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 June 30, 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
            
            2,472,582Class
            
            Outstanding
      at August 12, 2008















TABLEOF CONTENTS





PagePART
      I. FINANCIAL
      INFORMATIONItem
      1.
            
            Financial
      StatementsConsolidated Statements of Financial Condition as of June 30,
      2008 (unaudited) and March 31, 2008
            2Consolidated Statements of Income for the Three Months Ended
      June 30, 2008 and 2007 (unaudited)
            3Consolidated Statement of Changes in Stockholders’ Equity and
      Comprehensive Income for the Three Months Ended June 30, 2008
      (unaudited)
            4Consolidated Statements of Cash Flows for the Three Months
      Ended June 30, 2008 and 2007 (unaudited)
            5Notes to Consolidated Financial Statements
      (unaudited)
            6Item
      2.
            
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            12Item
      3.
            
            Quantitative and Qualitative Disclosures About Market
      Risk
            24Item
      4.
            
            Controls and Procedures
            24PART
      II. OTHER
      INFORMATIONItem
      1.
            
            Legal Proceedings
            25Item
      1A.
            
            Risk Factors
            25Item
      2.
            
            Issuer Purchases of Equity Securities
            25Item
      3.
            
            Defaults Upon Senior Securities
            25Item
      4.
            
            Submission of Matters to a Vote of Security
      Holders
            25Item
      5.
            
            Other Information
            26Item
      6.
            
            Exhibits
            26SIGNATURES
            26EXHIBITS





1
 Table of Contents





CARVERBANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION


(In
thousands, except per share data)





June
      30,
            
            
            March
      31,2008
            
            
            2008(unaudited)ASSETSCash
      and cash equivalents:Cash
      and due from banks
            
            $
            15,105
            
            
            $
            15,920Federal
      funds sold
            
            
            -
            
            
            
            10,500Interest
      earning deposits
            
            
            948
            
            
            
            948Total
      cash and cash equivalents
            
            
            16,053
            
            
            
            27,368Securities:Available-for-sale,
      at fair value (including pledged as collateral of $30,256 and $20,621at  June
      30 and March 31, 2008, respectively)
            
            
            31,164
            
            
            
            20,865Held-to-maturity,
      at amortized cost (including pledged as collateral of $16,440
      and  $16,643 at  June 30 and March 31, 2008,
      respectively; fair value of $16,497 and $17,493 at  June 30
      and March 31, 2008, respectively)
            
            
            16,629
            
            
            
            17,307Total
      securities
            
            
            47,793
            
            
            
            38,172Loans
      held-for-sale
            
            
            23,011
            
            
            
            23,767Loans
      receivable:Real
      estate mortgage loans
            
            
            579,497
            
            
            
            578,957Commercial
      business loans
            
            
            54,036
            
            
            
            52,109Consumer
      loans
            
            
            1,770
            
            
            
            1,728Allowance
      for loan losses
            
            
            (5,032
            )
            
            
            (4,878
            )Total
      loans receivable, net
            
            
            630,271
            
            
            
            627,916Office
      properties and equipment, net
            
            
            15,759
            
            
            
            15,780Federal
      Home Loan Bank of New York stock, at cost
            
            
            2,267
            
            
            
            1,625Bank
      owned life insurance
            
            
            9,231
            
            
            
            9,141Accrued
      interest receivable
            
            
            3,792
            
            
            
            4,063Goodwill
            
            
            6,370
            
            
            
            6,370Core
      deposit intangibles, net
            
            
            494
            
            
            
            532Other
      assets
            
            
            33,671
            
            
            
            41,859Total
      assets
            
            $
            788,712
            
            
            $
            796,593LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilities:Deposits
            
            $
            633,464
            
            
            $
            654,663Advances
      from the FHLB-New York and other borrowed money
            
            
            72,632
            
            
            
            58,625Other
      liabilities
            
            
            9,018
            
            
            
            9,772Total
      liabilities
            
            
            715,114
            
            
            
            723,060Minority
      interest
            
            
            19,150
            
            
            
            19,150Stockholders'
      equity:Common
      stock (par value $0.01 per share: 10,000,000 shares authorized; 2,524,691
      shares issued; 2,479,382 and 2,481,706 shares outstanding at June 30 and
      March 31, 2008, respectively)
            
            
            25
            
            
            
            25Additional
      paid-in capital
            
            
            24,091
            
            
            
            24,113Retained
      earnings
            
            
            30,941
            
            
            
            30,490Treasury
      stock, at cost (45,309 and 42,985 shares at June 30 and March 31, 2008,
      respectively)
            
            
            (661
            )
            
            
            (670
            )Accumulated
      other comprehensive income
            
            
            52
            
            
            
            425Total
      stockholders' equity
            
            
            54,448
            
            
            
            54,383Total
      liabilities and stockholders' equity
            
            $
            788,712
            
            
            $
            796,593





See
accompanying notes to unaudited consolidated financial statements





2
 Table of Contents





CARVERBANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME


(In
thousands, except per share data)


(Unaudited)




Three
      Months EndedJune
      30,2008
            
            
            2007Interest
      income:Loans
            
            $
            10,453
            
            
            $
            10,993Mortgage-backed
      securities
            
            
            561
            
            
            
            502Investment
      securities
            
            
            66
            
            
            
            462Federal
      funds sold
            
            
            39
            
            
            
            11Total
      interest income
            
            
            11,119
            
            
            
            11,968Interest
      expense:Deposits
            
            
            4,139
            
            
            
            4,331Advances
      and other borrowed money
            
            
            722
            
            
            
            984Total
      interest expense
            
            
            4,861
            
            
            
            5,315Net
      interest income
            
            
            6,258
            
            
            
            6,653Provision
      for loan losses
            
            
            169
            
            
            
            -Net
      interest income after provision for loan losses
            
            
            6,089
            
            
            
            6,653Non-interest
      income:Depository
      fees and charges
            
            
            668
            
            
            
            630Loan
      fees and service charges
            
            
            417
            
            
            
            379Gain
      on sale of loans
            
            
            247
            
            
            
            47Other
            
            
            416
            
            
            
            81Total
      non-interest income
            
            
            1,748
            
            
            
            1,137Non-interest
      expense:Employee
      compensation and benefits
            
            
            3,414
            
            
            
            3,173Net
      occupancy expense
            
            
            1,016
            
            
            
            836Equipment,
      net
            
            
            615
            
            
            
            592Other
            
            
            2,290
            
            
            
            1,903Total
      non-interest expense
            
            
            7,335
            
            
            
            6,504Income
      before income taxes and minority interest
            
            
            502
            
            
            
            1,286Income
      tax (benefit) expense
            
            
            (322
            )
            
            
            143Minority
      interest
            
            
            138
            
            
            
            -Net
      income
            
            $
            686
            
            
            $
            1,143Earnings
      per common share:Basic
            
            $
            0.28
            
            
            $
            0.46Diluted
            
            $
            0.27
            
            
            $
            0.44





See
accompanying notes to unauditedconsolidated financial
statements





3
 Table of Contents





CARVERBANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY


AND
COMPREHENSIVE INCOME


FOR
THE THREE MONTHS ENDED JUNE 30, 2008


(In
thousands)


(Unaudited)





Common
      Stock
            
            
            Additional
      Paid-In Capital
            
            
            Treasury
      Stock
            
            
            Retained
      Earnings
            
            
            Accumulated
      Other Comprehensive Income (Loss)
            
            
            Total
      Stock-Holders’ EquityBalance—March
      31, 2008
            
            $
            25
            
            
            $
            24,113
            
            
            $
            (670
            )
            
            $
            30,490
            
            
            $
            425
            
            
            $
            54,383Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            686
            
            
            
            -
            
            
            
            686Change
      in accumulated other comprehensive income, net of taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (373
            )
            
            
            (373
            )Comprehensive
      income, net of taxes:
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            686
            
            
            
            (373
            )
            
            
            313Effect
      of accounting change regarding pension plan measurement date pursuant to
      FASB statement no. 158
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            13
            
            
            
            
            
            
            
            13Dividends
      paid
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (248
            )
            
            
            -
            
            
            
            (248
            )Treasury
      stock activity
            
            
            -
            
            
            
            (22
            )
            
            
            9
            
            
            
            -
            
            
            
            -
            
            
            
            (13
            )Balance—June
      30, 2008
            
            $
            25
            
            
            $
            24,091
            
            
            $
            (661
            )
            
            $
            30,941
            
            
            $
            52
            
            
            $
            54,448





See
accompanying notes to unauditedconsolidated financial
statements





4
 Table of Contents





CARVERBANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)


(Unaudited)





Three
      Months Ended June 30,2008
            
            
            2007OPERATIONSNet
      income
            
            $
            686
            
            
            $
            1,143Adjustments
      to reconcile net income to net cash from operating
    activities:Provision
      for loan losses
            
            
            169
            
            
            
            -Stock
      based compensation expense
            
            
            35
            
            
            
            59Depreciation
      and amortization expense
            
            
            454
            
            
            
            410Amortization
      of premiums and discounts
            
            
            52
            
            
            
            53Loss
      from sale of real estate owned
            
            
            12
            
            
            
            -Gain
      on sale of loans
            
            
            (247
            )
            
            
            (47
            )Originations
      of loans held-for-sale
            
            
            (9,097
            )
            
            
            (5,907
            )Proceeds
      from sale of loans held-for-sale
            
            
            9,889
            
            
            
            4,012Changes
      in assets and liabilities:Decrease
      (increase) in accrued interest receivable
            
            
            271
            
            
            
            (513
            )Increase
      (decrease) in loan premiums and discounts and deferred
    charges
            
            
            41
            
            
            
            (110
            )Increase
      (decrease) in premiums and discounts - securities
            
            
            75
            
            
            
            (23
            )Decrease
      (increase) in other assets
            
            
            7,500
            
            
            
            (524
            )Decrease
      in other liabilities
            
            
            (749
            )
            
            
            (3,240
            )Net
      cash provided by (used in)  operating activities
            
            
            9,091
            
            
            
            (4,687
            )INVESTING
      ACTIVITIESPurchase
      of available-for-sale securites
            
            
            (12,446
            )
            
            
            -Proceeds
      from principal payments, maturities and calls of
    securities:Available-for-sale
            
            
            1,490
            
            
            
            3,557Held-to-maturity
            
            
            669
            
            
            
            789Proceeds
      from sales of available-for-sale securitiesOriginations
      of loans held-for-investment
            
            
            (43,225
            )
            
            
            (49,044
            )Loans
      purchased from third parties
            
            
            -
            
            
            
            (4,795
            )Principal
      collections on loans
            
            
            40,675
            
            
            
            32,044(Purchase)
      redemption of FHLB-NY stock
            
            
            (642
            )
            
            
            367Additions
      to premises and equipment
            
            
            (433
            )
            
            
            (1,005
            )Proceeds
      from sale of real estate owned
            
            
            1,061
            
            
            
            -Net
      cash used  in investing activities
            
            
            (12,851
            )
            
            
            (18,087
            )FINANCING
      ACTIVITIESNet
      (decrease) increase in deposits
            
            
            (21,199
            )
            
            
            16,208Net
      borrowing of  FHLB advances and other borrowings
            
            
            13,993
            
            
            
            10,193Common
      stock repurchased
            
            
            (101
            )
            
            
            (84
            )Dividends
      paid
            
            
            (248
            )
            
            
            (225
            )Net
      cash (used in) provided by financing activities
            
            
            (7,555
            )
            
            
            26,092Net
      (decrease) increase in cash and cash equivalents
            
            
            (11,315
            )
            
            
            3,318Cash
      and cash equivalents at beginning of period
            
            
            27,368
            
            
            
            17,350Cash
      and cash equivalents at end of period
            
            $
            16,053
            
            
            $
            20,668Supplemental
      information:Noncash
      Transfers-Change
      in unrealized loss on valuation of
      available-for-sale  investments, net
            
            $
            (373
            )
            
            $
            (286
            )Cash
      paid for-Interest
            
            $
            4,877
            
            
            $
            5,344Income
      taxes
            
            $
            40
            
            
            $
            670





See
accompanying notes to unaudited consolidated financial statements





5
 Table of Contents





NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)








(1)
            Organization




Nature
of operations




Carver
Bancorp, Inc.  (on a stand-alone basis, the “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., Carver Municipal Bank
(“CMB”) 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.





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





On
October 5, 2006, Carver Federal established CMB, a wholly-owned, New
York State chartered limited purpose commercial bank, with the intention of
expanding Carver Federal’s ability to compete for municipal and state agency
deposits and provide other fee income based services.  The Bank
invested $2.0 million of capital into CMB at its formation.  In the
State of New York, municipal entities may deposit funds only with commercial
banks, other than except through limited exceptions, and CMB provided Carver
Federal with a platform to enter into this line of business.As of June 30,
2008, Carver Federal has discontinued the operations of CMB and the entity is in
the process of dissolution.  The $2.0 million capital invested will
revert back to the Bank.





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








(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,
goodwill and intangibles, pensions, assessment of other than temporary
impairment and the fair value of financial instruments.  Actual
results could differ from these estimates.





6
 Table of Contents





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 period
ended June 30, 2008 are not necessarily indicative of results that may be
expected for the entire fiscal year ending March 31, 2009 (“fiscal
2009”).





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





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.





(3)
            Earnings
      Per Share




Basic
earnings per common share is computed by dividing net income 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 ESOP
shares are not considered to be outstanding.  For the three-month
periods ended June 30, 2008 and 2007, respectively, 37,730 and
75,794 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.  The effects of these potentially dilutive common shares were
considered in determining the diluted earnings per common share.








(4)
            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 June 30, 2008 totaled
$18,000 and $7,000, respectively.








(5)
            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):





7
 Table of Contents








For
      Three Months Ended June 30,Employee
      Pension Plan
            
            
            Directors'
      Retirement Plan2008
            
            
            2007
            
            
            2008
            
            
            2007Interest
      cost
            
            $
            37
            
            
            $
            40
            
            
            $
            -
            
            
            $
            1Expected
      return on assets
            
            
            (53
            )
            
            
            (55
            )
            
            
            5
            
            
            
            -Net
      periodic benefit cost (credit)
            
            $
            (16
            )
            
            $
            (15
            )
            
            $
            5
            
            
            $
            1





In
accordance with SFAS No.  158 “Employer’s Accounting for Defined
Benefit Pension and Other Postretirement Plans,” the Company recorded an
addition to its retained earnings during the first quarter of 2009 to reflect a
change of measurement date for plan assets and benefit obligation for December
31, 2007 to March 31, 2008.








(6)
            Common
      Stock Dividend




On August
13, 2008, the Board of Directors of the Holding Company declared, for the
quarter ended June 30, 2008, a cash dividend of ten cents ($0.10) per common
share outstanding.  The dividend is payable on September 11, 2008 to
stockholders of record at the close of business on August 28, 2008.








(7)
            Fair
      Value Measurements




On April
1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements,"
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:




·
            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 June 30, 2008, and that
are included in the Company’s Consolidated Statement of Condition:





Fair
      Value Measurements at June 30, 2008, Using(in
      thousands)
            
            Quoted
      Prices in Active Markets for Identical Assets
    (Level 1)
            
            
            Significant
      Other Observable Inputs (Level 2)
            
            
            Significant
      Other Unobservable Inputs (Level 3)
            
            
            Total
      Fair ValueMortgage
      servicing rights
            
            $
            -
            
            
            $
            -
            
            
            $
            827
            
            
            $
            827Securities
      available for sale
            
            $
            -
            
            
            $
            31,119
            
            
            $
            45
            
            
            $
            31,164





8
 Table of Contents





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 June 30, 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. 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.




The
following table presents information for MSR assets classified by the Company
within Level 3 of the valuation hierarchy for the three months ended June 30,
2008:




(in
      thousands)
            
            Mortgage
              Servicing
      Rights
            
            
            Securities
              Available
              for
      SaleBeginning
      balance, April 1, 2008
            
            $
            605
            
            
            $
            45Additions
            
            
            80
            
            
            
            -Total
      unrealized gain
            
            
            142
            
            
            
            -Ending
      balance, June 30, 2008
            
            $
            827
            
            
            $
            45








(8)
            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—including an amendment of FASB Statement
No. 115." 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 June 30,
2008.





9
 Table of Contents





Application of Accounting
Principles to Loan Commitments





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





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.








Disclosures about Derivative
Instruments and Hedging Activities





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





10
 Table of Contents





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





In April
of 2008, the FASB voted to eliminate Qualifying Special Purpose Entities (QSPEs)
from the guidance in SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of
Liabilities."  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 reevaluated
quarterly.  The previous rules required reconsideration only when
specified reconsideration events occurred.





11
 Table of Contents





ITEM2.
            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 ten branches and eleven
stand-alone 24/7 ATM Centers are located in low- to moderate-income
neighborhoods.  Many of these historically underserved communities are
now experiencing unprecedented growth and diversification of incomes, ethnicity
and economic opportunity, after decades of public and private
investment.





Today,
Carver Federal is the largest African-American 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 Office of Thrift Supervision following its most recent Community
Reinvestment Act examination in 2006.  The examination report noted
that 95% of Carver’s loan originations were within low- to moderate-income
geographies, which far exceeded peer institutions.  The Bank has
approximately $789 million in assets as of June 30, 2008 and employs
approximately 166 employees as of August 12, 2008.





12
 Table of Contents





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





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





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





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 areas
that were historically underserved by other financial institutions, the Bank is
facing increased competition for deposits and mortgage lending in its market
areas.  Management believes that this competition has become more
intense as a result of the improving economic conditions in the Bank’s market
area and an increased examination emphasis by federal banking regulators on
financial institutions’ fulfillment of their responsibilities under the
Community Reinvestment Act.  The Bank’s competition for loans comes
principally from mortgage banking companies, commercial banks, and savings
institutions.  The Bank’s most direct competition for deposits comes
from commercial banks, savings institutions and credit
unions.  Competition for deposits also comes from money market mutual
funds, corporate and government securities funds, and financial intermediaries
such as brokerage firms and insurance companies.  Many of the Bank’s
competitors have substantially greater resources and offer a wider array of
financial services and products.  At times, these larger financial
institutions may offer below market interest rates on mortgage loans and above
market interest rates for deposits.  These pricing concessions
combined with competitors’ larger presence in the New York market add to the
challenges the Bank faces in expanding its current market share and growing its
near term profitability.





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





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 NMTC award.





Carver
Federal’s total loan portfolio increased during the three months ended June 30,
2008.  The increase in total loans receivable, net, is primarily the
result of an increase in commercial real estate loans.  Total deposits
decreased during the three months ended June 30, 2008.  The decline
was primarily the result of decreases in deposits for certificates of deposit
and NOW accounts.  Available-for-sale securities increased during the
three months ended June 30, 2008 due to an increase in Agency
securities.  Advances and borrowings increased during the three months
ended June 30, 2008, primarily the result of higher Federal Home Loan Bank
advances.





Net
income for the three months ended June 30, 2008 decreased compared to the three
months ended June 30, 2007, due to a decrease in net interest income and an
increase in non-interest expense offset by an increase in non-interest
income.  Net interest income decreased as a result of a decrease in
the yield on average interest-earning assets and an increase in the average
balance of interest-bearing liabilities, the cost of which was not fully offset
by lower rates paid on such liabilities.  The result was a decrease in
both the interest rate spread and the net interest margin for the quarter
ended June 30, 2008 compared to the prior year period.





13
 Table of Contents





New
Markets Tax Credit Award




In June
2006, Carver Federal was selected by the U.S. Department of Treasury to
receive an award of $59.0 million in New Markets Tax Credits.  The
NMTC award is used to stimulate economic development in low- to moderate-income
communities.  The NMTC award enables the Bank to invest with community
and development partners in economic development projects with attractive terms
including, in some cases, below market interest rates, which may have the effect
of attracting capital to underserved communities and facilitating the
revitalization of the community, pursuant to the goals of the NMTC
program.  The NMTC award provides a credit to Carver Federal against
Federal income taxes when the Bank makes qualified investments.  The
credits are allocated over seven years from the time of the qualified
investment.  Recognition of the Bank’s NMTC award began in December
2006 when the Bank invested $29.5 million, one-half of its $59.0 million
award.  In December 2007, the Bank invested an additional $10.5
million and transferred rights to $19.0 million to an investor in a NMTC
project.  The Bank’s NMTC allocation was fully invested as of December
31, 2007.  During the seven year period, assuming the Bank meets
compliance requirements, the Bank will receive 39% of the $40.0 million invested
award amount in tax benefits (5% over each of the first three years, and 6% over
each of the next four years).  The Company expects to receive the
remaining NMTC tax benefit of approximately $11.6 million from its $40.0 million
investment through the period ending March 31, 2014.





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 $19.0
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 in accordance
with EITF Issue No. 04-5.  For the three months ended June 30,
2008, the Company recognized a tax benefit of $0.5 million related to the NMTC
award.




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, 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:




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 June 30, 2008, the Bank carried no
other-than-temporarily impaired securities.




Allowance
for Loan Losses




The
allowance for loan losses is maintained at a level considered adequate to
provide for probable loan losses inherent in the portfolio as of June 30,
2008.  During the third quarter of fiscal 2008, Carver changed
its loan loss methodology to be consistent with the Interagency Policy Statement
on the Allowance for Loan and Lease Losses released by the Federal Financial
Regulatory Agencies on December 13, 2006.  The change had an
immaterial affect on the allowance for loan losses at June 30,
2008.  Management is responsible for determining the adequacy of the
allowance for loan losses and the periodic provisioning for estimated losses
included in the consolidated financial statements.  The evaluation
process is undertaken on a quarterly basis, but may increase in frequency should
conditions arise that would require management’s prompt attention, such as
business combinations and opportunities to dispose of non-performing and
marginally performing loans by bulk sale or any development which may indicate
an adverse trend.





14
 Table of Contents





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





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





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





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





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





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





·      Amount
and trend of criticized loans;


·      Actual
losses;


·      Peer
comparisons with other financial institutions; and


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





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





15
 Table of Contents





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 June
30, 2008, the Company has purchased a total of 169,374 shares at an average
price of $16.00.  Purchases under the stock repurchase program may be
made from time to time on the open market and in privately negotiated
transactions.  The timing and actual number of shares repurchased
under the plan depends on a variety of factors including price, corporate and
regulatory requirements, and other market conditions.







Liquidity
and Capital Resources





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





Carver
Federal monitors its liquidity utilizing guidelines that are contained in a
policy developed by its management and approved by its Board of
Directors.  Carver Federal’s several liquidity measurements are
evaluated on a frequent basis.  The Bank was in compliance with this
policy as of June 30, 2008.  Management believes Carver Federal’s
short-term assets have sufficient liquidity to cover loan demand, potential
fluctuations in deposit accounts and to meet other anticipated cash
requirements.  Additionally, Carver Federal has other sources of
liquidity including the ability to borrow from the FHLB-NY utilizing unpledged
mortgage-backed securities and certain mortgage loans, the sale of
available-for-sale securities and the sale of certain mortgage
loans.  At June 30, 2008, based on available collateral held at the
FHLB-NY, Carver Federal had the ability to borrow from the FHLB-NY an additional
$81.3 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 quarter
ended June 30, 2008, total cash and cash equivalents decreased by $11.3 million
reflecting cash used in investing activities of $12.9 million and financing
activities of $7.6 million, offset by cash provided by operating activities of
$9.1 million.





Net cash
used in investing activities was $12.9 million, primarily represents cash
disbursed to fund mortgage loan originations of $43.2 million and purchases of
available-for-sale securities of $12.4 million, offset partially by principal
collections on loans of $40.7 million and proceeds from principal
payments/maturities/calls of securities of $1.5 million.  Net cash
used in financing activities was $7.6 million, primarily resulted from decreased
deposits of $21.2 million, offset partially by an increase in borrowings of
$14.0 million.  Net cash provided by operating activities during
this period was $9.1 million, primarily representing funds provided by proceeds
from loans held-for-sale of $9.9 million, an increase in other assets of $7.3
million, offset partially by funds used in originations of loans held-for-sale
of $9.1 million.





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





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 June 30,
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 June 30, 2008 (dollars in
thousands):





16
 Table of Contents




Amount
            
            
            %
      of Adj.
              AssetsTangible
      Equity:Capital
      level
            
            $
            62,813
            
            
            
            8.01
            %Less
      required capital level
            
            
            11,763
            
            
            
            1.50
            %Excess
      capital
            
            $
            51,050
            
            
            
            6.51
            %Core
      Capital:Capital
      level
            
            $
            62,981
            
            
            
            8.03
            %Less
      required capital level
            
            
            31,373
            
            
            
            4.00
            %Excess
      capital
            
            $
            31,608
            
            
            
            4.03
            %Risk-Based
      Capital:Capital
      level
            
            $
            68,013
            
            
            
            10.65
            %Less
      required capital level
            
            
            54,410
            
            
            
            8.00
            %Excess
      capital
            
            $
            13,603
            
            
            
            2.65
            %







Comparison
of Financial Condition at June 30, 2008 and March 31, 2008




Assets




At June
30, 2008, total assets decreased $7.9 million,or 1.0%, to $788.7
million compared to $796.6 million at March 31, 2008, primarily the result of
decreases in cash and cash equivalents of $11.3 million and other assets of $8.2
million, partially offset by increases in investment securities of $9.6 million
and loans receivable of $1.7 million.





Cash and
cash equivalents decreased $11.3 million, or 41.3%, to $16.1 million at June 30,
2008 compared to $27.4 million at March 31, 2008, primarily due to a
$10.5 million decrease in Federal funds sold and a $0.8 million decrease in cash
and due from banks.  Other assets decreased $8.2 million, or
19.9%, to $33.7 million at June 30, 2008 compared to $41.9 million at March
31, 2008, primarily due to completion of a settlement receivable of $7.4 million
from the sale of certain investments and disposition of real estate owned of
$1.0 million.





Total
securities increased $9.6 million, or 25.2%, to $47.8 million at June 30, 2008
compared to $38.2 million at March 31, 2008, reflecting an increase of $10.3
million in available-for-sale securities and a $0.7 million decrease in
held-to-maturity securities.  Available-for-sale securities
increased $10.3 million, or 49.4%, to $31.2 million at June 30, 2008
compared to $20.9 million at March 31, 2008, primarily due to an increase
in Agency securities of $9.6 million.  Held to maturity securities
decreased $0.7 million, or 3.9%, to $16.6 million at June 30, 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 $12.4 million in purchases of securities during
the quarter ended June 30, 2008.





Total
loans receivable, including loans held-for-sale, increased $1.7 million, or
0.3%, to $658.3 million at June 30, 2008 compared to $656.6 million at March 31,
2008.  The increase was primarily the result of an increase in
commercial real estate loans of $11.6 million and an increase in commercial
business loans of $1.9 million, offset by decreases in one- to four- family
loans of $6.4 million, construction loans of $2.5 million and multi-family loans
of $2.0 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.





At June
30, 2008, construction loans represented 23.7% of the Bank’s loan
portfolio.  Approximately 69.1% of the Bank’s construction loans are
participations in loans originated by 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.  During the three months ended June 30,
2008, local real estate market indicators showed increasing inventories and
longer marketing times for sales, but prices remained stable.  The
Bank will continue to closely monitor trends.





17
 Table of Contents





Liabilities
and Stockholders’ Equity




Liabilities





Total
liabilities decreased $8.0 million, or 1.1%, to $715.1 million at June 30, 2008
compared to $723.1 million at March 31, 2008.  The decrease in total
liabilities was primarily the result of a $21.2 million reduction in customer
deposits, offset by an increase of $14.0 million in advances and borrowed
money.





Deposits
decreased $21.2 million, or 3.2%, to $633.5 million at June 30, 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 $17.6
million, NOW accounts of $3.6 million and savings accounts of $1.7 million,
which were partially offset by an increase of $2.7 million in DDA
accounts.  The Bank replaced approximately $14.0 million of higher
cost certificates of deposit upon maturity with lower cost
borrowings.  At June 30, 2008, the Bank had $61.6 million in brokered
deposits.





Advances
from the FHLB-NY and other borrowed money increased $14.0 million, or 23.9%, to
$72.6 million at June 30, 2008 compared to $58.6 million at March 31,
2008.  The increase in advances and borrowed money was primarily
the result of an increase of $14.0 million in FHLB advances.  At June
30, 2008, based on available collateral held at the FHLB-NY, the Bank had the
ability to borrow from the FHLB-NY an additional $81.3 million on a secured
basis.





Stockholders’
Equity





Total
stockholders’ equity increased $0.1 million, or 0.01%, to $54.5 million at June
30, 2008 compared to $54.4 million at March 31, 2008.  The increase in
total stockholders’ equity was primarily attributable to net income for the
quarter ended June 30, 2008 totaling $0.7 million, partially offset by dividends
paid of $0.2 million and a decrease in accumulated other
comprehensive income of $0.4 million.  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.





18
 Table of Contents





As of
June 30, 2008, the Bank had outstanding loan commitments as follows (in
thousands):




Commitments
      to originate mortgage loans
            
            $
            66,348Commitments
      to originate commercial and consumer loans
            
            
            4,236Lines
      of credit
            
            
            24,637Letters
      of credit
            
            
            7,236$
            102,457





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.





19
 Table of Contents





CARVER
BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
AVERAGE BALANCES


(In
thousands)


(Unaudited)





For
      the Three Months Ended June 30,2008
            
            
            2007Average
            
            
            
            
            
            Average
            
            
            Average
            
            
            
            
            
            AverageBalance
            
            
            Interest
            
            
            Yield/Cost
            
            
            Balance
            
            
            Interest
            
            
            Yield/CostInterest
      Earning Assets:Loans
      (1)
            
            $
            654,501
            
            
            $
            10,453
            
            
            
            6.39
            %
            
            $
            617,973
            
            
            $
            10,993
            
            
            
            7.12
            %Mortgage-backed
      securities
            
            
            43,454
            
            
            
            561
            
            
            
            5.16
            %
            
            
            39,108
            
            
            
            502
            
            
            
            5.13
            %Investment
      securities (2)
            
            
            4,656
            
            
            
            66
            
            
            
            5.69
            %
            
            
            31,201
            
            
            
            462
            
            
            
            5.92
            %Fed
      funds sold
            
            
            7,501
            
            
            
            39
            
            
            
            2.09
            %
            
            
            933
            
            
            
            11
            
            
            
            4.73
            %Total
      interest-earning assets
            
            
            710,112
            
            
            
            11,119
            
            
            
            6.26
            %
            
            
            689,215
            
            
            
            11,968
            
            
            
            6.95
            %Non-interest-earning
      assets
            
            
            78,692
            
            
            
            
            
            
            
            
            
            
            
            54,542Total
      assets
            
            $
            788,804
            
            
            
            
            
            
            
            
            
            
            $
            743,757Interest
      Bearing Liabilities:Deposits:Now
      demand
            
            $
            24,231
            
            
            
            20
            
            
            
            0.33
            %
            
            $
            24,970
            
            
            
            35
            
            
            
            0.56
            %Savings
      and clubs
            
            
            125,496
            
            
            
            166
            
            
            
            0.53
            %
            
            
            137,273
            
            
            
            266
            
            
            
            0.78
            %Money
      market
            
            
            46,229
            
            
            
            296
            
            
            
            2.57
            %
            
            
            46,863
            
            
            
            242
            
            
            
            2.07
            %Certificates
      of deposit
            
            
            391,008
            
            
            
            3,643
            
            
            
            3.74
            %
            
            
            340,322
            
            
            
            3,777
            
            
            
            4.45
            %Mortgagors
      deposits
            
            
            3,314
            
            
            
            14
            
            
            
            1.69
            %
            
            
            2,820
            
            
            
            11
            
            
            
            1.56
            %Total
      deposits
            
            
            590,278
            
            
            
            4,139
            
            
            
            2.81
            %
            
            
            552,248
            
            
            
            4,331
            
            
            
            3.15
            %Borrowed
      money
            
            
            62,267
            
            
            
            722
            
            
            
            4.65
            %
            
            
            75,302
            
            
            
            984
            
            
            
            5.24
            %Total
      interest-bearing liabilities
            
            
            652,545
            
            
            
            4,861
            
            
            
            2.99
            %
            
            
            627,550
            
            
            
            5,315
            
            
            
            3.40
            %Non-interest-bearing
      liabilities:Demand
            
            
            53,658
            
            
            
            
            
            
            
            
            
            
            
            54,600Other
      liabilities
            
            
            9,470
            
            
            
            
            
            
            
            
            
            
            
            11,902Total
      liabilities
            
            
            715,673
            
            
            
            
            
            
            
            
            
            
            
            694,052Minority
      Interest
            
            
            19,150Stockholders'
      equity
            
            
            53,981
            
            
            
            
            
            
            
            
            
            
            
            49,705Total
      liabilities & stockholders' equity
            
            $
            788,804
            
            
            
            
            
            
            
            
            
            
            $
            743,757Net
      interest income
            
            
            
            
            
            $
            6,258
            
            
            
            
            
            
            
            
            
            
            $
            6,653Average
      interest rate spread
            
            
            
            
            
            
            
            
            
            
            3.28
            %
            
            
            
            
            
            
            
            
            
            
            3.55
            %Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            3.53
            %
            
            
            
            
            
            
            
            
            
            
            3.86
            %





(1)
Includes non-accrual loans


(2)
Includes FHLB-NY stock





20
 Table of Contents





Comparison
of Operating Results for the Three Months Ended June 30, 2008 and
2007







Overview




The
Company reported consolidated net income of $0.7 million and diluted earnings
per share of $0.27 for the quarter ended June 30, 2008 compared to net income of
$1.1 million and diluted earnings per share of $0.44 for the prior year
period.  Net income declined $0.5 million, or 40.0%, to $0.7 million,
primarily reflecting a decrease in net interest income of $0.4 million and an
increase in non-interest expense of $0.8 million, offset by increases in
non-interest income $0.6 million and an income tax benefit of $0.5
million.




Selected
operating ratios for the three months ended June 30, 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 EndedSelected
      Financial Data:
            
            June
      30,2008
            
            
            2007Return
      on average assets (1)
            
            
            0.35
            %
            
            
            0.62
            %Return
      on average equity (2)
            
            
            5.08
            
            
            
            9.22Net
      interest margin (3)
            
            
            3.53
            
            
            
            3.86Interest
      rate spread (4)
            
            
            3.28
            
            
            
            3.55Efficiency
      ratio (5)
            
            
            91.62
            
            
            
            83.49Operating
      expenses to average assets (6)
            
            
            3.72
            
            
            
            3.51Average
      equity toaverage assets
      (7)
            
            
            6.84
            
            
            
            6.69Average
      interest-earning assets to average interest-bearing
      liabilities
            
            
            1.09
            x
            
            
            1.10
            x





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


(2) Net
income, 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)
Operating expenses divided by sum of net interest income plus non-interest
income.


(6)
Non-interest expenses less loss on real estate owned, annualized, divided by
average total assets.


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







Interest Income




Interest
income decreased by $0.9 million, or 7.1%, to $11.1 million for the quarter
ended June 30, 2008 compared to $12.0 million for the prior year
period.  The decrease in interest income reflects a decrease in yield
on interest-earning assets of 69 basis points to 6.26% for the quarter ended
June 30, 2008 compared to 6.95% for the prior year period.  The
decrease in yield on interest earning assets reflects decreases in yields on
loans of 73 basis points, investment securities of 21 basis points and Federal
funds sold of 264 basis points.  The decrease in interest income was
primarily the result of decreases in interest income on loans of $0.5 million
and interest income on investment securities of $0.3 million.





Interest
income on loans decreased by $0.5 million, or 4.9%, to $10.5 million for the
quarter ended June 30, 2008 compared to $11.0 million for the prior year
period.  These results were primarily driven by a yield decrease of 73
basis points to 6.39% for the quarter ended June 30, 2008 compared to 7.12% 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 286
bps and 325 bps, respectively, since June 30, 2007; offset by an increase in
average loan balances of $36.5 million to $654.5 million for the quarter ended
June 30, 2008 compared to $618.0 million for the prior year period, primarily
due to growth in commercial real estate loans of $37.5 million.





21
 Table of Contents





Interest
income on securities decreased by $0.3 million, or 35.0%, to $0.6 million for
the quarter ended June 30, 2008 compared to $1.0 million for the prior year
period.  Interest income on investment securities decreased by $0.4
million, or 85.7%, to $0.1 million for the quarter ended June 30, 2008 compared
to $0.5 million for the prior year period.  The decrease in interest
income on investment securities for the quarter ended June 30, 2008 was
primarily the result of a $26.5 million, or 85.1%, reduction in the average
balances of investment securities to $4.7 million, compared to $31.2 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 23 basis points to 5.69% for the quarter ended June 30, 2008
compared to 5.92% 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 of $0.1 million, or 11.8%, to
$0.6 million for the quarter ended June 30, 2008 compared to $0.5 million for
the prior year period.  The increase was primarily the result of an
increase in the yield on mortgage-backed investment securities by 3 basis points
to 5.16% for the quarter ended June 30, 2008 compared to 5.13% for the prior
year period, as adjustable rate securities in the portfolio repriced to higher
coupon rates.  The average balances of mortgage-backed securities
increased by $4.3 million to $43.4 million for the quarter ended June 30, 2008
compared to $39.1 million for the prior year period.








Interest
Expense




Interest
expense decreased by $0.5 million, or 8.5%, to $4.9 million for the quarter
ended June 30, 2008 compared to $5.3 million for the prior year
period.  The decrease in interest expense primarily reflects a 41
basis point decrease in the average cost of interest-bearing liabilities to
2.99% for the quarter ended June 30, 2008 compared to 3.40% for the prior
year period, partially offset by growth in the average balance of
interest-bearing liabilities of $24.9 million, or 4.0%, to $652.5 million for
the quarter ended June 30, 2008 compared to $627.6 million for the prior year
period.  The decrease in interest expense was primarily the result of
decreases in interest expense on advances and other borrowed money of $0.3
million and interest expense on deposits of $0.2 million.





Interest
expense on advances and other borrowed money decreased $0.3 million, or 26.6%,
to $0.7 million for the quarter ended June 30, 2008 compared to $1.0 million for
the prior year period.  The decrease primarily reflects a 59 basis
point reduction in the average cost of borrowed money to 4.65% for the quarter
ended June 30, 2008 compared to 5.24% for the prior year period and the
decline in the average balance of total borrowed money outstanding of $13.0
million to $62.3 million for the quarter ended June 30, 2008 compared to $75.3
million for the prior year period.





Interest
expense on total deposits decreased $0.2 million, or 4.4%, to $4.1 million for
the quarter ended June 30, 2008 compared to $4.3 million for the prior year
period.  The decrease reflects a 34 basis point reduction in the
average cost of total deposits to 2.81% for the quarter ended June 30, 2008
compared to 3.15% for the prior year period, offset partially by an
increase in the average balance of total deposits of $38.1 million to $590.3
million for the quarter ended June 30, 2008 compared to $552.2 million for the
prior year period.





Historically,
the Bank’s customer deposits have provided a relatively low cost funding source
from which its net interest income and net interest margin have
benefited.  In addition, the Bank’s relationship with various
government entities has been a source of relatively stable and low cost
funding.







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 decreased $0.4 million, or
5.9%, to $6.3 million for the quarter ended June 30, 2008 compared to $6.7
million for the prior year period.  This decrease was a result of a
decrease in the yield on average interest-earning assets of 69 basis points and
an increase in the average balance of interest-bearing liabilities of $24.9
million.  The result was a 27 basis point decrease in the interest
rate spread to 3.28% for the quarter ended June 30, 2008 compared to 3.55% for
the prior year period.  The net interest margin also decreased to
3.53% for the quarter ended June 30, 2008 compared to 3.86% for the prior year
period.





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Provision
for Loan Losses and Asset Quality




The Bank
provided a $0.2 million loan loss provision for the quarter ended June 30, 2008
compared with no provision for the prior year period.  At June 30,
2008 and March 31, 2008, the Bank’s allowance for loan losses was $5.0 million
and $4.9 million, respectively.  The ratio of the allowance for loan
losses to non-performing loans was 80.5% at June 30, 2008 compared to
170.9% at March 31, 2008.  Non-performing loans increased during the
quarter due to multifamily and commercial loans going past due.  The
ratio of the allowance for loan losses to total loans was 0.76% at June 30, 2008
compared to 0.74% at March 31, 2008.





At June
30, 2008, non-performing assets totaled $6.4 million, or 0.81% 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.







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, we do not
expect the Statement to have a material impact on the Company.  At
June 30, 2008, the Bank’s loan portfolio contained $1.2 million in loans that we
consider subprime, all of which were performing loans.





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 Table of Contents





Non-Interest
Income




Non-interest
income is comprised of depository fees and charges, loan fees and service
charges, fee income from banking services and charges, gains or losses from the
sale of securities, loans and other assets and other non-interest
income.  Non-interest income increased by $0.6 million, or 53.7%, to
$1.7 million for the quarter ended June 30, 2008 compared to $1.1 million for
the prior year period.  The increase was primarily due to other income
of $0.3 million and gain on sale of loans of $0.2
million.   Other income increased by $0.3 million, primarily the
result of $0.2 million consolidation of income from the minority interest
created by the NMTC transaction.







Non-Interest
Expense




Non-interest
expense increased by $0.8 million, or 12.8%, to $7.3 million for the quarter
ended June 30, 2008 compared to $6.5 million for the prior year
period.  The increase was primarily due to increases in other expenses
of $0.4 million and employee compensation and benefits of $0.2
million.  The $0.4 million increase in other expense primarily
consists of the cost of data lines, ATM equipment and leases, and
charge-offs.  The charge-offs include $0.9 million in expenses, offset
by $0.9 million in income, primarily reflecting offsetting entries to conclude
the Community Capital Bank integration and system conversion.





Income
Tax Expense




Income
tax benefit increased by $0.4 million to $0.3 million for the quarter ended June
30, 2008 compared to income tax expense of $0.1 million for the prior year
period. The income tax expense of $0.2 million for the quarter ended June
30, 2008 was offset by the tax benefit generated by the NMTC investment totaling
$0.5 million.  The Bank’s NMTC award received in June 2006 has
been fully invested.  The Company expects to receive additional NMTC
tax benefits of approximately $11.6 million from its $40.0 million investment
through the period ending March 31, 2014.







ITEM3.
            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 June 30, 2008 compared to March 31,
2008.







ITEM4.
            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 June 30, 2008, the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the
end of the period covered by this report.  Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of the end of the
period covered by this report.





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





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 Table of Contents





(b)
Changes in Internal Control over Financial Reporting





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







PART
      II.
            OTHER
      INFORMATION







ITEM1.
            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.





ITEM1A.
            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.







ITEM2.
            Issuer
      Purchases of Equity Securities




During
the quarter ended June 30, 2008, the Company purchased an additional 9,900
shares of its common stock under its stock repurchase program.  As of
June 30, 2008, the Company has purchased a total of 169,374 shares at an average
price per share of $16.00.





Period
              
              Total
      number of shares purchased
              
              
              Average
      price paid per share
              
              
              Total
      number of shares as part of publicly announced plan
    (1)
              
              
              Total
      number of shares that may yet be purchased (2)April
      1, 2008 to April 30, 2008
              
              
              2,000
              
              
              $
              11.47
              
              
              
              2,000
              
              
              
              70,161May
      1, 2008 to May 31, 2008
              
              
              4,200
              
              
              $
              10.57
              
              
              
              4,200
              
              
              
              65,961June
      1, 2008 to June 30, 2008
              
              
              3,700
              
              
              $
              9.12
              
              
              
              6,500
              
              
              
              59,461




(1) The
Company’s stock purchase program was announced on August 2002 without an
expiration date.




(2) As
part of the stock repurchase program, the Company approved the repurchase of up
to 231,635 shares of its common stock.






ITEM3.
            Defaults
      Upon Senior Securities




Not
applicable.






ITEM4.
            Submission
      of Matters to a Vote of Security
Holders




Not
applicable.





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 Table of Contents





ITEM5.
            Other
      Information




Not
applicable.






ITEM6.
            Exhibits




The
following exhibits are submitted with this report:




Exhibit 11.
            Computation
      of Earnings Per Share.




Exhibit 31.1
            Certification
      of Chief Executive Officer.




Exhibit 31.2
            Certification
      of Chief Financial 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 Financial Officer furnished pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002, 18 U.S.C.  Section
    1350.




(1)
            Incorporated
      herein by reference to Registration Statement No.  333-5559 on
      Form S-4 of the Registrant filed with the Securities and Exchange
      Commission on June 7, 1996.




(2)
            Incorporated
      by reference to Exhibits 3.2 to the Registrant’s Current Report on Form
      8-K filed with the Securities and Exchange Commission on December 19,
      2007.







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:
      August 14,
      2008
            /s/ Deborah
      C.  WrightDeborah
      C.  WrightChairman
      and Chief Executive Officer(Principal
      Executive Officer)Date:
      August 14,
      2008
            /s/ Roy
      SwanRoy
      SwanExecutive
      Vice President and Chief Financial Officer(Principal
      Financial and Accounting Officer)






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