                      (724
                      )Net
      cash (used in) provided by financing activities
                      
                      
                      (1,157
                      )
                      
                      
                      56,573Net
      (decrease) increase in cash and cash equivalents
                      
                      
                      (5,467
                      )
                      
                      
                      1,192Cash
      and cash equivalents at beginning of period
                      
                      
                      27,368
                      
                      
                      
                      17,350Cash
      and cash equivalents at end of period
                      
                      $
                      21,901
                      
                      
                      $
                      18,542Supplemental
      information:Noncash
      Transfers-Change
      in unrealized loss on valuation of
      available-for-sale  investments, net
                      
                      $
                      276
                      
                      
                      $
                      93Cash
      paid for-Interest
                      
                      $
                      13,152
                      
                      
                      $
                      16,321Income
      taxes
                      
                      $
                      129
                      
                      
                      $
                      902





See
accompanying notes to consolidated financial statements


4
 Table of Contents


CARVER
BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY


AND
COMPREHENSIVE INCOME


FOR
THE NINE MONTHS ENDED DECEMBER 31, 2008


(In
thousands)


(Unaudited)





Common
      Stock
                      
                      
                      Additional
      Paid-In Capital
                      
                      
                      Treasury
      Stock
                      
                      
                      Retained
      Earnings
                      
                      
                      Accumulated
      Other Comprehensive Income
                      
                      
                      Total
      Stock-Holders’ EquityBalance—March
      31, 2008(As
      Previously Reported)
                      
                      $
                      25
                      
                      
                      $
                      24,113
                      
                      
                      $
                      (670
                      )
                      
                      $
                      30,490
                      
                      
                      $
                      425
                      
                      
                      $
                      54,383Adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (485
                      )
                      
                      
                      -
                      
                      
                      
                      (485
                      )Balance
      - March 31, 2008 (As restated)
                      
                      $
                      25
                      
                      
                      $
                      24,113
                      
                      
                      $
                      (670
                      )
                      
                      $
                      30,005
                      
                      
                      $
                      425
                      
                      
                      $
                      53,898Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (5,192
                      )
                      
                      
                      -
                      
                      
                      
                      (5,192
                      )Change
      in accumulated other comprehensive income, net of taxes
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      172
                      
                      
                      
                      172Comprehensive
      income (loss), net of taxes:
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (5,192
                      )
                      
                      
                      172
                      
                      
                      
                      (5,020
                      )Effect
      of accounting change regarding pension plan measurement date pursuant to
      FASB statement no. 158
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      13
                      
                      
                      
                      -
                      
                      
                      
                      13Dividends
      paid
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (741
                      )
                      
                      
                      -
                      
                      
                      
                      (741
                      )Treasury
      stock activity
                      
                      
                      -
                      
                      
                      
                      75
                      
                      
                      
                      (90
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (15
                      )Balance
      - December 31, 2008
                      
                      $
                      25
                      
                      
                      $
                      24,188
                      
                      
                      $
                      (760
                      )
                      
                      $
                      24,085
                      
                      
                      $
                      597
                      
                      
                      $
                      48,135








5
 Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)








(1)
            Organization




Nature
of operations




Carver
Bancorp, Inc.  (on a stand-alone basis, the “Company”, “Holding
Company” or “Registrant”), incorporated in May 1996, is the holding company for
Carver Federal Savings Bank (the “Bank” or “Carver Federal”).  Carver
Federal’s material subsidiaries include CFSB Realty Corp. and Carver Community
Development Corp.  (“CCDC”).  The Bank has a majority owned
interest in Carver Asset Corporation, a real estate investment trust formed in
February 2004.





“Carver,”
the “Company,” “we,” “us” or “our” refers to the Holding Company along with its
consolidated subsidiaries.  The Bank was chartered in 1948 and began
operations in 1949 as Carver Federal Savings and Loan Association, a federally
chartered mutual savings and loan association.  The Bank converted to
a federal savings bank in 1986.  On October 24, 1994, the Bank
converted from mutual to stock form and issued 2,314,275 shares of its common
stock, par value $0.01 per share.  On October 17, 1996, the Bank
completed its reorganization into a holding company structure (the
“Reorganization”) and became a wholly owned subsidiary of the Holding
Company.





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







(2)
            A)
      Basis of Presentation




The
accompanying unaudited consolidated financial statements of the Holding Company
have been prepared in accordance with United States generally accepted
accounting principles (“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
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the consolidated financial
statements.  Amounts subject to significant estimates and assumptions
are items such as the allowance for loan losses and lending–related commitments,
valuation on mortgage servicing rights (“MSR”), goodwill and intangibles,
pensions, assessment of other than temporary impairment and the fair value of
financial instruments.  Actual results could differ from these
estimates.




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, 2008, as previously filed with the SEC.  The
consolidated results of operations and other data for the three-month and nine
months periods ended December 31, 2008 are not necessarily indicative of results
that may be expected for the entire fiscal year ending March 31, 2009 (“fiscal
2009”).







B)
Reclassifications





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


6
 Table of Contents


(3)                  
Restatement




During
the quarter ended December 31, 2008, Carver became aware of certain adjustments
to suspense accounts related to check return processing and automated clearing
house (“ACH”) return processing that appeared to be incorrect.  A
review of the suspense account reconciliations commenced and an analysis was
performed on Carver’s accounting and financial reporting
practices.   Since fiscal 2007 the review raised questions, most
of which involved adjustments to various suspense accounts, and identified
evidence that certain adjustments were incorrect. The review found evidence
that, in the fiscal 2007 timeframe, suspense accounts adjustments for check
returns and ACH returns were improper and resulted in aged suspense items not
being properly cleared. As such, an adjustment of $761,000 was necessary to
correct the fiscal 2007 financial statements to reflect charge-offs that should
have been recorded in the period of the identified errors. This adjustment
resulted in a reduction in diluted earnings per share for fiscal 2007 from $1.00
to $0.81, a decrease of $0.19, or 19%. The errors and irregularities identified
in the course of the review revealed deficiencies in Carver’s accounting and
financial control environment, some of which were determined to be a material
weakness that requires corrective and remedial actions. For a description of the
control deficiencies identified by management as a result of the review and
Carver’s internal reviews described below, as well as management’s plan to
remediate those deficiencies, see “Part I — Item 4 —
Controls and Procedures.”
 
 Concurrently
with the review, Carver also conducted extensive internal reviews for the
purpose of the preparation and certification of Carver’s fiscal 2009 financial
statements and its assessment of internal controls over financial reporting.
Carver’s procedures included expanded account reviews and expanded balance sheet
reconciliations to ensure all accounts were fully reconciled, supported, and
appropriately documented. Carver also implemented improvements to its quarterly
and annual accounting close process to provide for more complete review of the
financial results.
  As a
result of the issues identified in the review, the Finance and Audit Committee,
in consultation with management and KPMG LLP, concluded on February 9, 2009 that
Carver’s previously issued financial statements for fiscal 2007 (including the
interim periods within those years), should no longer be relied upon because of
certain accounting errors and irregularities in those financial statements.
Accordingly, Carver will restate its previously issued financial statements for
those periods by filing an amended 2008 10-K. Restated financial information is
presented in this report, and will also be included in Carver’s Amended Annual
Report on form 10-K for Fiscal 2008.
 
 Set out
below is the impact of the adjustment by financial statement line item in
Carver’s consolidated statement of financial condition as of March
31,  2008 and consolidated changes in shareholders’ equity and
comprehensive income for the nine months ended December 31,
2008.


7
 Table of Contents


CARVER
BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION


(In
thousands, except per share data)


(unaudited)





March
      31,
                      
                      
                      
                      
                      
                      March
      31,2008
                      
                      
                      
                      
                      
                      2008(As
      Previously Reported)
                      
                      
                      Adjustment
                      
                      
                      (As
      Restated)ASSETSCash
      and cash equivalents:Cash
      and due from banks
                      
                      $
                      15,920
                      
                      
                      $
                      -
                      
                      
                      $
                      15,920Federal
      funds sold
                      
                      
                      10,500
                      
                      
                      
                      -
                      
                      
                      
                      10,500Interest
      earning deposits
                      
                      
                      948
                      
                      
                      
                      -
                      
                      
                      
                      948Total
      cash and cash equivalents
                      
                      
                      27,368
                      
                      
                      
                      
                      
                      
                      
                      27,368Securities:Available-for-sale,
      at fair value
                      
                      
                      20,865
                      
                      
                      
                      -
                      
                      
                      
                      20,865Held-to-maturity,
      at amortized cost
                      
                      
                      17,307
                      
                      
                      
                      -
                      
                      
                      
                      17,307Total
      securities
                      
                      
                      38,172
                      
                      
                      
                      -
                      
                      
                      
                      38,172Loans
      held-for-sale
                      
                      
                      23,767
                      
                      
                      
                      -
                      
                      
                      
                      23,767Loans
      receivable:Real
      estate mortgage loans
                      
                      
                      578,957
                      
                      
                      
                      -
                      
                      
                      
                      578,957Commercial
      business loans
                      
                      
                      52,109
                      
                      
                      
                      -
                      
                      
                      
                      52,109Consumer
      loans
                      
                      
                      1,728
                      
                      
                      
                      -
                      
                      
                      
                      1,728Allowance
      for loan losses
                      
                      
                      (4,878
                      )
                      
                      
                      -
                      
                      
                      
                      (4,878
                      )Total
      loans receivable, net
                      
                      
                      627,916
                      
                      
                      
                      -
                      
                      
                      
                      627,916Office
      properties and equipment, net
                      
                      
                      15,780
                      
                      
                      
                      -
                      
                      
                      
                      15,780Federal
      Home Loan Bank of New York stock, at cost
                      
                      
                      1,625
                      
                      
                      
                      -
                      
                      
                      
                      1,625Bank
      owned life insurance
                      
                      
                      9,141
                      
                      
                      
                      -
                      
                      
                      
                      9,141Accrued
      interest receivable
                      
                      
                      4,063
                      
                      
                      
                      -
                      
                      
                      
                      4,063Goodwill
                      
                      
                      6,370
                      
                      
                      
                      -
                      
                      
                      
                      6,370Core
      deposit intangibles, net
                      
                      
                      532
                      
                      
                      
                      -
                      
                      
                      
                      532Other
      assets
                      
                      
                      41,859
                      
                      
                      
                      (422
                      )
                      
                      
                      41,437Total
      assets
                      
                      $
                      796,593
                      
                      
                      $
                      (422
                      )
                      
                      $
                      796,171LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilities:Deposits
                      
                      $
                      654,663
                      
                      
                      $
                      -
                      
                      
                      $
                      654,663Advances
      from the FHLB-New York and other borrowed money
                      
                      
                      58,625
                      
                      
                      
                      -
                      
                      
                      
                      58,625Other
      liabilities
                      
                      
                      9,772
                      
                      
                      
                      63
                      
                      
                      
                      9,835Total
      liabilities
                      
                      
                      723,060
                      
                      
                      
                      63
                      
                      
                      
                      723,123Minority
      interest
                      
                      
                      19,150
                      
                      
                      
                      -
                      
                      
                      
                      19,150Stockholders'
      equity:Common
      stock
                      
                      
                      25
                      
                      
                      
                      -
                      
                      
                      
                      25Additional
      paid-in capital
                      
                      
                      24,113
                      
                      
                      
                      -
                      
                      
                      
                      24,113Retained
      earnings
                      
                      
                      30,490
                      
                      
                      
                      (485
                      )
                      
                      
                      30,005Treasury
      stock, at cost
                      
                      
                      (670
                      )
                      
                      
                      -
                      
                      
                      
                      (670
                      )Accumulated
      other comprehensive income
                      
                      
                      425
                      
                      
                      
                      -
                      
                      
                      
                      425Total
      stockholders' equity
                      
                      
                      54,383
                      
                      
                      
                      (485
                      )
                      
                      
                      53,898Total
      liabilities and stockholders' equity
                      
                      $
                      796,593
                      
                      
                      $
                      (422
                      )
                      
                      $
                      796,171





See
accompanying notes to consolidated financial statements


8
 Table of Contents


CARVER
BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY


AND
COMPREHENSIVE INCOME


FOR
THE NINE MONTHS ENDED DECEMBER 31, 2008


(In
thousands)


(Unaudited)





Common
      Stock
                  
                  
                  Additional
      Paid-In Capital
                  
                  
                  Treasury
      Stock
                  
                  
                  Retained
      Earnings
                  
                  
                  Accumulated
      Other Comprehensive Income
                  
                  
                  Total
      Stock-Holders’ EquityBalance—March
      31, 2008(As
      Previously Reported)
                  
                  $
                  25
                  
                  
                  $
                  24,113
                  
                  
                  $
                  (670
                  )
                  
                  $
                  30,490
                  
                  
                  $
                  425
                  
                  
                  $
                  54,383Adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (485
                  )
                  
                  
                  -
                  
                  
                  
                  (485
                  )Balance
      - March 31, 2008 (As restated)
                  
                  $
                  25
                  
                  
                  $
                  24,113
                  
                  
                  $
                  (670
                  )
                  
                  $
                  30,005
                  
                  
                  $
                  425
                  
                  
                  $
                  53,898Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (5,192
                  )
                  
                  
                  -
                  
                  
                  
                  (5,192
                  )Change
      in accumulated other comprehensive income, net of taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  172
                  
                  
                  
                  172Comprehensive
      income (loss), net of taxes:
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (5,192
                  )
                  
                  
                  172
                  
                  
                  
                  (5,020
                  )Effect
      of accounting change regarding pension plan measurement date pursuant to
      FASB statement no. 158
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  13
                  
                  
                  
                  -
                  
                  
                  
                  13Dividends
      paid
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (741
                  )
                  
                  
                  -
                  
                  
                  
                  (741
                  )Treasury
      stock activity
                  
                  
                  -
                  
                  
                  
                  75
                  
                  
                  
                  (90
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (15
                  )Balance
      - December 31, 2008
                  
                  $
                  25
                  
                  
                  $
                  24,188
                  
                  
                  $
                  (760
                  )
                  
                  $
                  24,085
                  
                  
                  $
                  597
                  
                  
                  $
                  48,135







(4)
            Earnings
      (Loss) Per Share




Basic
earnings (loss) per common share is computed by dividing net income (loss) by
the weighted-average number of common shares outstanding over the period of
determination.  Diluted earnings per common share includes 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 Employee
Stock Ownership Program (“ESOP”) shares are not
considered to be outstanding.  For the three-month periods ended
December 31, 2008 and 2007, respectively, 28,557 and 60,823 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
and unvested restricted stock grants for the same period.  For the
nine-month periods ended December 31, 2008 and 2007, 28,557 and 70,125 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 same period.  For the three and nine month periods
ended December 31, 2008 the Bank sustained net losses, therefore, the effects of
these stock options were not considered in computing fully diluted earnings per
common share as they would be anti-dilutive.





(5)
            Accounting
      for Stock Based Compensation





The
Company follows Statement of Financial Accounting Standards No. 123R, Share-Based Payment ("SFAS
No.  123R"), which requires that all stock-based compensation be
recognized as an expense in the financial statements and that such cost be
measured at the fair value of the award.  This statement was adopted
using the modified prospective method of application, which requires the Company
to recognize compensation expense on a prospective basis.  Therefore,
prior period financial statements have not been restated.  Under this
method, in addition to reflecting compensation expense for new share-based
awards, expense is also recognized to reflect the remaining service period of
awards that had been included in pro forma disclosures in prior
periods.  SFAS No. 123R also requires that excess tax benefits related
to stock option exercises be reflected as financing cash inflows instead of
operating cash inflows.  Stock-based compensation expense and the
related tax benefit recognized for the three months ended December 31, 2008,
totaled $11,000 and $4,000, respectively.  For the nine months ended
December 31, 2008, stock-based compensation expense and the related tax benefit
were $3,000 and $1,000, respectively.


9
 Table of Contents


(6)
            Benefit
      Plans





Employee Pension
Plan





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





Directors’ Retirement
Plan




Concurrent
with the conversion to a stock form of ownership, the Bank 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 employee pension plan and directors’ retirement plan as follows (in
thousands):




For
      Three Months Ended December 31,Employee
      Pension Plan
                                            
                                            
                                            Directors'
      Retirement Plan2008
                                            
                                            
                                            2007
                                            
                                            
                                            2008
                                            
                                            
                                            2007Interest
      cost
                                            
                                            $
                                            37
                                            
                                            
                                            $
                                            40
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            1Expected
      return on assets
                                            
                                            
                                            (53
                                            )
                                            
                                            
                                            (55
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Unrecognized
      gain
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (5
                                            )
                                            
                                            
                                            -Net
      periodic (benefit) expense
                                            
                                            $
                                            (16
                                            )
                                            
                                            $
                                            (15
                                            )
                                            
                                            $
                                            (5
                                            )
                                            
                                            $
                                            1
 
 
 For
      Nine Months Ended December 31,Employee
      Pension Plan
                                            
                                            
                                            Directors'
      Retirement Plan2008
                                            
                                            
                                            2007
                                            
                                            
                                            2008
                                            
                                            
                                            2007Interest
      cost
                                            
                                            $
                                            112
                                            
                                            
                                            $
                                            120
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            3Expected
      return on assets
                                            
                                            
                                            (160
                                            )
                                            
                                            
                                            (165
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Unrecognized
      gain
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (16
                                            )
                                            
                                            
                                            -Net
      periodic (benefit) expense
                                            
                                            $
                                            (48
                                            )
                                            
                                            $
                                            (45
                                            )
                                            
                                            $
                                            (16
                                            )
                                            
                                            $
                                            3


In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 158
“Employer’s Accounting for
Defined Benefit Pension and Other Postretirement Plans”, the Company
recorded an addition to its retained earnings on April 1, 2008 to reflect a
change of measurement date for plan assets and benefit obligation from December
31, 2007 to March 31, 2008.





(7)
            Common
      Stock Dividend





On
February 12, 2009, the Board of Directors of the Holding Company declared, for
the quarter ended December 31, 2008, a cash dividend of ten cents ($0.10) per
common share outstanding.  The dividend is payable on March 13, 2009
to stockholders of record at the close of business on February 27,
2009.





(8)
            Fair
      Value Measurements





On April
1, 2008, the Company adopted SFAS No.  157, "Fair Value
Measurements,"(“SFAS No. 157”) which, among other things, defines fair
value; establishes a consistent framework for measuring fair value; and expands
disclosure for each major asset and liability category measured at fair value on
either a recurring or nonrecurring basis.  SFAS No.157 clarifies that
fair value is an "exit" price, representing the amount that would be received
when selling an asset, or paid when transferring a liability, in an orderly
transaction between market participants.  Fair value is thus a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or liability.  As a
basis for considering such assumptions, SFAS No. 157 establishes a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair value
as follows:


10
 Table of Contents


·
            Level
      1– Inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.


·
            Level
      2– Inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.


·
            Level
      3– Inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.





A
financial instrument’s categorization within this valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement.





The
following table presents, by SFAS No. 157 valuation hierarchy, assets that are
measured at fair value on a recurring basis as of December 31, 2008, and that
are included in the Company’s Consolidated Statement of Financial
Condition:




Fair
      Value Measurements at December 31, 2008, Using(in
      thousands)
                
                Quoted
      Prices in Active
                  Markets
      for Identical
                  Assets
      (Level 1)
                
                
                Significant
      Other
                  Observable
      Inputs
                  (Level
      2)
                
                
                Significant
                  Unobservable
                  Inputs
      (Level 3)
                
                
                Total
      Fair
                  ValueLoans
      held for sale
                
                $
                -
                
                
                $
                21,563
                
                
                $
                -
                
                
                $
                21,563Mortgage
      servicing rights
                
                $
                -
                
                
                $
                -
                
                
                $
                612
                
                
                $
                612Securities
      available for sale
                
                $
                -
                
                
                $
                29,397
                
                
                $
                45
                
                
                $
                29,442




Instruments
for which unobservable inputs are significant to their fair value measurement
(i.e., Level 3) include mortgage servicing rights.  Level 3 assets
accounted for 0.1% of the Company’s total assets at December 31,
2008.




The
Company reviews and updates the fair value hierarchy classifications on a
quarterly basis.  Changes from one quarter to the next that are
related to the observable inputs to a fair value measurement may result in a
reclassification from one hierarchy level to another.




A
description of the methods and significant assumptions utilized in estimating
the fair value of available-for-sale securities follows:




Where
quoted prices are available in an active market, securities are classified
within Level 1 of the valuation hierarchy.  Level 1 securities include
highly liquid government securities and exchange-traded securities.




If quoted
market prices are not available for the specific security, then fair values are
estimated by using pricing models, quoted prices of securities with similar
characteristics, or discounted cash flows.  These pricing models
primarily use market-based or independently sourced market parameters as inputs,
including, but not limited to, yield curves, interest rates, equity or debt
prices, and credit spreads.  In addition to market information, models
also incorporate transaction details, such as maturity and cash flow
assumptions.  Securities valued in this manner would generally be
classified within Level 2 of the valuation hierarchy and primarily include such
instruments as mortgage-related securities and corporate debt.




In
certain cases where there is limited activity or less transparency around inputs
to the valuation, securities are classified within Level 3 of the valuation
hierarchy.  In valuing certain securities, the determination of fair
value may require benchmarking to similar instruments or analyzing default and
recovery rates.  Quoted price information for mortgage servicing
rights (“MSR”) is not available.  Therefore, MSR are valued using
market-standard models to model the specific cash flow structure.  Key
inputs to the model consist of principal balance of loans being serviced,
servicing fees and prepayment rate.




The
methods described above may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future fair
values.  Furthermore, while the Company believes its valuation methods
are appropriate and consistent with those of other market participants, the use
of different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different estimate of fair value at the
reporting date.


11
 Table of Contents


The
following table presents information for assets classified by the Company within
Level 3 of the valuation hierarchy for the nine months ended December 31,
2008:





(in
      thousands)
                    
                    Mortgage
      Servicing Rights
                    
                    
                    Securities
      Available for SaleBeginning
      balance, April 1, 2008
                    
                    $
                    605
                    
                    
                    $
                    45Additions
                    
                    
                    80
                    
                    
                    
                    -Total
      unrealized loss
                    
                    
                    (73
                    )
                    
                    
                    -Ending
      balance, December 31, 2008
                    
                    $
                    612
                    
                    
                    $
                    45






(9)
            Recent
      Accounting Pronouncements




The Fair Value Option for
Financial Assets and Liabilities





In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities(“SFAS No.
159”). SFAS No. 159 provides companies with the option of electing fair
value as an alternative measurement for most financial assets and
liabilities.  It also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities.  SFAS No. 159 requires companies to
provide additional information that will help investors and other users of
financial statements to more easily understand the effect of a company’s choice
to use fair value on its earnings.  It also requires entities
to display the fair value of those assets and liabilities for which the
company has chosen to use fair value on the face of the balance
sheet.  Under SFAS No. 159, fair value is used for both the initial
and subsequent measurement of the designated assets and/or liabilities, with the
changes in value recognized in earnings.  SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007.  The Company
adopted SFAS No. 159 on April 1, 2008, but did not elect the fair value option
for any eligible financial assets and liabilities through December 31,
2008.





Application of Accounting
Principles to Loan Commitments





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





Business
Combinations





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





Non-controlling Interests in
Consolidated Financial Statements





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements.” (“SFAS No. 160”) improves the
relevance, comparability, and transparency of financial information provided to
investors by requiring all entities to report non-controlling (minority)
interests in subsidiaries in the same way, i.e., as equity in the consolidated
financial statements.  In addition, SFAS No. 160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and non-controlling interests by requiring that they be treated as equity
transactions.  SFAS No. 160 is effective for fiscal years beginning
after December 15, 2008.





Salewith Repurchase Financing
Agreements





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


12
 Table of Contents


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





Disclosures about Derivative
Instruments and Hedging Activities





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS No.161”), an amendment of SFAS
No. 133.  The standard requires enhanced disclosures about derivative
instruments and hedged items that are accounted for under SFAS No. 133 and
related interpretations.  The standard will be effective for all of
the Company’s interim and annual financial statements for periods beginning
after November 15, 2008, with early adoption permitted.  The standard
expands the disclosure requirements for derivatives and hedged items and has no
impact on how Carver accounts for these instruments. Since the provisions
of SFAS No. 161 are disclosure related, our adoption of SFAS No. 161 will not
have an impact on our financial condition or results of operations.





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





In April
of 2008, the FASB voted to eliminate Qualifying Special Purpose Entities (QSPEs)
from the guidance in SFAS No.140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" (“SFAS
No.140”)  The revised standard has not been finalized and the
proposals will be subject to a public comment
period.   Currently, Carver does not have any of these assets or
transactions with a QSPE, but this change may have a significant impact on
Carver's consolidated financial statements as the Company may lose sales
treatment for future asset sales to a QSPE.  This proposed revision
could be effective as early as April 2010.




In
connection with the proposed changes to SFAS 140, the FASB also is proposing
three key changes to the consolidation model in FIN 46(R).  First,
former QSPEs would now be included in the scope of FIN 46(R).  In
addition, the FASB supports amending FIN 46(R) to change the method of analyzing
which party to a variable interest entity (“VIE”) should consolidate the VIE to
a primarily qualitative determination of control instead of today's risks and
rewards model.  Finally, the proposed amendment is expected to require
all VIEs and their primary beneficiaries to be re-evaluated
quarterly.  The previous rules required reconsideration only when
specified reconsideration events occurred.  The proposed amendment to
FIN 46(R) is not expected to have a material impact on our financial condition
or results of operations.




Disclosures about Transfers
of Financial Assets and Involvement with Variable Interest
Entities




In
December of 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8,
"Disclosures by Public Entities (Enterprises) about Transfers of Financial
Assets and Interests in Variable Interest Entities", which requires additional
disclosures about transfers of financial assets and involvement with variable
interest entities.  With respect to transfers of financial assets, the
FSP's objectives require affected companies to provide financial statement users
“with an understanding of” various matters including: the transferors continuing
involvement with financial assets in certain securitization transactions,
restrictions on assets reported in a company's balance sheet related to
transferred assets, reporting of servicing rights and the impact on the
transferor's financial statements where the transferor continues to be involved
with securitization arrangements that are accounted for as secured
borrowings.  With respect to an entity's involvement with variable
interest entities (VIEs), the FSP's objectives require affected companies
to provide financial statement users "with an understanding of" various matters
including: significant judgments and assumptions made in determining
whether a VIE should be consolidated and/or disclose information about the
involvement with the VIE, restrictions on consolidated VIE assets reported on
the company's balance sheet and the carrying amount of such assets, nature of
the risks associated with the company's involvement with the VIE and how the
involvement with the VIE impacts amounts reported in the company's financial
statements.




As noted
above, the Company has not previously transferred assets to QSPEs. The Company's
main involvement with VIEs arises in connection with the New Market Tax Credit
(NMTC) award that was transferred to an investor in a NMTC
project.




13
 Table of Contents


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







Forward-Looking
Statements





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





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




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




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




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




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




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




·
                changes
      in accounting principles, policies or guidelines which may cause
      conditions to be perceived differently;·
                litigation
      or other matters before regulatory agencies, whether currently existing or
      commencing in the future, which may delay the occurrence or non-occurrence
      of events longer than
anticipated;




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




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




Any or
all of our forward-looking statements in this Quarterly Report on Form 10-Q and
in any other public statements that we make may turn out to be
wrong.  They can be affected by inaccurate assumptions we might make
or by known or unknown risks and uncertainties.   The
forward-looking statements contained in this Quarterly Report on Form 10-Q are
made as of the date of this Quarterly Report on 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.





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 2008 Form 10-K.




Carver
Bancorp, Inc., a Delaware corporation, is the holding company for Carver Federal
Savings Bank, a federally chartered savings bank, and, on a parent-only basis,
had minimal results of operations.  The Holding Company is
headquartered in New York, New York.  The Holding Company conducts
business as a unitary savings and loan holding company, and the principal
business of the Holding Company consists of the operation of its wholly-owned
subsidiary, Carver Federal.  Carver Federal was founded in 1948 to
serve African-American communities whose residents, businesses and institutions
had limited access to mainstream financial services.  The Bank remains
headquartered in Harlem, and predominantly all its nine branches and sixteen
stand-alone 24/7 ATM Centers are located in low- to moderate-income
neighborhoods.  Many of these historically underserved communities
have recently experienced unprecedented growth and diversification of incomes,
ethnicity and economic opportunity, after decades of public and private
investment.





Today,
Carver Federal is the largest African- and Caribbean-American operated bank in
the United States.  The Bank remains dedicated to expanding wealth
enhancing opportunities in the communities it serves by increasing access to
capital and financial advice for consumers, businesses and non-profit
organizations, including faith-based institutions.  A measure of its
progress in achieving this goal includes the Bank's "Outstanding" rating,
awarded by the OTS following its most recent Community Reinvestment Act
examination in 2006.  The examination report noted that 95% of
Carver’s loan originations were within low- to moderate-income geographies,
which far exceeded peer institutions.  The Bank has approximately $790
million in assets as of December 31, 2008 and employs approximately 154
employees as of December 31, 2008.


14
 Table of Contents


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.  Carver Federal’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 incremental
provisions for loan losses, if any, non-interest income, operating expenses and
tax benefits from the New Market Tax Credit (“NMTC”)
award.




Carver
Federal engages in consumer and commercial banking services consistent with its
community banking roots. The Bank provides deposit products including demand,
savings and time deposits for consumers, businesses, non-profit organizations
and government agencies in its local market area within New York
City.  In addition to deposit products, Carver Federal offers a number
of other consumer and commercial banking products and services, including debit
cards, online banking including online bill pay, and telephone
banking.





The
Bank’s primary market area for deposits consists of areas currently served by
its branches, which are located in the Brooklyn, Manhattan and Queens boroughs
of New York City.  The neighborhoods in which the Bank’s branches are
located have historically been low- to moderate-income areas.





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





The
Company’s officers actively monitor market developments as they relate to
its deposit and lending businesses. Regarding deposits, the Bank’s competitive
advantages include Carver Federal’s 60 year history in its market area, its
active community involvement, long term customer relationships, and targeted
products and services along with  personal service consistent with
community banking. This history has allowed the Bank to retain and increase its
market share among significant centers of influence including local houses of
worship and other non-profit groups. In addition, the Bank’s depositors include
a substantial base of supporters of the Bank’s presence in New York’s inner city
communities, including public sector agencies and socially motivated depositors
in the private sector. These depositors provide a stable base of funding for the
Company’s operations, despite competitive pressures.





The
Bank’s primary lending market includes the Bronx, Kings, New York and Queens
Counties in New York City, and lower Westchester County, New
York.  Although the Bank’s branches are primarily located in
communities that were historically underserved by other financial institutions,
the Bank has, in recent years, faced increased competition for deposits and
mortgage lending in its market areas. In the last decade the Bank’s inner city
communities experienced an unprecedented level of growth in housing development,
consistent with New York City's explosive growth. This environment attracted new
homeowners to low and moderate income communities in record numbers, fueling
further investment in public amenities, private businesses and diversification
of family income and ethnic origin.





Current
economic indicators including construction permits, mortgages closed, housing
prices, rent levels and foreclosure rates, suggest that in recent quarters New
York City’s economy has entered a challenging period. However, while the
development pipeline has stalled, thereby reducing, mortgage originations
relative to peak years, rent levels are stable, particularly in the Bank’s core
markets. While management believes that these economic indicators represent a
more challenging environment in the near term, we note that the need for
affordable housing, for sale and rental, are in constant demand. As such we
believe that this demand will present opportunities for growth in our core
lending business, including financing and refinancing of multi-family buildings
and construction of affordable housing supported by public agencies targeting
the low and moderate income communities in which we operate. These lines of
business are not without competition. For example, the Bank competes with larger
community banks in seeking multi-family real estate loans in the New York
Metropolitan area market, as many banking institutions view this segment of the
market as a low risk asset. In the non-profit segment, money center and large
regional banks are significant competitors, given the opportunity to derive core
deposits and loans supported by solid collateral and long term business
relationships with government agencies. In sum, the overall weakness in the
economy and the competitive nature of our marketplace will present challenges as
the Bank seeks to expand lending and profitability.


15
 Table of Contents


Recent
Market Developments





The
financial services industry is facing unprecedented challenges in the face of
the current national and global economic crisis. The global and U.S. economies
are experiencing significantly reduced business activity as a result of among
other factors, disruptions in the financial system during the past year.
Dramatic declines in the housing market during the past year, with falling home
prices and increasing foreclosures and unemployment, have resulted in
significant write-downs of asset values by financial institutions, including
government-sponsored entities and major commercial and investment banks. These
write-downs, initially of mortgage-backed securities but spreading to credit
default swaps and other derivative securities, have caused many financial
institutions to seek additional capital; to merge with larger and stronger
institutions; and, in some cases, to fail. The Company is fortunate that the
markets it serves have been impacted to a lesser extent than many areas around
the country.




In
response to the financial crises affecting the banking system and financial
markets, there have been several recent announcements of Federal programs
designed to purchase assets from, provide equity capital to, and guarantee the
liquidity of the industry.




On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the "EESA")
was signed into law. The EESA authorizes the U.S. Treasury to, among other
things, purchase up to $700 billion of mortgages, mortgage-backed securities,
and certain other financial instruments from financial institutions for the
purpose of stabilizing and providing liquidity to the U.S. financial markets.
The Company did not materially originate or invest in sub-prime assets and,
therefore, does not expect to participate in the sale of any of its assets into
these programs. EESA also immediately increased the FDIC deposit insurance limit
from $100,000 to $250,000 through December 31, 2009.




On
October 14, 2008, the U.S. Department of Treasury (the “Treasury”) announced
that it will purchase equity stakes in a wide variety of banks and thrifts.
Under this program, known as the Troubled Asset Relief Program Capital Purchase
Program (the "TARP CPP"), the Treasury made $250 billion of capital available
(from the $700 billion authorized by the EESA) to U.S. financial institutions in
the form of preferred stock. In conjunction with the purchase of preferred
stock, the Treasury will receive warrants to purchase common stock with an
aggregate market price equal to 15% of the preferred
investment.  Participating financial institutions will be required to
adopt the Treasury's standards for executive compensation and corporate
governance for the period during which the Treasury holds equity issued under
the TARP CPP.  On January 20, 2009, the Company announced that it
completed the sale of $18.98 million in preferred stock to the Treasury in
connection with Carver’s participation in the TARP CPP. Importantly, Carver is
exempt from the requirement to issue a warrant to the Treasury to purchase
shares of common stock, as the Bank is a certified Community Development
Financial Institution (“CDFI”), conducting most of its depository and lending
activities in disadvantaged communities. Therefore the investment will not
dilute current common stock stockholders.




On
January 16, 2009, Carver issued 18,980 shares of Fixed Rate Cumulative Perpetual
Preferred Stock, Series A, with a liquidation preference of $1,000 per share.
The preferred stock investment represents $18.98 million dollars, or
approximately 3 percent of Carver's risk weighted assets as of December 31, 2008
and on a pro-forma basis as of  December 31, 2008 including capital
received, the Bank’s capital ratios exceeded minimum regulatory capital
requirements. The Treasury investment will substantially increase the Bank's
capital ratios as provided below, producing a tangible capital ratio of 9.97%;
core capital ratio of 9.99%; and risk-based capital ratio of 13.22%.




Proforma
      Capital Calculation at December 31,2008Tangible
      Equity
                      
                      
                      Core
      Capital
                      
                      
                      Risk-Based
      CapitalAmount
                      
                      
                      %
      of Adj.
                        Assets
                      
                      
                      Amount
                      
                      
                      %
      of Adj.
                        Assets
                      
                      
                      Amount
                      
                      
                      %
      of Adj.
                        AssetsCapital
      level
                      
                      $
                      60,736
                      
                      
                      
                      7.69
                      %
                      
                      $
                      60,883
                      
                      
                      
                      7.71
                      %
                      
                      $
                      66,395
                      
                      
                      
                      10.40
                      %TARP
                      
                      
                      18,000
                      
                      
                      
                      2.28
                      %
                      
                      
                      18,000
                      
                      
                      
                      2.28
                      %
                      
                      
                      18,000
                      
                      
                      
                      2.82
                      %TARP
      Adjusted Capital level
                      
                      
                      78,736
                      
                      
                      
                      9.97
                      %
                      
                      
                      78,883
                      
                      
                      
                      9.99
                      %
                      
                      
                      84,395
                      
                      
                      
                      13.22
                      %Less
      required capital level
                      
                      
                      11,845
                      
                      
                      
                      1.50
                      %
                      
                      
                      31,593
                      
                      
                      
                      4.00
                      %
                      
                      
                      51,077
                      
                      
                      
                      8.00
                      %Excess
      capital
                      
                      $
                      66,891
                      
                      
                      
                      8.47
                      %
                      
                      $
                      47,290
                      
                      
                      
                      5.99
                      %
                      
                      $
                      33,318
                      
                      
                      
                      5.22
                      %


New
Markets Tax Credit Award





In June
2006, Carver Federal was selected by the Treasury to receive an award of $59.0
million in New Markets Tax Credits (“NMTC”).  The NMTC award is used
to stimulate economic development in low- to moderate-income
communities.  The NMTC award enables the Bank to invest with community
and development partners in economic development projects with attractive terms
including, in some cases, below market interest rates, which may have the effect
of attracting capital to underserved communities and facilitating the
revitalization of the community, pursuant to the goals of the NMTC
program.  The NMTC award provides a credit to Carver Federal against
Federal income taxes when the Bank makes qualified investments.  The
credits are allocated over seven years from the time of the qualified
investment.  Recognition of the Bank’s NMTC award began in December
2006 when the Bank invested $29.5 million, one-half of its $59.0 million
award.  In December 2007, the Bank invested an additional $10.5
million and transferred rights to $19.2 million to an investor in a NMTC
project.  The Bank’s NMTC allocation was fully invested as of December
31, 2007.  During the seven year period, assuming the Bank meets
compliance requirements, the Bank will receive 39% of the $40.0 million invested
award amount in tax benefits (5% over each of the first three years, and 6% over
each of the next four years).  The Company expects to receive the
remaining NMTC tax benefit of approximately $10.6 million from its $40.0 million
investment over the period ending March 31, 2014.  For the three
months ended December 31, 2008, the Company recognized a tax benefit of $0.5
million related to the NMTC award


16
 Table of Contents


The
Bank’s subsidiary, CCDC, was formed to facilitate its participation in local
economic development and other community-based activities.  As part of
its operations, CCDC monitors the portfolio of investments related to the
$59.0 million NMTC award.  For financial reporting purposes, the $19.2
million transfer of rights to an investor in a NMTC project is reflected in the
other assets and minority interest sections of the balance sheet as the entity
to which the rights were transferred is required to be consolidated under
accounting standards based on an evaluation of certain contractual arrangement's
between the Company and the investor.  Under these arrangements, the
Company has a contingent obligation to reimburse the investor for any loss or
shortfall incurred as a result of the NTMC project being not in compliance with
certain regulations that would void the investor’s ability to otherwise utilize
tax credits stemming from the award.  The maximum possible loss to Carver
from such an arrangement is approximately $7.4 million.  At December 31,
2008 Carver has not recorded any liability with respect to this obligation in
accordance with Statement No. 5.





Critical
Accounting Policies





Note 1 to
the Company’s audited Consolidated Financial Statements for fiscal 2008 included
in its 2008 Form 10-K, as supplemented by this report, contains a summary of
significant accounting policies and is incorporated by reference.  The
Company believes its policies, with respect to the methodology for determining
the allowance for loan losses and asset impairment judgments, including other
than temporary declines in the value of the Company’s investment securities, and
goodwill impairment 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 the Company’s 2008 Form 10-K.





The
judgments used by management in applying the critical accounting policies
discussed below may be affected by a further and prolonged deterioration in the
economic environment, which may result in changes to future financial results.
Specifically, subsequent evaluations of the loan portfolio, in light of the
factors then prevailing, may result in significant changes in the allowance for
loan losses in future periods, and the inability to collect on outstanding loans
could result in increased loan losses. In addition, the valuation of certain
securities in our investment portfolio could be negatively impacted by
illiquidity or dislocation in marketplaces resulting in significantly depressed
market prices thus leading to further impairments.





Goodwill
Impairment





At
September 30, 2008, the company reported Goodwill from its acquisition of
Community Capital Bank in 2006 in the amount of $6.4 million.  In
accordance with Statement of Financial Accounting Standards No.142, “Goodwill
and Other Intangible Assets” (“SFAS No.142”) goodwill and intangible assets with
indefinite useful lives are no longer amortized, rather they are assessed, at
least annually, for impairment.  The Company tests goodwill for
impairment on an annual basis as of January 31, or more often if events or
circumstances indicate there may be impairment.  The Company has
determined that all of its activities constitute one reporting and operating
segment.





As
outlined in SFAS No.142 the Goodwill impairment analysis involves a two-step
test.  The first step, used to identify potential impairment, involves
comparing the fair value of the reporting unit to its carrying value including
goodwill.  If the fair value of the reporting unit exceeds its
carrying value, goodwill is not considered impaired.  If the carrying
value exceeds fair value, there is an indication of impairment and the second
step is performed to measure the amount of impairment.  The second
step involves calculating an implied fair value of goodwill for the reporting
unit, in the same manner as the amount of goodwill recognized in a business
combination, which is the excess of the fair value of the reporting unit, as
determined in the first step, over the aggregate fair values of the individual
assets, liabilities and identifiable intangibles as if the reporting unit was
being acquired in a business combination.  If the implied fair value
of goodwill exceeds the carrying value of reporting unit goodwill, there is no
impairment.  If the carrying value of reporting unit goodwill exceeds
the implied fair value of the goodwill, an impairment charge is recorded in
earnings for the excess.  Subsequent reversal of goodwill impairment
losses is not permitted.





The
Company commenced an interim goodwill impairment analysis during the second
quarter of fiscal year 2009, based on indications that the fair value of the
Company’s reporting unit may have declined below its carrying value as a result
of factors previously defined such as the further decline in the Company’s
market capitalization relative to the book value of shareholders’ equity and the
adverse market conditions impacting the financial services sector generally.
This analysis, which incorporates the second step test noted above, was not
completed as of the date of filing the second quarter fiscal 2009
10-Q.   The Company completed its interim impairment analysis
during the third quarter ended December 31, 2008. A valuation specialist was
engaged to assist management in its fair value assessment of goodwill. As a
result of the finalization of the goodwill impairment analysis the Company
determined that Goodwill was impaired and recorded an impairment charge of $6.4
million.


17
 Table of Contents


Securities
Impairment




The
Bank’s available-for-sale securities portfolio is carried at estimated fair
value, with any unrealized gains and losses, net of taxes, reported as
accumulated other comprehensive income/loss in stockholders’
equity.  Securities that the Bank has the positive intent and ability
to hold to maturity are classified as held-to-maturity and are carried at
amortized cost.  The fair values of securities in the portfolio are
based on published or securities dealers’ market values and are affected by
changes in interest rates.  The Bank periodically reviews and
evaluates the securities portfolio to determine if the decline in the fair value
of any security below its cost basis is other-than-temporary.  The
Bank generally views changes in fair value caused by changes in interest rates
as temporary, which is consistent with its experience.  However, if
such a decline is deemed to be other-than-temporary, the security is written
down to a new cost basis and the resulting loss is charged to
earnings.  At December 31, 2008, the Bank carried only temporarily
impaired securities where the fair value of the security is below its cost
basis.  It is management’s belief that the Bank’s securities portfolio
consists of investments that are sound and will fully recover their value prior
to maturity.  The portfolio has already shown indications of
recovery.





Allowance
for Loan Losses





The
allowance for loan losses is maintained at a level considered adequate to
provide for probable loan losses inherent in the portfolio as of December 31,
2008.  The increase in reserve is principally attributable to an
increase in the general reserve provision based upon the Company’s assessment of
current economic conditions and to a lesser extent, an increase in the actual
recent loss experience for business loans.  During the third quarter
of fiscal 2008, Carver changed its loan loss methodology for specifically
classified loans to be consistent with the Interagency Policy Statement on the
Allowance for Loan and Lease Losses released by the Federal Financial Regulatory
Agencies on December 13, 2006.  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.





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





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





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





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





·           Evaluation
of any changes in risk profile brought about by business combinations, customer
knowledge, the results of ongoing credit quality monitoring processes and the
cyclical nature of economic and business conditions.  An important
consideration in performing this evaluation is the concentration of real estate
related loans located in the New York City metropolitan area.





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


18
 Table of Contents


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





·
            Amount
      and trend of criticized loans;


·
            Actual
      losses;


·
            Peer
      comparisons with other financial institutions;
  and


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





A loan is
considered to be impaired, as defined by SFAS No.  114, “Accounting by Creditors for
Impairment of a Loan” (“SFAS No.114”), when it is probable that the
Company will be unable to collect all principal and interest amounts due
according to the contractual terms of the loan agreement.  The Company
tests loans covered under SFAS No.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 No.114.  Impaired loans are required to be measured
based upon (i) the present value of expected future cash flows, discounted at
the loan’s initial effective interest rate, (ii) the loan’s market price, or
(iii) fair value of the collateral if the loan is collateral
dependent.  If the loan valuation is less than the recorded value of
the loan, an allowance must be established for the difference.  The
allowance is established by either an allocation of the existing allowance for
loan losses or by a provision for loan losses, depending on various
circumstances.  Allowances are not needed when credit losses have been
recorded so that the recorded investment in an impaired loan is less than the
loan valuation.





Stock
Repurchase Program





In August
2002, the Company’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.  As of
December 31, 2008, the Company has purchased a total of 176,174 shares at an
average price of $15.72.





As noted
in sections Recent Market Developments and “Item 1A, Risk Factors”, on January
16, 2009 the Company issued 18,980 shares of Fixed Rate Cumulative Perpetual
Preferred Stock, Series A with a liquidation preference of $1,000 per share to
the Treasury pursuant to its participation in the TARP CPP. Among the conditions
of the Treasury’s investment in the Company is a prohibition of stock
repurchases by the Company during the time the Treasury holds the preferred
stock, unless prior approval of the Treasury is obtained. Accordingly, Carver’s
stock repurchase program has been suspended.





Liquidity
and Capital Resources





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





The
Company monitors its liquidity utilizing guidelines that are contained in a
policy developed by its management and approved by its Board of
Directors.  The Company’s several liquidity measurements are evaluated
on a frequent basis.  The Company was in compliance with this policy
as of December 31, 2008.  Management believes the Company’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 Company 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
certain mortgage loans.  At December 31, 2008, based on available
collateral held at the FHLB-NY, the Company had the ability to borrow from the
FHLB-NY an additional $20.9 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 nine months
ended December 31, 2008, total cash and cash equivalents decreased by $5.5
million reflecting cash used in investing activities of $12.8 million and
financing activities of $1.2 million, offset by cash provided by operating
activities of $8.5 million.


19
 Table of Contents


Net cash
used in investing activities was $12.8 million, primarily represents cash
disbursed to fund mortgage loan originations of $103.3 million and purchases of
available-for-sale securities of $12.4 million, offset partially by principal
collections on loans of $99.4 million and proceeds from principal payments,
maturities and calls of securities of $5.3 million.  Net cash used in
financing activities was $1.2 million, primarily resulting from decreased
deposits of $33.1 million, offset partially by an increase in borrowings of
$32.9 million.  Net cash provided by operating activities during this
period was $8.5 million, primarily due to a decrease in other assets of $3.2
million.





The
levels of the Company’s short-term liquid assets are dependent on Carver
Federal’s operating, investing and financing activities during any given
period.  The most significant liquidity challenge the Bank faces is
variability in its cash flows as a result of mortgage refinance
activity.  When mortgage interest rates decline, customers’ refinance
activities tend to accelerate, causing the cash flow from both the mortgage loan
portfolio and the mortgage-backed securities portfolio to
accelerate.  In contrast, when mortgage interest rates increase,
refinance activities tend to slow, causing a reduction of
liquidity.  However, in a rising rate environment, customers generally
tend to prefer fixed rate mortgage loan products over variable rate
products.





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 December 31,
2008, the Bank exceeded all regulatory minimum capital requirements and
qualified, under OTS regulations, as a well-capitalized
institution.  The table below presents certain information relating to
the Bank’s regulatory capital compliance at December 31, 2008 (dollars in
thousands):




Tangible
      Equity
                                  
                                  
                                  Core
      Capital
                                  
                                  
                                  Risk-Based
      CapitalAmount
                                  
                                  
                                  %
      of Adj.
                                    Assets
                                  
                                  
                                  Amount
                                  
                                  
                                  %
      of Adj.
                                    Assets
                                  
                                  
                                  Amount
                                  
                                  
                                  %
      of Adj.
                                    AssetsCapital
      level
                                  
                                  $
                                  60,736
                                  
                                  
                                  
                                  7.69
                                  %
                                  
                                  $
                                  60,883
                                  
                                  
                                  
                                  7.71
                                  %
                                  
                                  $
                                  66,395
                                  
                                  
                                  
                                  10.40
                                  %Less
      required capital level
                                  
                                  
                                  11,845
                                  
                                  
                                  
                                  1.50
                                  %
                                  
                                  
                                  31,593
                                  
                                  
                                  
                                  4.00
                                  %
                                  
                                  
                                  51,077
                                  
                                  
                                  
                                  8.00
                                  %Excess
      capital
                                  
                                  $
                                  48,891
                                  
                                  
                                  
                                  6.19
                                  %
                                  
                                  $
                                  29,290
                                  
                                  
                                  
                                  3.71
                                  %
                                  
                                  $
                                  15,318
                                  
                                  
                                  
                                  2.40
                                  %


Comparison
of Financial Condition at December 31, 2008 and March 31, 2008





Assets





At
December 31, 2008 total assets decreased $6.3 million, or 0.8%, to $789.9
million compared to $796.1 million at March 31, 2008, primarily as a result of
decreases in cash and cash equivalents of $5.5 million, goodwill of $6.4 million
and other assets of $4.0 million, partially offset by increases in total net
loans receivable of  $3.2 million and investment securities of $7.4
million.





Cash and
cash equivalents decreased $5.5 million, or 20.0%, to $21.9 million at December
31, 2008 compared to $27.4 million at March 31, 2008, primarily due to a $10.5
million decrease in federal funds sold offset by a $5.0 million increase in cash
and due from banks. The decrease in cash and cash equivalents is the result of
the Bank using excess liquidity to purchase higher yielding securities as a
result of the significant decline in federal funds rates.





Total
securities increased $7.4 million, or 19.5%, to $45.6 million at December 31,
2008 compared to $38.2 million at March 31, 2008, reflecting an increase of $8.6
million in available-for-sale securities and a $1.1 million decrease in
held-to-maturity securities. Available-for-sale securities increased $8.6
million, or 41.1%, to $29.4 million at December 31, 2008 compared to $20.9
million at March 31, 2008, primarily due to purchases of Agency securities of
$12.4 million. Held to maturity securities decreased $1.1 million, or 6.6%, to
$16.2 million at December 31, 2008 compared to $17.3 million at March 31, 2008,
primarily due to collection of normal principal repayments and maturities of
securities. Additionally, the Bank continues its strategy of reducing lower
yielding securities and replacing them with higher yielding loans. However, the
Bank may invest in securities from time to time to help diversify its asset
portfolio, manage liquidity and satisfy collateral requirements for certain
deposits. There were no purchases of securities during the quarter ended
December 31, 2008.





Total
loans receivable, net including loans held-for-sale, increased $1.1 million, or
0.2%, to $652.7 million at December 31, 2008 compared to $651.7 million at March
31, 2008.  The increase was primarily the result of an increase in
commercial real estate loans of $26.7 million and an increase in commercial
business loans of $3.4 million, offset by decreases in one- to four- family
loans of $16.2 million and construction loans of $11.4 million. The Bank
continues to grow its loan portfolio through focusing on origination of
loans in the markets it serves and will continue to augment these
originations with loan participations.


20
 Table of Contents


At
December 31, 2008, construction loans represented 22.6% of the Bank’s total loan
portfolio. Approximately 68% of the Bank’s construction loans are participations
in loans originated by the Community Preservation Corporation (“CPC”). CPC
is a non-profit mortgage lender whose mission is to enhance the quality and
quantity of affordable housing in the New York, New Jersey, and Connecticut
tri-state area. The Bank’s construction lending activity is concentrated in the
New York City market.





Although
the New York City real estate market continues to be resilient relative to other
real estate markets in certain parts of the U.S., the local economic
environment may face challenges created by job losses on Wall Street and
continued constraint in credit markets. This quarter is the first to reflect
some deterioration in real estate and business conditions in New York
City.  The Bank will continue to closely monitor trends.





Other
assets decreased $4.0 million, or  9.5%, to $37.5 million at December
31,  2008, compared to $41.4 million at March 31, 2008, primarily due
to receipt of a settlement receivable of $8.2 million from the sale of certain
available for sale investments.





Liabilities
and Stockholders’ Equity





Liabilities





Total
liabilities decreased $0.5 million, or 0.1%, to $722.6 million at December 31,
2008 compared to $723.1 million at March 31, 2008. The decrease in total
liabilities was primarily the result of a $33.1 million reduction in
customer deposits, offset by an increase of $32.9 million in advances from the
FHLB-NY and other borrowed money. The Bank made a strategic decision to
allow higher cost certificates of deposit to run off and replaced them with
lower cost borrowings to take advantage of the lower rate environment for
borrowed money.





Deposits
decreased $33.1 million, or 5.1%, to $621.5 million at December 31, 2008
compared to $654.7 million at March 31, 2008. The decrease in deposit balances
was primarily the result of decreases in certificates of deposit of $23.5
million, savings accounts of $8.8 million, money market accounts of $0.3
million and demand accounts of $1.2 million, which were partially offset by
an increase of $1.9 million in NOW accounts.





Advances
from the FHLB-NY and other borrowed money increased $32.9 million, or 56.1%, to
$91.5 million at December 31, 2008 compared to $58.6 million at March 31,
2008. The increase in advances and other borrowed money was primarily the result
of an increase of $32.9 million in FHLB-NY advances. At December 31, 2008, based
on available collateral held at the FHLB-NY, the Bank had the ability to
borrow from the FHLB-NY an additional $20.9 million on a secured
basis.





Stockholders’
Equity





Total
stockholders’ equity decreased $5.8 million, or 10.7%, to $48.1 million at
December 31, 2008 compared to $53.9 million at March 31, 2008.  The
decrease in total stockholders’ equity was primarily attributable to a net loss
for the nine months ended December 31, 2008 totaling $5.2 million, dividends
paid of $0.7 million, partially offset by an increase of $0.1 million
of accumulated other comprehensive income.  The Bank’s capital
levels meet regulatory requirements of a well-capitalized financial
institution.





Asset/Liability
Management





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





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





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 obligations, including commitments to originate mortgage and
consumer loans and to fund unused lines of credit.




21
 Table of Contents


As of
December 31, 2008, the Bank had outstanding loan commitments as follows (in
thousands):




Commitments
      to fund construction mortgage loans
                          
                          $
                          61,192Commitments
      to commercial and consumer loans
                          
                          
                          4,516Lines
      of credit
                          
                          
                          15,248Letters
      of credit
                          
                          
                          4,236$
                          85,192





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 Federal’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.




22
 Table of Contents




CARVER
      BANCORP, INC. AND SUBSIDIARIESCONSOLIDATED
      AVERAGE BALANCES(Dollars
      in thousands)(Unaudited)Three
      months ended December 31,2008
                        
                        
                        2007Average
                        
                        
                        
                        
                        
                        Average
                        
                        
                        Average
                        
                        
                        
                        
                        
                        AverageInterest
      Earning Assets:
                        
                        Balance
                        
                        
                        Interest
                        
                        
                        Yield/Cost
                        
                        
                        Balance
                        
                        
                        Interest
                        
                        
                        Yield/Cost(Dollars
      in thousands)Loans
      (1)
                        
                        $
                        655,324
                        
                        
                        $
                        9,800
                        
                        
                        
                        5.98
                        %
                        
                        $
                        642,600
                        
                        
                        $
                        11,403
                        
                        
                        
                        7.10
                        %Mortgage-backed
      securities
                        
                        
                        44,636
                        
                        
                        
                        578
                        
                        
                        
                        5.18
                        %
                        
                        
                        38,317
                        
                        
                        
                        518
                        
                        
                        
                        5.41
                        %Investment
      securities (2)
                        
                        
                        6,382
                        
                        
                        
                        39
                        
                        
                        
                        2.42
                        %
                        
                        
                        21,439
                        
                        
                        
                        328
                        
                        
                        
                        6.07
                        %Federal
      funds sold
                        
                        
                        4,025
                        
                        
                        
                        4
                        
                        
                        
                        0.39
                        %
                        
                        
                        6,020
                        
                        
                        
                        68
                        
                        
                        
                        4.48
                        %Total
      interest earning assets
                        
                        
                        710,367
                        
                        
                        
                        10,421
                        
                        
                        
                        5.87
                        %
                        
                        
                        708,376
                        
                        
                        
                        12,317
                        
                        
                        
                        6.95
                        %Non-interest
      earning assets
                        
                        
                        76,436
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        61,406Total
      assets
                        
                        $
                        786,803
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        769,782Interest
      Bearing Liabilities:Deposits:Now
      Accounts
                        
                        $
                        25,820
                        
                        
                        $
                        13
                        
                        
                        
                        0.20
                        %
                        
                        $
                        26,003
                        
                        
                        
                        58
                        
                        
                        
                        0.88
                        %Savings
      and clubs
                        
                        
                        118,456
                        
                        
                        
                        145
                        
                        
                        
                        0.49
                        %
                        
                        
                        129,669
                        
                        
                        
                        282
                        
                        
                        
                        0.86
                        %Money
      market accounts
                        
                        
                        44,424
                        
                        
                        
                        218
                        
                        
                        
                        1.95
                        %
                        
                        
                        42,096
                        
                        
                        
                        352
                        
                        
                        
                        3.32
                        %Certificates
      of deposit
                        
                        
                        359,731
                        
                        
                        
                        2,627
                        
                        
                        
                        2.90
                        %
                        
                        
                        385,035
                        
                        
                        
                        4,364
                        
                        
                        
                        4.50
                        %Mortgagor's
      deposit
                        
                        
                        2,965
                        
                        
                        
                        14
                        
                        
                        
                        1.87
                        %
                        
                        
                        2,745
                        
                        
                        
                        13
                        
                        
                        
                        1.88
                        %Total
      deposits
                        
                        
                        551,396
                        
                        
                        
                        3,017
                        
                        
                        
                        2.17
                        %
                        
                        
                        585,548
                        
                        
                        
                        5,069
                        
                        
                        
                        3.43
                        %Borrowed
      money
                        
                        
                        101,996
                        
                        
                        
                        991
                        
                        
                        
                        3.85
                        %
                        
                        
                        71,416
                        
                        
                        
                        932
                        
                        
                        
                        5.18
                        %Total
      interest bearing liabilities
                        
                        
                        653,392
                        
                        
                        
                        4,008
                        
                        
                        
                        2.43
                        %
                        
                        
                        656,964
                        
                        
                        
                        6,001
                        
                        
                        
                        3.62
                        %Non-interest-bearing
      liabilities:Demand
                        
                        
                        52,442
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        50,117Other
      Liabilities
                        
                        
                        6,869
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        11,276Total
      liabilities
                        
                        
                        712,703
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        718,357Minority
      Interest
                        
                        
                        19,150
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Stockholders'
      equity
                        
                        
                        54,950
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        51,425Total
      liabilities and stockholders' equity
                        
                        $
                        786,803
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        769,782Net
      interest income
                        
                        
                        
                        
                        
                        $
                        6,413
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        6,316Average
      interest rate spread
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.44
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.33
                        %Net
      interest margin
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.61
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.57
                        %(1)
      Includes non-accrual loans(2)
      Includes FHLB-NY stock


23
 Table of Contents




CARVER
      BANCORP, INC. AND SUBSIDIARIESCONSOLIDATED
      AVERAGE BALANCES(Dollars
      in thousands)(Unaudited)Nine
      months ended December 31,2008
                        
                        
                        2007Average
                        
                        
                        
                        
                        
                        Average
                        
                        
                        Average
                        
                        
                        
                        
                        
                        AverageInterest
      Earning Assets:
                        
                        Balance
                        
                        
                        Interest
                        
                        
                        Yield/Cost
                        
                        
                        Balance
                        
                        
                        Interest
                        
                        
                        Yield/Cost(Dollars
      in thousands)Loans
      (1)
                        
                        $
                        656,636
                        
                        
                        $
                        30,093
                        
                        
                        
                        6.11
                        %
                        
                        $
                        633,335
                        
                        
                        $
                        33,579
                        
                        
                        
                        7.07
                        %Mortgage-backed
      securities
                        
                        
                        44,705
                        
                        
                        
                        1,742
                        
                        
                        
                        5.20
                        %
                        
                        
                        37,749
                        
                        
                        
                        1,494
                        
                        
                        
                        5.28
                        %Investment
      securities (2)
                        
                        
                        5,747
                        
                        
                        
                        209
                        
                        
                        
                        4.76
                        %
                        
                        
                        27,023
                        
                        
                        
                        1,183
                        
                        
                        
                        5.81
                        %Federal
      funds sold
                        
                        
                        4,060
                        
                        
                        
                        44
                        
                        
                        
                        1.44
                        %
                        
                        
                        3,049
                        
                        
                        
                        109
                        
                        
                        
                        4.74
                        %Total
      interest earning assets
                        
                        
                        711,148
                        
                        
                        
                        32,088
                        
                        
                        
                        6.02
                        %
                        
                        
                        701,156
                        
                        
                        
                        36,365
                        
                        
                        
                        6.91
                        %Non-interest
      earning assets
                        
                        
                        77,746
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        63,448Total
      assets
                        
                        $
                        788,894
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        764,604Interest
      Bearing Liabilities:Deposits:Now
      Accounts
                        
                        $
                        24,460
                        
                        
                        $
                        49
                        
                        
                        
                        0.27
                        %
                        
                        $
                        25,303
                        
                        
                        
                        116
                        
                        
                        
                        0.61
                        %Savings
      and clubs
                        
                        
                        121,904
                        
                        
                        
                        474
                        
                        
                        
                        0.52
                        %
                        
                        
                        133,296
                        
                        
                        
                        812
                        
                        
                        
                        0.81
                        %Money
      market accounts
                        
                        
                        45,125
                        
                        
                        
                        736
                        
                        
                        
                        2.16
                        %
                        
                        
                        44,822
                        
                        
                        
                        852
                        
                        
                        
                        2.52
                        %Certificates
      of deposit
                        
                        
                        373,143
                        
                        
                        
                        9,218
                        
                        
                        
                        3.28
                        %
                        
                        
                        362,265
                        
                        
                        
                        12,157
                        
                        
                        
                        4.45
                        %Mortgagor's
      deposit
                        
                        
                        2,887
                        
                        
                        
                        38
                        
                        
                        
                        1.75
                        %
                        
                        
                        2,786
                        
                        
                        
                        33
                        
                        
                        
                        1.57
                        %Total
      deposits
                        
                        
                        567,519
                        
                        
                        
                        10,515
                        
                        
                        
                        2.46
                        %
                        
                        
                        568,472
                        
                        
                        
                        13,970
                        
                        
                        
                        3.26
                        %Borrowed
      money
                        
                        
                        87,261
                        
                        
                        
                        2,699
                        
                        
                        
                        4.11
                        %
                        
                        
                        76,252
                        
                        
                        
                        2,962
                        
                        
                        
                        5.16
                        %Total
      interest bearing liabilities
                        
                        
                        654,780
                        
                        
                        
                        13,214
                        
                        
                        
                        2.68
                        %
                        
                        
                        644,724
                        
                        
                        
                        16,932
                        
                        
                        
                        3.49
                        %Non-interest-bearing
      liabilities:Demand
                        
                        
                        52,957
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        52,574Other
      Liabilities
                        
                        
                        7,548
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        11,753Total
      liabilities
                        
                        
                        715,285
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        709,051Minority
      Interest
                        
                        
                        19,150
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Stockholders'
      equity
                        
                        
                        54,459
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        55,553Total
      liabilities and stockholders' equity
                        
                        $
                        788,894
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        764,604Net
      interest income
                        
                        
                        
                        
                        
                        $
                        18,874
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        19,433Average
      interest rate spread
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.34
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.42
                        %Net
      interest margin
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.54
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.70
                        %(1)
      Includes non-accrual loans(2)
      Includes FHLB-NY stock


24
 Table of Contents


Comparison
of Operating Results for the Three Months and Nine Months Ended December 31,
2008 and 2007





Overview





The
Company reported a net loss of $6.5 million or a loss per share of ($2.63) for
the quarter ended December 31, 2008 compared to net income of $1.6 million and
diluted earnings per share of $0.62 for the prior year period.   The
net loss of $6.5 million for the quarter ended December 31, 2008 is the result
of an increase in non-interest expense of $6.1 million, primarily due to
the impairment charge of goodwill, as well as an increase in the provision for
loan losses of $0.2 million, offset by increases in net interest income of $0.1
million and an income tax benefit of $0.3 million.





Carver’s
net loss for the nine months ended December 31, 2008 was $5.2 million or a loss
per share of ($2.10) compared to net income of $3.5 million for the prior year
period and diluted earnings per share of $1.36 for the prior year
period.  The net loss of $5.2 million for the nine months ended
December 31, 2008 is the result of an increase in non-interest expense of $7.1
million,  primarily due to the impairment charge of goodwill as well as a
decrease in non-interest income of $1.3 million and an increase in provision for
loan losses of $0.5 million, offset by an increase in income tax benefit of
$1.1 million.





Selected
operating ratios for the three and nine months ended December 31, 2008 and 2007
are set forth in the table below and the following analysis discusses the
changes in components of operating results:







CARVER
      BANCORP, INC. AND SUBSIDIARIESSELECTED
      KEY RATIOS(Unaudited)Three
      Months Ended
                        
                        
                        Nine
      Months EndedSelected
      Financial Data:
                        
                        December
      31,
                        
                        
                        December
      31,2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Return
      on average assets (1)(8)
                        
                        NM
                        
                        
                        
                        0.82
                        %
                        
                        NM
                        
                        
                        
                        0.61
                        %Return
      on average equity (2)(8)
                        
                        NM
                        
                        
                        
                        12.27
                        
                        
                        NM
                        
                        
                        
                        8.36Net
      interest margin (3)
                        
                        
                        3.61
                        %
                        
                        
                        3.57
                        
                        
                        
                        3.54
                        %
                        
                        
                        3.70Interest
      rate spread (4)
                        
                        
                        3.44
                        
                        
                        
                        3.33
                        
                        
                        
                        3.34
                        
                        
                        
                        3.42Efficiency
      ratio (5)
                        
                        
                        101.61
                        
                        
                        
                        83.87
                        
                        
                        
                        95.66
                        
                        
                        
                        85.96Operating
      expenses to average assets (6)
                        
                        
                        6.36
                        
                        
                        
                        4.14
                        
                        
                        
                        4.05
                        
                        
                        
                        3.78Average
      equity toaverage assets
      (7)
                        
                        
                        6.98
                        
                        
                        
                        6.68
                        
                        
                        
                        6.90
                        
                        
                        
                        7.27Average
      interest-earning assets to average interest-bearing
      liabilities
                        
                        
                        1.09
                        x
                        
                        
                        1.08
                        x
                        
                        
                        1.06
                        x
                        
                        
                        1.09
                        x





(1) Net
income (loss), annualized, divided by average total assets.


(2) Net
income (loss), annualized, divided by average total equity.


(3) Net
interest income, annualized, divided by average interest-earning
assets.


(4)
Combined weighted average interest rate earned less combined weighted average
interest rate cost.


(5)
Non-interest expense excluding Goodwill impairment divided by sum of net
interest income plus non-interest income.


(6)
Non-interest expense excluding Goodwill impairment, annualized, divided by
average total assets.


(7) Total
average equity divided by total average assets for the period.


(8) Due
to net loss ratios are not meaningful




Interest Income





Interest
income decreased by $1.9 million, or 15.4%, to $10.4 million for the quarter
ended December 31, 2008 compared to $12.3 million for the prior year
period.  The decrease in interest income was primarily the result of
decreases in interest income on loans of $1.6 million and interest income on
investment securities of $0.3 million. The decrease in interest income reflects
a decrease in the yield on interest-earning assets of 108 basis points to 5.87%
for the quarter ended December 31, 2008 as compared to 6.95% for the prior year
period.  The decrease in yield on interest earning assets was
primarily the result of a 112 basis points decrease in the yield on loans as a
result of LIBOR and prime based construction loans repricing at lower rates. The
decrease in interest income was also the result of the decline in the average
balance of investment securities from $21.4 million in the prior year
period to $6.4 million in the quarter ended December 31, 2008 due to securities
maturing.


25
 Table of Contents


For the
nine month period ended December 31, 2008, interest income decreased $4.3
million, or 11.8%, to $32.1 million, compared to $36.4 million for the prior
year period. The decrease in interest income was primarily the result of
decreases in interest income on loans of $3.5 million and interest income on
investment securities of $1.0 million, offset by an increase in interest income
on mortgage-backed securities of $0.2  million. The decrease in
interest income reflects a decrease in the yield on interest-earning assets
of 89 basis points to 6.02% for the nine months ended December 31, 2008 as
compared to 6.91% for the prior year period.  The decrease in yield on
interest earning assets was primarily the result of a 96 basis points
decrease in the yield on loans as a result of LIBOR and prime rate based
construction loans repricing at lower rates. The decrease in interest income was
also the result of the decline in the average balance of investment securities
from $27.0 million in the prior year period to $5.7 million in the quarter ended
December 31, 2008 due to securities maturing.





Interest
income on loans decreased by $1.6 million, or 14.1%, to $9.8 million for the
quarter ended December 31, 2008 compared to $11.4 million for the prior year
period.  These results were primarily driven by a yield decrease of
112 basis points to 5.98% for the quarter ended December 31, 2008 compared to
7.10% for the prior year period, primarily due to lower yields on construction
and small business loans tied to Libor and Prime rate indices, which have fallen
by 460 and 400 basis points, respectively, since December 31, 2007, offset by an
increase in average loan balances of $12.7 million to $655.3 million for the
quarter ended December 31, 2008 compared to $642.6 million for the prior year
period.





For the
nine month period ending December 31, 2008, interest income on loans decreased
$3.5 million, or 10.4%, to $30.1 million compared to $33.6 million for the prior
year period.  This decrease was driven by a decrease in yield
of 96 basis points, offset by higher average loan balances of $23.3
million.





Interest
income on investment and mortgage backed securities decreased by $0.3 million,
or 27.1%, to $0.6 million for the quarter ended December 31, 2008 compared to
$0.8 million for the prior year period.  Interest income on investment
securities decreased by $0.3 million, or 88.1%, to $0.04 million for the three
months ended December 31, 2008 compared to $0.3 million for the prior year
period.  The decrease in interest income on investment securities for
the quarter ended December 31, 2008 was primarily the result of a $15.1 million,
or 70.2%, decrease in the average balances of investment securities to $6.4
million, from $21.4 million for the prior year period.  The net
decrease in the average balance of investment securities demonstrates
management’s commitment to invest proceeds received from the sale of lower
yielding securities and repayment of securities into higher yielding
assets.  The investment securities yield decreased by 365 basis points
to 2.42% for the quarter ended December 31, 2008 compared to 6.07% for the prior
year period.





Additionally,
the decrease in interest income on investment securities was partially offset by
an increase in mortgage-backed securities interest income of $0.06 million, or
12%, to $0.6 million for the quarter ended December 31, 2008 compared to $0.5
million for the prior year period.  The increase was primarily the
result of an increase in the average balances of mortgage-backed securities by
$6.3 million to $44.6 million for the quarter ended December 31, 2008 compared
to $38.3 million for the prior year period.





For the
nine month period ending December 31, 2008, interest income on investments and
mortgage backed securities decreased $0.7 million, or 27.1%, to $2.0 million
from $2.7 million for the prior year period.  The decrease in interest
income on investment securities for the nine month period ended December 31,
2008 was primarily the result of a $21.3 million, or 78.7%, decrease in the
average balances of investment securities to $5.7 million, from $27.0
million for the prior year period.  This was offset by an increase in
mortgage-backed securities of $7.0 million, or 18.4%, to $44.7 million for the
nine month period ended December 31, 2008 compared to $37.7 million for the
prior year period.  Interest income was also negatively affected by a
decline of 105 basis points in the yield on investment securities from 5.81% in
the prior year period to 4.76% in the current year period.





Interest
Expense





Interest
expense decreased by $2.0 million, or 33.2%, to $4.0 million for the quarter
ended December 31, 2008 as compared to $6.0 million for the prior year period.
The decrease in interest expense was primarily the result of decreases in
interest expense on deposits of $2.1 million. The decrease in interest expense
primarily reflects a 119 basis point decrease in the average cost of
interest-bearing liabilities to 2.43% for the quarter ended December 31, 2008
compared to 3.62% for the prior year period, partially offset by a decrease in
the average balance of interest-bearing liabilities of $3.6 million, or 0.54%,
to $653.4 million for the quarter ended December 31, 2008 compared to $657.0
million for the prior year period. The decrease in the yield on interest bearing
liabilities was primarily the result of higher cost certificates of deposits
repricing at lower rates as well as lower costs on short-term advances from the
Federal Home Loan Bank of New York (“FHLB-NY”).





For the
nine month period ended December 31, 2008, interest expense decreased by $3.7
million, or 22.0%, to $13.2 million, compared to $16.9 million for the prior
year period.  The decrease in interest expense resulted primarily from a 81
basis point decrease in the annualized average cost of interest-bearing
liabilities to 2.68%, compared to 3.49% for the prior year period, offset
partially by growth in the average balance of interest-bearing liabilities of
$10.1 million, or 1.6%, to $654.8 million compared to $644.7 million for the
prior year period.


26
 Table of Contents


Interest
expense on total deposits decreased $2.0 million, or 40.5%, to $3.0 million for
the quarter ended December 31, 2008 compared to $5.1 million for the prior year
period.  The decrease reflects a 126 basis point reduction in the
average cost of deposits to 2.17% for the quarter ended December 31, 2008
compared to 3.43% for the prior year period and a decrease in the average
balance of total deposits of $34.1 million to $551.4 million for the quarter
ended December 31, 2008 compared to $585.5 million for the prior year
period.





For the
nine month period ended December 31, 2008, total interest expense on deposits
decreased $3.5 million, or 24.7%, to $10.5 million from $14.0 million for the
prior year period.  The decrease reflects a 80 basis point reduction
in the average cost of total deposits to 2.46% compared to 3.26% for the
prior year period primarily as a result of lower pricing on certificates of
deposits. The cost of certificates of deposits declined from 4.45% in the prior
year period to 3.28% in the current year period, a reduction of 117 basis
points.





For the
nine month period ended December 31, 2008, interest expense on borrowed money
decreased $0.3 million, or 8.9%, to $2.7 million, compared to $3.0 million for
the prior year period.  In the nine months ended December 31,
2008, the decrease primarily reflects a 105 basis point reduction in the
average cost of borrowed money to 4.11% compared to 5.16% for the prior
year period, offset by an increase in the average balance of total borrowed
money outstanding of $11.0 million to $87.3 million compared to $76.3 million
for the prior year period.





Net
Interest Income before Provision for Loan Losses





Net
interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities.  Net interest
income depends primarily upon the volume of interest-earning assets and
interest-bearing liabilities and the corresponding interest rates earned and
paid.  Our net interest income is significantly impacted by changes in
interest rate and market yield curves.





Net
interest income before the provision for loan losses increased $0.1 million, or
1.6%, to $6.4 million for the quarter ended December 31, 2008 compared to $6.3
million for the prior year period.  This slight increase reflects the
increase in the net interest margin from 3.57% in the prior year period to
3.61% for the quarter ended December 31, 2008, mainly due to the cost of
interest-bearing liabilities repricing downward faster than interest-earning
assets during a falling interest rate environment.  The yield on
average interest-earning assets declined 108 basis points while the cost of
interest-bearing liabilities declined 119 basis points during the same period
resulting in a more favorable net interest margin.





For the
nine month period ended December 31, 2008, net interest income before the
provision for loan losses decreased by $0.6 million, or 2.9%, to $18.9 million,
compared to $19.4 million for the prior year period.  This decrease
reflects the decrease in the net interest margin from 3.70% in the prior
year period to 3.54% for the nine months ended December 31, 2008 as well as
higher increase in the average balance of interest-bearing liabilities as
compared to interest-earnings assets during the same period.





Provision
for Loan Losses and Asset Quality





The Bank
maintains an allowance for loan losses that management believes is sufficient to
absorb inherent losses in its loan portfolio.  The adequacy of the
allowance for loan and lease losses (“ALLL”) is determined by management’s
continuing review of the Bank’s loan portfolio, which includes the
identification and review of individual problem situations that may affect a
borrower’s ability to repay.   Management reviews the overall
portfolio quality through an analysis of delinquency and non-performing loan
data, estimates of the value of underlying collateral and current
charge-offs.  A review of regulatory examinations, an assessment of
current and expected economic conditions and changes in the size and composition
of the loan portfolio are all taken into consideration.  The ALLL
reflects management’s evaluation of the loans presenting identified loss
potential as well as the risk inherent in various components of the
portfolio.  As such, an increase in the size of the portfolio or any
of its components could necessitate an increase in the ALLL even though there
may not be a decline in credit quality or an increase in potential problem
loans.





The
Bank’s provision for loan loss methodology is consistent with the Interagency
Policy Statement on the Allowance for Loan and Lease Losses  (the
“Interagency Policy Statement”) released by the Federal Financial Regulatory
Agencies on December 13, 2006.   For additional information
regarding Carver Federal’s ALLL policy, refer to Note 2 of Notes to Consolidated
Financial Statements, “Summary of Significant Accounting Policies” included in
the Holding Company’s Annual Report on Form 10-K for the fiscal year ended March
31, 2008.


27
 Table of Contents


The
following table sets forth an analysis of Carver Federal’s allowance for loan
losses for the three and nine months period ended December 31, 2008 (dollars in
thousands):







Three
      Months Ended December 31, 2008
                        
                        
                        Nine
      Months Ended December 31, 2008Beginning
      Balance
                        
                        $
                        5,135
                        
                        
                        $
                        4,878Less
      charge-offs:Business
                        
                        
                        (54
                        )
                        
                        
                        (124
                        )Consumer
                        
                        
                        (9
                        )
                        
                        
                        (61
                        )Total
      Charge- Offs:
                        
                        
                        (63
                        )
                        
                        
                        (185
                        )Add  Recoveries:Consumer
                        
                        
                        9
                        
                        
                        
                        49Total
      Recoveries:
                        
                        
                        9
                        
                        
                        
                        49Provision
      for Loan Losses
                        
                        
                        431
                        
                        
                        
                        770Ending
      Balance
                        
                        $
                        5,512
                        
                        
                        $
                        5,512Ratios:Net
      charge-offs to average loans outstanding
                        
                        
                        0.01
                        %
                        
                        
                        0.02
                        %Allowance
      to total loans
                        
                        
                        0.84
                        %
                        
                        
                        0.84
                        %Allowance
      to non-performing loans (1)
                        
                        
                        40.19
                        %
                        
                        
                        40.19
                        %








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





The Bank
provided a $0.4 million loan loss provision for the quarter ended December 31,
2008 compared with $0.2 million provision for the prior year
period.  For the nine month period ended December 31, 2008, the Bank
provided a $0.8 million loan loss provision compared with $0.2 provision for the
prior year period.  The increase recognizes the rise in non-performing
loans reflecting indications of deterioration in the housing market and the New
York City economy. The Bank’s future level of non-performing loans will be
influenced by economic conditions, including the impact of those conditions on
the Bank’s customers, interest rates and other factors existing at the time. At
December 31, 2008 and March 31, 2008, the Bank’s allowance for loan losses was
$5.5 million and $4.9 million, respectively.  The ratio of the
allowance for loan losses to non-performing loans was 40.3% at December 31, 2008
compared to 170.9% at March 31, 2008.  The ratio of the allowance for
loan losses to total loans was 0.84% at December 31, 2008 compared to 0.74% at
March 31, 2008.





Non-performing
Assets





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


28
 Table of Contents


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





On
December 31, 2008, non-accrual loans totaled $13.7 million, or 2.08% of total
loans receivable compared to $2.9 million, or 0.43% of total loans receivable at
March 31, 2008. Non-performing assets include loans 90 days past due,
non-accrual loans and other real estate owned.





At
December 31, 2008, non-performing assets totaled $14.3 million, or 1.81% of
total assets compared to $4.0 million, or 0.50% of total assets at March 31,
2008.  Non-performing assets include loans 90 days past due,
non-accrual loans and other real estate owned.  The Company’s future
levels of non-performing loans will be influenced by economic conditions,
including the impact of those conditions on the Company’s customers, interest
rates and other internal and external factors existing at the
time.


29
 Table of Contents


The
following table sets forth information with respect to Carver Federal’s
non-performing assets for the past five quarter’s ended (dollars in
thousands):




December
      2008
                
                
                September
      2008
                
                
                June
                  2008
                
                
                March
                  2008
                
                
                December
      2007Loans
      accounted for on a non-accrual basis (1):Gross
      loans receivable:One-
      to four-family
                
                $
                3,185
                
                
                $
                1,671
                
                
                $
                871
                
                
                $
                567
                
                
                $
                1,442Multifamily
                
                
                -
                
                
                
                -
                
                
                
                3,322
                
                
                
                -
                
                
                
                -Non-residential
                
                
                6,550
                
                
                
                10,424
                
                
                
                -
                
                
                
                522
                
                
                
                522Construction
                
                
                -
                
                
                
                3,157
                
                
                
                -
                
                
                
                -
                
                
                
                -Business
                
                
                3,907
                
                
                
                2,185
                
                
                
                2,059
                
                
                
                1,708
                
                
                
                2,056Consumer
                
                
                46
                
                
                
                20
                
                
                
                -
                
                
                
                57
                
                
                
                192Total
      non-accrual loans
                
                
                13,688
                
                
                
                17,457
                
                
                
                6,252
                
                
                
                2,854
                
                
                
                4,212Accruing
      loans contractually past due > 90 days (2)
                
                
                25
                
                
                
                9,349
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      non-performing loans (non-accrual & accruing loans past due > 90
      days)
                
                
                13,713
                
                
                
                26,806
                
                
                
                6,252
                
                
                
                2,854
                
                
                
                4,212Other
      non-performing assets (3):Real
      estate owned
                
                
                610
                
                
                
                635
                
                
                
                142
                
                
                
                1,163
                
                
                
                147Total
      other non-performing assets
                
                
                610
                
                
                
                635
                
                
                
                142
                
                
                
                1,163
                
                
                
                147Total
      non-performing assets (4)
                
                $
                14,323
                
                
                $
                27,441
                
                
                $
                6,394
                
                
                $
                4,017
                
                
                $
                4,359Non-performing
      loans to total loans
                
                
                2.08
                %
                
                
                4.22
                %
                
                
                0.97
                %
                
                
                0.43
                %
                
                
                0.66
                %Non-performing
      assets to total assets
                
                
                1.81
                %
                
                
                3.47
                %
                
                
                0.81
                %
                
                
                0.50
                %
                
                
                0.52
                %





(1)  Non-accrual
status denotes any loan where the delinquency exceeds 90 days past due and in
the opinion of management the collection of additional interest is
doubtful.  Payments received on a non-accrual loan are either applied
to the outstanding principal balance or recorded as interest income, depending
on assessment of the ability to collect on the loan





(2)  This
category represent loans that are 90 days or more past maturity that are current
with respect to principal and interest payments.





(3)  Other
non-performing assets generally represent property acquired by the Bank in
settlement of loans (i.e., through foreclosure, repossession or as an
in-substance foreclosure).  These assets are recorded at the lower of
their fair value or the cost to acquire.





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





In regard
to the increase in non-performing loans, the Company has an effective loan
workout process that actively negotiates with the borrowers to bring resolution
to delinquent loans.  All loans are collateralized, with LTV of less
than 70%, and management is of the opinion that the collateral adequately
secures these loans.





Potential
Problem Loans





In
addition to non-performing loans, Carver's loan portfolio includes $11.1 million
in mortgages with payments that are 60-89 days delinquent, which decreased $1.4
million from $12.5 last quarter.  Management is actively working with
each borrower to bring these loans to a current status.


30
 Table of Contents


Subprime
Loans





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




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




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




·
            Limited
      or no documentation of borrowers’
income;




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




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






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




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




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




·
            Bankruptcy
      in the last 5 years;




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




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




The Bank
has minimal exposure to the subprime loan market and, therefore, it does not
expect the Statement to have a material impact on the Company.  At
December 31, 2008, the Bank’s loan portfolio contained $1.2 million in loans
that it considers subprime, which loans are non-performing, other than one loan
in the amount of $0.5 million.




Non-Interest
Income





Non-interest
income decreased by $2.0 million, or 62.4%, to $1.2 million for the quarter
ended December 31, 2008 compared to $3.2 million for the prior year
period.  The decrease was due to other income decreasing $1.6 million
as well as a $0.2 million loss on loans.  The decrease in other income
is primarily related to a $1.7 million fee generated by a New Markets Tax Credit
transaction in the prior year period. The loss on loans resulted primarily from
a write down of mortgage servicing rights due to the declining rate environment
which makes servicing rights less valuable.




For the
nine month period ended December 31, 2008, non-interest income decreased $1.3
million to $4.5 million compared to $5.8 million for the prior year
period.  The decrease is primarily related to other income decreasing
by $1 million due to $1.7 million fee generated by a New Markets Tax Credit
transaction in the prior year period.





Non-Interest
Expense





Non-interest
expense increased by $6.1 million, or 77.1%, to $14.1 million for the quarter
ended December 31, 2008 compared to $8.0 million for the prior year
period.  The increase was primarily due to the $6.4 million write down
of goodwill due to impairment, as well as increases in occupancy expense of $0.3
million and FDIC insurance of $0.2 million, offset by decreases in employee
compensation and benefits of $0.5 million and other expenses of $0.3 million.
The reduction in employee compensation and benefits expense was the result of
reduction in cost of employee benefit plans and employee headcount achieved
during the quarter ended December 31, 2008.





During
the nine month period ended December 31, 2008, non-interest expense increased
$7.1 million, or 32.7%, to $28.7 million compared to $21.7 million for the prior
year period.The increase in
non-interest expense was primarily due to the $6.4 million of write down of
goodwill for impairment as well as increases of  $0.6 million in
occupancy and equipment expense, $0.3 employee compensation and
benefits, FDIC insurance of $0.3 million and $0.2 million in equipment
expense, offset by a decrease in other expenses of $0.6 million. The reduction
in other expenses was primarily related to a reduction of consulting expenses
during the nine months ended December 31, 2008.


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Income
Tax Expense





The
income tax benefit was $0.5 million for the quarter ended December 31, 2008
compared to a tax benefit of $0.3 million for the prior year
period.  The tax benefit for the quarter ended December 31, 2008
reflects a tax benefit of $0.5 million for the NMTC transaction.





For the
nine month period ended December 31, 2008, the Bank recorded a tax benefit of
$1.3 million compared to income tax benefit of $0.2 million for the prior year
period. The tax benefit for the nine months ended December 31, 2008 reflects a
tax benefit of $1.5 million for the NMTC investment transaction offset by tax
expense of $0.2 million related to income before income taxes excluding the
effect of the goodwill impairment charge of $6.4 million.





The
Bank’s NMTC award was received in June 2006 and has been fully
invested.  The Company expects to receive additional NMTC tax benefits
of approximately $10.6 million from its $40.0 million investment through the
period ending March 31, 2014.




ITEM
      3.
            Quantitative and Qualitative Disclosure about Market
      Risk





Quantitative
and qualitative disclosure about market risk is presented at March 31, 2008 in
Item 7A of the Company’s 2008 Form 10-K and is incorporated herein by
reference.  The Company believes that there has been no material
change in the Company’s market risk at December 31, 2008 compared to March 31,
2008.





ITEM
      4.
            Controls and Procedures





(a)
Evaluation of Disclosure Controls and Procedures





The
Company maintains controls and procedures designed to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission.  As of December 31, 2008, the Company's management,
including the Company's Chief Executive Officer and acting Chief Accounting
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act), as of the end of the period covered by this report.  Based upon
that evaluation, the Chief Executive Officer and Controller concluded that the
Company's disclosure controls and procedures were not effective as of March 31,
2007 and that the Company’s consolidated financial statements could not be
relied on for the fiscal years ended March 31, 2007 and March 31, 2008 because a
material weakness related to the reconciliation and review of automatic clearing
house transactions and checks issued and received by the Bank’s
customers  existed during fiscal 2007.  All charges to
income occurred during the Company’s 2007 fiscal year.  The Company
has taken corrective action and shall file an amended Annual Report on Form 10-K
for fiscal 2008 that has been approved by our independent auditor as soon as
practicable





Disclosure
controls and procedures are the controls and other procedures that are designed
to ensure that information required to be disclosed in the reports that the
Company files or submits under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in the reports that the Company files or submits under the
Exchange Act is accumulated and communicated to management, including the Chief
Executive Officer and Controller, as appropriate, to allow timely decisions
regarding required disclosure.





(b)
Changes in Internal Control over Financial Reporting





Other
than as set forth below, there have not been any changes in the Company's
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to
which this report relates that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.  As disclosed in footnote 3 to the Company’s financial
statements in included in this Form 10-Q Carver implemented improvements to its
quarterly and annual accounting close process to provide for a more complete
review of its financial results.


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PART
      II.
            OTHER
      INFORMATION





ITEM
      1.
            Legal
      Proceedings





Disclosure
regarding legal proceedings to which the Company is a party is presented in Note
14 to the audited Consolidated Financial Statements in the 2008 Form 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 2008 Form
10-K.





ITEM
      1A.
            Risk
      Factors





For a
summary of risk factors relevant to the Company’s operations, see Part I, Item
1A, “Risk Factors,” in the Company’s 2008 Form 10-K.  There has been
no material change in risk factors relevant to the Company’s operations since
the filing of the 2008 Form 10-K as updated in the Company’s Quarterly Reports
on Form 10-Q for the fiscal quarters ended June 30, 2008 and September 30, 2008,
except as discussed below.





Results
of operations are affected by economic conditions in the New York metropolitan
area and nationally.





The
Company’s retail banking and a significant portion of our lending are
concentrated in the New York metropolitan area, which includes New York, New
Jersey and Connecticut.  As a result of this geographic
concentration, the Company’s results of operations largely depend upon
economic conditions in this area, although they also depend on economic
conditions in other areas.





We are
operating in a challenging and uncertain economic environment, both nationally
and locally.  Financial institutions continue to be affected by sharp
declines in the real estate market and constrained financial
markets.  Continued declines in real estate values, home sales volumes
and financial stress on borrowers as a result of the uncertain economic
environment, including job losses, could have an adverse effect on our borrowers
or their customers, which could adversely affect our financial condition and
results of operations.  In addition, the decreases in real estate
values could adversely affect the value of property used as collateral for our
loans.





The
banking industry has experienced increases in loan delinquencies in
2008.  A further deterioration in national and local economic
conditions, particularly in the New York metropolitan area, could have a
material adverse impact on the quality of Carver’s loan portfolio, which could
result in an increase in delinquencies, causing a decrease in our interest
income as well as an adverse impact on the Company loan loss experience, causing
an increase in its allowance for loan losses.  Such deterioration
could also adversely impact the demand for the Company’s products and services,
and, accordingly, its results of operations.





Changes
in laws, government regulation and monetary policy may have a material effect on
our results of operations.





Financial
institutions have been the subject of significant legislative and regulatory
changes and may be the subject of further significant legislation or regulation
in the future, none of which is within our control. Significant new laws or
regulations or changes in, or repeals of, existing laws or regulations,
including those with respect to federal and state taxation, may cause our
results of operations to differ materially.  In addition, the cost and
burden of compliance, over time, have significantly increased and could
adversely affect our ability to operate profitably.  Further, federal
monetary policy significantly affects credit conditions for the Company, as well
as for our borrowers, particularly as implemented through the Federal Reserve
System, primarily through open market operations in U.S. government securities,
the discount rate for bank borrowings and reserve requirements. A material
change in any of these conditions could have a material impact on the Company or
our borrowers, and therefore on our results of operations.





In
response to the financial crises affecting the banking system and financial
markets, the EESA was signed into law. Pursuant to the EESA, the Treasury has
the authority to, among other things, purchase up to $700 billion of troubled
assets (including mortgages, mortgage-backed securities and certain other
financial instruments) from financial institutions for the purpose of
stabilizing and providing liquidity to the U.S. financial
markets.  Subsequently, the Treasury, the FRB and the FDIC issued a
joint statement announcing additional steps aimed at stabilizing the financial
markets.  First, the Treasury announced the Capital Purchase Program,
a $250 billion voluntary capital purchase program available to qualifying
financial institutions that sell preferred shares to the Treasury. Second, the
FDIC announced that its Board of Directors, under the authority to prevent
“systemic risk” in the U.S. banking system, approved the TLGP, which is intended
to strengthen confidence and encourage liquidity in the banking system by
permitting the FDIC to (1) guarantee certain newly-issued senior unsecured debt
issued by participating institutions and (2) fully insure non-interest bearing
transaction deposit accounts held at participating FDIC-insured
institutions.  Third, to further increase access to funding for
businesses in all sectors of the economy, the FRB announced further details of
its Commercial Paper Funding Facility, which provides a broad backstop for the
commercial paper market.


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There can
be no assurance, however, as to the actual impact that the foregoing or any
other governmental program will have on the financial markets. The failure of
any such program or the U.S. government to stabilize the financial markets and a
continuation or worsening of current financial market conditions and the
national and regional economy is expected to materially and adversely affect our
business, financial condition, results of operations, access to credit and the
trading price of our common stock.





Pursuant
to Carver’s participation in the TARP CPP, the Company entered into certain
agreements with the Treasury that may limit our activities in a number of
ways.  For example, our ability to declare or pay dividends on any of
our shares will be limited.  Specifically, we will not be able to
declare dividends payments on common, junior preferred or pari passu preferred
shares if we are in arrears on the dividends on the senior preferred shares
issued to the Treasury.  Further, we will not be permitted to increase
dividends on our common stock without the Treasury’s approval until the third
anniversary of the investment unless the senior preferred stock issued to the
Treasury has been redeemed or transferred.  In addition, our ability
to repurchase our shares will be restricted. The Treasury’s consent generally
will be required for us to make any stock repurchase until the third anniversary
of the investment by the Treasury unless the senior preferred stock issued to
the Treasury has been redeemed or transferred.  Further, common,
junior preferred or pari passu preferred shares may not be repurchased if we are
in arrears on the dividends on the senior preferred shares issued to the
Treasury.





In
addition, we must also adopt the Treasury’s standards for executive compensation
and corporate governance for the period during which the Treasury holds equity
issued under this program.  These standards would generally apply to
our CEO, CFO and the three next most highly compensated officers.  The
standards include (1) ensuring that incentive compensation for senior executives
does not encourage unnecessary and excessive risks that threaten the value of
the financial institution; (2) required claw back of any bonus or incentive
compensation paid to a senior executive based on statements of earnings, gains
or other criteria that are later proven to be materially inaccurate; (3)
prohibition on making golden parachute payments to senior executives; and (4)
agreement not to deduct for tax purposes executive compensation in excess of
$500,000 for each senior executive.  In particular, the change to the
deductibility limit on executive compensation would likely increase the overall
cost of our compensation programs.





The FDIC
recently adopted a restoration plan and issued a notice of proposed rulemaking
and request for comment that would initially raise the assessment rate schedule,
uniformly across all four risk categories into which the FDIC assigns insured
institutions, by seven basis points (annualized) of insured deposits beginning
on January 1, 2009.  Under the proposed plan, beginning with the
second quarter of 2009, the initial base assessment rates will range from 10 to
45 basis points depending on an institution’s risk category, with adjustments
resulting in increased assessment rates for institutions with a significant
reliance on secured liabilities and brokered deposits.  Under the
proposal the FDIC may continue to adopt actual rates that are higher without
further notice-and-comment rulemaking subject to certain
limitations.  If the FDIC determines that assessment rates should be
increased, institutions in all risk categories could be affected.  The
FDIC has exercised this authority several times in the past and could continue
to raise insurance assessment rates in the future.  The increased
deposit insurance premiums proposed by the FDIC are expected to result in a
significant increase in our non-interest expense, which will have a material
impact on our results of operations beginning in 2009.





We expect
to face increased regulation and supervision of our industry as a result of the
existing financial crisis, and there will be additional requirements and
conditions imposed on us to the extent that we participate in any of the
programs established or to be established by the Treasury under the EESA or by
the federal bank regulatory agencies. Such additional regulation and supervision
may increase our costs and limit our ability to pursue business
opportunities.







ITEM
      2.
            Issuer
      Purchases of Equity
Securities





During
the quarter ended December 31, 2008, the Company purchased no additional shares
of its common stock under its stock repurchase program.  As of
December 31, 2008, the Company has purchased a total of 176,174 shares at an
average price per share of $15.72.




ITEM
      3.
            Defaults Upon Senior
Securities





Not
applicable.




ITEM
      4.
            Submissionof Matters to a Vote of Security
      Holders




Not
applicable.




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ITEM
      5.
            Other
      Information





Carver
Federal, through its affiliation with Merrill Lynch & Co., began offering a
comprehensive range of wealth management products of its customers in April of
2007. The Company and Merrill Lynch & Co. have agreed to terminate this
alliance on or before May 31, 2009.




Exhibits
10.1, 10.2, 10.3 and 10.4 have been amended in connection with the Company’s
participation in TARP CPP and Exhibits 10.1 and 10.2 were also amended to comply
with the requirements of Section 409A of the Internal Revenue Code of 1986, as
amended.




ITEM
      6.
            Exhibits




The
following exhibits are submitted with this report:






Exhibit 10.1
            Amendments
      to the Carver Bancorp Inc. 2006 Stock Incentive
  Plan.




Exhibit 10.2
            Amendments
      to the Carver Bancorp Inc. Performance Compensation
  Plan




Exhibit 10.3
            First
      Amendment to the Employment Agreement entered into as of June 1, 1999
      between Carver Bancorp, Inc. and Deborah C.
  Wright




Exhibit 10.4
            First
      Amendment to the Employment Agreement entered into as of June 1, 1999
      between Carver Federal Savings Bank and Deborah C.
  Wright




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




Exhibit 31.1
            Certification
      of Chief Executive Officer.




Exhibit 31.2
            Certification
      of Chief Accounting Officer.




Exhibit 32.1
            Certification
      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
            Certification
      of Chief Accounting Officer furnished pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002, 18 U.S.C.  Section
    1350.


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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:
      February 17,
      2009
                  /s/ Deborah
      C.  WrightDeborah
      C.  WrightChairman
      and Chief Executive Officer(Principal
      Executive Officer)Date:
      February 17,
      2009
                  /s/ Michael A. TrinidadMichael
      A. TrinidadSenior
      Vice President and Controller(Principal
      Financial and Accounting
Officer)






36