Edgar Filing: CARVER BANCORP INC

Form 10-K/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


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

For the fiscal year ended March 31, 2008


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

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


*Common Stock, par value $.01 per share*		*NASDAQ Global Market*
(Title of Class)		(Name of each Exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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		o Accelerated Filer		o Non-accelerated Filer		þ Smaller Reporting Company

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

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

DOCUMENTS INCORPORATED BY REFERENCE:

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

TABLE OF CONTENTS


PART II
	ITEM 6. SELECTED FINANCIAL DATA
		CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
		CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
		CONSOLIDATED STATEMENTS OF CASH FLOWS
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
		CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
		CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
		CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
		CONSOLIDATED STATEMENTS OF CASH FLOWS
	ITEM 9A. DISCLOSURE CONTROLS AND PROCEDURES
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EXHIBIT INDEX
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

EXPLANATORY NOTE

Carver Bancorp, Inc. (the “Company” or “Carver”) is filing this amendment No. 1 to its Annual Report on Form 10-K for the year ended March 31, 2008 to reflect the restatement of its Consolidated Financial Statements, as discussed in Note 2 of the Notes to the Consolidated Financial Statements contained in Part II, Item 8: Financial statements and supplementary data. Except for Items 6, 7, 8 and 9A of Part II, no other information in the Form 10-K is being amended or updated. This restatement has been disclosed previously in the Company’s financial results as reported on Form 10-Q as of December 31, 2008.

PART II

ITEM 6. SELECTED FINANCIAL DATA.

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


	2008			2007			2006			2005			2004
	(Restated)			(Restated)
Selected Financial Condition Data:
Assets	$	796,182		$	739,530		$	661,396		$	626,377		$	538,830
Loans held-for-sale		23,767			23,226			—			—			—
Total loans receivable, net		627,231			579,866			493,432			421,987			351,900
Securities		38,172			67,117			108,286			149,335			139,877
Cash and cash equivalents		27,368			17,350			22,904			20,420			22,774
Deposits		654,663			615,122			504,638			455,870			375,519
Borrowed funds		58,625			61,093			93,792			115,299			104,282
Stockholders’ equity		53,881			51,142			48,697			45,801			44,645

Number of deposit accounts		46,771			46,034			41,614			40,199			38,578
Number of branches		10			10			8			8			6

Operating Data:
Interest income	$	48,132		$	41,740		$	32,385		$	28,546		$	26,234
Interest expense		22,656			19,234			13,493			9,758			8,700

Net interest income before provision for loan losses		25,476			22,506			18,892			18,788			17,534
Provision for loan losses		222			276			—			—			—

Net interest income after provision for loan losses		25,254			22,230			18,892			18,788			17,534
Non-interest income		7,861			2,869			5,341			4,075			5,278
Non-interest expense		29,898			24,100			19,134			18,696			15,480

Income before income taxes		3,217			999			5,099			4,167			7,332
Income tax (benefit) expense		(892	)		(1,099	)		1,329			1,518			2,493
Minority interest, net of taxes		146			—			—			—			—

Net income	$	3,963		$	2,098		$	3,770		$	2,649		$	4,839

Basic earnings per common share	$	1.59		$	0.84		$	1.50		$	1.06		$	2.03

Diluted earnings per common share	$	1.55		$	0.81		$	1.45		$	1.03		$	1.87

Cash dividends per common share	$	0.40		$	0.35		$	0.31		$	0.26		$	0.20


Selected Statistical Data:
Return on average assets (1)		0.52	%		0.30	%		0.60	%		0.45	%		0.93	%
Return on average equity (2)		7.23			4.25			7.93			5.80			11.40
Net interest margin (3)		3.62			3.44			2.97			3.41			3.56
Average interest rate spread (4)		3.34			3.16			3.18			3.26			3.40
Efficiency ratio (5)		90.31			94.98			78.96			81.77			67.86
Operating expense to average assets (6)		3.92			3.34			3.04			3.21			2.97
Average equity to average assets		7.16			7.05			7.54			7.84			8.13
Dividend payout ratio (7)		24.50			34.04			20.63			24.64			9.86

Asset Quality Ratios:
Non-performing assets to total assets (8)		0.50	%		0.61	%		0.42	%		0.16	%		0.39	%
Non-performing loans to total loans receivable (8)		0.43			0.74			0.55			0.23			0.60
Allowance for loan losses to total loans receivable		0.74			0.89			0.81			0.96			1.16


(1)		Net income divided by average total assets.

(2)		Net income divided by average total equity.

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

(4)		The difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(5)		Non-interest expense divided by the sum of net interest income and non-interest income.

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

(7)		Dividends paid to common stockholders as a percentage of net income available to common stockholders.

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

RESTATEMENT

During the quarter ended December 31, 2008, Carver became aware of certain adjustments to suspense accounts related to check return processing and automated clearing house (“ACH”) return processing that appeared to be incorrect. A review of the suspense account reconciliations commenced and an analysis was performed on Carver’s accounting and financial reporting practices. The review raised questions regarding transactions since fiscal 2007, most of which involved adjustments to various suspense accounts, and identified evidence that certain adjustments were incorrect. The review found evidence that during fiscal 2007, suspense accounts adjustments for check returns and ACH returns were improper and resulted in aged suspense items not being properly cleared. As a result, an adjustment totaling $761,000 ($485,000 net of tax) was necessary to correct the fiscal 2007 financial statements to reflect charge-offs that should have been recorded in the appropriate period. This adjustment resulted in a reduction in diluted earnings per share for fiscal 2007 from $1.00 to $0.81, a decrease of $0.19, or 19%. The errors and irregularities identified in the course of the review revealed deficiencies in Carver’s accounting and financial control environment, some of which were determined to be a material weakness requiring corrective and remedial actions.

Concurrently with the review, Carver also conducted extensive internal reviews for the purpose of the preparation and certification of Carver’s fiscal 2009 financial statements and its assessment of internal controls over financial reporting. Carver’s procedures included expanded account reviews and expanded balance sheet reconciliations to ensure all accounts were fully reconciled, supported, and appropriately documented. Carver also implemented improvements to its quarterly and annual accounting close process to provide for more complete review of the financial results.

As a result of the issues identified in the review, the Finance and Audit Committee, in consultation with management and KPMG LLP, concluded on February 9, 2009 that Carver’s previously issued financial statements for fiscal 2007 and fiscal 2008 (including the interim periods within those years), should no longer be relied upon because of certain accounting errors and irregularities in those financial statements. Accordingly, Carver restated its previously issued financial statements for those periods by filing this Amendment No. 1 to its Form 10-K for the year ended March 31, 2008. Restated financial information is presented in this Amendment No. 1 to its Form 10-K for the year ended March 31, 2008.

Set out below is the impact of the adjustment by financial statement line item in Carver’s consolidated statement of financial condition as of March 31, 2008 and 2007, the Consolidated Statements of Income and Cash Flows for the year ended March 31, 2007 and the Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the years ended March 31, 2008 and 2007. In addition, the income tax effect of the above adjustment has been reflected in footnote 11 of the consolidated financial statements.

Immaterial Corrections

The Consolidated Statement of Income for the year ended March 31, 2008 reflects an immaterial correction to reflect additional audit expenses in the amount of $28,000. After taxes this resulted in a decrease in net income of $17,000. As a result the corrected basic EPS remains unchanged at $1.59 while the corrected diluted EPS remains unchanged at $1.55.

The Consolidated Statement of Financial Position as of March 31, 2008 and 2007 also reflects an adjustment to reclassify $0.7 million from commercial business loans to goodwill. This adjustment was the result of a re-evaluation of goodwill in connection with the reconciliation matters disclosed above and elsewhere herein.

Management believes these corrections to prior period mistatements to be immaterial.

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except per share data)


	March 31,			March 31,			March 31,			March 31,			March 31,			March 31,
	2008			2008			2008			2007			2007			2007
	(As Previously									(As Previously
	Reported)(1)			Adjustment			(As Restated)			Reported)(1)			Adjustment			(As Restated)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	15,920		$	—		$	15,920		$	14,619		$	—			14,619
Federal funds sold		10,500			—			10,500			1,300			—			1,300
Interest earning deposits		948			—			948			1,431			—			1,431

Total cash and cash equivalents		27,368						27,368			17,350						17,350
Securities:
Available-for-sale, at fair value		20,865			—			20,865			47,980			—			47,980
Held-to-maturity, at amortized cost		17,307			—			17,307			19,137			—			19,137

Total securities		38,172			—			38,172			67,117			—			67,117

Loans held-for-sale		23,767			—			23,767			23,226			—			23,226

Loans receivable:
Real estate mortgage loans		578,957			—			578,957			533,667			—			533,667
Commercial business loans		51,424			—			51,424			50,541			—			50,541
Consumer loans		1,728			—			1,728			1,067			—			1,067
Allowance for loan losses		(4,878	)		—			(4,878	)		(5,409	)		—			(5,409	)

Total loans receivable, net		627,231			—			627,231			579,866			—			579,866

Office properties and equipment, net		15,780			—			15,780			14,626			—			14,626
Federal Home Loan Bank of New York stock, at cost		1,625			—			1,625			3,239			—			3,239
Bank owned life insurance		9,141			—			9,141			8,795			—			8,795
Accrued interest receivable		4,063			—			4,063			4,335			—			4,335
Goodwill		7,055			—			7,055			6,401			—			6,401
Core deposit intangibles, net		532			—			532			684			—			684
Other assets		41,870			(422	)		41,448			14,313			(422	)		13,891

Total assets	$	796,604		$	(422	)	$	796,182		$	739,952		$	(422	)	$	739,530


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	654,663		$	—		$	654,663		$	615,122		$	—			615,122
Advances from the FHLB-NY and other borrowed money		58,625			—			58,625			61,093			—			61,093
Other liabilities		9,800			63			9,863			12,110			63			12,173

Total liabilities		723,088			63			723,151			688,325			63			688,388

Minority interest		19,150			—			19,150			—			—			—

Stockholders’ equity:
Common stock		25			—			25			25			—			25
Additional paid-in capital		24,113			—			24,113			23,996			—			23,996
Retained earnings		30,473			(485	)		29,988			27,436			(485	)		26,951
Unamortized awards of common stock under ESOP											(4	)					(4	)
Treasury stock, at cost		(670	)		—			(670	)		(277	)		—			(277	)
Accumulated other comprehensive income		425			—			425			451			—			451

Total stockholders’ equity		54,366			(485	)		53,881			51,627			(485	)		51,142

Total liabilities and stockholders’ equity	$	796,604		$	(422	)	$	796,182		$	739,952		$	(422	)	$	739,530


(1)		Includes adjustments for immaterial corrections to reclassify $685,000 from commercial business loans to goodwill as of 3/31/07 and to reflect additional audit expenses of $28,000 ($17,000 after tax) in fiscal 2008 net income.

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)


	Years Ended March 31,
	2007			2007			2007
	(As Previously
	Reported)			Adjustment			(As Restated)
Interest Income:
Loans	$	37,277		$	—		$	37,277
Mortgage-backed securities		2,877			—			2,877
Investment securities		1,325			—			1,325
Federal funds sold		261			—			261

Total interest income		41,740			—			41,740

Interest expense:
Deposits		15,227			—			15,227
Advances and other borrowed money		4,007			—			4,007

Total interest expense		19,234			—			19,234


Net interest income		22,506			—			22,506

Provision for loan losses		276			—			276

Net interest income after provision for loan losses		22,230			—			22,230

Non-interest income:
Depository fees and charges		2,476			—			2,476
Loan fees and service charges		1,238			—			1,238
Write-down of loans held for sale		(702	)		—			(702	)
Gain (loss) on sale of securities		(624	)		—			(624	)
Gain on sale of loans		192			—			192
Loss on sale of real estate owned		(108	)		—			(108	)
Other		397			—			397

Total non-interest income		2,869			—			2,869

Non-interest expense:
Employee compensation and benefits		10,470			—			10,470
Net occupancy expense		2,667			—			2,667
Equipment, net		2,071			—			2,071
Merger related expenses		1,258			—			1,258
Consulting Expense		496			—			496
Other		6,377			761			7,138

Total non-interest expense		23,339			761			24,100

Income before income taxes and minority interes		1,760			(761	)		999
Income tax (benefit) expense		(823	)		(276	)		(1,099	)
Minority interest, net of taxes		—			—			—

Net income	$	2,583		$	(485	)	$	2,098


Earnings per common share:
Basic	$	1.03		$	(0.19	)	$	0.84

Diluted	$	1.00		$	(0.19	)	$	0.81

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(In thousands)

(As Previously Reported)


									Common			Common
			Additional						Stock			Stock						Accumulated Other			Total Stock-
	Common		Paid-In			Treasury			Acquired			Acquired			Retained			Comprehensive			Holders’
	Stock		Capital			Stock			By ESOP			By MRP			Earnings			Income (Loss)			Equity
Balance—March 31, 2005	$	25	$	23,937		$	(420	)	$	(126	)	$	(128	)	$	22,748		$	(235	)	$	45,801
Net income		—		—			—			—			—			3,770			—			3,770
Loss on pension liability		—		—			—			—			—			—			(281	)		(281	)
Change in net unrealized loss on available-for-sale securities, net of taxes		—		—			—			—			—			—			(158	)		(158	)

Comprehensive income, net of taxes:		—		—			—			—			—			3,770			(439	)		3,331
Dividends paid		—		—			—			—			—			(782	)		—			(782	)
Treasury stock activity		—		(2	)		117			—			—			—			—			115
Allocation of ESOP Stock		—		—			—			116			—			—			—			116
Purchase of shares for MRP		—		—			—			—			116			—			—			116

Balance—March 31, 2006		25		23,935			(303	)		(10	)		(12	)		25,736			(674	)		48,697
Adjustment to initially implement SFAS 158		—		—			—			—			—			—			281			281

Balance post implementation of SFAS 158		25		23,935			(303	)		(10	)		(12	)		25,736			(393	)		48,978
Net income		—		—			—			—			—			2,583			—			2,583
Minimum pension liability adjustment		—		—			—			—			—			—			79			79
Change in net unrealized loss on available-for-sale securities, net of taxes		—		—			—			—			—			—			765			765

Comprehensive income, net of taxes:		—		—			—			—			—			2,583			844			3,427
Dividends paid		—		—			—			—			—			(883	)		—			(883	)
Treasury stock activity		—		61			26			—			—			—			—			87
Allocation of ESOP Stock		—		—			—			6			—			—			—			6
Purchase of shares for MRP		—		—			—			—			12			—			—			12

Balance—March 31, 2007		25		23,996			(277	)		(4	)		—			27,436			451			51,627
Net income		—		—			—			—			—			3,980			—			3,980
Minimum pension liability adjustment		—		—			—			—			—			—			195			195
Change in net unrealized loss on available-for-sale securities, net of taxes		—		—			—			—			—			—			(221	)		(221	)

Comprehensive income, net of taxes:		—		—			—			—			—			3,980			(26	)		3,954
Adjustment to initially implement SFAS 156		—		—			—			—			—			49			—			49
Dividends paid		—		—			—			—			—			(975	)		—			(975	)
Treasury stock activity		—		117			(393	)		4			—			—			—			(272	)

Balance—March 31, 2008	$	25	$	24,113		$	(670	)	$	—		$	—		$	30,490		$	425		$	54,383

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(In thousands)

(As Restated)


									Common			Common
			Additional						Stock			Stock						Accumulated Other			Total Stock-
	Common		Paid-In			Treasury			Acquired			Acquired			Retained			Comprehensive			Holders’
	Stock		Capital			Stock			By ESOP			By MRP			Earnings			Income (Loss)			Equity
Balance—March 31, 2005	$	25	$	23,937		$	(420	)	$	(126	)	$	(128	)	$	22,748		$	(235	)	$	45,801
Net income		—		—			—			—			—			3,770			—			3,770
Loss on pension liability		—		—			—			—			—			—			(281	)		(281	)
Change in net unrealized loss on available- for-sale securities, net of taxes		—		—			—			—			—			—			(158	)		(158	)

Comprehensive income, net of taxes:		—		—			—			—			—			3,770			(439	)		3,331
Dividends paid		—		—			—			—			—			(782	)		—			(782	)
Treasury stock activity		—		(2	)		117			—			—			—			—			115
Allocation of ESOP Stock		—		—			—			116			—			—			—			116
Purchase of shares for MRP		—		—			—			—			116			—			—			116

Balance—March 31, 2006		25		23,935			(303	)		(10	)		(12	)		25,736			(674	)		48,697
Adjustment to initially implement SFAS 158		—		—			—			—			—			—			281			281

Balance post implementation of SFAS 158		25		23,935			(303	)		(10	)		(12	)		25,736			(393	)		48,978
Net income (as restated)		—		—			—			—			—			2,098			—			2,098
Minimum pension liability adjustment		—		—			—			—			—			—			79			79
Change in net unrealized loss on available- for-sale securities, net of taxes		—		—			—			—			—			—			765			765

Comprehensive income, net of taxes:		—		—			—			—			—			2,098			844			2,942
Dividends paid		—		—			—			—			—			(883	)		—			(883	)
Treasury stock activity		—		61			26			—			—			—			—			87
Allocation of ESOP Stock		—		—			—			6			—			—			—			6
Purchase of shares for MRP		—		—			—			—			12			—			—			12

Balance—March 31, 2007 (as restated)		25		23,996			(277	)		(4	)		—			26,951			451			51,142
Net income		—		—			—			—			—			3,963			—			3,963
Minimum pension liability adjustment		—		—			—			—			—			—			195			195
Change in net unrealized loss on available- for-sale securities, net of taxes		—		—			—			—			—			—			(221	)		(221	)

Comprehensive income, net of taxes:		—		—			—			—			—			3,963			(26	)		3,937
Adjustment to initially implement SFAS 156		—		—			—			—			—			49			—			49
Dividends paid		—		—			—			—			—			(975	)		—			(975	)
Treasury stock activity		—		117			(393	)		4			—			—			—			(272	)
Allocation of ESOP Stock		—		—			—			—			—			—			—			—
Purchase of shares for MRP		—		—			—			—			—			—			—			—

Balance—March 31, 2008 (as restated)	$	25	$	24,113		$	(670	)	$	—		$	—		$	29,988		$	425		$	53,881

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Years Ended March 31,
	2007			2007			2007
	(As Previously
	Reported)			Adjustment			(As Restated)
Cash flows from operating activites:
Net income	$	2,583		$	(485	)	$	2,098
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		276			—			276
Stock based compensation expense		426			—			426
Depreciation and amortization expense		1,581			—			1,581
Amortization of premiums and discounts		(1,145	)		—			(1,145	)
Impairment charge on securities		—			—			—
(Gain) Loss from sale of securities		624			—			624
Gain on sale of loans		(192	)		—			(192	)
Writedown on loans held-for-sale		702			—			702
Loss on sale of real estate owned		108			—			108
Originations of loans held-for-sale		(24,708	)		—			(24,708	)
Proceeds from sale of loans held-for-sale		14,422			—			14,422
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable		(1,365	)		—			(1,365	)
Increase in other assets		(2,662	)		422			(2,240	)
(Decrease) increase in other liabilities		(4,330	)		63			(4,267	)

Net cash (used in) provided by operating activities		(13,680	)		—			(13,680	)

Cash flows from investing activites:
Purchases of securities:
Available-for-sale		—			—			—
Proceeds from principal payments, maturities and calls of securities:
Available-for-sale		26,539			—			26,539
Held-to-maturity		7,185			—			7,185
Proceeds from sales of available-for-sale securities		57,942			—			57,942
Originations of loans held-for-investment		(105,284	)		—			(105,284	)
Loans purchased from third parties		(58,191	)		—			(58,191	)
Principal collections on loans		146,410			—			146,410
Proceeds from sales of loan originations held-for-investment		16,548			—			16,548
Redemption of FHLB-NY stock		1,388			—			1,388
Additions to premises and equipment		(1,869	)		—			(1,869	)
Proceeds from sale of real estate owned		404			—			404
Payments for acquisition, net of cash acquired		(2,425	)		—			(2,425	)

Net cash (used in) provided by investing activities		88,647			—			88,647

Cash flows from financing activites:
Net increase (decrease) in deposits		(33,657	)		—			(33,657	)
Net repayment of FHLB advances and other borrowings		(45,660	)		—			(45,660	)
Common stock repurchased		(321	)		—			(321	)
Dividends paid		(883	)		—			(883	)

Net cash provided by (used in) financing activities		(80,521	)		—			(80,521	)

Net (decrease) increase in cash and cash equivalents		(5,554	)		—			(5,554	)
Cash and cash equivalents at beginning of period		22,904			—			22,904

Cash and cash equivalents at end of period	$	17,350		$	—		$	17,350


Supplemental information:
Noncash Transfers-
Change in unrealized loss on valuation of available-for-sale investments, net	$	765		$	—		$	765

Cash paid for-
Interest	$	19,510		$	—		$	19,510
Income taxes	$	652		$	—		$	652

PART II

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements presented elsewhere in this report. The Company’s results of operations are significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies, changes in accounting standards and actions of regulatory agencies.

Executive Summary

Carver Bancorp, Inc. is a savings and loan holding company organized under the laws of the state of Delaware. Carver is committed to providing superior customer service while offering a range of banking products and financial services to our retail and commercial customers. The Holding Company’s primary subsidiary is Carver Federal Savings Bank, which operates from ten branches in the New York City boroughs of Manhattan, Brooklyn and Queens.

Fiscal 2008

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

Reported earnings increased 90% from fiscal 2007, but were basically flat when removing the impact of fiscal 2007’s acquisition and balance sheet restructuring. The Company’s net interest income grew to a record level of over $25 million, following an increase in our net interest margin of 18 basis points to 3.62%. This margin expansion resulted from a 7.8% increase in loans and deposit growth of 6.4%, although consistent with peers, core deposits are migrating to higher priced CDs. Additionally, credit quality remained strong with non-performing loans at 0.50% of total assets. Securities and borrowings portfolios decreased during fiscal 2008, which is consistent with the Company’s strategy to reduce lower yielding securities and invest in higher yielding mortgages and loans. Carver’s fiscal 2008 performance was driven by three primary factors: first, Carver’s lending business continued to excel, and credit quality remained stable; second, Carver leveraged its New Markets Tax Credit award to bolster bottom line performance; and third, Carver’s asset/liability management eased margin pressure.

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

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

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

Fiscal 2009

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

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

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

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

Acquisition of Community Capital Bank

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

The transaction, which was accounted for under the purchase accounting method, included the recognition of approximately $0.8 million of core deposit intangibles and $5.1 million representing the excess of the purchase price over the fair value of identifiable net assets (“goodwill”). At March 31, 2008, goodwill relating to the transaction and subsequent additional purchase accounting adjustments, primarily income taxes, sales tax assessment and professional fees, totaled approximately $7.1 million. A re-evaluation of goodwill in connection with the reconciliation matter disclosed elsewhere herein resulted in the reclassification of $0.7 million from loans to goodwill as of March 31, 2008 and 2007.

New Markets Tax Credit Award

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

Critical Accounting Policies

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Carver’s policy with respect to the methodologies used to determine the allowance for loan losses is the most critical accounting policy. This policy is important to the presentation of Carver’s financial condition and results of operations, and it involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in our results of operations or financial condition.

See Note 2 of Notes to Consolidated Financial Statements for a description of our summary of significant accounting policies, including those related to allowance for loan losses, and an explanation of the methods and assumptions underlying their application.

Securities Impairment

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

Allowance for Loan Losses

The allowance for loan losses is maintained at a level considered adequate to provide for probable loan losses inherent in the portfolio as of March 31, 2008. During the third quarter of fiscal 2008, Carver changed its loan loss methodology to be consistent with the Interagency Policy Statement on the Allowance for Loan and Lease Losses released by the Federal Financial Regulatory Agencies on December 13, 2006. The change had an immaterial affect on the allowance for loan losses at March 31, 2008. Management is responsible for determining the adequacy of the allowance for loan losses and the periodic provisioning for estimated losses included in the consolidated financial statements. The evaluation process is undertaken on a quarterly basis, but may increase in frequency should conditions arise that would require management’s prompt attention, such as business combinations and opportunities to dispose of non-performing and marginally performing loans by bulk sale or any development which may indicate an adverse trend.

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

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

•

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

•

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

•

Evaluation of any changes in risk profile brought about by business combinations, customer knowledge, the results of ongoing credit quality monitoring processes and the cyclical nature of economic and business conditions. An important consideration in performing this evaluation is the concentration of real estate related loans located in 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 include consideration of the sufficiency of collateral. Any adverse trend in real estate markets could seriously affect underlying values available to protect against loss.

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

•

Amount and trend of criticized loans;

•

Actual losses;

•

Peer comparisons with other financial institutions; and

•

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

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

Asset/Liability Management

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

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

Stock Repurchase Program

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

Discussion of Market Risk—Interest Rate Sensitivity Analysis

As a financial institution, the Bank’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Bank’s assets and liabilities, and the market value of all interest-earning assets, other than those which are short term in maturity. Since virtually all of the Company’s interest-bearing assets and liabilities are held by the Bank, most of the Company’s interest rate risk exposure is retained by the Bank. As a result, all significant interest rate risk management procedures are performed at the Bank. Based upon the Bank’s nature of operations, the Bank is not subject to foreign currency exchange or commodity price risk. The Bank does not own any trading assets.

Carver Federal seeks to manage its interest rate risk by monitoring and controlling the variation in repricing intervals between its assets and liabilities. To a lesser extent, Carver Federal also monitors its interest rate sensitivity by analyzing the estimated changes in market value of its assets and liabilities assuming various interest rate scenarios. As discussed more fully below, there are a variety of factors that influence the repricing characteristics of any given asset or liability.

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific period of time and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Generally, during a period of falling interest rates, a negative gap could result in an increase in net interest income, while a positive gap could adversely affect net interest income. Conversely, during a period of rising interest rates a negative gap could adversely affect net interest income, while a positive gap could result in an increase in net interest income. As illustrated below, Carver Federal had a negative one-year gap equal to 12.47% of total rate sensitive assets at March 31, 2008. As a result, Carver Federal’s net interest income could be negatively affected by rising interest rates and positively affected by falling interest rates.

The following table sets forth information regarding the projected maturities, prepayments and repricing of the major rate-sensitive asset and liability categories of Carver Federal as of March 31, 2008. Maturity repricing dates have been projected by applying estimated prepayment rates based on the current rate environment. The information presented in the following table is derived in part from data incorporated in “Schedule CMR: Consolidated Maturity and Rate,” which is part of the Bank’s quarterly reports filed with the OTS. The repricing and other assumptions are not necessarily representative of the Bank’s actual results. Classifications of items in the table below are different from those presented in other tables and the financial statements and accompanying notes included herein and do not reflect non-performing loans (dollars in thousands):


	< 3 Mos.			4-12 Mos.			1-3 Yrs.			3-5 Yrs.			5-10 Yrs.			10+ Yrs.			Total
Rate Sensitive Assets:
Loans	$	171,142		$	65,102		$	113,724		$	127,919		$	70,390		$	107,599		$	655,876
Mortgage Backed Securities		5,265			6,297			8,728			943			2,823			12,756			36,812
Federal Funds Sold		10,500			—			—			—			—			—			10,500
Investment Securities		—			—			—			—			1,360			—			1,360

Total interest-earning assets		186,907			71,399			122,452			128,862			74,573			120,355			704,548


Rate Sensitive Liabilities:
NOW accounts		2,167			2,500			5,999			5,086			6,726			5,689			28,167
Savings Accounts		9,681			11,168			26,798			22,719			30,042			25,411			125,819
Money market accounts		3,502			4,040			9,694			8,218			10,867			9,192			45,513
Certificate of Deposits		136,426			162,345			25,690			12,739			399			6			337,604
Borrowings		1,000			14,108			—			30,142			—			—			45,250

Total interest-bearing liabilities		152,776			194,161			68,181			78,904			48,034			40,298			582,353


Interest Sensitivity Gap	$	34,131		$	(122,762	)	$	54,271		$	49,958		$	26,539		$	80,057		$	122,194


Cumulative Interest Sensitivity Gap	$	34,131		$	(88,631	)	$	(34,360	)	$	15,598		$	42,137		$	122,194
Ratio of Cumulative Gap to Total Rate Sensitive assets		4.84	%		-12.58	%		-4.88	%		2.21	%		5.98	%		17.34	%

The table above assumes that fixed maturity deposits are not withdrawn prior to maturity and that transaction accounts will decay as disclosed in the table above.

Certain shortcomings are inherent in the method of analysis presented in the table above. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in the market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, generally have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Additionally, credit risk may increase as many borrowers may experience an inability to service their debt in the event of a rise in interest rate. Virtually all of the adjustable-rate loans in Carver Federal’s portfolio contain conditions that restrict the periodic change in interest rate.

Net Portfolio Value (“NPV”) Analysis. As part of its efforts to maximize net interest income while managing risks associated with changing interest rates, management also uses the NPV methodology. NPV is the present value of expected net cash flows from existing assets less the present value of expected cash flows from existing liabilities plus the present value of net expected cash inflows from existing financial derivatives and off-balance-sheet contracts.

Under this methodology, interest rate risk exposure is assessed by reviewing the estimated changes in NPV that would hypothetically occur if interest rates rapidly rise or fall along the yield curve. Projected values of NPV at both higher and lower regulatory defined rate scenarios are compared to base case values (no change in rates) to determine the sensitivity to changing interest rates.

Presented below, as of March 31, 2008, is an analysis of the Bank’s interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts of 100 basis points and 50 basis points plus or minus changes in market interest rates. Such limits have been established with consideration of the impact of various rate changes and the Bank’s current capital position. The Bank considers its level of interest rate risk for fiscal 2008, as measured by changes in NPV, to be “minimal”. The information set forth below relates solely to the Bank; however, because virtually all of the Company’s interest rate risk exposure lies at the Bank level, management believes the table below also similarly reflects an analysis of the Company’s interest rate risk (dollars in thousands):


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


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

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV require the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV table presented assumes that the composition of Carver Federal’s interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV table provides an indication of Carver Federal’s interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on Carver Federal’s net interest income and may differ from actual results.

Average Balance, Interest and Average Yields and Rates

The following table sets forth certain information relating to Carver Federal’s average interest-earning assets and average interest-bearing liabilities and related yields for the years ended March 31. The table also presents information for the fiscal years indicated with respect to the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, or “interest rate spread,” which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution’s profitability is its “net interest margin,” which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income (dollars in thousands):


	2008							2007							2006
					Average							Average							Average
	Average				Yield/			Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost			Balance		Interest		Cost

Interest Earning Assets:
Loans	$	639,583	$	44,499		6.96	%	$	558,058	$	37,278		6.68	%	$	443,461	$	26,563		5.99	%
Mortgage-backed securities		39,079		2,071		5.30	%		64,682		2,877		4.45	%		113,574		4,439		3.91	%
Investment securities		22,902		1,434		6.26	%		27,161		1,325		4.88	%		25,698		971		3.78	%
Fed funds sold		3,007		128		4.26	%		5,145		261		5.07	%		12,166		412		3.39	%

Total interest earning assets		704,571		48,132		6.83	%		655,046		41,741		6.37	%		594,899		32,385		5.44	%
Non-interest earning assets		63,440							44,576							35,198

Total assets	$	768,011						$	699,622						$	630,097


Interest Bearing Liabilities:
Deposits:
NOW demand	$	24,660		138		0.56	%	$	25,313		98		0.39	%	$	24,397		74		0.30	%
Savings and clubs		131,627		1,004		0.76	%		136,785		931		0.68	%		137,934		919		0.67	%
Money market savings		44,688		1,193		2.67	%		43,303		1,133		2.62	%		36,583		601		1.64	%
Certificates of deposit		370,933		16,489		4.45	%		312,452		13,036		4.17	%		237,992		7,297		3.07	%
Mortgagors deposits		2,687		42		1.56	%		2,154		30		1.39	%		2,044		30		1.47	%

Total deposits		574,595		18,866		3.28	%		520,007		15,228		2.93	%		438,950		8,921		2.03	%
Borrowed money		73,880		3,790		5.13	%		78,853		4,007		5.08	%		107,551		4,572		4.25	%

Total interest bearing liabilities		648,475		22,656		3.49	%		598,860		19,235		3.21	%		546,501		13,493		2.47	%


Non-interest-bearing liabilities:
Demand		51,713							40,676							29,079
Other liabilities		12,803							10,739							6,980

Total liabilities		712,991							650,275							582,560
Stockholders’ equity		55,020							49,347							47,537

Total liabilities and stockholders’ equity	$	768,011						$	699,622						$	630,097

Net interest income			$	25,476						$	22,506						$	18,892


Average interest rate spread						3.34	%						3.16	%						2.97	%


Net interest margin						3.62	%						3.44	%						3.18	%


Ratio of avgerage interest-earning assets to interest-bearing liabilities						108.65	%						109.38	%						108.86	%

Rate/Volume Analysis

The following table sets forth information regarding the extent to which changes in interest rates and changes in volume of interest related assets and liabilities have affected Carver Federal’s interest income and expense during the fiscal years ended March 31 (in thousands):


	2008 vs. 2007									2007 vs. 2006
	Increase (Decrease) due to									Increase (Decrease) due to
	Volume			Rate			Total			Volume			Rate			Total
Interest Earning Assets:
Loans	$	5,626		$	1,595		$	7,221		$	6,864		$	3,060		$	9,924
Investment securities		(248	)		357			109			1,473			172			1,645
Mortgage-backed securities		(1,289	)		483			(806	)		(3,377	)		1,102			(2,276	)
Fed funds sold, FHLB stock & other		(101	)		(32	)		(133	)		(238	)		205			(33	)

Total interest earning assets		3,988			2,403			6,391			4,722			4,539			9,260

Interest Bearing Liabilities:
Deposits
NOW demand		(4	)		44			40			3			20			23
Savings and clubs		(39	)		112			73			(8	)		20			12
Money market savings		37			23			60			110			356			467
Certificates of deposit		2,580			873			3,453			2,283			2,632			4,915
Mortgagors deposits		8			4			12			2			(2	)		0

Total deposits		2,582			1,056			3,638			2,390			3,026			5,417
Borrowed money		(255	)		38			(217	)		(1,220	)		893			(327	)

Total interest bearing liabilities		2,327			1,094			3,421			1,170			3,919			5,090

Net change in interest income	$	1,661		$	1,309		$	2,970		$	3,552		$	620		$	4,170

For each category of interest-earning assets and interest-bearing liabilities, information is provided for changes attributable to: (1) changes in volume (changes in volume multiplied by prior rate); (2) changes in rate (change in rate multiplied by old volume); and (3) changes in rate/volume. Changes in rate/volume variance are allocated proportionately between changes in rate and changes in volume.

Comparison of Financial Condition at March 31, 2008 and 2007

Assets

At March 31, 2008, total assets increased $56.6 million, or 7.7%, to $796.2 million compared to $739.5 million at March 31, 2007, primarily the result of increases in loans receivable and loans held-for-sale of $47.4 million, other assets of $27.4 million and cash and cash equivalents of $10.0 million, partially offset by decreases in investment securities of $28.9 million and FHLB-NY stock of $1.6 million.

Total loans receivable, including loans held-for-sale, increased $47.4 million, or 7.8%, to $655.9 million at March 31, 2008 compared to $608.5 million at March 31, 2007. The increase was primarily the result of an increase in commercial real estate loans of $35.3 million and an increase in construction loans of $21.2 million, offset by a decrease of multi-family loans of $13.2 million. The Bank continues to grow its loan portfolio through focusing on the origination of loans in the markets it serves and will continue to augment these originations with loan purchases.

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

Other assets increased $27.5 million, or 198.3%, to $41.4 million at March 31, 2008 compared to $13.9 million at March 31, 2007, primarily due to a $19.0 million NMTC transaction on December 31, 2007, which increased both other assets and minority interest. Additionally, other assets consisted of a settlement receivable of $7.6 million from the sale of certain investments.

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

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

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

Liabilities and Stockholders’ Equity

Liabilities

At March 31, 2008, total liabilities increased $34.7 million, or 5.0%, to $723.1 million at March 31, 2008 compared to $688.4 million at March 31, 2007. The increase in total liabilities was primarily the result of $39.5 million of additional customer deposits, offset by decreases of $2.5 million in advances and borrowed money and $2.3 million of other liabilities.

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

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

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

Stockholders’ Equity

Total stockholders’ equity increased $2.8 million, or 5.4%, to $53.9 million at March 31, 2008 compared to $51.1 million at March 31, 2007. The increase in total stockholders’ equity was primarily attributable to net income for fiscal 2008 totaling $4.0 million, partially offset by dividends paid of $1.0 million, the repurchase of common stock totaling $0.4 million in accordance with the Company’s stock repurchase program and a favorable pension valuation adjustment of $0.2 million. The Bank’s capital levels meet regulatory requirements of a well-capitalized financial institution.

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

Net Income

The Company reported net income of $4.0 million and diluted earnings per share of $1.55 for fiscal 2008 compared to net income of $2.1 million and diluted earnings per share of $0.81 for fiscal 2007. Net income rose $1.9 million, or 90.0%, to $4.0 million, primarily reflecting increases in net interest income of $3.0 million and non-interest income of $5.0 million, offset by an increase in non-interest expense of $5.8 million. The prior year period included special pre-tax charges of $1.3 million related to CCB acquisition costs and $1.3 million related to the balance sheet repositioning.

Interest Income

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

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

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

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

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

Interest Expense

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

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

Interest expense on advances and other borrowed money decreased $0.2 million, or 5.4%, to $3.8 million for fiscal 2008 compared to $4.0 million for fiscal 2007. The average balance of total borrowed money outstanding declined, primarily as a result of a $5.0 million decrease in the average balance of outstanding borrowings to $73.9 million for fiscal 2008 compared to $78.9 million in fiscal 2007. Partially offsetting the decrease in interest expense was a 5 basis point increase in the cost of borrowed money to 5.13% in fiscal 2008 compared to 5.08% in fiscal 2007. This was partially offset by an increased cost of debt service on the $13.0 million in floating rate junior subordinated notes issued by the Company in connection with issuance of trust preferred securities by Carver Statutory Trust I in September 2003. Cash distributions on the trust preferred debt securities are cumulative and payable at a floating rate per annum (reset quarterly) equal to 3.05% over the 3-month LIBOR, with a rate at March 31, 2008 of 5.85%.

Net Interest Income Before Provision for Loan Losses

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned and paid. Our net interest income is significantly impacted by changes in interest rate and market yield curves. See “—Discussion of Market Risk—Interest Rate Sensitivity Analysis” for further discussion on the potential impact of changes in interest rates on our results of operations.

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

Provision for Loan Losses and Asset Quality

The Bank provided $0.2 million in provision for loan losses for fiscal 2008 compared to $0.3 million for fiscal 2007, a decrease of $0.1 million. The Bank records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level that is considered appropriate to absorb probable losses inherent in the existing loan portfolio. Factors considered when evaluating the adequacy of the allowance for loan losses include the volume and type of lending conducted, the Bank’s previous loan loss experience, the known and inherent risks in the loan portfolio, adverse situations that may affect the borrowers’ ability to repay, the estimated value of any underlying collateral, trends in the local and national economy and trends in the real estate market.

The Bank had net charge-offs of $0.8 million for fiscal 2008 compared to $0.1 million for fiscal 2007. At March 31, 2008 and 2007, the Bank’s allowance for loan losses was $4.9 million and $5.4 million, respectively. The ratio of the allowance for loan losses to non-performing loans was 170.89% at March 31, 2008 compared to 119.9% at March 31, 2007. The ratio of the allowance for loan losses to total loans was 0.74% at March 31, 2008 compared to 0.89% at March 31, 2007. Additionally, at a 0.43% ratio, the level of non-performing loans to total loans receivable remains within the range the Bank has experienced over the trailing twelve quarters. The Bank’s future levels of non-performing loans will be influenced by economic conditions, including the impact of those conditions on the Bank’s customers, interest rates and other internal and external factors existing at the time. The Bank believes its reported allowance for loan losses at March 31, 2008 is adequate to provide for estimated probable losses in the loan portfolio. For further discussion of non-performing loans and allowance for loan losses, see “Item 1—Business—General Description of Business—Asset Quality” and Note 1 of Notes to the Consolidated Financial Statements.

Subprime Loans

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

•

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

•

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

•

Limited or no documentation of borrowers’ income;

•

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

•

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

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

•

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

•

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

•

Bankruptcy in the last 5 years;

•

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

•

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

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

Non-Interest Income

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

Non-Interest Expense

Non-interest expense increased by $5.8 million, or 23.9%, to $29.9 million for fiscal 2008 compared to $24.1 million for fiscal 2007. The increase was primarily due to increases in employee compensation and benefits of $2.9 million, consulting expense of $2.2 million, net occupancy expense of $0.9 million and other expenses of $0.6 million. The increase in employee compensation and benefits is primarily due to the Community Capital Bank acquisition and investments in new talent in the retail, lending and accounting units. The $2.2 million increase in consulting expense falls into three categories: regulatory requirements (preparation for compliance with Sarbanes-Oxley Act Section 404 and recent Inter-Agency Guidance on Allowances for Loan Losses); strengthening our back office, including the accounting, lending and retail operations departments, by adding new staff and providing temporary expertise; and engaging consultants to assist the management team to analyze significant opportunities to improve financial results. For example, the Bank engaged consultants to conduct a rigorous business optimization review to help management identify further potential improvements in the Bank’s operations, in part through greater systems integration. The $0.6 million increase in other expense primarily consists of the cost of sub-servicing of loans, ATM expenses, charge-offs and regulatory reporting costs. The fiscal 2007 expense included $1.3 million in merger related expenses.

Income Tax Expense

Income tax benefit decreased by $0.2 million, or 18.8%, to $0.9 million for fiscal 2008 compared to $1.1 million for fiscal 2007, resulting in a net tax benefit of $0.9 million, which includes a minority interest tax expense of $0.1 million. The decrease in tax benefit reflects income before income taxes of $3.2 million for fiscal 2008 compared to $1.0 million for fiscal 2007. The income tax expense of $1.1 million for fiscal 2008 was offset by the tax benefit generated by the NMTC investment totaling $2.0 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 $12.1 million from its $40.0 million investment over approximately the next six years.

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

Net Income

For fiscal 2007, the Company recorded net income of $2.1 million, or $0.81 per diluted common share, compared to $3.8 million, or $1.45 per diluted common share, for fiscal 2006. The $1.7 million decrease is primarily due to an increase of $5.0 million in non-interest expense and a decrease of $2.5 million in non-interest income, partially offset by an increase of $3.3 million in net interest income after provision for loan losses, and a decrease of $2.4 million in the Company’s income tax provision compared to fiscal 2006.

Interest Income

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

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

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

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

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

Interest Expense

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

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

Interest expense on advances and other borrowed money decreased by $0.6 million, or 12.4%, to $4.0 million for fiscal 2007 compared to $4.6 million for fiscal 2006. The decrease in interest expense on borrowed money for fiscal 2007 reflects a $28.7 million decline in the average balance of borrowed money reflecting management’s strategy of using deposit growth and cash flows from the repayment of mortgage-backed securities to repay FHLB-NY advances. Partially offsetting the decrease was a rise of 83 basis points in the average cost of borrowed money, primarily the result of increases in the indexed rate of trust preferred debt securities which adjust quarterly and have increased in the current interest rate environment.

Net Interest Income

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

Provision for Loan Losses

During fiscal 2007 a $0.3 million provision was recorded for loan losses. The Bank records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level that is considered appropriate to absorb probable losses inherent in the existing loan portfolio. Factors considered when evaluating the adequacy of the allowance for loan losses include the volume and type of lending conducted, the Bank’s previous loan loss experience, the known and inherent risks in the loan portfolio, adverse situations that may affect the borrowers’ ability to repay, the estimated value of any underlying collateral, trends in the local and national economy and trends in the real estate market.

During fiscal 2007, the Bank had net charge-offs of $73,000 compared to $82,000 for fiscal 2006. At March 31, 2007, non-performing loans totaled $4.5 million, or 0.74% of total loans, compared to $2.7 million, or 0.55% of total loans, at March 31, 2006. At March 31, 2007, the Bank’s allowance for loan losses was $5.4 million compared to $4.0 million at March 31, 2006, resulting in a ratio of the allowance to non-performing assets of 119.9% at March 31, 2007 compared to 147.1% at March 31, 2006, and a ratio of allowance for possible loan losses to total loans of 0.89% and 0.81% at March 31, 2007 and March 31, 2006, respectively. The Bank believes its reported allowance for loan losses at March 31, 2007 is adequate to provide for estimated probable losses in the loan portfolio. For further discussion of non-performing loans and allowance for loan losses, see “Item 1—Business—General Description of Business—Asset Quality” and Note 1 of Notes to the Consolidated Financial Statements.

Non-Interest Income

Non-interest income is comprised of loan fees and service charges, fee income from banking services and charges, gains or losses from the sale of securities, loans and other assets and certain other miscellaneous non-interest income. Non-interest income decreased $2.5 million, or 46.3%, to $2.9 million for fiscal 2007 compared to $5.3 million for fiscal 2006. The decline in non-interest income was comprised primarily of a decrease of $1.0 million in loan fees and service charges due primarily to lower loan prepayment penalty income, $0.6 million in losses associated with the repositioning of the balance sheet, $0.7 million in the write-down of loans held for sale, a decrease of $0.2 million in the gain on the sale of loans and $0.1 million loss on the sale of real estate owned. Partially offsetting these decreases were increases in other non-interest income and deposit fees and charges of $0.1 million and $18,000, respectively. The decline in the gain on the sale of loans was primarily attributable to a gain on a bulk sale of loans during fiscal 2006.

Non-Interest Expense

Non-interest expense increased by $5.0 million, or 26.0%, to $24.1 million for fiscal 2007 compared to $19.1 million for fiscal 2006. The increase in non-interest expense was primarily attributable to the acquisition of CCB and the resulting operating and non-recurring merger related expenses. Non-recurring merger related expenses represented $1.3 million of the increase, and employee compensation and benefits, net occupancy expense, equipment, net, and other non-interest expense increased $1.0 million, $4.0 million, $0.1 million and $2.0 million, respectively.

Interest Tax Expense

Income tax benefit was $1.1 million for fiscal 2007, as compared to an income tax expense of $1.3 million for fiscal 2006. The Bank recognized a $1.5 million benefit in fiscal 2007 from the NMTC program and pre-tax income was $4.1 million less in fiscal 2007 compared to fiscal 2006. The two items account for the $2.4 million change in taxes from fiscal 2007 to fiscal 2006.

Liquidity and Capital Resources

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

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

Congress eliminated the statutory liquidity requirement that required federal savings banks to maintain a minimum amount of liquid assets of between 4% and 10%, as determined by the Director of the OTS, the Bank’s primary federal regulator. The Bank is required to maintain sufficient liquidity to ensure its safe and sound operation. As a result of the elimination of the liquidity requirement, the Bank manages its liquidity through a Board-approved liquidity policy. The Bank’s most liquid assets are cash and short-term investments. The level of these assets is dependent on the Bank’s operating, investing and financing activities during any given period. At March 31, 2008 and 2007, assets qualifying for short-term liquidity, including cash and short-term investments, totaled $27.4 million and $17.4 million, respectively.

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

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

The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During fiscal 2008, total cash and cash equivalents increased by $10.0 million reflecting cash provided by financing activities of $54.9 million, offset by cash used in operating of $26.8 million and investing activities of $18.1 million.

Net cash provided by financing activities was $54.9 million, primarily resulting from increased deposits of $39.5 million and consolidation of minority interest in a NMTC transaction of $19.1 million, offset partially by reductions in borrowings of $2.5 million and the payment of common dividends of $1.0 million. Net cash used in operating activities during this period was $26.8 million, primarily representing funds used in originations of loans held-for-sale of $20.2 million, an increase in other assets of $29.7 million (primarily resulting from a NMTC transaction), offset partially by proceeds from sales of loans held-for-sale $20.0 million. Net cash used in investing activities was $18.1 million, primarily representing cash disbursed to fund mortgage loan originations of $162.6 million, loans purchased from third parties of $29.7 million and purchases of available-for-sale securities of $15.3 million, offset partially by principal collections on loans of $145.5 million, proceeds from sale of available-for-sale securities of $36.1 million and proceeds from principal payments/maturities/calls of securities of $9.2 million.

Off-Balance Sheet Arrangements and Contractual Obligations

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), these instruments are not recorded in the consolidated financial statements. Such instruments primarily include lending commitments.

Lending commitments include commitments to originate mortgage and consumer loans and commitments to fund unused lines of credit. The Bank also has contractual obligations related to operating leases. Additionally, the Bank has a contingent liability related to a standby letter of credit. See Note 14 of Notes to Consolidated Financial Statements for the Bank’s outstanding lending commitments and contractual obligations at March 31, 2008.

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


	Payments due by period
Contractual			Less than		1 – 3		3 – 5		More than
Obligations	Total		1 year		years		years		5 years
Long term debt obligations:
FHLB advances	$	15,249	$	15,107	$	—	$	142	$	—
Repo Borrowings		30,141								30,141
Guaranteed preferred beneficial interest in junior subordinated debentures		13,375		—		—		—		13,375

Total long term debt obligations		58,765		15,107		—		142		43,516

Operating lease obligations:
Lease obligations for rental properties		11,456		1,517		3,014		2,262		4,663

Total contractual obligations	$	70,221	$	16,624	$	3,014	$	2,404	$	48,179

Regulatory Capital Position

The Bank must satisfy three minimum capital standards established by the OTS. For a description of the OTS capital regulation, see “Item 1—Regulation and Supervision—Federal Banking Regulation—Capital Requirements.”

The Bank presently exceeds all capital requirements as currently promulgated. At March 31, 2008, the Bank had tangible equity ratio, core capital ratio, and total risk-based capital ratio of 7.7%, 7.7% and 10.2%, respectively, and was considered well capitalized. For additional information regarding Carver Federal’s Regulatory Capital and Ratios, refer to Note 12 of Notes to Consolidated Financial Statements, “Stockholders’ Equity.”

Impact of Inflation and Changing Prices

The financial statements and accompanying notes appearing elsewhere herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of Carver Federal’s operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact on Carver Federal’s performance than do the effects of the general level of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
Carver Bancorp, Inc.:

We have audited the accompanying consolidated statements of financial condition of Carver Bancorp, Inc. and subsidiaries as of March 31, 2008 and 2007, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carver Bancorp, Inc. and subsidiaries as of March 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2008, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP
New York, New York
July 1, 2008, except as to the restatement and subsequent events discussed in Note 2 and Note 20, respectively, to the consolidated financial statements which is as of July 2, 2009.

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except per share data)


	March 31,			March 31,
	2008			2007
	(As Restated)			(As Restated)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	15,920			14,619
Federal funds sold		10,500			1,300
Interest earning deposits		948			1,431

Total cash and cash equivalents		27,368			17,350
Securities:
Available-for-sale, at fair value (including pledged as collateral of $20,621 and $34,649 at March 31, 2008 and 2007, respectively)		20,865			47,980
Held-to-maturity, at amortized cost (including pledged as collateral of $16,643 and $18,581 at March 31, 2008 and 2007, respectively; fair value of $17,167 and $19,005 at March 31, 2008 and 2007, respectively)		17,307			19,137

Total securities		38,172			67,117

Loans held-for-sale		23,767			23,226

Loans receivable:
Real estate mortgage loans		578,957			533,667
Commercial business loans		51,424			50,541
Consumer loans		1,728			1,067
Allowance for loan losses		(4,878	)		(5,409	)

Total loans receivable, net		627,231			579,866
Office properties and equipment, net		15,780			14,626
Federal Home Loan Bank of New York stock, at cost		1,625			3,239
Bank owned life insurance		9,141			8,795
Accrued interest receivable		4,063			4,335
Goodwill		7,055			6,401
Core deposit intangibles, net		532			684
Other assets		41,448			13,891

Total assets	$	796,182		$	739,530


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	654,663			615,122
Advances from the FHLB-NY and other borrowed money		58,625			61,093
Other liabilities		9,863			12,173

Total liabilities		723,151			688,388
Minority interest		19,150			—

Stockholders’ equity:
Preferred stock (par value $0.01 per share; 112 shares authorized; 112 issued and outstanding) Common stock (par value $0.01 per share: 10,000,000 shares authorized; 2,524,691 shares issued; 2,481,706 and 2,507,985 shares outstanding at March 31, 2008 and 2007, respectively)		25			25
Additional paid-in capital		24,113			23,996
Retained earnings		29,988			26,951
Unamortized awards of common stock under ESOP		—			(4	)
Treasury stock, at cost (42,985 and 16,706 shares at March 31, 2008 and 2007, respectively)		(670	)		(277	)
Accumulated other comprehensive income		425			451

Total stockholders’ equity		53,881			51,142

Total liabilities and stockholders’ equity	$	796,182		$	739,530

See accompanying notes to consolidated financial statements.

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)


	Years Ended March 31,
	2008			2007			2006
				(As Restated)
Interest Income:
Loans	$	44,499		$	37,277		$	26,563
Mortgage-backed securities		2,071			2,877			4,439
Investment securities		1,434			1,325			971
Federal funds sold		128			261			412

Total interest income		48,132			41,740			32,385

Interest expense:
Deposits		18,866			15,227			8,921
Advances and other borrowed money		3,790			4,007			4,572

Total interest expense		22,656			19,234			13,493


Net interest income		25,476			22,506			18,892

Provision for loan losses		222			276			—

Net interest income after provision for loan losses		25,254			22,230			18,892

Non-interest income:
Depository fees and charges		2,669			2,476			2,458
Loan fees and service charges		1,628			1,238			2,231
Write-down of loans held for sale		—			(702	)		—
Gain (loss) on sale of securities		431			(624	)		—
Gain on sale of loans		323			192			351
Loss on sale of real estate owned		—			(108	)		—
New Market Tax Credit Transfer Fee		1,700			—			—
Other		1,110			397			301

Total non-interest income		7,861			2,869			5,341

Non-interest expense:
Employee compensation and benefits		13,323			10,470			9,512
Net occupancy expense		3,590			2,667			2,284
Equipment, net		2,451			2,071			1,939
Merger related expenses		—			1,258			—
Consulting Expense		2,733			496			307
Other		7,801			7,138			5,092

Total non-interest expense		29,898			24,100			19,134

Income before income taxes and minority interest		3,217			999			5,099
Income tax (benefit) expense		(892	)		(1,099	)		1,329
Minority interest, net of taxes		146			—			—

Net income	$	3,963		$	2,098		$	3,770


Earnings per common share:
Basic	$	1.59		$	0.84		$	1.50

Diluted	$	1.55		$	0.81		$	1.45

See accompanying notes to consolidated financial statements.

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(In thousands)

(As Restated)


									Common			Common						Accumulated
			Additional						Stock			Stock						Other			Total Stock-
	Common		Paid-In			Treasury			Acquired			Acquired			Retained			Comprehensive			Holders’
	Stock		Capital			Stock			By ESOP			By MRP			Earnings			Income (Loss)			Equity
Balance—March 31, 2005	$	25	$	23,937		$	(420	)	$	(126	)	$	(128	)	$	22,748		$	(235	)	$	45,801
Net income		—		—			—			—			—			3,770			—			3,770
Loss on pension liability		—		—			—			—			—			—			(281	)		(281	)
Change in net unrealized loss on available-for-sale securities, net of taxes		—		—			—			—			—			—			(158	)		(158	)

Comprehensive income, net of taxes:		—		—			—			—			—			3,770			(439	)		3,331
Dividends paid		—		—			—			—			—			(782	)		—			(782	)
Treasury stock activity		—		(2	)		117			—			—			—			—			115
Allocation of ESOP Stock		—		—			—			116			—			—			—			116
Purchase of shares for MRP		—		—			—			—			116			—			—			116

Balance—March 31, 2006		25		23,935			(303	)		(10	)		(12	)		25,736			(674	)		48,697
Adjustment to initially implement SFAS 158		—		—			—			—			—			—			281			281

Balance post implementation of SFAS 158		25		23,935			(303	)		(10	)		(12	)		25,736			(393	)		48,978
Net income (as restated)		—		—						—			—			2,098			—			2,098
Minimum pension liability adjustment		—								—			—			—			79			79
Change in net unrealized loss on available-for-sale securities, net of taxes		—		—			—			—			—			—			765			765

Comprehensive income, net of taxes:		—		—			—			—			—			2,098			844			2,942
Dividends paid		—		—			—			—			—			(883	)		—			(883	)
Treasury stock activity		—		61			26			—			—			—			—			87
Allocation of ESOP Stock		—		—			—			6			—			—			—			6
Purchase of shares for MRP		—		—			—			—			12			—			—			12

Balance—March 31, 2007 (as restated)		25		23,996			(277	)		(4	)		—			26,951			451			51,142
Net income		—		—			—			—			—			3,963			—			3,963
Minimum pension liability adjustment		—		—			—			—			—			—			195			195
Change in net unrealized loss on available-for-sale securities, net of taxes		—		—			—			—			—			—			(221	)		(221	)

Comprehensive income, net of taxes:		—		—			—			—			—			3,963			(26	)		3,937
Adjustment to initially implement SFAS 156		—		—			—			—			—			49			—			49
Dividends paid		—		—			—			—			—			(975	)		—			(975	)
Treasury stock activity		—		117			(393	)		4			—			—			—			(272	)

Balance—March 31, 2008 (as restated)	$	25	$	24,113		$	(670	)	$	—		$	—		$	29,988		$	425		$	53,881

See accompanying notes to consolidated financial statements.

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Years Ended March 31,
	2008			2007			2006
				(As Restated)
Cash flows from operating activites:
Net income	$	3,963		$	2,098		$	3,770
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		222			276			—
Stock based compensation expense		272			426			233
Depreciation and amortization expense		1,709			1,581			1,546
Amortization of premiums and discounts		(250	)		(1,145	)		863
(Gain) Loss from sale of securities		(431	)		624			—
Gain on sale of loans		(323	)		(192	)		(351	)
Writedown on loans held-for-sale		—			702			—
Loss on sale of real estate owned		—			108			—
Originations of loans held-for-sale		(20,172	)		(24,708	)		(12,646	)
Proceeds from sale of loans held-for-sale		19,953			14,422			12,197
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable		272			(1,365	)		(268	)
Increase in other assets		(29,702	)		(2,240	)		(2,430	)
(Decrease) increase in other liabilities		(2,283	)		(4,267	)		4,249

Net cash (used in) provided by operating activities		(26,770	)		(13,680	)		7,163

Cash flows from investing activites:
Purchases of securities:
Available-for-sale		(15,265	)		—			(26,811	)
Held-to-maturity		—			—			(19	)
Proceeds from principal payments, maturities and calls of securities:
Available-for-sale		7,358			26,539			60,645
Held-to-maturity		1,803			7,185			4,816
Proceeds from sales of available-for-sale securities		36,116			57,942			1,575
Originations of loans held-for-investment		(162,556	)		(105,284	)		(98,704	)
Loans purchased from third parties		(29,736	)		(58,191	)		(96,140	)
Principal collections on loans		145,458			146,410			113,482
Proceeds from sales of loan originations held-for-investment		—			16,548			10,697
Redemption of FHLB-NY stock		1,614			1,388			498
Additions to premises and equipment		(2,862	)		(1,869	)		(1,082	)
Proceeds from sale of real estate owned		—			404			—
Payments for acquisition, net of cash acquired		—			(2,425	)		—

Net cash (used in) provided by investing activities		(18,070	)		88,647			(31,043	)

Cash flows from financing activites:
Net increase (decrease) in deposits		39,541			(33,657	)		48,768
Net repayment of FHLB advances and other borrowings		(2,527	)		(45,660	)		(21,507	)
Capital contribution by minority interest		19,150			—			—
Common stock repurchased		(331	)		(321	)		(115	)
Dividends paid		(975	)		(883	)		(782	)

Net cash provided by (used in) financing activities		54,858			(80,521	)		26,364

Net (decrease) increase in cash and cash equivalents		10,018			(5,554	)		2,484
Cash and cash equivalents at beginning of period		17,350			22,904			20,420

Cash and cash equivalents at end of period	$	27,368		$	17,350		$	22,904


Supplemental information:
Noncash Transfers-
Change in unrealized loss on valuation of available-for-sale investments, net	$	221		$	765		$	(158	)

Cash paid for-
Interest	$	21,973		$	19,510		$	13,502
Income taxes	$	922		$	652		$	2,107

See accompanying notes to consolidated financial statements.

CARVER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION

Nature of operations

Carver Bancorp, Inc. (on a stand-alone basis, the “Holding Company” or “Registrant”), was incorporated in May 1996 and its principal wholly-owned subsidiary is Carver Federal Savings Bank (the “Bank” or “Carver Federal”) “), Alhambra Holding Corp., an inactive Delaware corporation, and Carver Federal’s wholly-owned subsidiaries, CFSB Realty Corp., Carver Municipal Bank (“CMB”), Carver Community Development Corp. (“CCDC”) and CFSB Credit Corp. which is currently inactive. The Bank has a majority owned interest in Carver Asset Corporation, a real estate investment trust formed in February 2004.

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

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

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

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

NOTE 2. RESTATEMENT

As a result of the issues identified in the review, the Finance and Audit Committee, in consultation with management and KPMG, concluded on February 9, 2009 that Carver’s previously issued financial statements for fiscal 2007 and fiscal 2008 (including the interim periods within those years), should no longer be relied upon because of certain accounting errors and irregularities in those financial statements. Accordingly, Carver restated its previously issued financial statements for those periods by filing this Amendment No. 1 to its Form 10-K for the year ended March 31, 2008. Restated financial information is presented in this Amendment No. 1 to its Form 10-K for the year ended March 31, 2008.

Set forth below is the impact of the adjustment by financial statement line item in Carver’s consolidated statement of financial condition as of March 31, 2008 and 2007, the Consolidated Statements of Income and Cash Flows for the year ended March 31, 2007 and the Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the years ended March 31, 2008 and 2007. In addition, the income tax effect of the above adjustment has been reflected in footnote 11 of the Consolidated Financial Statements.

Immaterial Corrections

The Consolidated Statement of Income for the year ended March 31, 2008 reflects an immaterial correction to correctly reflect additional audit expenses in the amount of $28,000. After taxes this resulted in a decrease in net income of $17,000. As a result the corrected basic EPS remains unchanged at $1.59 while the corrected diluted EPS remains unchanged at $1.55.

The Consolidated Statement of Financial Position as of March 31, 2008 and 2007 also reflects an adjustment to reclassify $0.7 million from commercial business loans to goodwill. The adjustment was the result of a re-evaluation of goodwill in connection with the reconciliation matters disclosed above and elsewhere herein.

Management believes these corrections to prior period mistatements to be immaterial.

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except per share data)


	March 31,			March 31,			March 31,			March 31,			March 31,			March 31,
	2008			2008			2008			2007			2007			2007
	(As Previously									(As Previously
	Reported)(1)			Adjustment			(As Restated)			Reported)(1)			Adjustment			(As Restated)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	15,920		$	—		$	15,920		$	14,619		$	—			14,619
Federal funds sold		10,500			—			10,500			1,300			—			1,300
Interest earning deposits		948			—			948			1,431			—			1,431

Total cash and cash equivalents		27,368						27,368			17,350						17,350
Securities:
Available-for-sale, at fair value		20,865			—			20,865			47,980			—			47,980
Held-to-maturity, at amortized cost		17,307			—			17,307			19,137			—			19,137

Total securities		38,172			—			38,172			67,117			—			67,117

Loans held-for-sale		23,767			—			23,767			23,226			—			23,226

Loans receivable:
Real estate mortgage loans		578,957			—			578,957			533,667			—			533,667
Commercial business loans		51,424			—			51,424			50,541			—			50,541
Consumer loans		1,728			—			1,728			1,067			—			1,067
Allowance for loan losses		(4,878	)		—			(4,878	)		(5,409	)		—			(5,409	)

Total loans receivable, net		627,231			—			627,231			579,866			—			579,866

Office properties and equipment, net		15,780			—			15,780			14,626			—			14,626
Federal Home Loan Bank of New York stock, at cost		1,625			—			1,625			3,239			—			3,239
Bank owned life insurance		9,141			—			9,141			8,795			—			8,795
Accrued interest receivable		4,063			—			4,063			4,335			—			4,335
Goodwill		7,055			—			7,055			6,401			—			6,401
Core deposit intangibles, net		532			—			532			684			—			684
Other assets		41,870			(422	)		41,448			14,313			(422	)		13,891

Total assets	$	796,604		$	(422	)	$	796,182		$	739,952		$	(422	)	$	739,530


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	654,663		$	—		$	654,663		$	615,122		$	—			615,122
Advances from the FHLB-NY and other borrowed money		58,625			—			58,625			61,093			—			61,093
Other liabilities		9,800			63			9,863			12,110			63			12,173

Total liabilities		723,088			63			723,151			688,325			63			688,388

Minority interest		19,150			—			19,150			—			—			—

Stockholders’ equity:
Common stock		25			—			25			25			—			25
Additional paid-in capital		24,113			—			24,113			23,996			—			23,996
Retained earnings		30,473			(485	)		29,988			27,436			(485	)		26,951
Unamortized awards of common stock under ESOP											(4	)					(4	)
Treasury stock, at cost		(670	)		—			(670	)		(277	)		—			(277	)
Accumulated other comprehensive income		425			—			425			451			—			451

Total stockholders’ equity		54,366			(485	)		53,881			51,627			(485	)		51,142

Total liabilities and stockholders’ equity	$	796,604		$	(422	)	$	796,182		$	739,952		$	(422	)	$	739,530


(1)		Includes adjustments for immaterial corrections to reclassify $685,000 from commercial business loans to goodwill as of 3/31/07 and to reflect additional audit expenses of $28,000 ($17,000 after tax) in fiscal 2008 net income.

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)


	Years Ended March 31,
	2007			2007			2007
	(As Previously
	Reported)			Adjustment			(As Restated)
Interest Income:
Loans	$	37,277		$	—		$	37,277
Mortgage-backed securities		2,877			—			2,877
Investment securities		1,325			—			1,325
Federal funds sold		261			—			261

Total interest income		41,740			—			41,740

Interest expense:
Deposits		15,227			—			15,227
Advances and other borrowed money		4,007			—			4,007

Total interest expense		19,234			—			19,234


Net interest income		22,506			—			22,506

Provision for loan losses		276			—			276

Net interest income after provision for loan losses		22,230			—			22,230

Non-interest income:
Depository fees and charges		2,476			—			2,476
Loan fees and service charges		1,238			—			1,238
Write-down of loans held for sale		(702	)		—			(702	)
Gain (loss) on sale of securities		(624	)		—			(624	)
Gain on sale of loans		192			—			192
Loss on sale of real estate owned		(108	)		—			(108	)
Other		397			—			397

Total non-interest income		2,869			—			2,869

Non-interest expense:
Employee compensation and benefits		10,470			—			10,470
Net occupancy expense		2,667			—			2,667
Equipment, net		2,071			—			2,071
Merger related expenses		1,258			—			1,258
Consulting Expense		496			—			496
Other		6,377			761			7,138

Total non-interest expense		23,339			761			24,100

Income before income taxes and minority interes		1,760			(761	)		999
Income tax (benefit) expense		(823	)		(276	)		(1,099	)
Minority interest, net of taxes		—			—			—

Net income	$	2,583		$	(485	)	$	2,098


Earnings per common share:
Basic	$	1.03		$	(0.19	)	$	0.84

Diluted	$	1.00		$	(0.19	)	$	0.81

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(In thousands)

(As Previously Reported)


									Common			Common
			Additional						Stock			Stock						Accumulated Other			Total Stock-
	Common		Paid-In			Treasury			Acquired			Acquired			Retained			Comprehensive			Holders’
	Stock		Capital			Stock			By ESOP			By MRP			Earnings			Income (Loss)			Equity
Balance—March 31, 2005	$	25	$	23,937		$	(420	)	$	(126	)	$	(128	)	$	22,748		$	(235	)	$	45,801
Net income		—		—			—			—			—			3,770			—			3,770
Loss on pension liability		—		—			—			—			—			—			(281	)		(281	)
Change in net unrealized loss on available-for-sale securities, net of taxes		—		—			—			—			—			—			(158	)		(158	)

Comprehensive income, net of taxes:		—		—			—			—			—			3,770			(439	)		3,331
Dividends paid		—		—			—			—			—			(782	)		—			(782	)
Treasury stock activity		—		(2	)		117			—			—			—			—			115
Allocation of ESOP Stock		—		—			—			116			—			—			—			116
Purchase of shares for MRP		—		—			—			—			116			—			—			116

Balance—March 31, 2006		25		23,935			(303	)		(10	)		(12	)		25,736			(674	)		48,697
Adjustment to initially implement SFAS 158		—		—			—			—			—			—			281			281

Balance post implementation of SFAS 158		25		23,935			(303	)		(10	)		(12	)		25,736			(393	)		48,978
Net income		—		—			—			—			—			2,583			—			2,583
Minimum pension liability adjustment		—		—			—			—			—			—			79			79
Change in net unrealized loss on available-for-sale securities, net of taxes		—		—			—			—			—			—			765			765

Comprehensive income, net of taxes:		—		—			—			—			—			2,583			844			3,427
Dividends paid		—		—			—			—			—			(883	)		—			(883	)
Treasury stock activity		—		61			26			—			—			—			—			87
Allocation of ESOP Stock		—		—			—			6			—			—			—			6
Purchase of shares for MRP		—		—			—			—			12			—			—			12

Balance—March 31, 2007		25		23,996			(277	)		(4	)		—			27,436			451			51,627
Net income		—		—			—			—			—			3,980			—			3,980
Minimum pension liability adjustment		—		—			—			—			—			—			195			195
Change in net unrealized loss on available-for-sale securities, net of taxes		—		—			—			—			—			—			(221	)		(221	)

Comprehensive income, net of taxes:		—		—			—			—			—			3,980			(26	)		3,954
Adjustment to initially implement SFAS 156		—		—			—			—			—			49			—			49
Dividends paid		—		—			—			—			—			(975	)		—			(975	)
Treasury stock activity		—		117			(393	)		4			—			—			—			(272	)

Balance—March 31, 2008	$	25	$	24,113		$	(670	)	$	—		$	—		$	30,490		$	425		$	54,383

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(In thousands)

(As Restated)


									Common			Common
			Additional						Stock			Stock						Accumulated Other			Total Stock-
	Common		Paid-In			Treasury			Acquired			Acquired			Retained			Comprehensive			Holders’
	Stock		Capital			Stock			By ESOP			By MRP			Earnings			Income (Loss)			Equity
Balance—March 31, 2005	$	25	$	23,937		$	(420	)	$	(126	)	$	(128	)	$	22,748		$	(235	)	$	45,801
Net income		—		—			—			—			—			3,770			—			3,770
Loss on pension liability		—		—			—			—			—			—			(281	)		(281	)
Change in net unrealized loss on available- for-sale securities, net of taxes		—		—			—			—			—			—			(158	)		(158	)

Comprehensive income, net of taxes:		—		—			—			—			—			3,770			(439	)		3,331
Dividends paid		—		—			—			—			—			(782	)		—			(782	)
Treasury stock activity		—		(2	)		117			—			—			—			—			115
Allocation of ESOP Stock		—		—			—			116			—			—			—			116
Purchase of shares for MRP		—		—			—			—			116			—			—			116

Balance—March 31, 2006		25		23,935			(303	)		(10	)		(12	)		25,736			(674	)		48,697
Adjustment to initially implement SFAS 158		—		—			—			—			—			—			281			281

Balance post implementation of SFAS 158		25		23,935			(303	)		(10	)		(12	)		25,736			(393	)		48,978
Net income (as restated)		—		—			—			—			—			2,098			—			2,098
Minimum pension liability adjustment		—		—			—			—			—			—			79			79
Change in net unrealized loss on available- for-sale securities, net of taxes		—		—			—			—			—			—			765			765

Comprehensive income, net of taxes:		—		—			—			—			—			2,098			844			2,942
Dividends paid		—		—			—			—			—			(883	)		—			(883	)
Treasury stock activity		—		61			26			—			—			—			—			87
Allocation of ESOP Stock		—		—			—			6			—			—			—			6
Purchase of shares for MRP		—		—			—			—			12			—			—			12

Balance—March 31, 2007 (as restated)		25		23,996			(277	)		(4	)		—			26,951			451			51,142
Net income		—		—			—			—			—			3,963			—			3,963
Minimum pension liability adjustment		—		—			—			—			—			—			195			195
Change in net unrealized loss on available- for-sale securities, net of taxes		—		—			—			—			—			—			(221	)		(221	)

Comprehensive income, net of taxes:		—		—			—			—			—			3,963			(26	)		3,937
Adjustment to initially implement SFAS 156		—		—			—			—			—			49			—			49
Dividends paid		—		—			—			—			—			(975	)		—			(975	)
Treasury stock activity		—		117			(393	)		4			—			—			—			(272	)
Allocation of ESOP Stock		—		—			—			—			—			—			—			—
Purchase of shares for MRP		—		—			—			—			—			—			—			—

Balance—March 31, 2008 (as restated)	$	25	$	24,113		$	(670	)	$	—		$	—		$	29,988		$	425		$	53,881

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Years Ended March 31,
	2007			2007			2007
	(As Previously
	Reported)			Adjustment			(As Restated)
Cash flows from operating activites:
Net income	$	2,583		$	(485	)	$	2,098
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		276			—			276
Stock based compensation expense		426			—			426
Depreciation and amortization expense		1,581			—			1,581
Amortization of premiums and discounts		(1,145	)		—			(1,145	)
Impairment charge on securities		—			—			—
(Gain) Loss from sale of securities		624			—			624
Gain on sale of loans		(192	)		—			(192	)
Writedown on loans held-for-sale		702			—			702
Loss on sale of real estate owned		108			—			108
Originations of loans held-for-sale		(24,708	)		—			(24,708	)
Proceeds from sale of loans held-for-sale		14,422			—			14,422
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable		(1,365	)		—			(1,365	)
Increase in other assets		(2,662	)		422			(2,240	)
(Decrease) increase in other liabilities		(4,330	)		63			(4,267	)

Net cash (used in) provided by operating activities		(13,680	)		—			(13,680	)

Cash flows from investing activites:
Purchases of securities:
Available-for-sale		—			—			—
Proceeds from principal payments, maturities and calls of securities:
Available-for-sale		26,539			—			26,539
Held-to-maturity		7,185			—			7,185
Proceeds from sales of available-for-sale securities		57,942			—			57,942
Originations of loans held-for-investment		(105,284	)		—			(105,284	)
Loans purchased from third parties		(58,191	)		—			(58,191	)
Principal collections on loans		146,410			—			146,410
Proceeds from sales of loan originations held-for-investment		16,548			—			16,548
Redemption of FHLB-NY stock		1,388			—			1,388
Additions to premises and equipment		(1,869	)		—			(1,869	)
Proceeds from sale of real estate owned		404			—			404
Payments for acquisition, net of cash acquired		(2,425	)		—			(2,425	)

Net cash (used in) provided by investing activities		88,647			—			88,647

Cash flows from financing activites:
Net increase (decrease) in deposits		(33,657	)		—			(33,657	)
Net repayment of FHLB advances and other borrowings		(45,660	)		—			(45,660	)
Common stock repurchased		(321	)		—			(321	)
Dividends paid		(883	)		—			(883	)

Net cash provided by (used in) financing activities		(80,521	)		—			(80,521	)

Net (decrease) increase in cash and cash equivalents		(5,554	)		—			(5,554	)
Cash and cash equivalents at beginning of period		22,904			—			22,904

Cash and cash equivalents at end of period	$	17,350		$	—		$	17,350


Supplemental information:
Noncash Transfers-
Change in unrealized loss on valuation of available-for-sale investments, net	$	765		$	—		$	765

Cash paid for-
Interest	$	19,510		$	—		$	19,510
Income taxes	$	652		$	—		$	652

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidated financial statement presentation

The consolidated financial statements include the accounts of the Holding Company, the Bank and the Bank’s wholly-owned or majority owned subsidiaries, Carver Asset Corporation, CFSB Realty Corp., CMB, Carver Community Development Corporation, and CFSB Credit Corp. All significant intercompany accounts and transactions have been eliminated in consolidation.

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the period then ended. Amounts subject to significant estimates and assumptions are items such as the allowance for loan losses, goodwill and intangibles, pensions and the fair value of financial instruments. Management believes that prepayment assumptions on mortgage-backed securities and mortgage loans are appropriate and the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses or future write downs of real estate owned may be necessary based on changes in economic conditions in the areas where Carver Federal has extended mortgages and other credit instruments. Actual results could differ significantly from those assumptions.

In addition, the Office of Thrift Supervision (“OTS”), Carver Federal’s regulator, as an integral part of its examination process, periodically reviews Carver Federal’s allowance for loan losses and, if applicable, real estate owned valuations. The OTS may require Carver Federal to recognize additions to the allowance for loan losses or additional write downs of real estate owned based on their judgments about information available to them at the time of their examination.

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

Cash and cash equivalents

For the purpose of reporting cash flows, cash and cash equivalents include cash, amounts due from depository institutions, federal funds sold and other short-term instruments with original maturities of three months or less. Federal funds sold are generally sold for one-day periods. The amounts due from depository institutions include a non-interest bearing account held at the Federal Reserve Bank (“FRB”) where any additional cash reserve required on demand deposits would be maintained. Currently, this reserve requirement is zero since the Bank’s vault cash satisfies cash reserve requirements for deposits.

Securities

When purchased, securities are designated as either securities held-to-maturity or securities available-for-sale. Securities are classified as held-to-maturity and carried at amortized cost only if the Bank has a positive intent and ability to hold such securities to maturity. Securities held-to-maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity.

If not classified as held-to-maturity, securities are classified as available-for-sale demonstrating management’s ability to sell in response to actual or anticipated changes in interest rates and resulting prepayment risk or any other factors. Available-for-sale securities are reported at fair value. Estimated fair values of securities are based on either published or security dealers’ market value. Unrealized holding gains or losses for securities available-for-sale are excluded from earnings and reported net of deferred income taxes as a separate component of accumulated other comprehensive income (loss), a component of Stockholders’ Equity. Any impairment in the available-for-sale securities deemed other-than-temporary, is written down against the cost basis and charged to earnings. No impairment charge was recorded for fiscal 2008, 2007 or 2006. Gains or losses on sales of securities of all classifications are recognized based on the specific identification method.

Loans Held-for-Sale

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

Loans Receivable

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

The Bank defers loan origination fees and certain direct loan origination costs and accretes such amounts as an adjustment of yield over the expected lives of the related loans using methodologies which approximate the interest method. Premiums and discounts on loans purchased are amortized or accreted as an adjustment of yield over the contractual lives, of the related loans, adjusted for prepayments when applicable, using methodologies which approximate the interest method.

Loans are generally placed on non-accrual status when they are past due 90 days or more as to contractual obligations or when other circumstances indicate that collection is questionable. When a loan is placed on non-accrual status, any interest accrued but not received is reversed against interest income. Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on an assessment of the ability to collect the loan. A non-accrual loan is restored to accrual status when principal and interest payments become less than 90 days past due and its future collectibility is reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level considered adequate to provide for probable loan losses inherent in the portfolio as of March 31, 2008. Management is responsible for determining the adequacy of the allowance for loan losses and the periodic provisioning for estimated losses included in the consolidated financial statements. The evaluation process is undertaken on a quarterly basis, but may increase in frequency should conditions arise that would require management’s prompt attention, such as business combinations and opportunities to dispose of non-performing and marginally performing loans by bulk sale or any development which may indicate an adverse trend.

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

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

•

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.

•

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

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

•

Amount and trend of criticized loans;

•

Actual losses;

•

Peer comparisons with other financial institutions; and

•

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

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

Segment Reporting

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

Concentration of Risk

The Bank’s principal lending activities are concentrated in loans secured by real estate, a substantial portion of which is located in New York City. Accordingly, the ultimate collectibility of a substantial portion of the Company’s loan portfolio is susceptible to changes in New York’s real estate market conditions.

Office Properties and Equipment

Office properties and equipment are comprised of land, at cost, and buildings, building improvements, furnishings and equipment and leasehold improvements, at cost, less accumulated depreciation and amortization. Depreciation and amortization charges are computed using the straight-line method over the following estimated useful lives:


Buildings and improvements		10 to 25 years
Furnishings and equipment		3 to 5 years
Leasehold improvements		Lesser of useful life or remaining term of lease

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

Federal Home Loan Bank Stock

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

Bank Owned Life Insurance

Bank Owned Life Insurance (“BOLI”) is carried at its cash surrender value on the balance sheet and is classified as a non-interest-earning asset. Death benefits proceeds received in excess of the policy’s cash surrender value are recognized in income. Returns on the BOLI assets are added to the carrying value and included as non-interest income in the consolidated statement of income. Any receipt of benefit proceeds is recorded as a reduction to the carrying value of the BOLI asset. At March 31, 2008, Carver held no policy loans against its BOLI cash surrender values or restrictions on the use of the proceeds.

Mortgage Servicing Rights

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

Real Estate Owned

Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at the fair value at the date of acquisition and thereafter carried at the lower of cost or fair value less estimated selling costs. The fair value of such assets is determined based primarily upon independent appraisals and other relevant factors. The amounts ultimately recoverable from real estate owned could differ from the net carrying value of these properties because of economic conditions. Costs incurred to improve properties or prepare them for sale are capitalized. Revenues and expenses related to the holding and operating of properties are recognized in operations as earned or incurred. Gains or losses on sale of properties are recognized as incurred.

Identifiable Intangible Assets

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

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

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

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

Income Taxes

Carver Federal accounts for income taxes using the asset and liability method. Temporary differences between the basis of assets and liabilities for financial reporting and tax purposes are measured as of the balance sheet date. Deferred tax liabilities or recognizable deferred tax assets are calculated on such differences, using current statutory rates, which result in future taxable or deductible amounts. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

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

Securities Impairment

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

Earnings per Common Share

Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS includes any additional common shares as if all potentially dilutive common shares were issued (e.g., outstanding share awards under the Company’s stock option plans). For the purpose of these calculations, unreleased shares of the Carver Federal Savings Bank Employee Stock Ownership Plan (“ESOP”) are not considered to be outstanding.

Treasury Stock

Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity.

Pension Plans

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

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

Stock-Based Compensation Plans

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

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


	2006
Net Income available to common shareholders:
As reported	$	3,770
Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects		(105	)

Pro forma	$	3,665


Basic earnings per share:
As reported	$	1.50
Pro forma		1.46

Diluted earnings per share:
As reported	$	1.45
Pro forma		1.43

Weighted average number of shares outstanding		2,506,029

Compensation expense is recognized for the Bank’s ESOP equal to the fair value of shares committed to be released for allocation to participant accounts. Any difference between the fair value at that time and the ESOP’s original acquisition cost is charged or credited to stockholders’ equity (additional paid-in capital). The cost of unallocated ESOP shares (shares not yet committed to be released) is reflected as a reduction of stockholders’ equity.

The Company grants “incentive stock options” only to its employees and grants “nonqualified stock options” to employees and non-employee directors. All options granted, vested and unexercised as of March 31, 2006 will still be accounted for under APB No. 25. No compensation expense is recognized if the exercise price of the option is greater than or equal to the fair market value of the underlying stock on the date of grant.

Reclassifications

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

NOTE 4. IMPAIRMENT AND GOODWILL

The Company annually evaluates long-lived assets, certain identifiable intangibles and deferred costs for indication of impairment in value. When required, asset impairment will be recorded as an expense in the current period. The Company reported goodwill from its acquisition of Community Capital Bank in 2006 in the amount of $7.1 million

In accordance with Statement of Financial Accounting Standards No.142, “Goodwill and Other Intangible Assets” (“SFAS No.142”) goodwill and intangible assets with indefinite useful lives are no longer amortized, rather they are assessed, at least annually, for impairment. The Company tests goodwill for impairment on an annual basis as of January 31, or more often if events or circumstances indicate there may be impairment. The Company has determined that all of its activities constitute one reporting and operating segment.

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

NOTE 5. SECURITIES

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


	Amortized		Gross Unrealized					Estimated
	Cost		Gains		Losses			Fair-Value
Available-for-Sale:
Mortgage-backed securities:
Government National Mortgage Association	$	8,303	$	—	$	(123	)	$	8,180
Federal Home Loan Mortgage Corporation		4,077		19		—			4,096
Federal National Mortgage Association		6,748		107		—			6,855
Other		205		4		—			209

Total mortgage-backed securities		19,333		130		(123	)		19,340
U.S. Government Agency Securities		1,473		52		—			1,525

Total available-for-sale		20,806		182		(123	)		20,865


Held-to-Maturity:
Mortgage-backed securities:
Government National Mortgage Association		573		34		—			607
Federal Home Loan Mortgage Corporation		12,343		11		(230	)		12,124
Federal National Mortgage Association		4,216		78		(32	)		4,262

Total mortgage-backed securities		17,132		123		(262	)		16,993
Other		175		—		(1	)		174

Total held-to-maturity		17,307		123		(263	)		17,167

Total securities	$	38,113	$	305	$	(386	)	$	38,032

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


	Amortized		Gross Unrealized					Estimated
	Cost		Gains		Losses			Fair-Value
Available-for-Sale:
Mortgage-backed securities:
Government National Mortgage Association	$	13,637	$	47	$	(65	)	$	13,619
Federal Home Loan Mortgage Corporation		1,116		12		(3	)		1,125
Federal National Mortgage Association		5,905		30		(40	)		5,895
Other		517		20		—			537

Total mortgage-backed securities		21,175		109		(108	)		21,176
U.S. Government Agency Securities		26,417		387		—			26,804

Total available-for-sale		47,592		496		(108	)		47,980


Held-to-Maturity:
Mortgage-backed securities:
Government National Mortgage Association		727		25		—			752
Federal Home Loan Mortgage Corporation		13,308		9		(166	)		13,151
Federal National Mortgage Association		4,792		53		(50	)		4,795
Other		120		—		—			120

Total mortgage-backed securities		18,947		87		(216	)		18,818
Other		190		—		(3	)		187

Total held-to-maturity		19,137		87		(219	)		19,005

Total securities	$	66,729	$	583	$	(327	)	$	66,985

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


	2008		2007		2006
Available-for-Sale:
Proceeds	$	22,428	$	14,422	$	12,197
Gross gains		431		22		—
Gross losses		—		646		—

The net unrealized gain on available-for-sale securities was $0.1 million ($36,000 after taxes) at March 31, 2008 and net unrealized gain of $0.4 million ($0.2 million after taxes) at March 31, 2007. On November 30, 2002 the Bank transferred $22.8 million of mortgage-backed securities from available-for-sale to held-to-maturity as a result of management’s intention to hold these securities in portfolio until maturity. A related unrealized gain of $0.5 million was recorded as a separate component of stockholders’ equity and is being amortized over the remaining lives of the securities as an adjustment to yield. As of March 31, 2008 the carrying value of these securities was $8.8 million and a related net unrealized gain of $0.1 million continues to be reported. There was a loss of $0.6 million resulting from the sale of available-for-sale securities in fiscal 2007. At March 31, 2008 the Bank pledged securities of $9.7 million as collateral for advances from the FHLB-NY.

The following is a summary of the carrying value (amortized cost) and fair value of securities at March 31, 2008, by remaining period to contractual maturity (ignoring earlier call dates, if any). Actual maturities may differ from contractual maturities because certain security issuers have the right to call or prepay their obligations. The table below does not consider the effects of possible prepayments or unscheduled repayments.


	Amortized				Weighted
	Cost		Fair Value		Avg Rate
Available-for-Sale:
Less than one year	$	42	$	43		5.44	%
One through five years		181		188		5.31	%
Five through ten years		6,706		6,264		5.42	%
After ten years		14,280		14,370		5.02	%

	$	21,209	$	20,865		5.13	%


Held-to-maturity:
One through five years	$	11	$	11		5.15	%
Five through ten years		493		486		5.00	%
After ten years		16,803		16,670		5.78	%

	$	17,307	$	17,167		5.76	%

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


	Less than 12 months					12 months or longer					Total
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
Available-for-Sale:
Mortgage-backed securities	$	(33	)	$	3,857	$	(90	)	$	4,033	$	(123	)	$	7,890

Total available-for-sale		(33	)		3,857		(90	)		4,033		(123	)		7,890


Held-to-Maturity:
Mortgage-backed securities		(7	)		451		(255	)		13,800		(262	)		14,251
U.S. Government Agency Securities		—			—		(1	)		174		(1	)		174

Total held-to-maturity		(7	)		451		(256	)		13,974		(263	)		14,425

Total securities	$	(40	)	$	4,308	$	(346	)	$	18,007	$	(386	)	$	22,315

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


	Less than 12 months					12 months or longer				Total
	Unrealized			Fair		Unrealized		Fair		Unrealized			Fair
	Losses			Value		Losses		Value		Losses			Value
	(in thousands)
Available-for-Sale:
Mortgage-backed securities		(108	)		9,498		—		—		(108	)		9,498

Total available-for-sale		(108	)		9,498		—		—		(108	)		9,498


Held-to-Maturity:
Mortgage-backed securities		(216	)		15,241		—		—		(216	)		15,241
U.S. Government Agency Securities		(3	)		187		—		—		(3	)		187

Total Held-to- Maturity		(219	)		15,428		—		—		(219	)		15,428

Total securities		(327	)		24,926		—		—		(327	)		24,926

A total of 29 securities had an unrealized loss at March 31, 2008 compared to 24 at March 31, 2007. Based on estimated fair value, all the securities in an unrealized loss position were United States government agency-backed securities, which represents 32.4% and 20.3% of total securities at March 31, 2008 and 2007, respectively. The cause of the temporary impairment is directly related to the change in interest rates. In general, as interest rates decline, the fair value of securities will rise, and conversely as interest rates rise, the fair value of securities will decline. Management considers fluctuations in fair value as a result of interest rate changes to be temporary, which is consistent with the Bank’s experience. The impairments are deemed temporary based on the direct relationship of the rise in fair value to movements in interest rates, the life of the investments and their high credit quality.

NOTE 6. LOANS RECEIVABLE, NET

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


	2008						2007
	Amount			Percent			Amount			Percent
Gross loans receivable:
One- to four-family	$	103,419			16.33	%	$	100,910			17.22	%
Multifamily		78,657			12.42	%		91,877			15.68	%
Non-residential		238,508			37.66	%		203,187			34.68	%
Construction		158,877			25.09	%		137,697			23.50	%
Business		51,424			8.23	%		51,226			8.74	%
Consumer and other ⁽¹⁾		1,728			0.27	%		1,067			0.18	%

Total loans receivable		633,298			100.00	%		585,964			100.00	%


Add:
Premium on loans		725						990
Less:
Deferred fees and loan discounts		(1,229	)					(994	)
Allowance for loan losses		(4,878	)					(5,409	)

Total loans receivable, net	$	627,231					$	580,551


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

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

Mortgage loan portfolios serviced for Federal National Mortgage Association (“FNMA”) and other third parties are not included in the accompanying consolidated financial statements. The unpaid principal balances of these loans aggregated $52.0 million, $38.8 million and $33.2 million at March 31, 2008, 2007, and 2006, respectively. Custodial escrow balances, maintained in connection with the above-mentioned loan servicing, were approximately $0.2 million, $0.1 million and $0.1 million at March 31, 2008, 2007 and 2006, respectively. During the years ended March 31, 2008, 2007 and 2006, the Bank recognized gains on the sale of loans of $0.3 million, $0.2 million and $0.4 million, respectively.

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

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


	2008			2007			2006

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

Balance at end of the year	$	4,878		$	5,409		$	4,015

Non-accrual loans consist of loans for which the accrual of interest has been discontinued as a result of such loans becoming 90 days or more delinquent as to principal and/or interest payments. Interest income on non-accrual loans is recorded when received. Restructured loans consist of loans where borrowers have been granted concessions in regards to the terms of their loans due to financial or other difficulties, which rendered them unable to repay their loans under the original contractual terms.

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

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

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

NOTE 7. OFFICE PROPERTIES AND EQUIPMENT, NET

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


	2008			2007

Land	$	415		$	415
Building and improvements		9,874			9,834
Leasehold improvements		6,041			5,262
Furniture and equipment		12,079			10,039

		28,409			25,550
Less accumulated depreciation and amortization		(12,629	)		(10,924	)

Office properties and equipment, net	$	15,780		$	14,626

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

NOTE 8. ACCRUED INTEREST RECEIVABLE

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


	2008		2007

Loans receivable	$	3,751	$	3,689
Mortgage-backed securities		273		590
Investments and other interest bearing assets		39		56

Total accrued interest receivable	$	4,063	$	4,335

NOTE 9. DEPOSITS

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


	2008								2007
			Percent			Weighted					Percent			Weighted
			of Total			Average					of Total			Average
	Amount		Deposits			Rate			Amount		Deposits			Rate

Non-interest-bearing demand	$	51,736		7.90	%		0.00	%	$	50,891		8.27	%		0.00	%
NOW accounts		28,168		4.30	%		0.20	%		28,910		4.70	%		0.31	%
Savings and club		125,819		19.22	%		0.53	%		137,960		22.43	%		0.78	%
Money market savings account		45,514		6.95	%		2.94	%		46,996		7.64	%		2.18	%
Certificates of deposit		400,587		61.20	%		4.10	%		347,753		56.53	%		4.28	%
Other		2,839		0.43	%		1.51	%		2,612		0.43	%		1.39	%

Total	$	654,663		100.00	%		2.83	%	$	615,122		100.00	%		2.78	%

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


	Period to Maturity
									Total		Percent
Rate	< 1 Yr.		1-2 Yrs.		2-3 Yrs.		3+ Yrs.		2007		of Total
0% – 0.99%	$	2,993	$	389	$	48	$	231	$	3,661		0.91	%
1% – 1.99%		27,640		—		—		—		27,640		6.90	%
2% – 3.99%		98,003		9,577		4,202		1,743		113,525		28.34	%
4% and over		231,542		9,054		3,995		11,170		255,761		63.85	%

Total	$	360,178	$	19,020	$	8,245	$	13,144	$	400,587		100.00	%

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

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


	2008			2007			2006

NOW demand	$	138		$	98		$	74
Savings and clubs		1,004			931			919
Money market savings		1,193			1,133			601
Certificates of deposit		16,522			13,079			7,321
Mortgagors deposits		42			30			30

		18,899			15,271			8,945

Penalty for early withdrawal of certificates of deposit		(33	)		(44	)		(24	)

Total interest expense	$	18,866		$	15,227		$	8,921

NOTE 10. BORROWED MONEY

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


Maturing	2008					2007
Year Ended	Weighted					Weighted
March 31,	Average Rate			Amount		Average Rate			Amount
2008		0.00	%	$	—		4.58	%	$	32,500
2009		3.77	%	$	15,107		3.78	%		15,107
2012		4.63	%		30,143		3.50	%		168

		4.34	%	$	45,250		4.32	%	$	47,775

As a member of the FHLB-NY, the Bank may have outstanding FHLB-NY borrowings in a combination of term advances and overnight funds of up to 25% of its total assets, or approximately $199.0 million at March 31, 2008. Borrowings are secured by the Bank’s investment in FHLB-NY stock and by a blanket security agreement. This agreement requires the Bank to maintain as collateral certain qualifying assets (principally mortgage loans and securities) not otherwise pledged. At March 31, 2008, advances were secured by pledges of the Bank’s investment in the capital stock of the FHLB-NY totaling $1.6 million and a blanket assignment of the Bank’s unpledged qualifying mortgage loans of $187.9 million and mortgage-backed and investment securities of $9.7 million. The Bank has sufficient collateral at the FHLB-NY to be able to borrow an additional $29.4 million from the FHLB-NY at March 31, 2008.

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

Subordinated Debt Securities. On September 17, 2003, Carver Statutory Trust I, issued 13,000 shares, liquidation amount $1,000 per share, of floating rate capital securities. Gross proceeds from the sale of these trust preferred debt securities of $13.0 million, and proceeds from the sale of the trust’s common securities of $0.4 million, were used to purchase approximately $13.4 million aggregate principal amount of the Holding Company’s floating rate junior subordinated debt securities due 2033. The trust preferred debt securities are redeemable at par quarterly at the option of the Company beginning on or after September 17, 2008 and have a mandatory redemption date of September 17, 2033. Cash distributions on the trust preferred debt securities are cumulative and payable at a floating rate per annum resetting quarterly with a margin of 3.05% over the three-month LIBOR.

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


	2008			2007			2006
Amounts outstanding at the end of year:
FHLB advances	$	15,250		$	47,775		$	80,935
Guaranteed preferred beneficial interest in junior subordinated debentures	$	13,375		$	13,318		$	13,260

Rate paid at year end:
FHLB advances		3.77	%		4.32	%		4.13	%
Guaranteed preferred beneficial interest in junior subordinated debentures		5.85	%		8.40	%		7.97	%

Maximum amount of borrowing outstanding at any month end:
FHLB advances	$	60,874		$	93,975		$	112,488
Guaranteed preferred beneficial interest in junior subordinated debentures	$	13,375		$	13,318		$	13,260

Approximate average amounts outstanding for year:
FHLB advances	$	36,724		$	65,567		$	94,798
Guaranteed preferred beneficial interest in junior subordinated debentures	$	13,344		$	13,286		$	13,230

Approximate weighted average rate paid during year:
FHLB advances		5.18	%		4.36	%		3.81	%
Guaranteed preferred beneficial interest in junior subordinated debentures		7.76	%		8.33	%		7.50	%

NOTE 11. INCOME TAXES

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


	2008			2007			2006
	(Restated)
Federal income tax expense (benefit):
Current	$	70		$	1,628		$	1,155
Deferred		(1,107	)		(3,018	)		35

		(1,037	)		(1,390	)		1,190


State and local income tax expense:
Current		169			296			196
Deferred		(24	)		(5	)		(57	)

		145			291			139


Total provision for income tax (benefit) expense	$	(892	)	$	(1,099	)	$	1,329

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


	2008						2007						2006
	Amount			Percent			Amount			Percent			Amount			Percent
	(Restated)
Statutory Federal income tax	$	1,094			34.0	%	$	339			34.0	%	$	1,734			34.0	%
State and local income taxes, net of Federal tax benefit		86			2.7	%		187			11.6	%		92			1.8	%
New markets tax credit		(2,000	)		-61.6	%		(1,475	)		-83.8	%		—			—
General business credit		(41	)		-1.3	%		(69	)		-3.9	%		(73	)		-1.5	%
Release of contingency reserve		—			—			—			—			(500	)		-9.8	%
Other		(31	)		-1.0	%		(81	)		-4.6	%		76			1.5	%

Total income tax (benefit) expense	$	(892	)		-27.2	%	$	(1,099	)		-46.7	%	$	1,329			26.0	%

Carver Federal’s stockholders’ equity includes approximately $2.8 million at the end of each year ended March 31, 2008, 2007 and 2006, which has been segregated for federal income tax purposes as a bad debt reserve. The use of this amount for purposes other than to absorb losses on loans may result in taxable income for federal income taxes at the then current tax rate.

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


	2008		2007
Deferred Tax Assets:
Income from affiliate	$	—	$	1,876
Allowance for loan losses		1,427		1,839
Deferred loan fees		461		371
Compensation and benefits		102		109
Non-accrual loan interest		579		587
Capital loss carryforward		591		591
Deferred rent		111		111
Purchase accounting adjustment		159		702
Net operating loss carry forward		2,072		—
New markets tax credit		3,227		1,242
Depreciation		330		—
Other		28		2

Total Deferred Tax Assets		9,087		7,430


Deferred Tax Liabilities:
Depreciation		—		128
Income from affiliate		690		—
Minimum pension liability		170		50
Unrealized gain on available-for-sale securities		92		228

Total Deferred Tax Liabilities		952		406


Net Deferred Tax Assets	$	8,135	$	7,024

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

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

The Company has no uncertain tax positions. The Company and its subsidiaries are subject to U.S. federal, New York State and New York City income taxation. The Company is no longer subject to examination by taxing authorities for years before March 31, 2005. CCB, a subsidiary of the Holding Company, which was purchased in 2006, is currently subject to a New York State examination by the taxing authorities for tax years 2003 and 2004.

The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as of April 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. FIN 48 had no affect on the Company’s financial statements.

NOTE 12. EARNINGS PER COMMON SHARE

The following table reconciles the earnings available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted earnings per share for years ended March 31 (in thousands):


	2008		2007		2006
	(Restated)
Net income — basic and diluted	$	3,963	$	2,098	$	3,770


Weighted average common shares outstanding — basic		2,492		2,511		2,506
Effect of dilutive options		50		57		59
Effect of dilutive MRP shares		19		18		27

Weighted average common shares outstanding — diluted		2,561		2,586		2,592

NOTE 13. STOCKHOLDERS’ EQUITY

Conversion and Stock Offering. On October 24, 1994, the Bank issued in an initial public offering 2,314,375 shares of common stock, par value $0.01 (the “Common Stock”), at a price of $10 per share resulting in net proceeds of $21.5 million. As part of the initial public offering, the Bank established a liquidation account at the time of conversion, in an amount equal to the surplus and reserves of the Bank at September 30, 1994. In the unlikely event of a complete liquidation of the Bank (and only in such event), eligible depositors who continue to maintain accounts shall be entitled to receive a distribution from the liquidation account. The total amount of the liquidation account may be decreased if the balances of eligible deposits decreased as measured on the annual determination dates. The Bank is not permitted to pay dividends to the Holding Company on its capital stock if the effect thereof would cause its net worth to be reduced below either: (i) the amount required for the liquidation account, or (ii) the amount required for the Bank to comply with applicable minimum regulatory capital requirements.

Regulatory Capital. The operations and profitability of the Bank are significantly affected by legislation and the policies of the various regulatory agencies. The OTS has promulgated capital requirements for financial institutions consisting of minimum tangible and core capital ratios of 1.5% and 3.0%, respectively, of the institution’s adjusted total assets and a minimum risk-based capital ratio of 8.0% of the institution’s risk weighted assets. Although the minimum core capital ratio is 3.0%, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), as amended, stipulates that an institution with less than 4.0% core capital is deemed undercapitalized. At March 31, 2008 and 2007, the Bank exceeded all of its regulatory capital requirements.

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


	GAAP		Tangible			Leverage			Risk-Based
	Capital		Equity			Capital			Capital
Stockholders’ Equity at March 31, 2008 ⁽¹⁾ (As restated)	$	68,184	$	68,184		$	68,184		$	68,184


Add:
General valuation allowances				—			—			4,878
Deduct:
Unrealized gains on securities available-for-sale, net				(151	)		(151	)		(151	)
Goodwill and qualifying intangible assets, net				(7,587	)		(7,587	)		(7,587	)
Other				(33	)		(33	)		(33	)

Regulatory Capital				60,413			60,413			65,291
Minimum Capital requirement				11,852			23,709			51,673

Regulatory Capital Excess			$	48,561		$	36,704		$	13,618


⁽¹⁾		Carver Federal only.

Comprehensive Income. Comprehensive income represents net income and certain amounts reported directly in stockholders’ equity, such as the net unrealized gain or loss on securities available for sale and loss on pension liability. The Holding Company has reported its comprehensive income for fiscal 2008, 2007 and 2006 in the Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income. Carver Federal’s accumulated other comprehensive income or loss included net unrealized losses on securities at March 31, 2008 and 2007 was $0.2 million and $0.4 million, respectively. Included in the amounts at March 31, 2006 were unrealized gains of $0.2 million relating to available-for-sale securities that were transferred during fiscal 2003 to held-to-maturity. This unrealized gain is an unrealized gain reported as a separate component of stockholders’ equity and is amortized over the remaining lives of the securities as an adjustment to yield. Also included in accumulated other comprehensive income at March 31, 2008 and 2007 was gains on the Bank’s pension plan liabilities of $0.3 million and $0.1 million, net of taxes, respectively. At March 31, 2006, there was a loss on the Bank’s employee pension plan liability of $0.3 million, net of taxes, included in accumulated other comprehensive loss.

NOTE 14. EMPLOYEE BENEFIT AND STOCK COMPENSATION PLANS

Pension Plan. Carver Federal has a non-contributory defined benefit pension plan covering all who were participants prior to curtailment of the plan. The benefits are based on each employee’s term of service through the date of curtailment. Carver Federal’s policy was to fund the plan with contributions which equal the maximum amount deductible for federal income tax purposes. The plan was curtailed during the fiscal year ended March 31, 2001.

The following table sets forth the plan’s changes in benefit obligation, changes in plan assets and funded status and amounts recognized in Carver Federal’s consolidated financial statements at March 31 (in thousands):


	2008			2007
Change in projected benefit obligation during the year:
Projected benefit obligation at the beginning of year	$	2,887		$	2,892
Interest cost		163			159
Actuarial (gain) loss		(308	)		55
Benefits paid		(170	)		(219	)
Settlements		(173	)		—

Projected benefit obligation at end of year	$	2,399		$	2,887


Change in fair value of plan assets during the year:
Fair value of plan assets at beginning of year	$	2,877		$	2,870
Actual return on plan assets