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 September 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
              
              2,469,935Class
              
              Outstanding
      at November 5, 2008




TABLEOF CONTENTS





PagePART
      I. FINANCIAL INFORMATIONItem
      1.
                              Financial
      StatementsConsolidated Statements of Financial Condition as of September
      30, 2008 (unaudited) and March 31, 2008
                              2Consolidated Statements of Income for the Three and Six Months
      Ended September 30, 2008 and 2007 (unaudited)
                              3Consolidated Statement of Changes in Stockholders’ Equity and
      Comprehensive Income for the Six Months Ended September 30, 2008
      (unaudited)
                              4Consolidated Statements of Cash Flows for the Six Months Ended
      September 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
                              28Item
      4.
                              Controls and Procedures
                              28PART
      II. OTHER INFORMATIONItem
      1.
                              Legal Proceedings
                              30Item
      1A.
                              Risk Factors
                              30Item
      2.
                              Issuer Purchases of Equity Securities
                              31Item
      3.
                              Defaults Upon Senior Securities
                              32Item
      4.
                              Submission of Matters to a Vote of Security
      Holders
                              32Item
      5.
                              Other Information
                              33Item
      6.
                              Exhibits
                              33SIGNATURES
                              34EXHIBITS
                              33





1


CARVER BANCORP, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITION(In
      thousands, except per share data)September
      30,
                                
                                
                                March
      31,2008
                                
                                
                                2008(unaudited)ASSETSCash
      and cash equivalents:Cash
      and due from banks
                                
                                $
                                12,787
                                
                                
                                $
                                15,920Federal
      funds sold
                                
                                
                                1,790
                                
                                
                                
                                10,500Interest
      earning deposits
                                
                                
                                948
                                
                                
                                
                                948Total
      cash and cash equivalents
                                
                                
                                15,525
                                
                                
                                
                                27,368Securities:Available-for-sale,
      at fair value (including pledged as collateral of $30,266 and $20,621
      at  September 30 and March 31, 2008,
    respectively)
                                
                                
                                30,311
                                
                                
                                
                                20,865Held-to-maturity,
      at amortized cost (including pledged as collateral of $15,863 and $16,643
      at  September 30 and March 31, 2008, respectively; fair value of
      $16,221 and $17,167 at  September 30 and March 31, 2008,
      respectively)
                                
                                
                                16,388
                                
                                
                                
                                17,307Total
      securities
                                
                                
                                46,699
                                
                                
                                
                                38,172Loans
      held-for-sale
                                
                                
                                22,946
                                
                                
                                
                                23,767Loans
      receivable:Real
      estate mortgage loans
                                
                                
                                579,531
                                
                                
                                
                                578,957Commercial
      business loans
                                
                                
                                54,361
                                
                                
                                
                                52,109Consumer
      loans
                                
                                
                                1,890
                                
                                
                                
                                1,728Allowance
      for loan losses
                                
                                
                                (5,135
                                )
                                
                                
                                (4,878
                                )Total
      loans receivable, net
                                
                                
                                630,647
                                
                                
                                
                                627,916Office
      properties and equipment, net
                                
                                
                                15,831
                                
                                
                                
                                15,780Federal
      Home Loan Bank of New York stock, at cost
                                
                                
                                3,923
                                
                                
                                
                                1,625Bank
      owned life insurance
                                
                                
                                9,319
                                
                                
                                
                                9,141Accrued
      interest receivable
                                
                                
                                3,792
                                
                                
                                
                                4,063Goodwill
                                
                                
                                6,370
                                
                                
                                
                                6,370Core
      deposit intangibles, net
                                
                                
                                456
                                
                                
                                
                                532Other
      assets
                                
                                
                                35,232
                                
                                
                                
                                41,859Total
      assets
                                
                                $
                                790,740
                                
                                
                                $
                                796,593LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilities:Deposits
                                
                                $
                                599,818
                                
                                
                                $
                                654,663Advances
      from the FHLB-New York and other borrowed money
                                
                                
                                109,437
                                
                                
                                
                                58,625Other
      liabilities
                                
                                
                                7,374
                                
                                
                                
                                9,772Total
      liabilities
                                
                                
                                716,629
                                
                                
                                
                                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;  2,468,470 and 2,481,706 shares outstanding at
      September 30 and March 31, 2008, respectively)
                                
                                
                                25
                                
                                
                                
                                25Additional
      paid-in capital
                                
                                
                                24,177
                                
                                
                                
                                24,113Retained
      earnings
                                
                                
                                31,316
                                
                                
                                
                                30,490Treasury
      stock, at cost (56,221 and 42,985 shares at September 30 and March 31,
      2008, respectively)
                                
                                
                                (781
                                )
                                
                                
                                (670
                                )Accumulated
      other comprehensive income
                                
                                
                                224
                                
                                
                                
                                425Total
      stockholders' equity
                                
                                
                                54,961
                                
                                
                                
                                54,383Total
      liabilities and stockholders' equity
                                
                                $
                                790,740
                                
                                
                                $
                                796,593See
      accompanying notes to consolidated financial statements





2




CARVERBANCORP, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOME(In
      thousands, except per share data)(Unaudited)Three
      Months Ended
                  
                  
                  Six
      Months EndedSeptember
      30,
                  
                  
                  September
      30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Interest
      Income:Loans
                  
                  $
                  9,840
                  
                  
                  $
                  11,184
                  
                  
                  $
                  20,293
                  
                  
                  $
                  22,177Mortgage-backed
      securities
                  
                  
                  603
                  
                  
                  
                  474
                  
                  
                  
                  1,165
                  
                  
                  
                  976Investment
      securities
                  
                  
                  98
                  
                  
                  
                  401
                  
                  
                  
                  170
                  
                  
                  
                  855Federal
      funds sold
                  
                  
                  2
                  
                  
                  
                  29
                  
                  
                  
                  40
                  
                  
                  
                  41Total
      interest income
                  
                  
                  10,543
                  
                  
                  
                  12,088
                  
                  
                  
                  21,668
                  
                  
                  
                  24,049Interest
      expense:Deposits
                  
                  
                  3,361
                  
                  
                  
                  4,570
                  
                  
                  
                  7,500
                  
                  
                  
                  8,901Advances
      and other borrowed money
                  
                  
                  981
                  
                  
                  
                  1,055
                  
                  
                  
                  1,709
                  
                  
                  
                  2,030Total
      interest expense
                  
                  
                  4,342
                  
                  
                  
                  5,625
                  
                  
                  
                  9,209
                  
                  
                  
                  10,931Net
      interest income before provision for loan losses
                  
                  
                  6,201
                  
                  
                  
                  6,463
                  
                  
                  
                  12,459
                  
                  
                  
                  13,118Provision
      for loan losses
                  
                  
                  170
                  
                  
                  
                  --
                  
                  
                  
                  339
                  
                  
                  
                  --Net
      interest income after provision for loan losses
                  
                  
                  6,031
                  
                  
                  
                  6,463
                  
                  
                  
                  12,120
                  
                  
                  
                  13,118Non-interest
      income:Depository
      fees and charges
                  
                  
                  713
                  
                  
                  
                  686
                  
                  
                  
                  1,381
                  
                  
                  
                  1,315Loan
      fees and service charges
                  
                  
                  389
                  
                  
                  
                  512
                  
                  
                  
                  806
                  
                  
                  
                  890Write-down
      of loans held for sale
                  
                  
                  (16
                  )
                  
                  
                  --
                  
                  
                  
                  (16
                  )
                  
                  
                  --Gain
      on sale of securities
                  
                  
                  --
                  
                  
                  
                  79
                  
                  
                  
                  --
                  
                  
                  
                  79Gain
      (loss) on sale of loans
                  
                  
                  --
                  
                  
                  
                  (19
                  )
                  
                  
                  246
                  
                  
                  
                  28Other
                  
                  
                  485
                  
                  
                  
                  195
                  
                  
                  
                  902
                  
                  
                  
                  277Total
      non-interest income
                  
                  
                  1,571
                  
                  
                  
                  1,453
                  
                  
                  
                  3,319
                  
                  
                  
                  2,589Non-interest
      expense:Employee
      compensation and benefits
                  
                  
                  3,616
                  
                  
                  
                  3,145
                  
                  
                  
                  7,030
                  
                  
                  
                  6,317Net
      occupancy expense
                  
                  
                  903
                  
                  
                  
                  928
                  
                  
                  
                  1,919
                  
                  
                  
                  1,765Equipment,
      net
                  
                  
                  694
                  
                  
                  
                  513
                  
                  
                  
                  1,309
                  
                  
                  
                  1,105Federal
      deposit insurance premiums
                  
                  
                  125
                  
                  
                  
                  18
                  
                  
                  
                  156
                  
                  
                  
                  38Other
                  
                  
                  1,967
                  
                  
                  
                  2,592
                  
                  
                  
                  4,226
                  
                  
                  
                  4,476Total
      non-interest expense
                  
                  
                  7,305
                  
                  
                  
                  7,196
                  
                  
                  
                  14,640
                  
                  
                  
                  13,701Income
      before income taxes
                  
                  
                  297
                  
                  
                  
                  720
                  
                  
                  
                  799
                  
                  
                  
                  2,006Income
      tax (benefit) expense
                  
                  
                  (422
                  )
                  
                  
                  (44
                  )
                  
                  
                  (745
                  )
                  
                  
                  99Minority
      Interest
                  
                  
                  98
                  
                  
                  
                  --
                  
                  
                  
                  237
                  
                  
                  
                  --Net
      income
                  
                  $
                  621
                  
                  
                  $
                  764
                  
                  
                  $
                  1,307
                  
                  
                  $
                  1,907Earnings
      per common share:Basic
                  
                  $
                  0.25
                  
                  
                  $
                  0.31
                  
                  
                  $
                  0.53
                  
                  
                  $
                  0.76Diluted
                  
                  $
                  0.25
                  
                  
                  $
                  0.30
                  
                  
                  $
                  0.52
                  
                  
                  $
                  0.74


3




CARVERBANCORP, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITYAND
      COMPREHENSIVE INCOMEFOR
      THE SIX MONTHS ENDED SEPTEMBER 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
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,307
                  
                  
                  
                  -
                  
                  
                  
                  1,307Change
      in accumulated other comprehensive income, net of taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (201
                  )
                  
                  
                  (201
                  )Comprehensive
      income, net of taxes:
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,307
                  
                  
                  
                  (201
                  )
                  
                  
                  1,106Effect
      of accounting change regarding pension plan measurement date pursuant to
      FASB statement no. 158
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  13
                  
                  
                  
                  
                  
                  
                  
                  13Dividends
      paid
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (494
                  )
                  
                  
                  -
                  
                  
                  
                  (494
                  )Treasury
      stock activity
                  
                  
                  -
                  
                  
                  
                  64
                  
                  
                  
                  (111
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (47
                  )Balance—September
      30, 2008
                  
                  $
                  25
                  
                  
                  $
                  24,177
                  
                  
                  $
                  (781
                  )
                  
                  $
                  31,316
                  
                  
                  $
                  224
                  
                  
                  $
                  54,961


4




CARVERBANCORP, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(in
      thousands)(Unaudited)Six Months Ended September
    30,2008
                        
                        
                        2007OPERATIONSNet
      income
                        
                        $
                        1,307
                        
                        
                        $
                        1,907Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Provision
      for loan losses
                        
                        
                        339
                        
                        
                        
                        -Provision
      for REO losses
                        
                        
                        28
                        
                        
                        
                        -Stock
      based compensation expense
                        
                        
                        (9
                        )
                        
                        
                        75Depreciation
      and amortization expense
                        
                        
                        939
                        
                        
                        
                        840Amortization
      of premiums and discounts
                        
                        
                        102
                        
                        
                        
                        105Gain
      on sale of loans
                        
                        
                        (246
                        )
                        
                        
                        (28
                        )Gain
      on sale of fixed assets
                        
                        
                        -
                        
                        
                        
                        (1
                        )Originations
      of loans held-for-sale
                        
                        
                        (9,097
                        )
                        
                        
                        (10,187
                        )Proceeds
      from sale of loans held-for-sale
                        
                        
                        9,889
                        
                        
                        
                        7,540Changes
      in assets and liabilities:Decrease
      (increase) in accrued interest receivable
                        
                        
                        271
                        
                        
                        
                        (125
                        )Decrease
      in loan premiums and discounts and deferred charges
                        
                        
                        43
                        
                        
                        
                        30Increase
      (decrease) in premiums and discounts - securities
                        
                        
                        66
                        
                        
                        
                        (190
                        )Decrease
      (increase) in other assets
                        
                        
                        5,981
                        
                        
                        
                        (1,799
                        )Decrease
      in other liabilities
                        
                        
                        (2,154
                        )
                        
                        
                        (2,203
                        )Net
      cash provided by (used in)  operating activities
                        
                        
                        7,459
                        
                        
                        
                        (4,036
                        )INVESTING
      ACTIVITIESPurchase
      of available-for-sale securites
                        
                        
                        (12,446
                        )
                        
                        
                        (3,724
                        )Proceeds
      from principal payments, maturities and calls of
    securities:Available-for-sale
                        
                        
                        2,628
                        
                        
                        
                        5,490Held-to-maturity
                        
                        
                        901
                        
                        
                        
                        1,233Proceeds
      from sales of available-for-sale securities
                        
                        
                        -
                        
                        
                        
                        5,540Originations
      of loans held-for-investment
                        
                        
                        (70,248
                        )
                        
                        
                        (81,588
                        )Loans
      purchased from third parties
                        
                        
                        -
                        
                        
                        
                        (15,261
                        )Principal
      collections on loans
                        
                        
                        66,887
                        
                        
                        
                        71,600(Purchase)
      redemption of FHLB-NY stock
                        
                        
                        (2,298
                        )
                        
                        
                        579Additions
      to premises and equipment
                        
                        
                        (990
                        )
                        
                        
                        (1,394
                        )Proceeds
      from sale of real estate owned
                        
                        
                        949
                        
                        
                        
                        -Net
      cash used  in investing activities
                        
                        
                        (14,617
                        )
                        
                        
                        (17,525
                        )FINANCING
      ACTIVITIESNet
      (decrease) increase in deposits
                        
                        
                        (54,845
                        )
                        
                        
                        5,828Net
      borrowing of  FHLB advances and other borrowings
                        
                        
                        50,813
                        
                        
                        
                        20,487Common
      stock repurchased
                        
                        
                        (159
                        )
                        
                        
                        (410
                        )Dividends
      paid
                        
                        
                        (494
                        )
                        
                        
                        (473
                        )Net
      cash (used in) provided by financing activities
                        
                        
                        (4,685
                        )
                        
                        
                        25,432Net
      (decrease) increase in cash and cash equivalents
                        
                        
                        (11,843
                        )
                        
                        
                        3,871Cash
      and cash equivalents at beginning of period
                        
                        
                        27,368
                        
                        
                        
                        17,350Cash
      and cash equivalents at end of period
                        
                        $
                        15,525
                        
                        
                        $
                        21,221Supplemental
      information:Noncash
      Transfers-Change
      in unrealized loss on valuation of
      available-for-sale  investments, net
                        
                        $
                        (201
                        )
                        
                        $
                        (203
                        )Cash
      paid for-Interest
                        
                        $
                        9,482
                        
                        
                        $
                        10,804Income
      taxes
                        
                        $
                        80
                        
                        
                        $
                        862See
      accompanying notes to consolidated financial statements




5





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. 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.Carver Federal has
discontinued the operations of CMB and the dissolution of the entity was
effective July 18, 2008.  The $2.0 million capital investment reverted
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
disclosure 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.




The
unaudited consolidated financial statements presented herein should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Holding Company’s Annual Report on Form 10-K for the fiscal year
ended March 31, 2008, as previously filed with the SEC.  The
consolidated results of operations and other data for the three-month and six
months periods ended September 30, 2008 are not necessarily indicative of
results that may be expected for the entire fiscal year ending March 31, 2009
(“fiscal 2009”).





6





In June
2005, the Emerging Issues Task Force (“EITF”) of the Financial Accounting
Standard Board (“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 September 30, 2008 and 2007, respectively, 29,571 and 69,462
shares of common stock were potentially issuable from the exercise of stock
options with an exercise price that is less than the average market price of the
common shares and unvested restricted stock grants for the same
period.  For the six-month periods ended September 30, 2008 and 2007,
34,144 and 72,104 shares of common stock were potentially issuable from the
exercise of stock options with an exercise price that is less than the average
market price of the common shares for the same period.  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 benefit and the related tax expense recognized for the three months
ended September 30, 2008 totaled $27,000 and $10,000,
respectively.  For the six months ended September 30, 2008,
stock-based compensation benefit and the related tax expense were $9,000 and
$3,000, 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.





7





The
following table sets forth the components of net periodic pension expense for
the employee pension plan and directors’ retirement plan as follows (in
thousands):




For
      Three Months Ended September 30,Employee
      Pension Plan
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    Directors'
      Retirement Plan2008
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    2007
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    2008
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    2007Interest
      cost
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    37
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    40
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    -
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    1Expected
      return on assets
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    (53
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    (55
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    -
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    -Unrecognized
      loss (gain)
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    -
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    -
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    (5
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    -Net
      periodic (benefit) expense
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    (16
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    (15
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    (5
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    1For
      Six Months Ended September 30,Employee
      Pension Plan
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    Directors'
      Retirement Plan2008
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    2007
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    2008
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    2007Interest
      cost
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    75
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    80
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    -
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    2Expected
      return on assets
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    (107
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    (110
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    -
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    -Unrecognized
      loss (gain)
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    -
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    -
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    (10
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    -Net
      periodic (benefit) expense
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    (32
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    (30
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    (10
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    2


In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 158
“Employer’s Accounting for
Defined Benefit Pension and Other Postretirement Plans”, the Company
recorded an addition to its retained earnings on April 11, 2008 to reflect a
change of measurement date for plan assets and benefit obligation from December
31, 2007 to March 31, 2008.







(6)
            Common
      Stock Dividend




On
November 13, 2008, the Board of Directors of the Holding Company declared, for
the quarter ended September 30, 2008, a cash dividend of ten cents ($0.10) per
common share outstanding.  The dividend is payable on December 12,
2008 to stockholders of record at the close of business on November 28,
2008.






(7)
            Fair
      Value Measurements




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




·
            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.





8





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




Fair
      Value Measurements at September 30, 2008, Using(in
      thousands)
                      
                      Quoted
      Prices in Active Markets for Identical Assets(Level 1)
                      
                      
                      Significant
      Other Observable Inputs (Level 2)
                      
                      
                      Significant
      Unobservable Inputs (Level 3)
                      
                      
                      Total
      Fair ValueLoans
      held for sale
                      
                      $
                      -
                      
                      
                      $
                      22,297
                      
                      
                      $
                      -
                      
                      
                      $
                      22,297Mortgage
      servicing rights
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      827
                      
                      
                      $
                      827Securities
      available for sale
                      
                      $
                      1,508
                      
                      
                      $
                      28,758
                      
                      
                      $
                      45
                      
                      
                      $
                      30,311




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 September 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.  In valuing certain collateralized debt obligations, the
determination of fair value may require benchmarking to similar instruments or
analyzing default and recovery rates.  Quoted price information for
mortgage servicing rights (“MSR”) is not available.  Therefore, MSR
are valued using market-standard models to model the specific cash flow
structure.  Key inputs to the model consist of principal balance of
loans being serviced, servicing fees and prepayment rate.




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




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





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


9





(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(“SFAS No.
159”)—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 September 30,
2008.








Application of Accounting
Principles to Loan Commitments





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








Business
Combinations





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








Non-controlling Interests in
Consolidated Financial Statements





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








Salewith Repurchase Financing
Agreements





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





10





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








Disclosures about Derivative
Instruments and Hedging Activities





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





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





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





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





11





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
have recently experienced unprecedented growth and diversification of incomes,
ethnicity and economic opportunity, after decades of public and private
investment.





Today,
Carver Federal is the largest African-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 $791 million in assets as of September 30, 2008 and employs
approximately 157 employees as of October 31, 2008.





12





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 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.




13





Recent
Market Developments





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




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




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




On
October 14, 2008, the U.S. Treasury announced that it will purchase equity
stakes in a wide variety of banks and thrifts. Under this program, known as the
Troubled Asset Relief Program Capital Purchase Program (the "TARP Capital
Purchase Program"), the U.S. Treasury made $250 billion of capital
available (from the $700 billion authorized by the EESA) to U.S. financial
institutions in the form of preferred stock. In conjunction with the purchase of
preferred stock, the U.S. Treasury will receive warrants to purchase common
stock with an aggregate market price equal to 15% of the preferred
investment.  Participating financial institutions will be required to
adopt the U.S. Treasury's standards for executive compensation and corporate
governance for the period during which the Treasury holds equity issued under
the TARP Capital Purchase Program.  The U.S. Treasury also announced
that nine large financial institutions have already participated in the TARP
Capital Purchase Program. The Company is currently well capitalized, and
continues to lend in its market.  The Company is evaluating its
participation in the program.







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 (“NMTC”).  The
NMTC award is used to stimulate economic development in low- to moderate-income
communities.  The NMTC award enables the Bank to invest with community
and development partners in economic development projects with attractive terms
including, in some cases, below market interest rates, which may have the effect
of attracting capital to underserved communities and facilitating the
revitalization of the community, pursuant to the goals of the NMTC
program.  The NMTC award provides a credit to Carver Federal against
Federal income taxes when the Bank makes qualified investments.  The
credits are allocated over seven years from the time of the qualified
investment.  Recognition of the Bank’s NMTC award began in December
2006 when the Bank invested $29.5 million, one-half of its $59.0 million
award.  In December 2007, the Bank invested an additional $10.5
million and transferred rights to $19.2 million to an investor in a NMTC
project.  The Bank’s NMTC allocation was fully invested as of December
31, 2007.  During the seven year period, assuming the Bank meets
compliance requirements, the Bank will receive 39% of the $40.0 million invested
award amount in tax benefits (5% over each of the first three years, and 6% over
each of the next four years).  The Company expects to receive the
remaining NMTC tax benefit of approximately $11.1 million from its $40.0 million
investment over 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 September 30,
2008, the Company recognized a tax benefit of $0.5 million related to the NMTC
award.





14





Critical
Accounting Policies




Note 1 to
the Company’s audited Consolidated Financial Statements for fiscal 2008 included
in its 2008 Form 10-K, as supplemented by this report, contains a summary of
significant accounting policies and is incorporated by reference.  The
Company believes its policies, with respect to the methodology for determining
the allowance for loan losses and asset impairment judgments, including other
than temporary declines in the value of the Company’s investment securities, and
goodwill impairment involve a high degree of complexity and require management
to make subjective judgments which often require assumptions or estimates about
highly uncertain matters.  Changes in these judgments, assumptions or
estimates could cause reported results to differ materially.  The
following description of these policies should be read in conjunction with the
corresponding section of the Company’s 2008 Form 10-K.




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






Goodwill
 Goodwill
recorded at September 30, 2008 relates primarily to the acquisition of Community
Capital Bank in 2006.  The Company tests goodwill for impairment on an
annual basis as of January 31, or more often if events or circumstances indicate
there may be impairment.  The Company has determined that all of its
activities constitute one reporting and operating segment.
  Goodwill
impairment analysis involves a two-step test.  The first step, used to
identify potential impairment, involves comparing the fair value of the
reporting unit to its carrying value including goodwill.  If the fair
value of the reporting unit exceeds its carrying value, goodwill is not
considered impaired.  If the carrying value exceeds fair value, there
is an indication of impairment and the second step is performed to measure the
amount of impairment.  The second step involves calculating an implied
fair value of goodwill for the reporting unit, in the same manner as the amount
of goodwill recognized in a business combination, which is the excess of the
fair value of the reporting unit, as determined in the first step, over the
aggregate fair values of the individual assets, liabilities and identifiable
intangibles as if the reporting unit was being acquired in a business
combination.  If the implied fair value of goodwill exceeds the
carrying value of reporting unit goodwill, there is no impairment.  If
the carrying value of reporting unit goodwill exceeds the implied fair value of
the goodwill, an impairment charge is recorded in earnings for the
excess.  Subsequent reversal of goodwill impairment losses is not
permitted.
  The
Company commenced an interim goodwill impairment analysis during the second
fiscal quarter, based on indications that the fair value of the Company’s
reporting unit may have declined below its carrying value as a result of factors
such as the further decline in the Company’s market capitalization relative to
the book value of shareholders’ equity and the adverse market conditions
impacting the financial services sector generally. This analysis, which
incorporates the second step test noted above, is not complete as of the date of
this filing.  However, the Company continues to believe, based on
available information regarding the fair value of implied goodwill, that no
impairment should be recorded at September 30, 2008.
  The
Company expects to complete its interim impairment analysis during the third
quarter ending December 31, 2008 and should it determine that its goodwill has
been impaired it would record such adjustment in the third quarter.




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 September 30, 2008, the Bank carried only temporarily
impaired securities where the fair value of the security is below its cost
basis.







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 September 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 September 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.





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, types of collateral and financial condition
of the borrowers.  Loan loss allowances are established for problem
loans based on a review of such information and/or appraisals of the underlying
collateral.  On the remainder of its loan portfolio, loan loss
allowances are based upon a combination of factors including, but not limited
to, actual loan loss experience, composition of loan portfolio, current economic
conditions and management’s judgment.  Although management believes
that adequate loan loss allowances have been established, actual losses are
dependent upon future events and, as such, further additions to the level of the
loan loss allowance may be necessary in the future.





15





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 No.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 No.114 for impairment if they are on
non-accrual status or have been restructured.  Consumer credit
non-accrual loans are not tested for impairment because they are included in
large groups of smaller-balance homogeneous loans that, by definition, are
excluded from the scope of SFAS No.114.  Impaired loans are required
to be measured based upon (i) the present value of expected future cash flows,
discounted at the loan’s initial effective interest rate, (ii) the loan’s market
price, or (iii) fair value of the collateral if the loan is collateral
dependent.  If the loan valuation is less than the recorded value of
the loan, an allowance must be established for the difference.  The
allowance is established by either an allocation of the existing allowance for
loan losses or by a provision for loan losses, depending on various
circumstances.  Allowances are not needed when credit losses have been
recorded so that the recorded investment in an impaired loan is less than the
loan valuation.





Stock Repurchase
Program




In August
2002, the Company’s Board of Directors authorized a stock repurchase program to
acquire up to 231,635 shares of the Company’s outstanding common stock, or
approximately 10 percent of the then outstanding shares.  As of
September 30, 2008, the Company has purchased a total of 176,174 shares at an
average price of $15.72.  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.





16





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 September 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 Federal Home Loan Bank of New
York (“FHLB-NY”) utilizing unpledged mortgage-backed securities and certain
mortgage loans, the sale of available-for-sale securities and the sale of
certain mortgage loans.  At September 30, 2008, based on available
collateral held at the FHLB-NY, Carver Federal had the ability to borrow from
the FHLB-NY an additional $41.2 million on a secured basis, utilizing
mortgage-related loans and securities as collateral.





The
unaudited Consolidated Statements of Cash Flows present the change in cash from
operating, investing and financing activities.  During the six months
ending September 30, 2008, total cash and cash equivalents decreased by $11.8
million reflecting cash used in investing activities of $14.6 million and
financing activities of $4.7 million, offset by cash provided by operating
activities of $7.4 million.





Net cash
used in investing activities was $14.6 million, primarily represents cash
disbursed to fund mortgage loan originations of $70.2 million and purchases of
available-for-sale securities of $12.4 million, offset partially by principal
collections on loans of $66.9 million and proceeds from principal payments,
maturities and calls of securities of $3.5 million.  Net cash used in
financing activities was $4.7 million, primarily resulted from decreased
deposits of $54.8 million, offset partially by an increase in borrowings of
$50.8 million.  Net cash provided by operating activities during this
period was $7.4 million, primarily due to a decrease in other assets of
$6.0 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 September
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 September 30, 2008 (dollars in
thousands):




Tangible
      Equity
                              
                              
                              Core
      Capital
                              
                              
                              Risk-Based
      CapitalAmount
                              
                              
                              %
      of Adj.
                                Assets
                              
                              
                              Amount
                              
                              
                              %
      of Adj.
                                Assets
                              
                              
                              Amount
                              
                              
                              %
      of Adj.
                                AssetsCapital
      level
                              
                              $
                              63,835
                              
                              
                              
                              8.12
                              %
                              
                              $
                              63,998
                              
                              
                              
                              8.13
                              %
                              
                              $
                              69,133
                              
                              
                              
                              10.88
                              %Less
      required capital level
                              
                              
                              11,800
                              
                              
                              
                              1.50
                              %
                              
                              
                              31,469
                              
                              
                              
                              4.00
                              %
                              
                              
                              50,815
                              
                              
                              
                              8.00
                              %Excess
      capital
                              
                              $
                              52,035
                              
                              
                              
                              6.62
                              %
                              
                              $
                              32,529
                              
                              
                              
                              4.13
                              %
                              
                              $
                              18,318
                              
                              
                              
                              2.88
                              %


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




Assets





At
September 30, 2008, total assets decreased $5.9 million,or 0.7%, to $790.7
million compared to $796.6 million at March 31, 2008, primarily as a result of
decreases in cash and cash equivalents of $11.8 million and other assets of $6.6
million, partially offset by increases in Federal Home Loan Bank stock of $2.3
million, investment securities of $8.5 million and loans receivable, net of $2.7
million.





17





Cash and
cash equivalents decreased $11.9 million, or 43.3%, to $15.5 million at
September 30, 2008 compared to $27.4 million at March 31, 2008, primarily due to
a $8.7million decrease in federal funds sold and a $3.1 million decrease in cash
and due from banks. The decrease in cash and cash equivalents is the result of
the Bank using excess liquidity to purchase higher yielding securities as a
result of the significant decline in federal funds rates.
 
 Other
assets decreased $6.6 million, or 15.8%, to $35.2 million at September 30, 2008
compared to $41.9 million at March 31, 2008, primarily due to receipt of a
settlement receivable of $8.2 million from the sale of certain
investments.
 
 Total
securities increased $8.5 million, or 22.3%, to $46.7 million at September 30,
2008 compared to $38.2 million at March 31, 2008, reflecting an increase of $9.4
million in available-for-sale securities and a $0.9 million decrease in
held-to-maturity securities. Available-for-sale securities increased $9.4
million, or 45.3%, to $30.3 million at September 30, 2008 compared to $20.9
million at March 31, 2008, primarily due to purchases of Agency securities of
$9.1 million. Held to maturity securities decreased $0.9 million, or 5.3%, to
$16.4million at September 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 no purchases of
securities during the quarter ended September 30,
 2008.
 
 Total
loans receivable, net including loans held-for-sale, increased $2.7 million, or
0.4%, to $653.6 million at September 30, 2008 compared to $651.7 million at
March 31, 2008. The increase was primarily the result of an increase in
commercial real estate loans of $13.2 million and an increase in commercial
business loans of $2.3 million, offset by decreases in one- to four- family
loans of $11.9 million and construction loans of $1.5 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
September 30, 2008, construction loans represented 24.7% of the Bank’s total
loan portfolio. Approximately 70% 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. This quarter is the first to reflect
some deterioration in real estate and business conditions in New York City.
The Bank will continue to closely monitor trends.
 
 
 Liabilities
and Stockholders’ Equity
  Liabilities
 
 Total
liabilities decreased $6.4 million, or 0.9%, to $716.7 million at September 30,
2008 compared to $723.1 million at March 31, 2008. The decrease in total
liabilities was primarily the result of a $54.8 million reduction in
customer deposits, offset by an increase of $50.8 million in advances from the
FHLB-NY and other borrowed money. The Bank made a strategic decision to
allow higher cost certificates of deposit to run off and replaced them with
lower cost borrowings to take advantage of the lower rate environment for
borrowed money.
  Deposits
decreased $54.8 million, or 8.4%, to $599.8 million at September 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 $44.1
million, savings accounts of $6.8 million, NOW accounts of $2.6 million and
demand accounts of $2.1 million, which were partially offset by an increase
of $0.9 million in money market accounts.
 
 Advances
from the FHLB-NY and other borrowed money increased $50.8 million, or 86.7%, to
$109.5 million at September 30, 2008 compared to $58.6 million at March 31,
2008. The increase in advances and other borrowed money was primarily the result
of an increase of $50.8 million in FHLB-NY advances. At September 30, 2008,
based on available collateral held at the FHLB-NY, the Bank had the ability
to borrow from the FHLB-NY an additional $41.2 million on a secured
basis.





Stockholders’
Equity





Total
stockholders’ equity increased $0.6 million, or 1.1%, to $55.0 million at
September 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 six months ended September 30, 2008 totaling $1.3 million, partially
offset by dividends paid of $0.5 million and the decrease of accumulated
other comprehensive income of $0.2 million.  The Bank’s capital levels
meet regulatory requirements of a well-capitalized financial
institution.





18





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.




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




Commitments
      to fund construction mortgage loans
                          
                          $
                          67,057Commitments
      to commercial and consumer loans
                          
                          
                          4,236Lines
      of credit
                          
                          
                          22,767Letters
      of credit
                          
                          
                          9,316$
                          103,376




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


CARVER BANCORP, INC. AND
SUBSIDIARIESCONSOLIDATED
      AVERAGE BALANCES(Dollars
      in thousands)(Unaudited)Three
      months ended September 30,2008
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2007Average
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Average
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Average
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  AverageInterest
      Earning Assets:
                                                                                                                                                                                  
                                                                                                                                                                                  Balance
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Interest
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Yield/Cost
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Balance
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Interest
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Yield/Cost(Dollars
      in thousands)Loans
      (1)
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  660,058
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  9,840
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  5.96
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  639,264
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  11,184
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  7.00
                                                                                                                                                                                  %Mortgage-backed
      securities
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  46,013
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  603
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  5.24
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  35,838
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  474
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  5.29
                                                                                                                                                                                  %Investment
      securities (2)
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  6,190
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  98
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  6.28
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  28,475
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  401
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  5.60
                                                                                                                                                                                  %Federal
      funds sold
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  691
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  0.92
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2,171
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  29
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  5.31
                                                                                                                                                                                  %Total
      interest earning assets
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  712,952
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  10,543
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  5.91
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  705,748
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  12,088
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  6.85
                                                                                                                                                                                  %Non-interest
      earning assets
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  78,219
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  55,964Total
      assets
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  791,171
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  761,712Interest
      Bearing Liabilities:Deposits:Now
      Accounts
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  23,326
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  16
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  0.27
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  24,933
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  24
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  0.38
                                                                                                                                                                                  %Savings
      and clubs
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  121,800
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  163
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  0.53
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  132,991
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  265
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  0.79
                                                                                                                                                                                  %Money
      market accounts
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  44,732
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  223
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  1.98
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  45,529
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  258
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2.25
                                                                                                                                                                                  %Certificates
      of deposit
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  368,883
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2,949
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  3.17
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  361,231
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  4,014
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  4.42
                                                                                                                                                                                  %Mortgagor's
      deposit
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2,386
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  10
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  1.66
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2,793
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  9
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  1.28
                                                                                                                                                                                  %Total
      deposits
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  561,127
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  3,361
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2.38
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  567,477
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  4,570
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  3.20
                                                                                                                                                                                  %Borrowed
      money
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  97,248
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  981
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  4.00
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  82,027
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  1,055
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  5.12
                                                                                                                                                                                  %Total
      interest bearing liabilities
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  658,375
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  4,342
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2.62
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  649,504
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  5,625
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  3.45
                                                                                                                                                                                  %Non-interest-bearing
      liabilities:Demand
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  52,777
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  53,028Other
      Liabilities
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  6,339
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  9,006Total
      liabilities
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  717,491
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  711,538Minority
      Interest
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  19,150
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -Stockholders'
      equity
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  54,530
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  50,174Total
      liabilities and stockholders' equity
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  791,171
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  761,712Net
      interest income
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  6,201
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  6,463Average
      interest rate spread
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  3.29
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  3.40
                                                                                                                                                                                  %Net
      interest margin
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  3.48
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  3.66
                                                                                                                                                                                  %(1)
      Includes non-accrual loans(2)
      Includes FHLB-NY stock


20




CARVER
      BANCORP, INC. AND SUBSIDIARIESCONSOLIDATED
      AVERAGE BALANCES(Dollars
      in thousands)(Unaudited)Six
      months ended September 30,2008
                                                                        
                                                                        
                                                                        2007Average
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        Average
                                                                        
                                                                        
                                                                        Average
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        AverageInterest
      Earning Assets:
                                                                        
                                                                        Balance
                                                                        
                                                                        
                                                                        Interest
                                                                        
                                                                        
                                                                        Yield/Cost
                                                                        
                                                                        
                                                                        Balance
                                                                        
                                                                        
                                                                        Interest
                                                                        
                                                                        
                                                                        Yield/Cost(Dollars
      in thousands)Loans
      (1)
                                                                        
                                                                        $
                                                                        657,295
                                                                        
                                                                        
                                                                        $
                                                                        20,293
                                                                        
                                                                        
                                                                        
                                                                        6.17
                                                                        %
                                                                        
                                                                        $
                                                                        628,677
                                                                        
                                                                        
                                                                        $
                                                                        22,177
                                                                        
                                                                        
                                                                        
                                                                        7.06
                                                                        %Mortgage-backed
      securities
                                                                        
                                                                        
                                                                        44,740
                                                                        
                                                                        
                                                                        
                                                                        1,165
                                                                        
                                                                        
                                                                        
                                                                        5.21
                                                                        %
                                                                        
                                                                        
                                                                        37,464
                                                                        
                                                                        
                                                                        
                                                                        976
                                                                        
                                                                        
                                                                        
                                                                        5.21
                                                                        %Investment
      securities (2)
                                                                        
                                                                        
                                                                        5,427
                                                                        
                                                                        
                                                                        
                                                                        170
                                                                        
                                                                        
                                                                        
                                                                        6.25
                                                                        %
                                                                        
                                                                        
                                                                        29,831
                                                                        
                                                                        
                                                                        
                                                                        855
                                                                        
                                                                        
                                                                        
                                                                        5.72
                                                                        %Federal
      funds sold
                                                                        
                                                                        
                                                                        4,077
                                                                        
                                                                        
                                                                        
                                                                        40
                                                                        
                                                                        
                                                                        
                                                                        1.96
                                                                        %
                                                                        
                                                                        
                                                                        1,555
                                                                        
                                                                        
                                                                        
                                                                        41
                                                                        
                                                                        
                                                                        
                                                                        5.26
                                                                        %Total
      interest earning assets
                                                                        
                                                                        
                                                                        711,539
                                                                        
                                                                        
                                                                        
                                                                        21,668
                                                                        
                                                                        
                                                                        
                                                                        6.09
                                                                        %
                                                                        
                                                                        
                                                                        697,527
                                                                        
                                                                        
                                                                        
                                                                        24,049
                                                                        
                                                                        
                                                                        
                                                                        6.89
                                                                        %Non-interest
      earning assets
                                                                        
                                                                        
                                                                        78,406
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        55,231Total
      assets
                                                                        
                                                                        $
                                                                        789,945
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        $
                                                                        752,758Interest
      Bearing Liabilities:Deposits:Now
      Accounts
                                                                        
                                                                        $
                                                                        23,776
                                                                        
                                                                        
                                                                        
                                                                        35
                                                                        
                                                                        
                                                                        
                                                                        0.29
                                                                        %
                                                                        
                                                                        $
                                                                        24,951
                                                                        
                                                                        
                                                                        
                                                                        58
                                                                        
                                                                        
                                                                        
                                                                        0.46
                                                                        %Savings
      and clubs
                                                                        
                                                                        
                                                                        123,638
                                                                        
                                                                        
                                                                        
                                                                        330
                                                                        
                                                                        
                                                                        
                                                                        0.53
                                                                        %
                                                                        
                                                                        
                                                                        135,120
                                                                        
                                                                        
                                                                        
                                                                        530
                                                                        
                                                                        
                                                                        
                                                                        0.78
                                                                        %Money
      market accounts
                                                                        
                                                                        
                                                                        45,477
                                                                        
                                                                        
                                                                        
                                                                        519
                                                                        
                                                                        
                                                                        
                                                                        2.28
                                                                        %
                                                                        
                                                                        
                                                                        46,193
                                                                        
                                                                        
                                                                        
                                                                        501
                                                                        
                                                                        
                                                                        
                                                                        2.16
                                                                        %Certificates
      of deposit
                                                                        
                                                                        
                                                                        379,885
                                                                        
                                                                        
                                                                        
                                                                        6,592
                                                                        
                                                                        
                                                                        
                                                                        3.46
                                                                        %
                                                                        
                                                                        
                                                                        350,817
                                                                        
                                                                        
                                                                        
                                                                        7,792
                                                                        
                                                                        
                                                                        
                                                                        4.43
                                                                        %Mortgagor's
      deposit
                                                                        
                                                                        
                                                                        2,847
                                                                        
                                                                        
                                                                        
                                                                        24
                                                                        
                                                                        
                                                                        
                                                                        1.68
                                                                        %
                                                                        
                                                                        
                                                                        2,807
                                                                        
                                                                        
                                                                        
                                                                        20
                                                                        
                                                                        
                                                                        
                                                                        1.42
                                                                        %Total
      deposits
                                                                        
                                                                        
                                                                        575,623
                                                                        
                                                                        
                                                                        
                                                                        7,500
                                                                        
                                                                        
                                                                        
                                                                        2.60
                                                                        %
                                                                        
                                                                        
                                                                        559,888
                                                                        
                                                                        
                                                                        
                                                                        8,901
                                                                        
                                                                        
                                                                        
                                                                        3.17
                                                                        %Borrowed
      money
                                                                        
                                                                        
                                                                        79,853
                                                                        
                                                                        
                                                                        
                                                                        1,709
                                                                        
                                                                        
                                                                        
                                                                        4.27
                                                                        %
                                                                        
                                                                        
                                                                        78,683
                                                                        
                                                                        
                                                                        
                                                                        2,030
                                                                        
                                                                        
                                                                        
                                                                        5.15
                                                                        %Total
      interest bearing liabilities
                                                                        
                                                                        
                                                                        655,476
                                                                        
                                                                        
                                                                        
                                                                        9,209
                                                                        
                                                                        
                                                                        
                                                                        2.80
                                                                        %
                                                                        
                                                                        
                                                                        638,571
                                                                        
                                                                        
                                                                        
                                                                        10,931
                                                                        
                                                                        
                                                                        
                                                                        3.41
                                                                        %Non-interest-bearing
      liabilities:Demand
                                                                        
                                                                        
                                                                        53,215
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        53,809Other
      Liabilities
                                                                        
                                                                        
                                                                        7,892
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        10,447Total
      liabilities
                                                                        
                                                                        
                                                                        716,583
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        702,827Minority
      Interest
                                                                        
                                                                        
                                                                        19,150
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        -Stockholders'
      equity
                                                                        
                                                                        
                                                                        54,212
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        49,931Total
      liabilities and stockholders' equity
                                                                        
                                                                        $
                                                                        789,945
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        $
                                                                        752,758Net
      interest income
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        $
                                                                        12,459
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        $
                                                                        13,118Average
      interest rate spread
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        3.29
                                                                        %
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        3.48
                                                                        %Net
      interest margin
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        3.50
                                                                        %
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        3.76
                                                                        %(1)
      Includes non-accrual loans(2)
      Includes FHLB-NY stock


21





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






Overview




The
Company reported consolidated net income of $0.6 million and diluted earnings
per share of $0.25 for the quarter ended September 30, 2008 compared to net
income of $0.8 million and diluted earnings per share of $0.30 for the prior
year period.  Net income declined $0.2 million, or 18.8%, to $0.6
million is the  result of a decrease in net interest income of $0.4
million, and increase in provision for loan losses of $0.2 million and an
increase in non-interest expense of $0.1 million, offset by increases in
non-interest income $0.1 million and an income tax benefit of $0.4
million.





Net
income for the six months ended September 30, 2008 was $1.3 million compared to
net interest income of $1.9 million for the prior year period, a decrease of
$0.6 million.  The decrease in net income is the result of a decrease
in net interest income of $0.7 million, an increase in non-interest expense of
$0.9 million and an increase in provision for loan losses of $0.3 million,
offset by an increase in non-interest income of $0.7 million and an income tax
benefit of $0.7 million compared to an income tax expense of $0.1
million.




Selected
operating ratios for the three and six months ended September 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 Ended
                            
                            
                            Six
      Months EndedSelected
      Financial Data:
                            
                            September
      30,
                            
                            
                            September
      30,2008
                            
                            
                            2007
                            
                            
                            2008
                            
                            
                            2007Return
      on average assets (1)
                            
                            
                            0.31
                            %
                            
                            
                            0.40
                            %
                            
                            
                            0.33
                            %
                            
                            
                            0.51
                            %Return
      on average equity (2)
                            
                            
                            4.56
                            
                            
                            
                            6.03
                            
                            
                            
                            4.82
                            
                            
                            
                            7.62Net
      interest margin (3)
                            
                            
                            3.48
                            
                            
                            
                            3.66
                            
                            
                            
                            3.50
                            
                            
                            
                            3.76Interest
      rate spread (4)
                            
                            
                            3.29
                            
                            
                            
                            3.40
                            
                            
                            
                            3.29
                            
                            
                            
                            3.48Efficiency
      ratio (5)
                            
                            
                            94.00
                            
                            
                            
                            90.90
                            
                            
                            
                            92.79
                            
                            
                            
                            87.23Operating
      expenses to average assets (6)
                            
                            
                            3.69
                            
                            
                            
                            3.78
                            
                            
                            
                            3.71
                            
                            
                            
                            3.64Average
      equity toaverage assets
      (7)
                            
                            
                            6.89
                            
                            
                            
                            6.59
                            
                            
                            
                            6.86
                            
                            
                            
                            6.63Average
      interest-earning assets to average interest-bearing
      liabilities
                            
                            
                            1.08
                            x
                            
                            
                            1.09
                            x
                            
                            
                            1.09
                            x
                            
                            
                            1.09
                            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.




22





Interest
Income
  Interest
income decreased by $1.6 million, or 12.8%, to $10.5 million for the quarter
ended September 30, 2008 compared to $12.1 million for the prior year
period.  The decrease in interest income was primarily the result of
decreases in interest income on loans of $1.3 million and interest income on
investment securities of $0.3 million. The decrease in interest income reflects
a decrease in the yield on interest-earning assets of 94 basis points to 5.91%
for the quarter ended September 30, 2008 as compared to 6.85% for the prior year
period.  The decrease in yield on interest earning assets was
primarily the result of a 104 basis points decrease in the yield on loans as a
result of LIBOR and prime based construction loans repricing at lower rates. The
decrease in interest income was also the result of the decline in the average
balance of investment securities from $28.5 in the prior year period to $6.2
million in the quarter ended September 30, 2008 as securities
matured.
 
 For the
six month period ending September 30, 2008, interest income decreased $2.4
million, or 9.9%, to $21.6 million, compared to $24.0 million for the prior year
period. The decrease in interest income was primarily the result of decreases in
interest income on loans of $1.9 million and interest income on investment
securities of $0.7 million, offset by an increase in interest income on
mortgage-backed securities of 0.2  million. The decrease in interest
income reflects a decrease in the yield on interest-earning assets of 80 basis
points to 6.09% for the six months ended September 30, 2008 as compared to 6.89%
for the prior year period.  The decrease in yield on interest earning
assets was primarily the result of an 89 basis points decrease in the yield on
loans as a result of LIBOR and prime rate based construction loans repricing at
lower rates. The decrease in interest income was also the result of the decline
in the average balance of investment securities from $29.8 in the prior year
period to $5.4 million in the quarter ended September 30, 2008 due to matured
securities.





Interest
income on loans decreased by $1.3 million, or 12.1%, to $9.8 million for the
quarter ended September 30, 2008 compared to $11.2 million for the prior year
period.  These results were primarily driven by a yield decrease of
104 basis points to 5.96% for the quarter ended September 30, 2008 compared to
7.00% 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 294 bps and 263 bps, respectively, since September 30, 2007, offset by an
increase in average loan balances of $20.8 million to $660.1 million for the
quarter ended September 30, 2008 compared to $639.3 million for the prior year
period, primarily due to growth in commercial real estate loans of $31.7
million.





For the
six month period ending September 30, 2008, interest income on loans decreased
$1.9 million, or 8.6%, to $20.3 million compared to $22.2 million for the prior
year period.  This decrease was driven by a decrease in yield of 88
basis points, offset by higher average loan balances of $28.6
million.





Interest
income on investment and mortgage backed securities decreased by $0.2 million,
or 19.9%, to $0.7 million for the quarter ended September 30, 2008 compared to
$0.9 million for the prior year period.  Interest income on investment
securities decreased by $0.3 million, or 75.0%, to $0.1 million for the three
months ended September 30, 2008 compared to $0.4 million for the prior year
period.  The decrease in interest income on investment securities for
the quarter ended September 30, 2008 was primarily the result of a $22.3
million, or 78.3%, reduction in the average balances of investment securities to
$6.2 million, compared to $28.5 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 68
basis points to 6.28% for the quarter ended September 30, 2008 compared to 5.60%
for the prior year period.





Additionally,
the decrease in interest income on investment securities was partially offset by
an increase in mortgage-backed securities interest income of $0.1 million, or
20%, to $0.6 million for the quarter ended September 30, 2008 compared to $0.5
million for the prior year period.  The increase was primarily the
result of an increase in the average balances of mortgage-backed securities by
$10.2 million to $46.0 million for the quarter ended September 30, 2008 compared
to $35.8 million for the prior year period.





For the
six month period ending September 30, 2008, interest income on investments and
mortgage backed securities decreased $0.5 million, or 27.1%, to $1.3 million
from $1.8 million for the prior year period.  The decrease in interest
income on investment securities for the six month period ended September 30,
2008 was primarily the result of a $24.4 million, or 81.8%, reduction in the
average balances of investment securities to $5.4 million, compared to
$29.8 million for the prior year period.  This was offset by an
increase in mortgage-backed securities of $7.3 million, or 19.2%, to $44.7
million for the six month period ended September 30, 2008 compared to $37.5
million for the prior year period.  The effect of the decrease in the
balance of investment securities was partially offset by a 53 basis point
increase in the annualized average yield on such securities to 6.25% compared to
5.72% in the prior year period.  The yield on mortgage-backed
securities remained level at 5.21%.





Interest
Expense





Interest
expense decreased by $1.3 million, or 22.8%, to $4.3 million for the quarter
ended September 30, 2008 as compared to $5.6 million for the prior year period.
The decrease in interest expense was primarily the result of decreases in
interest expense on deposits of $1.2 million and interest expense on advances
and other borrowed money of $0.1 million. The decrease in interest expense
primarily reflects an 83 basis point decrease in the average cost of
interest-bearing liabilities to 2.62% for the quarter ended September 30, 2008
compared to 3.45% for the prior year period, partially offset by growth in the
average balance of interest-bearing liabilities of $8.9 million, or 1.4%, to
$658.4 million for the quarter ended September 30, 2008 compared to $649.5
million for the prior year period. The decrease in the yield on interest bearing
liabilities was primarily the result of higher cost certificates of deposits
repricing at lower rates as well as lower costs on short-term advances from the
Federal Home Loan Bank of New York (“FHLB”).
 
 For the
six month period ended September 30, 2008, interest expense decreased by $1.7
million, or 15.7%, to $9.2 million, compared to $10.9 million for the prior year
period.  The decrease in interest expense resulted primarily from a 61
basis point decrease in the annualized average cost of interest-bearing
liabilities to 2.80%, compared to 3.41% for the prior year period, offset
partially by growth in the average balance of interest-bearing liabilities of
$16.9 million, or 2.6%, to $655.5 million compared to $638.6 million for the
prior year period.


23





Interest
expense on total deposits decreased $1.2 million, or 26.7%, to $3.4 million for
the quarter ended September 30, 2008 compared to $4.6 million for the prior year
period.  The decrease reflects a 82 basis point reduction in the
average cost of deposits to 2.38% for the quarter ended September 30, 2008
compared to 3.20% for the prior year period and a decrease in the average
balance of total deposits of $6.4 million to $561.1 million for the quarter
ended September 30, 2008 compared to $567.5 million for the prior year
period.





For the
six month period ended September 30, 2008, total interest expense on deposits
decreased $1.4 million, or 15.7%, to $7.5 million from $8.9 million for the
prior year period.  The decrease reflects a 57 basis point reduction
in the average cost of total deposits to 2.60% compared to 3.17% for the
prior year period, offset by an increase in the average balance of total
deposits of $15.7 million to $575.6 million for the quarter ended September 30,
2008 compared to $559.9 million for the prior year period.





Interest
expense on borrowed money decreased $0.1 million, or 7.0%, to $1.0 million for
the quarter ended September 30, 2008 compared to $1.1 million for the prior year
period.  The decrease primarily reflects a 112 basis point reduction
in the average cost of borrowed money to 4.00% for the quarter ended September
30, 2008 compared to 5.12% for the prior year period, offset by an increase
in the average balance of total borrowed money outstanding of $15.2 million to
$97.2 million for the quarter ended September 30, 2008 compared to $82.0 million
for the prior year period.





For the
six month period ended September 30, 2008, interest expense on borrowed money
decreased $0.3 million, or 15.8%, to $1.7 million, compared to $2.0 million for
the prior year period.  In the six months ended September 30,
2008, the decrease primarily reflects a 88 basis point reduction in the
average cost of borrowed money to 4.27% compared to 5.15% for the prior
year period, offset by an increase in the average balance of total borrowed
money outstanding of $1.2 million to $79.9 million compared to $78.7 million for
the prior year period.








Net
Interest Income before Provision for Loan Losses





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





Net
interest income before the provision for loan losses decreased $0.3 million, or
4.6%, to $6.2 million for the quarter ended September 30, 2008 compared to $6.5
million for the prior year period.  This decrease was a result of a
decrease in the yield on average interest-earning assets of 94 basis points and
an increase in the average balance of interest-bearing liabilities of $8.9
million.  The result was a 11 basis point decrease in the interest
rate spread to 3.29% for the quarter ended September 30, 2008 compared to 3.40%
for the prior year period.  The net interest margin also decreased to
3.48% for the quarter ended September 30, 2008 compared to 3.66% for the prior
year period.





For the
six month period ending September 30, 2008, net interest income before the
provision for loan losses decreased by $0.7 million, or 5.0%, to $12.5 million,
compared to $13.1 million for the prior year period.  Net interest
margin for the six month period ending September 30, 2008, decreased 26 basis
points to 3.50% compared to 3.76% for the prior year period.





Provision
for Loan Losses and Asset Quality





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





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





24





The
following table sets forth an analysis of Carver Federal’s allowance for loan
losses for the three and six months period ended September 30, 2008 (dollars in
thousands):


Three
      Months Ended September 30, 2008
                            
                            
                            Six
      Months Ended September 30, 2008Beginning
      Balance
                            
                            $
                            5,032
                            
                            
                            $
                            4,878Less
      charge-offs:Business
                            
                            
                            (70
                            )
                            
                            
                            (70
                            )Consumer
                            
                            
                            (16
                            )
                            
                            
                            (52
                            )Total
      Charge- Offs:
                            
                            
                            (86
                            )
                            
                            
                            (122
                            )Add  Recoveries:Consumer
                            
                            
                            19
                            
                            
                            
                            40Total
      Recoveries:
                            
                            
                            19
                            
                            
                            
                            40Provision
      for Loan Losses
                            
                            
                            170
                            
                            
                            
                            339Ending
      Balance
                            
                            $
                            5,135
                            
                            
                            $
                            5,135Ratios:Net
      charge-offs to average loans outstanding
                            
                            
                            0.01
                            %
                            
                            
                            0.01
                            %Allowance
      to total loans
                            
                            
                            0.81
                            %
                            
                            
                            0.81
                            %Allowance
      to non-performing loans (1)
                            
                            
                            29.42
                            %
                            
                            
                            29.42
                            %


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





The Bank
provided a $0.2 million loan loss provision for the quarter ended September 30,
2008 compared with no provision for the prior year period.  For the
six month period ended September 30, 2008, the Bank provided a $0.3 million loan
loss provision compared with no provision for the prior year period. The
increase recognizes the rise in non-performing loans reflecting indications of
deterioration in the housing market and the New York City economy.The Bank’s future level of non-performing loans will be influenced by
economic conditions, including the impact of those conditions on the Bank’s
customers, interest rates and other factors existing at the
time.  At September 30, 2008 and March 31, 2008, the Bank’s
allowance for loan losses was $5.1 million and $4.9 million,
respectively.  The ratio of the allowance for loan losses to
non-performing loans was 29.42% at September 30, 2008 compared to 170.9% at
March 31, 2008.  The ratio of the allowance for loan losses to total
loans was 0.81% at September 30, 2008 compared to 0.74% at March 31,
2008.








Non-performing
Assets.





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





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





25





On
September 30, 2008, non-accrual loans totaled $17.5 million, or 2.75% of total
loans receivable compared to $2.9 million, or 0.43% of total loans receivable at
March 31, 2008.  Non-performing assets include loans 90 days past due,
non-accrual loans and other real estate owned.




At
September 30, 2008, non-performing assets totaled $27.4 million, or 3.46% 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.





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





September
                    2008
                  
                  
                  June
                    2008
                  
                  
                  March
                    2008
                  
                  
                  December
                    2007
                  
                  
                  September
                    2007Loans
      accounted for on a non-accrual basis (1):Gross
      loans receivable:One-
      to four-family
                  
                  $
                  1,671
                  
                  
                  $
                  871
                  
                  
                  $
                  567
                  
                  
                  $
                  1,442
                  
                  
                  $
                  757Multifamily
                  
                  
                  -
                  
                  
                  
                  3,322
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,273Non-residential
                  
                  
                  10,424
                  
                  
                  
                  -
                  
                  
                  
                  522
                  
                  
                  
                  522
                  
                  
                  
                  -Construction
                  
                  
                  3,157
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Business
                  
                  
                  2,185
                  
                  
                  
                  2,059
                  
                  
                  
                  1,708
                  
                  
                  
                  2,056
                  
                  
                  
                  2,392Consumer
                  
                  
                  20
                  
                  
                  
                  -
                  
                  
                  
                  57
                  
                  
                  
                  192
                  
                  
                  
                  27Total
      non-accrual loans
                  
                  
                  17,457
                  
                  
                  
                  6,252
                  
                  
                  
                  2,854
                  
                  
                  
                  4,212
                  
                  
                  
                  4,449Accruing
      loans contractually past due > 90 days (2)
                  
                  
                  9,349
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      non-performing loans (non-accrual & accruing loans past due > 90
      days)
                  
                  
                  26,806
                  
                  
                  
                  6,252
                  
                  
                  
                  2,854
                  
                  
                  
                  4,212
                  
                  
                  
                  4,449Other
      non-performing assets (3):Real
      estate owned
                  
                  
                  635
                  
                  
                  
                  142
                  
                  
                  
                  1,163
                  
                  
                  
                  147
                  
                  
                  
                  28Total
      other non-performing assets
                  
                  
                  635
                  
                  
                  
                  142
                  
                  
                  
                  1,163
                  
                  
                  
                  147
                  
                  
                  
                  28Total
      non-performing assets (4)
                  
                  $
                  27,441
                  
                  
                  $
                  6,394
                  
                  
                  $
                  4,017
                  
                  
                  $
                  4,359
                  
                  
                  $
                  4,477Non-performing
      loans to total loans
                  
                  
                  4.22
                  %
                  
                  
                  0.97
                  %
                  
                  
                  0.43
                  %
                  
                  
                  0.66
                  %
                  
                  
                  0.70
                  %Non-performing
      assets to total assets
                  
                  
                  3.47
                  %
                  
                  
                  0.81
                  %
                  
                  
                  0.50
                  %
                  
                  
                  0.52
                  %
                  
                  
                  0.58
                  %
 
 
 (1)  Non-accrual
status denotes any loan where the delinquency exceeds 90 days past due and in
the opinion of management the collection of additional interest is
doubtful.  Payments received on a non-accrual loan are either applied
to the outstanding principal balance or recorded as interest income, depending
on assessment of the ability to collect on the loan
 
 (2)  This
category represent loans that are 90 days or more past maturity that are current
with respect to principal and interest payments.
 
 (3)  Other
non-performing assets generally represent property acquired by the Bank in
settlement of loans (i.e., through foreclosure, repossession or as an
in-substance foreclosure).  These assets are recorded at the lower of
their fair value or the cost to acquire.
 
 (4)  Total
non-performing assets consist of non-accrual loans, accruing loans 90 days or
more past due and property acquired in settlement of loans.


26





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




Potential
problem loans




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




Subprime
Loans





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




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




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




·
            Limited
      or no documentation of borrowers’
income;




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




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




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




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




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




·
            Bankruptcy
      in the last 5 years;




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




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




The Bank
has minimal exposure to the subprime loan market and, therefore, it does not
expect the Statement to have a material impact on the Company.  At
September 30, 2008, the Bank’s loan portfolio contained $1.2 million in loans
that if considers subprime, all of which were performing loans.




Non-Interest
Income


Non-interest
income increased by $0.1 million, or 8.1%, to $1.6 million for the quarter ended
September 30, 2008 compared to $1.5 million for the prior year
period.  The increase was due to other income increasing $0.3 million,
offset by a decrease in loan fees and service charges and gain on sale of
securities of $0.1 million, respectively.  Other income increased by
$0.3 million, primarily the result of $0.2 million consolidation of income from
the minority interest created by the New Markets Tax Credit (“NMTC”)
transaction.
 
 For the
six month period ended September 30, 2008, non-interest income increased $0.7
million to $3.3 million compared to $2.6 million for the prior year
period.  For the six month period ended September 30, 2008, other
income increased by $0.6 million, primarily the result of a $0.4 million
consolidation of income from the minority interest created by the NMTC
transaction.


27
  Non-Interest
Expense





Non-interest
expense increased by $0.1 million, or 1.5%, to $7.3 million for the quarter
ended September 30, 2008 compared to $7.2 million for the prior year
period.  The increase was primarily due to increases in employee
compensation and benefits of $0.5 million and equipment expense of $0.2 million,
offset by a decrease in other expenses of $0.6 million.  The decrease
in other expenses was the result of a reduction in consulting expenses which
declined from $0.8 million in prior year period to $0.4 million for the second
quarter fiscal 2009.
 
 During
the six month period ended September 30, 2008, non-interest expense increased
$0.9 million, or 6.9%, to $14.6 million compared to $13.7 million for the prior
year period.The increase in
non-interest expense was primarily due to increases of $0.7 million in employee
compensation and benefits to $7.0 million compared to $6.3 million, $0.2 million
in equipment expense to $1.3 million compared to $1.1 million and $0.1 million
in net occupancy expense to $1.9 million compared to $1.8 million, respectively,
for the prior year period.


Income
Tax Expense





The
income tax benefit was $0.4 million for the quarter ended September 30, 2008
compared to a tax benefit of $44,000 for the prior year period.  The
tax benefit for the quarter ended September 30, 2008 reflects income before
taxes of $0.3 million which resulted in income tax expense of $0.1 million
offset by the tax benefit generated by the NMTC transaction totaling $0.5
million, compared to income before income taxes of $0.7 million for the prior
year period, which resulted in income tax expense of $0.3 million offset by the
tax benefit generated by the NMTC investment totaling $0.4
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 $11.1 million from its $40.0 million investment through the
period ending March 31, 2014.
 
 For the
six month period ended September 30, 2008, the bank recorded a tax benefit of
$0.8 million compared to income tax expense of $0.1 million for the prior year
period. The tax benefit for the six months ended September 30, 2008 reflects
income before taxes of $0.8 million which resulted in income tax expense of $0.3
million offset by the tax benefit generated by the NMTC investment totaling $1.0
million as compared to income before income taxes of $2.0 million for the prior
year period, which resulted in income tax expense of $0.8 million offset by the
tax benefit generated by the NMTC investment totaling
$0.7 million.


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 September 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 September 30, 2008, the Company's management,
including the Company's Chief Executive Officer and acting Chief Accounting
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act), as of the end of the period covered by this report.  Based upon
that evaluation, the Chief Executive Officer and Controller concluded that the
Company's disclosure controls and procedures were 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 Controller, as appropriate, to allow timely decisions
regarding required disclosure.




28




(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.







29





PARTII.
            OTHER
      INFORMATION




ITEM
      1.
            Legal
      Proceedings




Disclosure
regarding legal proceedings to which the Company is a party is presented in Note
14 to the audited Consolidated Financial Statements in the 2008 Form 10-K and is
incorporated herein by reference.  There have been no material changes
with regard to such legal proceedings since the filing of the 2008 Form
10-K.







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  except as discussed
below.




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




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




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




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




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




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




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





30





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




If we
participate in the CPP, our ability to declare or pay dividends on any of our
shares will be limited.  Specifically, we will not be able to declare
dividends payments on common, junior preferred or pari passu preferred shares if
we are in arrears on the dividends on the senior preferred shares issued to the
Treasury.  Further, we will not be permitted to increase
dividends on our common stock without the Treasury’s approval until the
third anniversary of the investment unless the senior preferred stock issued to
the Treasury has been redeemed or transferred.  In addition, our
ability to repurchase our shares will be restricted. The Treasury’s consent
generally will be required for us to make any stock repurchase until the third
anniversary of the investment by the Treasury unless the senior preferred stock
issued to the Treasury has been redeemed or transferred.  Further,
common, junior preferred or pari passu preferred shares may not be repurchased
if we are in arrears on the dividends on the senior preferred shares issued to
the Treasury.




If we
choose to participate in the program, we must also adopt the Treasury’s
standards for executive compensation and corporate governance for the period
during which the Treasury holds equity issued under this
program.  These standards would generally apply to our CEO, CFO and
the three next most highly compensated officers.  The standards
include (1) ensuring that incentive compensation for senior executives does not
encourage unnecessary and excessive risks that threaten the value of the
financial institution; (2) required clawback of any bonus or incentive
compensation paid to a senior executive based on statements of earnings, gains
or other criteria that are later proven to be materially inaccurate; (3)
prohibition on making golden parachute payments to senior executives; and (4)
agreement not to deduct for tax purposes executive compensation in excess of
$500,000 for each senior executive.  In particular, the change to the
deductibility limit on executive compensation would likely increase the overall
cost of our compensation programs.  In conjunction with any purchase
of senior preferred shares, the Treasury would receive warrants to purchase our
common stock with an aggregate market price equal to 15% of the senior preferred
investment.  The warrants would be immediately exercisable and have a
term of 10 years.  Therefore, we could potentially be subject to the
executive compensation and corporate governance restrictions for a 10 year time
period if we participate in the CPP.  We are currently evaluating
whether or not we will participate in the CPP.




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




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






ITEM2.          Issuer
Purchases of Equity Securities




During
the quarter ended September 30, 2008, the Company purchased an additional 6,800
shares of its common stock under its stock repurchase program.  As of
September 30, 2008, the Company has purchased a total of 176,174 shares at an
average price per share of $15.72.





31




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)July
      1, 2008 to July 31, 2008
                      
                      
                      6,800
                      
                      
                      
                      8.66
                      
                      
                      
                      6,800
                      
                      
                      
                      55,448August
      1, 2008 to August 31, 2008
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -September
      1, 2008 to September 30, 2008
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -


(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




The
Holding Company held its Annual Meeting on September 16, 2008 for the fiscal
year ended March 31, 2008.




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




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




2.
            the
      ratification of the appointment of KPMG LLP as independent auditors of the
      Holding Company for the fiscal year ending March 31,
      2009.





32





The
results of voting were as follows:


Proposal
      1:
                                    Election
      of Directors:Holding
      Company NomineesCarol Baldwin Moody
                                    For
                                    
                                    
                                    2,093,491Withheld
                                    
                                    
                                    10,346Abstain
                                    
                                    
                                    -Edward B. Ruggiero
                                    For
                                    
                                    
                                    2,019,158Withheld
                                    
                                    
                                    84,679Abstain
                                    
                                    
                                    -Proposal
      2:
                                    Ratification
      of Appointment of Independent Auditors
                                    For
                                    
                                    
                                    2,097,504Against
                                    
                                    
                                    6,229Abstain
                                    
                                    
                                    104


In
addition to the nominees elected at the Annual Meeting, the following persons’
terms of office as directors continued after the Annual Meeting: Dr. Samuel J.
Daniel, David L. Hines, Robert Holland, Jr., Pazel G. Jackson, Robert R. Tarter
and Deborah C. Wright.






ITEM5.
            Other
      Information




In
November 2008, the board of the directors of the Holding Company appointed
Michael A. Trinidad, 51, as acting chief accounting officer to serve
until a permanent chief accounting officer is appointed.  Mr. Trinidad
is currently Senior Vice President and Controller of the Holding
Company. He joined the Holding Company in June 2007. Previously, Mr.
Trinidad was First Vice President and Corporate Accounting Manager at
Independence Community Bank, a position he held since 1997. Mr. Trinidad
was employed at Independence Community Bank since 1989, where he held
various managerial roles with increasing responsibilities in the Corporate
Accounting Group. In 2006, Independence Community Bank was acquired
by Sovereign Bancorp Inc. Prior to Independence, Mr. Trinidad was
employed by Greater New York Savings Bank (acquired by Astoria Financial
Corp. in 1997). At Greater New York, Mr. Trinidad held various managerial
roles in Accounting, Lending and Information Technology Groups.
Mr. Trinidad earned a B.B.A in Accounting Information Systems from Pace
University.
  At the
end of October we began to offier residential loans products through PHH
Mortgage Corporation (“PHH”), a third party provider, via our branches, website
and call center. In addition to fee income derived from this channel, we
anticipate that a recent agreement to purchase whole loans underwritten by PHH,
using the Bank’s lending standards, will provide an avenue for loan growth, when
real estate markets stabilize.






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 Accounting Officer.Exhibit 32.1
                                  Certification
      of Chief Executive Officer furnished pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002, 18 U.S.C.  Section
    1350.Exhibit 32.2
                                  Certification
      of Chief Accounting Officer furnished pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002, 18 U.S.C.  Section
    1350.





33





SIGNATURES








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





CARVER
      BANCORP, INC.Date:
      November 14,
      2008
                        /s/ Deborah
      C.  WrightDeborah
      C.  WrightChairman
      and Chief Executive Officer(Principal
      Executive Officer)Date:
      November 14,
      2008
                        /s/ Michael A. TrinidadMichael
      A. TrinidadSenior
      Vice President and Controller(Acting
      Chief Accounting Officer)
   34