CARVER BANCORP INC - Quarter Report: 2005 December (Form 10-Q)

Exhibit 11.

Computation of Net Income Per Share.

Exhibit 31.1

Certification of Chief Executive Officer.

Exhibit 31.2

Certification of Chief Financial Officer.

Exhibit 32.1(*)

Written Statement of Chief Executive Officer furnished pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2005

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

For the transition period from _________ to _________

Commission File Number: 0-21487

CARVER BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware		13-3904174
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

75 West 125^th Street, New York, New York		10027
(Address of Principal Executive Offices)		(Zip Code)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No ___

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act).

Yes ___ No X

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

Common Stock, par value $.01

2,506,798

Class

Outstanding at January 31, 2006

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Statements of Financial Condition as of

December 31, 2005 (unaudited) and March 31, 2005

Consolidated Statements of Income for the Three and Nine Months

Ended December 31, 2005 and 2004 (unaudited)

Consolidated Statement of Changes in Stockholders’ Equity and

Comprehensive Income for the Nine Months Ended December 31, 2005 (unaudited)

Consolidated Statements of Cash Flows for the Nine Months

Ended December 31, 2005 and 2004 (unaudited)

Notes to Consolidated Financial Statements (unaudited)

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Submission of Matters to a Vote of Security Holders

Item 5.

Other Information

Item 6.

Exhibits

SIGNATURES

EXHIBITS

PART I.

FINANCIAL INFORMATION

ITEM 1.

Financial Statements

See accompanying notes to consolidated financial statements.

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

FOR THE NINE MONTHS ENDED DECEMBER 31, 2005

(In thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1)	BASIS OF PRESENTATION

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

The unaudited consolidated financial statements presented herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Holding Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2005 (“2005 10-K”) previously filed with the SEC. The consolidated results of operations and other data for the three-month or nine-month periods ended December 31, 2005 are not necessarily indicative of results that may be expected for the entire fiscal year ending March 31, 2006 (“fiscal 2006”).

The accompanying unaudited consolidated financial statements include the accounts of the Holding Company and its wholly owned subsidiaries, Carver Federal Savings Bank (the “Bank” or “Carver Federal”), Alhambra Holding Corp., an inactive Delaware corporation, and the Bank’s wholly-owned subsidiaries, CFSB Realty Corp. and CFSB Credit Corp., and the Bank’s majority owned subsidiary, Carver Asset Corporation. The Holding Company and its consolidated subsidiaries are referred to herein collectively as “Carver” or the “Company.” All significant inter-company accounts and transactions have been eliminated in consolidation.

In addition, the Holding Company has a subsidiary, Carver Statutory Trust I, which is not consolidated with Carver for financial reporting purposes as a result of our adoption of Financial Accounting Standards Board (“FASB”), revised Interpretation No. 46, “Consolidation of Variable Interest Entities, and Interpretation of Accounting Research Bulletin No. 51” (“FIN46R”), effective January 1, 2004. Carver Statutory Trust I was formed in 2003 for the purpose of issuing 13,000 shares, liquidation amount $1,000 per share, of floating rate capital securities (“trust preferred securities”). Gross proceeds from the sale of these trust preferred securities were $13.0 million, and, together with the proceeds from the sale of the trust's common securities, were used to purchase approximately $13.4 million aggregate principal amount of the Holding Company's floating rate junior subordinated debt securities due 2033. The junior subordinated debt securities are repayable quarterly at the option of the Holding Company, beginning on or after July 7, 2007, and have a mandatory repayment date of September 17, 2033. Interest on the junior subordinated debt securities is cumulative and payable at a floating rate per annum (reset quarterly) equal to 3.05% over three-month LIBOR, with a rate of 7.55% as of December 31, 2005. The Holding Company has fully and unconditionally guaranteed the obligations of Carver Statutory Trust I to the trust's capital security holders. See Note 6 for further discussion of the impact of our adoption of FIN 46R.

(2)	NET INCOME PER COMMON SHARE

Basic earnings per common share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding over the period of determination. Diluted earnings per common share include any additional common shares as if all potentially dilutive common shares were issued (for instance, convertible preferred stock and stock options with an exercise price that is less than the average market price of the common shares for the periods stated). For the purpose of these calculations, unreleased ESOP shares are not considered to be outstanding. For the three-month period ended December 31, 2004, preferred dividends of $15,837 were deducted from net income to arrive at the amount of net income available to common stockholders. However, in October 2004 all outstanding shares of preferred stock were converted into common shares. Also, 52,692 shares of common stock at December 31, 2005 and 90,770 of common stock at December 31, 2004 were potentially issuable from the exercise of stock options with an exercise price that is less than the average market price of the common shares for the three-months ended December 31, 2005 and 2004, respectively. The effects of these potentially dilutive common shares were considered in determining the diluted net income per common share.

(3)	STOCK OPTION PLAN

Accounting for Stock Based Compensation

The Holding Company grants “incentive stock options” only to its employees and grants “nonqualified stock options” to employees and non-employee directors. Under Accounting Principle Board Opinion (“APB”) No. 25 “Accounting for Stock Issued to Employees”, 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. In December 2004, the FASB issued a revised Statement of Financial Accounting Standards No. 123 “Accounting for Stock Based Compensation, Share Based Payment”, (“SFAS 123R”) which requires that compensation cost relating to share–based payment transactions be recognized in the financial statements. The associated costs will be measured based on the fair value of the equity instruments issued. SFAS 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS 123R, per SEC guidance, is effective as of the first annual reporting period beginning after June 15, 2005. Carver Federal will adopt SFAS 123R as of April 1, 2006. Further disclosure is presented in Note 6.

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

The fair value of the option grants was estimated on the date of the grant using the Black-Scholes option pricing model applying the following weighted average assumptions: risk-free interest rates of 4.50% and 4.15%, for the relevant quarters ended December 31, 2005 and 2004, respectively; volatility of 21.42% and 27.27% for the quarters ended December 31, 2005 and 2004, respectively; expected dividend yield was 1.42% and 0.98% for the quarters ended December 31, 2005 and 2004, respectively; and an expected life ten years was used for all option grants.

(4)	EMPLOYEE BENEFIT PLANS

Employee Pension Plan

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

Directors’ Retirement Plan

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

The following table sets forth the components of net periodic pension expense for the pension plan and directors’ retirement plan for the three months ended December 31, of the calendar years indicated.

(5)	COMMON STOCK DIVIDEND

On February 7, 2006, the Board of Directors of the Holding Company declared, for the quarter ended December 31, 2005, a cash dividend of eight cents ($0.08) per common share outstanding. The dividend is payable on March 7, 2006 to stockholders of record at the close of business on February 21, 2006.

(6)	RECENT ACCOUNTING PRONOUNCEMENTS

The Meaning of Other-Than-Temporary impairment and It’s Application to Certain Investments

In November 2005, the FASB issued Staff Position No. FASB 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary impairment and Its Application to Certain Investments” (FSP FAS 115-1 and FAS 124-1), which amends FASB Statements No. 115, Accounting for Certain Investments in Debt and Equity Securities, and No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations, and APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. FSP FAS 115-1 and FAS 124-1 addresses the determination of when an investment is considered impaired; whether the impairment is other than temporary; and how to measure an impairment loss and also addresses accounting considerations subsequent to the recognition of an other-than–temporary impairment on a debt security, and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. Under FSP FAS 115-1 and FAS 124-1, impairment losses must be recognized in earnings equal to the entire difference between the security’s cost and it fair share value at the financial statement date, without considering partial recoveries subsequent to that date. FSP FAS 115-1 and FAS 124-1 also requires that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. This pronouncement is effective for reporting periods beginning after December 15, 2005. The Company does not expect application to have any impact on its financial condition, results of operations or financial statement disclosures.

Accounting Changes and Error Corrections

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”(SFAS No. 154), which replaces APB Opinion No. 20, “Accounting Changes,” or APB No. 20, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement when the pronouncement does not include specific transaction provisions. SFAS No. 154 requires retrospective application of changes in accounting principle to prior periods’ financial statements unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of the change in net income for the period of the change in accounting principle. SFAS No. 154 carries forward without change the guidance contained in APB No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS No. 154 also carries forward the guidance in APB No. 20 requiring justification of a change in accounting principle on the basis of preferability. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with early adoption permitted. Carver will adopt this pronouncement as of April 1, 2006 and it is not expected to have any impact on the Company’s consolidated financial condition or results of operations.

Accounting for Stock Based Compensation, Share Based Payment

In December 2004, the FASB issued SFAS 123R which replaces the guidance prescribed in SFAS 123. SFAS 123R requires that compensation cost relating to share–based payment transactions be recognized in the financial statements. The associated costs will be measured based on the fair value of the equity or liability instruments issued. SFAS 123R covers a wide

range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS 123R, per SEC guidance, is effective as of the first annual reporting period beginning after June 15, 2005. Carver will adopt this pronouncement as of April 1, 2006 and it is not expected to have a material impact on the Company’s consolidated financial condition or results of operations.

Consolidation of Variable Interest Entities

In December 2003, the FASB issued FIN46R. FIN46R addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the variable interest entity. FIN46R replaces an earlier version that was issued in January 2003. All public companies, such as Carver, were required to fully implement FIN46R no later than the end of the first reporting period ending after March 15, 2004. The adoption of FIN46R resulted in the deconsolidation of Carver Statutory Trust I, which did not have a material impact on the Company’s financial condition or results of operations.

Accounting for Certain Loans or Debt Securities Acquired in a Transfer

In December 2003, the American Institute of Certified Public Accountants issued Statement of Position No. 03-3, “Accounting For Certain Loans or Debt Securities Acquired In a Transfer” (“SOP No. 03-3”). SOP No. 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP No. 03-3 prohibits “carry over” or creation of valuation allowances in the initial accounting of all loans acquired in transfers within the scope of SOP No. 03-3, which includes loans acquired in a business combination. SOP No. 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP No. 03-3 did not have any impact on the Company’s financial condition or results of operations.

(7)	RECLASSIFICATIONS

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

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

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

The forward-looking statements contained herein are made as of the date of this Form 10-Q, and the Company assumes no obligation to, and expressly disclaims any obligation to, update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements or to update the reasons why actual results

could differ from those projected in the forward-looking statements. You should consider these risks and uncertainties in evaluating forward-looking statements and you should not place undue reliance on these statements.

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

Overview

The Holding Company, a Delaware corporation, is the holding company for Carver Federal, a federally chartered savings bank, and, on a parent-only basis, had minimal results of operations. The Holding Company is headquartered in New York, New York. The Holding Company conducts business as a unitary savings and loan holding company, and the principal business of the Holding Company consists of the operation of its wholly-owned subsidiary, Carver Federal. The Bank is focused on successfully building its core business by providing superior customer service while offering a wide range of financial products. As of December 31, 2005, the Bank operated eight full-service banking locations in the New York City boroughs of Brooklyn, Queens and Manhattan and five stand alone 24/7 ATM centers.

Carver Federal’s net income, like others in the thrift industry, is dependent primarily on net interest income, which is the difference between interest income earned on its interest-earning assets such as loans, investment and mortgage-backed securities portfolios and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. The Bank’s earnings are also affected by general economic and competitive conditions, particularly changes in market interest rates and government and regulatory policies. Additionally, net income is affected by any incremental provision for loan losses, as well as non-interest income and operating expenses. Throughout fiscal 2006, the Bank continues to be impacted by the changing interest rate environment where the Federal Open Market Committee (“FOMC”), at December 31, 2005, had raised the federal funds rates six separate times for a total increase of 150 basis points. The effect of these interest rate increases have negatively impacted Carver’s net interest margin as interest rates paid on liabilities increased more quickly than yields earned on assets. Consequently, Carver’s net interest margin declined to 3.23% for the third quarter of fiscal 2006 from 3.42% for the prior year period and also for the nine month period to 3.17% from 3.43% for the prior year period. Included in these margin results is an increase in the cost of funds as a result of the Bank obtaining $25.0 million in Banking Development District (“BDD”) deposits from New York State for its recent branch opening in Harlem. In addition, other deposit balances increased as a result of the Bank increasing rates offered on its deposit products in an effort to remain competitive and stem attrition. Our competitive deposit rates have enabled retention of maturing certificates of deposit accounts as well as attracted new deposit relationships thus resulting in growth in total deposits. While the Bank also experienced strong growth in its loan portfolio, the expected contribution to margin was minimized by lower market rates on new commercial and residential mortgage loans due to increased competition. Also negatively impacting margin were pay downs of higher yielding loans in the portfolio, however yields on construction loans, which predominantly adjust with the prime rate, have helped to offset the negative impact as these loans reset with each rise in short term rates. The Bank’s securities and federal funds sold portfolios are shorter term in duration and thereby benefit from the rise in short term interest rates as well. Although the yield on the investment portfolio increased, the Bank’s current philosophy is to allow the portfolio to pay down and use those funds to originate higher yielding loans.

The growth in core deposits further fueled improvements in depository fees and charges. The high level of loan originations also resulted in additional loan closing income. This income was offset in part by decreases in prepayment penalties as refinancings declined from previously higher volumes. The Bank also generates additional income, though to a lesser extent, through investment and insurance product sales revenue and, depending on market conditions, net gains on sales of securities and loans. Management expects to improve fee income contributions by leveraging investments made for franchise expansion, better customer service and more financial product offerings.

The level of operating expenses such as salaries and benefits, occupancy and equipment costs, other general and administrative expenses, net losses on sales of securities and loans and income tax expense further affects the Bank’s net income. Management’s goal is to continue to control, and where possible reduce non-interest expense, consistent with its franchise expansion objectives. The Bank’s outsourcing efforts have already yielded positive results towards expense reductions and other outsourcing actions are planned in the near future.

This discussion and analysis of the Company’s financial condition should be read in conjunction with the audited Consolidated Financial Statements, the notes thereto and other financial information included in the Company’s 2005 10-K.

Critical Accounting Policies

Note 1 to our audited Consolidated Financial Statements for fiscal 2005 included in our 2005 10-K, as supplemented by this report, contains a summary of our significant accounting policies and is incorporated herein. We believe our policies with respect to the methodology for our determination of the allowance for loan losses and asset impairment judgments, including other than temporary declines in the value of our securities, involve a high degree of complexity and require management to make subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments,

assumptions or estimates could cause reported results to differ materially. The following description of these policies should be read in conjunction with the corresponding section of our 2005 10-K.

Securities Impairment

Carver Federal’s available-for-sale securities portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive loss/income in stockholders’ equity. Securities, which the Bank has the positive intent and ability to hold to maturity, are classified as held-to-maturity and are carried at amortized cost. The fair values of securities in portfolio, which are primarily adjustable rate mortgage-backed securities at December 31, 2005, are based on published or securities dealers’ market values and are affected by changes in interest rates. The Bank periodically reviews and evaluates the securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary. The Bank generally views changes in fair value caused by changes in interest rates as temporary, which is consistent with its experience. However, if such a decline is deemed to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged to earnings. At December 31,2005, the Bank carried no permanently impaired securities.

Allowance for loan losses

Allowance for loan losses are maintained at a level considered adequate to provide for probable loan losses inherent in the portfolio as of December 31, 2005. Management is responsible for determining the adequacy of the allowance for loan losses and the periodic provisioning for estimated losses included in the consolidated financial statements. The evaluation process is undertaken on a quarterly basis, but may increase in frequency should conditions arise that would require management’s prompt attention, such as business combinations and opportunities to dispose of non-performing and marginally performing loans by bulk sale or any development which may indicate an adverse trend.

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

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

•

Establishment of reserve amounts for all specifically identified criticized loans that have been designated as requiring attention by management’s internal loan review program, bank regulatory examinations or the Bank’s external auditors.

•

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

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

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

The second allocation or loss factor approach to common or homogeneous loans is made by applying the average loss factor based on several years of loss experience to the outstanding balances in each loan category. It gives recognition to the loss

experience of acquired businesses, business cycle changes and the real estate components of loans. Since many loans depend upon the sufficiency of collateral, any adverse trend in the real estate markets could seriously affect underlying values available to protect against loss.

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

	•	Regulatory examinations
	•	Amount and trend of criticized loans
	•	Actual losses
	•	Peer comparisons with other financial institutions
	•	Economic data associated with the real estate market in the Company’s lending market areas
	•	Opportunities to dispose of marginally performing loans for cash consideration

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

Stock Repurchase Program

In August 2002, Carver’s Board of Directors authorized a stock repurchase program to acquire up to 231,635 shares of the Company’s outstanding common stock, or approximately 10 percent of the then outstanding shares. On October 25, 2005, the Board of Directors approved accelerating the repurchase of the remaining 148,051 shares under the 2002 stock repurchase program, or up to a $2.5 million total investment, to take place over the following 18 months. This acceleration is intended to return capital to shareholders and capitalize on current trading values, and continue funding stock-based benefit and compensation plans. Since that time, the Company has purchased an additional 7,390 shares at an average price of $15.45. As of December 31, 2005 the Company has purchased a total of 90,974 shares at an average price of $16.91. Purchases for the stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. The timing and actual number of shares repurchased under the plan depends on a variety of factors including price, corporate and regulatory requirements, and other market conditions.

Liquidity and Capital Resources

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

The Bank monitors its liquidity utilizing guidelines that are contained in a policy developed by management of the Bank and approved by the Bank’s Board of Directors. The Bank’s several liquidity measurements are evaluated on a frequent basis. Management believes the Bank’s short-term assets have sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash requirements. Additionally, the Bank has other sources of liquidity including the ability to borrow from the Federal Home Loan Bank of New York (“FHLB-NY”) utilizing unpledged mortgage-backed securities and certain mortgage loans, the sale of available-for-sale securities and the sale of loans. At December 31, 2005, based on available collateral held at the FHLB-NY the Bank had the ability to borrow from the FHLB-NY an additional $38.6 million on a secured basis, utilizing mortgage-related loans and securities as collateral.

The unaudited Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During the nine months ended December 31, 2005, total cash and cash equivalents increased by $3.8 million reflecting

cash provided by operating and financing activities offset by cash used in investing activities. Net cash provided by operating activities during this period was $8.3 million, primarily representing proceeds from the sale of loans originated for sale, cash provided from operations and satisfaction of receivables included in other assets offset in part by cash used in the satisfaction of other liabilities and cash due from accrued interest receivable on certain assets. Net cash used in investing activities was $26.1 million, primarily representing cash disbursements to fund mortgage loan originations and purchases of loans and securities, partially offset by principal collections on loans, repayment of principal on securities, maturities of securities and proceeds from the sale of available-for-sale securities. Net cash provided by financing activities was $21.6 million, primarily representing a net increase in deposit balances, partially offset by repayments of advances from the FHLB-NY, repurchases of the Company’s common stock and the payment of common dividends. See “Comparison of Financial Condition at December 31, 2005 and March 31, 2005” for a discussion of the changes in securities, loans, deposits and FHLB-NY borrowings.

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

Since the beginning of fiscal 2006, the FOMC raised the federal funds rate six times resulting in a 150 basis point increase. Although short-term rates have increased, mortgage loans and mortgage-backed securities are typically tied to longer-term rates which have either not increased as dramatically or remained relatively flat. When mortgage interest rates increase, customers’ refinance activities tend to decelerate, causing the cash flow from both the mortgage loan portfolio and the mortgage-backed securities portfolio to decline.

The OTS requires that the Bank meet minimum capital requirements. Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. At December 31, 2005, the Bank exceeded all regulatory minimum capital requirements and qualified, under OTS regulations, as a well-capitalized institution.

The table below presents certain information relating to the Bank’s capital compliance at December 31, 2005.

Comparison of Financial Condition at December 31, 2005 and March 31, 2005

Assets

Total assets increased $19.6 million, or 3.1%, to $646.0 million at December 31, 2005 compared to $626.4 million at March 31, 2005. The increase in total assets was primarily the result of net loan growth of $45.8 million and increases in cash and cash equivalents, accrued interest receivable and FHLB-NY stock of $3.8 million, $364,000 and $201,000, respectively. These increases to total assets were partially offset by decreases in total securities and other assets of $29.8 million and $551,000, respectively.

Cash and cash equivalents for the nine months ended December 31, 2005 increased $3.8 million or 18.62%, to $24.2 million, compared to $20.4 million at March 31, 2005. The increase was primarily a result of the Bank having a higher balance at the Federal Reserve Bank from check inclearings that was unavailable to be invested otherwise.

Total securities decreased $29.8 million, or 20.0%, to $119.5 million at December 31, 2005 from $149.3 million at March 31, 2005 as security repayments, maturities and sales exceeded new purchases. The securities portfolio decline reflects $32.9 million in total principal repayments, maturities of $21.8 million and the sale of $1.6 million of Independence Federal Savings Bank (“IFSB”) common stock. Reductions to the securities portfolio were partially offset in part by new purchases amounting to $26.8 million, to replace repaid securities held as collateral for deposits. These purchases consisted of $23.3 million in United States Treasury and Agency securities and $3.5 million in Government National Mortgage Association mortgage-backed securities. Also adding to the decreases to total securities was a change in the net unrealized loss on securities of $296,000 resulting from the mark-to-market of the available for sale securities in portfolio.

Total loans receivable, net, increased $45.8 million, or 10.9%, to $467.8 million at December 31, 2005 from $422.0 million at March 31, 2005. The increase resulted primarily from $140.6 million in loan originations and purchases exceeding the $94.8 million in repayments and sales during the first nine months of fiscal 2006. Loan originations for the period totaled $76.2 million and were comprised of $32.1 million in construction, $22.9 million in non-residential, $11.9 million in one-to four –family, $9.0 million in multifamily and $357,000 in consumer loans. Management continues to evaluate yields and loan quality in the competitive New York metropolitan area market and in certain instances has decided to purchase loans to supplement internal originations. Total loan purchases for the same period amounted to $64.3 million of which $24.2 were non-residential, $18.1 million were construction, $12.6 were one-to four-family and $9.4 million were multifamily loans. Management also assesses yields and economic risk in determining the balance of interest-earning assets allocated to loan originations and purchases compared to additional purchases of mortgage-backed securities.

The Bank’s investment in FHLB-NY stock increased by $201,000, or 3.9%, to $5.3 million compared to $5.1 million at March 31, 2005. FHLB-NY now requires Banks to own membership stock as well as activity-based stock which resulted in the purchase of additional FHLB-NY stock.

Other assets decreased $551,000, or 4.2%, to $12.6 million at December 31, 2005 from $13.2 million at March 31, 2005. The decrease is primarily the result of a reduction in the Bank’s deferred tax asset.

Liabilities and Stockholders’ Equity

Liabilities

At December 31, 2005, total liabilities increased by $17.3 million, or 3.0%, to $597.9 million compared to $580.6 million at March 31, 2005. The increase in liabilities primarily reflects an increase in total deposits of $28.3 million, partially offset by decreases of $6.0 million and $5.0 million in advances from the FHLB-NY and other borrowed money and other liabilities, respectively.

The $28.3 million increase in total deposits represents a 6.2% increase to $484.2 million at December 31, 2005 from $455.9 million at March 31, 2005. The increase in deposit balances was the result of balance increases in certificates of deposits, demand and money market accounts of $23.6 million, $9.4 million and $271,000, respectively, partially offset by decreases of $3.7 million and $1.2 million in the balance of savings and escrow deposit accounts. The increase in certificates of deposits is primarily the result of the Bank receiving an additional $25.0 million in BDD deposits from New York State for the Bank’s newest branch at 145^th Street in the Pathmark grocery store in Bradhurst Court in Harlem. Also contributing to deposit growth was the Bank’s continued emphasis on developing depository relationships with borrowers and offering special promotions and campaigns to attract new consumer depositors. At December 31, 2005, the Bank managed eight branches and five stand-alone 24/7 ATM Centers. Management believes that deposits will continue to grow as the Bank begins to capitalize on its investment in franchise expansions, customer service and the offering of a wider array of financial products.

Advances from the FHLB-NY and other borrowed money decreased $6.0 million, or 5.2% to $109.3 million at December 31, 2005 compared to $115.3 million at March 31, 2005. This decrease is primarily the result of the repayment of two matured

FHLB-NY advances: a $7.0 million advance with a cost of 5.21% and a $1.0 million advance with a cost of 2.50%. Management, with its commitment to manage the impact of margin compression, elected to repay these borrowings with available excess liquidity.

Other liabilities decreased $5.0 million, or 53.6%, to $4.4 million at December 31, 2005 from $9.4 million at March 31, 2005. The decrease was primarily attributable to a $3.5 million decrease in the Bank’s liability for income taxes of which $2.1 million represents a corporate tax remittance to taxing authorities.

Stockholders’ Equity

Total stockholders’ equity increased $2.3 million or 5.3%, to $48.1 million at December 31, 2005 compared to $45.8 million at March 31, 2005. The increase in total stockholders’ equity was primarily attributable to an increase of $2.2 million in retained earnings principally resulting from net income, distributions of the Company’s treasury stock to fund benefit plans resulting in an increase in capital of $336,000, partially offset by a decrease of $183,000 in accumulated other comprehensive income related to the mark-to-market of the Bank’s available-for-sale securities. As required by SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” securities accounted for as held-to-maturity are carried at cost while such securities designated as available-for-sale are carried at market with any adjustments made directly to stockholders’ equity, net of taxes, and does not impact the Consolidated Statements of Income.

During the quarter ended December 31, 2005, the Holding Company purchased an additional 7,390 shares of its common stock under its stock repurchase program.

Asset/Liability Management

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

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

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

Off-Balance Sheet Arrangements and Contractual Obligations

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers and in connection with its overall investment strategy. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are not recorded in the consolidated financial statements. Such instruments primarily include lending commitments.

Lending obligations include commitments to originate mortgage and consumer loans and to fund unused lines of credit. Additionally, the Bank has a contingent liability related to a standby letter of credit.

As of December 31, 2005, the Bank has outstanding loan commitments and a letter of credit as follows:

The Bank also has contractual obligations related to long-term debt obligations and operating leases. As of December 31, 2005, the Bank has contractual obligations as follows:

Analysis of Earnings

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

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

Comparison of Operating Results for the Three Months Ended December 31, 2005 and 2004

Overview. The Company reported consolidated net income for the three-month period ended December 31, 2005 of $1.3 million, an increase of $367,000 compared to $920,000 for the prior year period. These results primarily reflect an increase in interest income of $987,000 and a decrease in income taxes of $574,000, partially offset by increases in interest and non-interest expenses of $953,000 and $161,000, respectively and a reduction in non-interest income. This year over year increase in net income contributed to both the increases in the return on average equity and the return on average assets for the corresponding period.

Selected operating ratios for the three months ended December 31, 2005 and 2004 are set forth in the table below and the following analysis discusses the changes in components of operating results.

Interest Income. Interest income increased by $987,000, or 13.7%, to $8.2 million for the three months ended December 31, 2005, compared to $7.2 million in the prior year period. Interest income increased primarily as a result of higher average loan balances of $63.0 million this fiscal period compared to the prior year period. Also contributing to the increase in net interest income was a 34 basis points increase in the annualized average yield on total interest-earning assets to 5.53% for the three months ended December 31, 2005 compared to 5.19% for the prior year period, reflecting increases in yields on federal funds, total securities and loans of 201 basis points, 51 basis points and 6 basis points, respectively. The increase in yield on interest-earning assets was partially offset by the effects of a decrease in the average balance of total securities of $25.6 million.

Interest income on loans increased by $1.0 million, or 17.4%, to $6.8 million for the three months ended December 31, 2005 compared to $5.8 million for the prior year period. The change was primarily due to an increase in average mortgage loan balances of $63.0 million to $452.7 million, or 16.2%, compared to $389.7 million for the prior year period. The increase was amplified by a 6 basis points increase in the annualized average yield on loans for the three months ended December 31, 2005 to 5.99% compared to 5.93% for the prior year period. The year over year growth in loan balance is reflective of management’s commitment to grow assets primarily through originations and purchases of high quality mortgage loans for its portfolio at a level that exceeds loan repayments. The modest increase in loan yields is reflective of the current rate environment where longer term rates, which dictate mortgage loans yields, remained relatively flat compared to the faster rising shorter term rates.

Interest income on total securities decreased moderately by $53,000, remaining at $1.4 million for both the three month periods ended December 31, 2005 and 2004. The decrease was primarily the effect of a reduction in the average balance of total securities of $25.6 million to $134.6 million compared to $160.2 million in the prior year period as matured and repaid securities

are only being replaced to the extent additional deposit collateral is needed. In most cases deposit collateral needs are being met by using municipal letters of credit provided by the FHLB-NY. The effect of the decrease in the balance of securities was partially offset by a 51 basis points rise in the annualized average yield on securities to 4.03% from 3.52% in the prior year period since adjustable securities in portfolio are repricing at a higher rate of return.

Interest income on federal funds sold increased by $37,000 to $69,000 for the three months ended December 31, 2005 compared to $32,000 for the prior year period. The rise was primarily attributable to an increase of 201 basis points in the annualized yield on federal funds sold combined with a slight increase in the average balance of federal funds of $329,000 to $7.0 million from $6.6 million in the prior year period. Yields on federal funds increased as the FOMC again raised the federal funds rate twice in the quarter for a total of 50 basis points.

Interest Expense. Total interest expense increased by $953,000, or 38.4%, to $3.4 million for the three months ended December 31, 2005, compared to $2.5 million for the prior year period. The rise resulted primarily from an increase in the average balance of interest-bearing liabilities of $29.0 million, or 5.6%, to $545.5 million from $516.5 million during the prior year period. Also contributing to the increase in interest expense was a higher annualized average cost of interest-bearing liabilities of 59 basis points to 2.50% for the third quarter of fiscal 2006 from 1.91% for the prior year period.

Interest expense on deposits increased $828,000 or 57.1%, to $2.3 million for the three months ended December 31, 2005, compared to $1.4 million for the prior year period. The increase in interest expense on deposits was due primarily to a $28.7 million, or 7.0%, increase in the average balance of interest-bearing deposits to $436.4 million for the three months ended December 31, 2005 from $407.7 million for the prior year period. Additionally, a 59 basis point rise in the rate paid on deposits to 2.50% compared to 1.91% for the prior year period added to the increase. Customer deposits have historically provided Carver with a relatively low cost funding source from which its net interest income and net interest margin have benefited. The Bank has grown core deposits including new deposits from branch expansion, however, rates on deposits are increasing in cost as short-term rates rise, thus decreasing the Bank’s net interest margin. See “Liabilities and Stockholders’ Equity—Liabilities.”

Interest expense on advances and other borrowed money increased $125,000, or 12.1%, to $1.2 million for the three months ended December 31, 2005 compared to $1.0 million for the prior year period. The increase was primarily the result of a 44 basis point increase in the cost of borrowed money to 4.22% from 3.78% for the prior year period. The increased cost of borrowed money is mainly related to the cost of debt service of the $13 million in floating rate junior subordinated notes raised by the Company through an issuance of trust preferred securities by Carver Statutory Trust I in September 2003 which has increased to a rate of 7.55% and is expected to continue to rise as rates increase. Also contributing to the increase in interest expense on advances and other borrowed money was a $257,000 increase in the average balance of outstanding borrowings to $109.1 million from $108.8 million from the prior year period. While the Bank paid down some of its relatively higher cost FHLB-NY advances during the fiscal year, additional advances were taken from time to time to meet liquidity needs mainly to fund the purchases and/or originations of mortgage loans. As opportunities arise, management intends to replace matured FHLB-NY advances with lower costing deposits. See “Liabilities and Stockholders’ Equity—Liabilities.”

Net Interest Income Before Provision for Loan Losses. Net interest income before the provision for loan losses increased moderately by $34,000, or 0.7%, to $4.8 million for the three months ended December 31, 2005, compared to $4.7 million for the prior year period. The Company’s annualized average interest rate spread for the three months ended December 31, 2005 decreased by 25 basis points to 3.03% compared to 3.28% in the prior year period. Net interest margin, represented by annualized net interest income divided by average total interest-earning assets, decreased 19 basis points to 3.23% for the three months ended December 31, 2005 from 3.42% in the prior year period.

Provision for Loan Losses and Asset Quality. The Company did not provide for additional loan loss reserves for the three-month periods ended December 31, 2005 or 2004 as the Company considers the overall allowance for loan losses to be adequate. During the third quarter of fiscal 2006, the Company recorded net charge-offs of $37,000 compared to net recoveries of $5,000 for the prior year period. At December 31, 2005, the Bank’s allowance for loan losses was $4.0 million, substantially unchanged from March 31, 2005. The ratio of the allowance for loan losses to non-performing loans was 184.1% at December 31, 2005 compared to 410.7% at March 31, 2005. The ratio of the allowance for loan losses to total loans was 0.85% at December 31, 2005 compared to 0.96% at March 31, 2005.

At December 31, 2005, non-performing assets totaled $2.2 million, or 0.47% of total loans receivable compared to $1.0 million, or 0.23% of total loans receivable, at March 31, 2005. Non-performing assets include loans 90 days past due, non-accrual loans and other real estate owned. As of the end of December 31, 2005, the Bank held one real estate owned property as a result of a property tax redemption. While non performing assets have increased due to increases in loans 90 days past due, the level of non performing assets to total loans remains within the range the Bank has experienced over the trailing nine quarters. At December 31, 2005, non-performing assets consisted of 11 loans 90 days or more delinquent at an average balance of $199,000, compared to 5 loans with an average balance of $196,000 at March 31, 2005. Future levels of non-performing assets will be influenced by economic conditions, including the impact of those conditions on our customers, interest rates and other internal and external factors existing at the time.

Non-Interest Income. Total non-interest income for the quarter ended December 31, 2005 decreased $80,000, or 6.7%, to $1.1 million, compared to $1.2 million for the prior year period. The decrease in non-interest income resulted mainly from a decline in loan fees and service charges of $80,000, primarily reflecting a reduction in prepayment penalty income as a result of slowing mortgage refinance activity. Deposit fees and charges declined minimally by $16,000 but were offset by an increase in other income mostly from the Bank’s investment in Bank owned life insurance (“BOLI”).

Management anticipates continued momentum in depository fees and services charges as the Bank moves toward recognizing the full potential of its franchise expansions and offering more financial products. Although it is not expected that mortgage prepayments will revert to previous high levels, the Company’s strategy is to boost future loan fee income through new product offerings such as the sale of subprime and fixed-rate jumbo mortgage products. These new products will be originated and subsequently sold to a pre-established secondary market purchaser, thereby generating additional non-interest income while mitigating the Bank’s exposure to additional credit risk.

Non-Interest Expense. For the quarter ended December 31, 2005, total non-interest expense increased $161,000, or 3.6%, to $4.7 million compared to $4.5 million for the same period last year. The increase in non-interest expense was primarily due to additional equipment and net occupancy expenses of $145,000 and $65,000, respectively, primarily resulting from the new branches and 24/7 ATM centers. Also contributing to the increase in non-interest expense is an additional $54,000 in other expense mainly from increased legal expenses. Offsetting these increases was a reduction in employee compensation and benefits expense of $103,000 primarily reflecting the timing of replacing staff due to attrition and reduced cost of employee benefits plans resulting from the Bank’s outsourcing efforts.

Management believes that while the Company’s efficiency ratio exceeds its peers, it is reflective of the dramatic steps that have been taken to grow the franchise as part of a broader objective of accelerating the pace along the path to higher earnings. In addition, management is continuing to conduct a comprehensive review of costs to improve the Company’s efficiency ratio. As such, Carver made progress throughout fiscal 2006 in reducing costs by successfully completing the outsourcing of our core deposit processing, ATM driving technology and human resources functions.

Income Tax Expense. For the three-month period ended December 31, 2005, income taxes decreased $574,000, or 111.7%, resulting in a tax benefit of $60,000 compared to an expense of $514,000 for the prior year period. The net tax benefit represents the difference between a $500,000 recovery of income tax expense attributable to the release of contingency reserves for closed tax examination years and income tax accrued for current earnings.

Comparison of Operating Results for the Nine Months Ended December 31, 2005 and 2004

Overview

Selected operating ratios for the nine months ended December 31, 2005 and 2004 are set forth in the table below. The following analysis discusses the changes in components of operating results giving rise to net income.

Net Income. The Company reported a $472,000 or 20.9% increase in net income for the nine months ended December 31, 2005 to $2.7 million compared to $2.3 million for the corresponding prior year period. This income resulted in a year-to-date earnings per diluted share of $1.06, compared to $0.87 for the corresponding prior year period. Income for the nine months ended December 31, 2004 included a grant from the Department of the Treasury of $1.1 million offset by a $1.5 million impairment charge for IFSB stock deemed other than temporary and an $847,000 charge for the terminated merger with IFSB. Net income for the nine months ended December 31, 2005 benefited from a decrease in income taxes of $595,000 and increases in non-interest income and net interest income of $380,000 and $79,000, respectively, partially offset by an increase of $582,000 in non-interest expense.

Interest Income. Interest income increased by $2.8 million, or 13.2%, to $23.7 million for the nine months ended December 31, 2005 compared to $20.9 million in the corresponding prior year period. The rise in interest income was primarily due to an increase in the average balance of interest-earning assets of $49.1 million, or 9.1%, to $591.7 million for the nine months ended December 31, 2005 compared with $542.6 million for the corresponding prior year period. There was also an increase of 19 basis points in the annualized average yield on interest-earning assets to 5.34% for the nine months ended December 31, 2005 compared to 5.15% for the corresponding prior year period.

Interest income on loans increased by $2.3 million, or 13.7%, to $19.2 million for the nine months ended December 31, 2005 compared to $16.9 million for the corresponding prior year period. The increase in interest income on loans was due primarily to an increase in average mortgage loan balances of $55.5 million, or 14.7%, to $432.3 million for the nine months ending December 31, 2005 compared to $376.8 million for the corresponding prior year period. The increase in interest income on loans was partially offset by a decrease of 6 basis points in the annualized average yield on mortgage loans to 5.92% compared to 5.98% for the nine months ended December 31, 2004.

Interest income on total securities increased by $207,000, or 5.2%, to $4.2 million for the nine months ended December 31, 2005 compared to $4.0 million for the corresponding prior year period. The change was primarily due to an increase in the

annualized average yield on investment securities of 43 basis points to 3.82% from 3.39% during the corresponding prior year period. Partially offsetting the increase was a decrease in the average balance of total securities of $10.6 million, or 6.8%, to $145.5 million for the nine months ended December 31, 2005 compared to $156.1 million for the same period ended December 31, 2004.

Interest income on federal funds sold increased by $248,000 to $337,000 for the nine months ended December 31, 2005 compared to $89,000 for the corresponding prior year period. The average balance of federal funds increased $4.2 million to $13.9 million from $9.7 million for the corresponding prior year period. In addition, the annualized yield on federal funds sold increased 201 basis points to 3.22% for the nine months ended December 31, 2005 compared to 1.21% for the corresponding prior year period.

Interest Expense. Total interest expense increased by $2.7 million, or 38.2%, to $9.7 million for the nine months ended December 31, 2005 compared to $7.0 million for the corresponding prior year period. The increase in interest expense is primarily due to growth in the average balance of interest-bearing liabilities of $48.9 million, or 9.9%, to $544.4 million from $495.5 million for the corresponding prior year period. Also contributing to the increase in total interest expense was an increase in the annualized average cost of interest-bearing liabilities of 49 basis points to 2.37% from 1.88% for the corresponding prior year period.

Interest expense on deposits increased $2.4 million, or 60.7%, to $6.2 million for the nine months ended December 31, 2005 compared to $3.9 million for the corresponding prior year period. The increase in interest expense on deposits was due primarily to a $45.0 million increase in the average balance of interest-bearing deposits to $434.2 million from $389.2 million for the corresponding prior year period combined with a 49 basis point increase in the average rate paid on deposits to 2.37% for the nine months ended December 31, 2005 compared to 1.88% for the corresponding prior year period.

Interest expense on advances and other borrowed money increased $325,000, or 10.4%, to $3.5 million for the nine months ended December 31, 2005 compared to $3.1 million for the corresponding prior year period. This change resulted primarily from an increase of $3.9 million in the average balance of advances from the FHLB-NY and a 26 basis point increase in the total cost of advances and other borrowed money including the Company’s floating rate trust preferred securities.

Management intends to repay FHLB-NY borrowings with the expectation of replacing them with lower costing deposits. It is expected that the cost of the Company’s floating rate trust preferred securities will continue to increase in cost as they reprice quarterly and have been consistently increasing as the short term interest rate environment has risen.

Net Interest Income Before Provision for Loan Losses. Net interest income before the provision for loan losses increased by $79,000, or 0.6%, to $14.0 million for the nine months ended December 31, 2005, compared to $13.9 million for the corresponding prior year period. The Company’s annualized average interest rate spread decreased by 30 basis points to 2.97% for the nine months ended December 31, 2005 compared to 3.27% for the corresponding prior year period. Net interest margin, represented by annualized net interest income divided by average total interest-earning assets, decreased 26 basis points to 3.17% for the nine months ended December 31, 2005 from 3.43% for the corresponding prior year period.

Provision for Loan Losses and Asset Quality. The Company did not provide for additional loan losses for each nine months ended December 31, 2005 and 2004. The Company believes the total loan loss allowance to be adequate.

Non-Interest Income. Non-interest income increased $380,000, or 12.0%, to $3.6 million compared to $3.2 million for the same period last year. Non-interest income increased compared to the same nine month period of fiscal 2005 when the Company recognized an impairment charge deemed other than temporary of $1.5 million, resulting from the decline in market price of 150,000 shares of IFSB stock held by the Company. In the nine months of fiscal 2006, depository fees and charges increased $226,000, resulting from higher ATM usage, growth in debit card income and commissions earned from the sale of investments and life insurance. Also contributing to the rise in non-interest income was an increase of $131,000 in other income, primarily income earned as a result of the Bank’s investment in a BOLI program. These increases were partially offset by a net $1.1 million grant from the Department of the Treasury’s Community Development Financial Institution Fund included in results for the same period last year. In this fiscal period loan fees and service charges declined $201,000, primarily as a result of decreased mortgage prepayment penalties following continued decline in mortgage refinancing activity.

Non-Interest Expense. Non-interest expense increased $582,000, or 4.3%, to $14.1 million compared to $13.5 million for the same period last year. The increase in non-interest expense was due to increases in employee compensation and benefits expense of $624,000, resulting from the staffing of new branches, Company-wide annual salary increases in the second quarter of fiscal 2006 and the increased cost of employee benefit plans. Also contributing to the increase in non-interest expense were additional equipment and net occupancy expenses of $310,000 and $268,000, respectively, also as a result of opening the new branches and 24/7 ATM centers. Also contributing to the increase in non-interest expense is an increase in other expenses of $227,000 mainly a result of increased telephone and data line charges associated with additional branches and ATM centers and increased legal expenses. Partially offsetting the increase in non-interest expense was a charge of $847,000 incurred in the same period last year, which resulted from expensing previously capitalized costs related to cessation of the merger with IFSB.

Income Tax Expense. For the nine months ended December 31, 2005, income taxes decreased $595,000, or 44.8%, to $733,000, compared to $1.3 million for the prior year period. Income tax expense was offset by the recovery of $500,000 attributable to the release of contingency reserves for closed tax examination years and the tax benefit associated with the BOLI investment the Company made in September 2004.

ITEM 3.

Quantitative and Qualitative Disclosure about Market Risk

Quantitative and qualitative disclosure about market risk is presented at March 31, 2005 in Item 7A of the Company’s 2005 10-K and is incorporated herein by reference. The Company believes that there has been no material changes in the Company’s market risk at December 31, 2005 compared to March 31, 2005.

ITEM 4.

Controls and Procedures

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. As of December 31, 2005, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer (the Company’s principal executive officer and principal financial officer, respectively), of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

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

PART II.

OTHER INFORMATION

ITEM 1.

Legal Proceedings

Disclosure regarding legal proceedings that the Company is a party to is presented in Note 13 to our audited Consolidated Financial Statements in the 2005 10-K and is incorporated herein by reference. Except as set forth below, there have been no material changes with regard to such legal proceedings since the filing of the 2005 10-K.

In January 2004, Michael Lee & Company ("Michael Lee"), former accountants for Hale House Center, Inc., filed an action against Carver Federal in New York County Supreme Court, asserting a single claim for contribution against Carver Federal. The complaint alleges that Carver Federal should be liable to Michael Lee in the event that Michael Lee is found liable to non-parties Hale House Center, Inc. and its affiliated corporations ("Hale House plaintiffs") in a separate action that the Hale House plaintiffs have filed against Michael Lee asserting claims of professional malpractice and breach of contract due to Michael Lee's alleged provision of deficient accounting services to Hale House. The basis of Michael Lee's contribution claim against Carver Federal was that Carver Federal allegedly breached a legal duty it owed Hale House by improperly opening and maintaining a checking account on behalf of one of the Hale House affiliates. Carver Federal and Michael Lee entered into a Settlement Agreement on August 15, 2005, the terms of which the Company does not believe are material to it or any of its subsidiaries.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended December 31, 2005, the Holding Company purchased an additional 7,390 shares of its common stock under its stock repurchase program. To date, Carver has purchased a total of 90,974 of the total 231,635 approved under the program which leaves the number of shares yet to be repurchased at 140,661. Based on the closing price of Carver’s common stock on December 31, 2005, the approximate value of the 140,661 shares was $2,166,000.

ITEM 3.

Defaults Upon Senior Securities

Not applicable.

ITEM 4.

Submission of Matters to a Vote of Security Holders

Not applicable.

ITEM 5.

Other Information

Not applicable.

ITEM 6.

Exhibits

The following exhibits are submitted with this report:

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

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

SIGNATURES

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

CARVER BANCORP, INC.

Date: February 14, 2006	/s/ Deborah C. Wright
	Deborah C. Wright
	Chairman, President and Chief Executive Officer

Date: February 14, 2006	/s/ William C. Gray
	William C. Gray
	Senior Vice President and Chief Financial Officer