CARVER BANCORP INC - Quarter Report: 2010 September (Form 10-Q)

10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2010


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

For the transition period from to

Commission File Number: 1-13007

CARVER BANCORP, INC.

(Exact name of registrant as specified in its charter)


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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 (§232.405 of this chapter) 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 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

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


Common Stock, par value $0.01		2,484,285
Class		Outstanding at October 26, 2010

TABLE OF CONTENTS


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Financial Condition as of September 30, 2010 (unaudited) and March 31, 2010		2

Consolidated Statements of Income for the Three and Six Months Ended September 30, 2010 and 2009 (unaudited)		3

Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income for the Six Months Ended September 30, 2010 (unaudited)		4

Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2010 and 2009 (unaudited)		5

Notes to Consolidated Financial Statements (unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 3. Quantitative and Qualitative Disclosures About Market Risk		45

Item 4. Controls and Procedures		45

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		46

Item 1A. Risk Factors		46

Item 2. Issuer Purchases of Equity Securities		47

Item 3. Defaults Upon Senior Securities		47

Item 4. Reserved		47

Item 5. Other Information		47

Item 6. Exhibits		47

SIGNATURES		48

Exhibit 11
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except per share data)


	September 30,			March 31,
	2010			2010
	(unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	27,978		$	37,513
Money market investments		7,836			833

Total cash and cash equivalents		35,814			38,346

Investment securities:
Available-for-sale, at fair value		57,465			43,050
Held-to-maturity, at amortized cost (fair value of $20,243 and $12,603 at September 30, 2010 and March 31, 2010, respectively)		19,623			12,343

Total securities		77,088			55,393

Loans held-for-sale		550			—

Loans receivable:
Real estate mortgage loans		560,147			600,913
Commercial business loans		57,679			67,695
Consumer loans		1,387			1,403

Loans, net		619,213			670,011
Allowance for loan losses		(17,425	)		(12,000	)

Total loans receivable, net		601,788			658,011

Premises and equipment, net		11,821			12,076
Federal Home Loan Bank of New York stock, at cost		3,353			4,107
Bank owned life insurance		9,963			9,803
Accrued interest receivable		3,217			3,539
Core deposit intangibles, net		152			228
Deferred Tax Asset (net of valuation allowance)		—			14,321
Other assets		11,044			9,650

Total assets	$	754,790		$	805,474


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Savings	$	107,061		$	115,817
Non-Interest Bearing Checking		66,676			58,792
NOW		42,002			43,593
Money Market		68,559			67,122
Certificates of Deposit		314,635			317,925

Total Deposits		598,933			603,249
Advances from the FHLB-New York and other borrowed money		112,542			131,557
Other liabilities		8,273			8,982

Total liabilities		719,748			743,788

Stockholders’ equity:
Preferred stock (par value $0.01 per share, 2,000,000 shares authorized; 18,980 Series A shares, with a liquidation preference of $1,000.00 per share, issued and outstanding at March 31, 2010 exchanged for 18,980 Series B shares with a liquidation preference of $1,000.00 per share, issued and outstanding September 30, 2010		18,980			18,980
Common stock (par value $0.01 per share: 10,000,000 shares authorized; 2,524,691 shares issued; 2,484,285 and 2,474,719 shares outstanding at September 30, 2010 and March 31, 2010, respectively)		25			25
Additional paid-in capital		24,300			24,374
Retained earnings		(7,535	)		18,806
Treasury stock, at cost (40,406 and 49,972 shares at September 30, 2010 and March 31, 2010, respectively)		(568	)		(697	)
Accumulated other comprehensive income		(160	)		198

Total stockholders’ equity		35,042			61,686

Total liabilities and stockholders’ equity	$	754,790		$	805,474

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2010			2009*			2010			2009*
Interest Income:
Loans	$	8,686		$	9,689		$	17,635		$	18,788
Mortgage-backed securities		525			687			1,112			1,431
Investment securities		94			126			158			187
Money market investments		38			5			58			15

Total interest income		9,343			10,507			18,963			20,421

Interest expense:
Deposits		1,504			1,777			3,021			3,815
Advances and other borrowed money		983			951			2,024			1,936

Total interest expense		2,487			2,728			5,045			5,751


Net interest income		6,856			7,779			13,918			14,670

Provision for loan losses		7,829			1,315			14,077			2,003

Net interest income after provision for loan losses		(973	)		6,464			(159	)		12,667

Non-interest income:
Depository fees and charges		742			782			1,499			1,499
Loan fees and service charges		214			339			435			567
Gain on sale of securities, net		739			—			763			—
Gain on sale of loans, net		4			—			8			4
New Market Tax Credit (“NMTC”) fees		370			38			1,181			75
Lower of Cost or market adjustment on loans held for sale		—			(2,136	)		—			(2,136	)
Other		176			304			221			471

Total non-interest income		2,245			(673	)		4,107			480

Non-interest expense:
Employee compensation and benefits		2,901			3,194			6,107			6,313
Net occupancy expense		975			1,155			1,952			2,142
Equipment, net		548			416			1,085			1,000
Consulting fees		326			162			545			369
Federal deposit insurance premiums		394			255			750			1,048
Other		2,492			1,756			4,662			3,124

Total non-interest expense		7,636			6,938			15,101			13,996

Loss before income taxes		(6,364	)		(1,147	)		(11,153	)		(849	)
Income tax expense/(benefit)		16,998			(838	)		14,702			(1,235	)

Net (loss) income	$	(23,362	)	$	(309	)	$	(25,855	)	$	386


Loss per common share:	$	(9.44	)	$	(0.22	)	$	(10.53	)	$	(0.04	)


*		Restated as previously disclosed in a Form 8-K filed with the Securities and Exchange Commission on July 15, 2010

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

For the six months ended September 30, 2010

(In thousands)

(Unaudited)


														Accumulated
					Additional									Other			Total
	Preferred		Common		Paid-In			Treasury			Retained			Comprehensive			Stockholders’
	Stock		Stock		Capital			Stock			Earnings			Income (Loss)			Equity
Balance—March 31, 2010	$	18,980	$	25	$	24,374		$	(697	)	$	18,808		$	198		$	61,688
Net loss		—		—		—			—			(25,855	)		—			(25,855	)
Minimum pension liability adjustment		—		—		—			—			—			(110	)		(110	)
Reclassification of gains included in net loss net of taxes		—		—		—			—			—			(458	)		(458	)
Change in net unrealized Gain on available-for-sale securities, net of taxes		—		—		—			—			—			210			210

Comprehensive income (loss), net of taxes:		—		—		—			—			(25,855	)		(358	)		(26,213	)
Common Dividends paid		—		—		—			—			(62	)		—			(62	)
Preferred Dividends paid		—		—		—			—			(506	)		—			(506	)
Accrued Preferred Dividends		—		—		(80	)		—			80			—			—
Treasury stock activity		—		—		3			129			—			—			132
Stock based compensation		—		—		3			—			—			—			3

Balance—September 30, 2010	$	18,980	$	25	$	24,300		$	(568	)	$	(7,535	)	$	(160	)	$	35,042

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Six Months Ended September 30,
	2010			2009*
OPERATING ACTIVITIES
Net (loss)/income	$	(25,855	)	$	386
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		14,077			2,003
Deferred Tax Asset valuation allowance		20,684			—
Provision for REO losses		19			—
Stock based compensation expense		51			5
Depreciation and amortization expense		760			943
Amortization of premiums and discounts		—			295
Amortization of intangibles		76			76
Loss from sale of real estate owned		20			34
Gain on sale of securities		(763	)		—
Gain on sale of loans		(8	)		(4	)
Market Adjustment on Held For Sale Loans		—			2,136
Originations of loans held-for-sale		(2,128	)		(647	)
Proceeds from sale of loans held-for-sale		2,128			818
(Increase) Decrease in accrued interest receivable		322			192
(Increase) Decrease in loan premiums and discounts and deferred charges		(412	)		294
Increase in premiums and discounts — securities		(771	)		—
(Increase) decrease in other assets		(7,954	)		(6,766	)
Increase (decrease) in other liabilities		(328	)		(39	)

Net cash used in operating activities		(82	)		(274	)

INVESTING ACTIVITIES
Purchases of securities:
Available-for-sale		(65,130	)		—
Held-to-maturity		(7,980	)		—
Proceeds from principal payments, maturities, calls and sales of securities:
Available-for-sale		50,996			7,607
Held-to-maturity		834			1,968
Originations of loans held-for-investment		(14,501	)		(66,138	)
Loans purchased from third parties		—			(6,726	)
Principal collections on loans		56,974			49,496
(Purchase) redemption of FHLB-NY stock		753			(496	)
Additions to premises and equipment		(505	)		(155	)
Proceeds from sale of real estate owned		7			522

Net cash provided by (used in) investing activities		21,448			(13,922	)

FINANCING ACTIVITIES
Net (decrease) increase in deposits		(4,316	)		1,265
Net change in borrowings of FHLB advances and other borrowings		(19,015	)		14,986
Dividends paid		(568	)		(969	)

Net cash (used in) provided by financing activities		(23,899	)		15,282

Net (decrease) increase in cash and cash equivalents		(2,532	)		1,086
Cash and cash equivalents at beginning of period		38,346			13,341

Cash and cash equivalents at end of period	$	35,814		$	14,427

Supplemental information:
Noncash Transfers-
Change in unrealized loss on valuation of available-for-sale investments, net	$	(163	)	$	402
Transfers from loans held-for-investment to loans held-for-sale	$	550		$	—
Cash paid for-
Interest	$	4,997		$	8,214
Income taxes	$	1,120		$	88


*		Restated as previously disclosed in a Form 8-K filed with the Securities and Exchange Commission on July 15, 2010

See accompanying notes to consolidated financial statements

CARVER BANCORP, INC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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 subsidiaries are 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 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 a mutual holding company 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 Accounting Standards Codification (“ASC”) 810, “Consolidations,” Carver Statutory Trust I is not consolidated for financial reporting purposes.

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 nine branches located throughout the City of New York that primarily serve the communities in which they operate.

NOTE 2. 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., 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 U.S. generally accepted accounting principles. 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. These unaudited consolidated financial statements should be read in conjunction with the March 31, 2010 Annual Report to Stockholders on Form 10-K. Amounts subject to significant estimates and assumptions are items such as the allowance for loan losses, realization of deferred tax assets, 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. Current market conditions increase the risk and complexity of the judgments in these estimates.

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 2009, the FASB released the Accounting Standards Codification (“ASC” or “Codification”) as the single source of authoritative non-governmental GAAP. The Codification is effective for interim and annual periods ended after September 15, 2009. All previously existing non-SEC accounting standards documents are superseded. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) are also sources of authoritative GAAP for SEC registrants. The Company’s policies were not affected by the conversion to ASC. However, references to specific accounting guidance in the Company’s financial statements have been changed to the appropriate section of the ASC.

Reclassifications

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

Restatement of Second Quarter Fiscal 2010 Results to Reflect the Correct Estimated Value of Certain Residential Mortgage Loans

As previously disclosed in a Form 8-K filed with the Securities and Exchange Commission on July 15, 2010, the Company restated the previously reported operating results for the second fiscal quarter ended September 30, 2009. This was to adjust the estimated fair value of certain residential mortgage loans, which were classified as Held-for-Sale. This caused them to be reported at a lower cost or fair value, as of September 30, 2009. As a result, the net income for the second fiscal quarter was adjusted from a $0.8 million profit to a $0.3 million loss for the quarter. The adjustment reduced net income for the six month period ended September 30, 2009 from $1.5 million to $0.4 million. For additional information, please review the Company’s Form 10-K for the year ended March 31, 2010 and the Form 8-K filed on July 15, 2010. All financial information provided herein reflects these restated amounts.

NOTE 3. EARNINGS PER SHARE

The following table reconciles the earnings (loss) available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted earnings (loss) per share for years ended September 30 (in thousands):


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2010			2009*			2010			2009*
Earnings per common share — basic
Net (loss) income	$	(23,362	)	$	(309	)	$	(25,855	)	$	386
Less: CPP Preferred Dividends		269			237			506			474
Dividends paid and undistributed (losses)/earnings allocated to participating securities		(172	)		(4	)		(187	)		2

Net Income Available to Common Shareholders	$	(23,459	)	$	(542	)	$	(26,174	)	$	(90	)


Weighted average common shares outstanding		2,483,025			2,474,719			2,482,883			2,472,383


Earnings per common share	$	(9.44	)	$	(0.22	)	$	(10.53	)	$	(0.04	)


(1)		As of September 30, 2010, there were no potentially dilutive shares except for 54,369 unvested restricted shares which are also participating securities.

*		Restated as previously disclosed in a Form 8-K filed with the Securities and Exchange Commission on July 15, 2010.

NOTE 4. ACCOUNTING FOR STOCK BASED COMPENSATION

All stock-based compensation is recognized as an expense measured at the fair value of the award. The accounting guidance also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows in the consolidated statement of cash flows. Stock-based compensation expense recognized for the six months ended September 30, 2010 and 2009 totaled $51,000 and $5,000 respectively.

NOTE 5. BENEFIT PLANS

Carver Federal has a non-contributory defined benefit pension plan covering all who were participants prior to curtailment of the plan during the fiscal year ended March 31, 2001. The benefits are based on each employee’s term of service through the date of curtailment. The plan was curtailed during the fiscal year ended March 31, 2001.

NOTE 6. COMMON STOCK DIVIDEND

As previously disclosed in a Form 8-K filed with the Securities and Exchange Commission on October 29, 2010, the Company’s Board of Directors announced that, based on highly uncertain economic conditions and the desire to preserve capital, Carver was suspending payment of the quarterly cash dividend on its common stock. While no assurance can be given that the payment of cash dividends will resume, the Board will continue to monitor business conditions, the Company’s capitalization and profitability levels, asset quality and other factors in considering whether to resume such payments in the future.

NOTE 7. INVESTMENT SECURITIES

The Bank utilizes mortgage-backed and other investment securities in its asset/liability management strategy. In making investment decisions, the Bank considers, among other things, its yield and interest rate objectives, its interest rate and credit risk position and its liquidity and cash flow.

Generally, the investment policy of the Bank is to invest funds among categories of investments and maturities based upon the Bank’s asset/liability management policies, investment quality, loan and deposit volume and collateral requirements, liquidity needs and performance objectives. ASC subtopic 320-942 requires that securities be classified into three categories: trading, held-to-maturity, and available-for-sale. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value with unrealized gains and losses included in earnings. Debt securities for which the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. All other securities not classified as trading or held-to-maturity are classified as available-for-sale and reported at fair value with unrealized gains and losses included, on an after-tax basis, in a separate component of stockholders’ equity. At September 30, 2010, the Bank had no securities classified as trading. At September 30, 2010, $57.5 million, or 74.5% of the Bank’s mortgage-backed and other investment securities, were classified as available-for-sale. The remaining $19.6 million or 25.5% were classified as held-to-maturity.

The following table sets forth the amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at September 30, 2010 (in thousands):


	Amortized		Gross Unrealized					Estimated
	Cost		Gains		Losses			Fair-Value
Available-for-Sale:
Mortgage-backed securities:
Government National Mortgage Association	$	32,447	$	28	$	—		$	32,475
Federal Home Loan Mortgage Corporation		2,052		9		—			2,061
Federal National Mortgage Association		5,898		—		(13	)		5,885
Other		45		—		—			45

Total mortgage-backed securities		40,442		37		(13	)		40,466
U.S. Government Agency Securities		2,000		—		—			2,000
U.S. Government Security		14,999		—		—			14,999

Total available-for-sale		57,441		37		(13	)		57,465


Held-to-Maturity:
Mortgage-backed securities:
Government National Mortgage Association		8,374		313		—			8,687
Federal Home Loan Mortgage Corporation		8,516		173		—			8,689
Federal National Mortgage Association		2,603		135		—			2,738

Total mortgage-backed securities		19,493		621		—			20,114
Other		130		—		(1	)		129

Total held-to-maturity		19,623		621		(1	)		20,243

Total securities	$	77,064	$	658	$	(14	)	$	77,708

The following table sets forth the amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at March 31, 2010 (in thousands):


	Amortized		Gross Unrealized					Estimated
	Cost		Gains		Losses			Fair-Value
Available-for-Sale:
Mortgage-backed securities:
Government National Mortgage Association	$	23,993	$	27	$	(114	)	$	23,906
Federal Home Loan Mortgage Corporation		4,293		232		—			4,525
Federal National Mortgage Association		12,469		283		(2	)		12,750
Other		352		85		(52	)		385

Total mortgage-backed securities		41,107		627		(168	)		41,566
U.S. Government Agency Securities		1,496		—		(12	)		1,484

Total available-for-sale		42,603		627		(180	)		43,050


Held-to-Maturity:
Mortgage-backed securities:
Government National Mortgage Association		430		41		—			471
Federal Home Loan Mortgage Corporation		8,797		74		—			8,871
Federal National Mortgage Association		2,976		147		—			3,123

Total mortgage-backed securities		12,202		262		—			12,465
Other		140		—		(2	)		138

Total held-to-maturity		12,342		262		(2	)		12,603

Total securities	$	54,945	$	889	$	(182	)	$	55,653

The following table sets forth the unrealized losses and fair value of securities at September 30, 2010 for less than 12 months and 12 months or longer (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	$	(13	)	$	4,886	$	—		$	—	$	(13	)	$	4,886
U.S. Government Security*		—			14,998		—			—		—			14,998
Agencies*		—			998		—			—		—			998

Total available-for-sale	$	(13	)	$	20,882	$	—		$	—	$	(13	)	$	20,882


Held-to-Maturity:
Mortgage-backed securities	$	—		$	—	$	—		$	—	$	—		$	—
Other		—			—		(1	)		129		(1	)		129

Total held-to-maturity	$	—		$	—	$	(1	)	$	129	$	(1	)	$	129

Total securities	$	(13	)	$	20,882	$	(1	)	$	129	$	(14	)	$	21,011


*		shows those securities with an unrealized loss of less than $1 thousand.

The following table sets forth the unrealized losses and fair value of securities at March 31, 2010 for less than 12 months and 12 months or longer (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	$	(42	)	$	13,172	$	(126	)	$	7,682	$	(168	)	$	20,855
Agencies		(12	)		1,484		0			0		(12	)		1,484

Total available-for-sale	$	(54	)	$	14,656	$	(126	)	$	7,682	$	(180	)	$	22,339


Held-to-Maturity:
Other		0			0		(2	)		137		(2	)		137

Total held-to-maturity	$	—		$	—	$	(2	)	$	137	$	(2	)	$	137

Total securities	$	(54	)	$	14,656	$	(128	)	$	7,819	$	(182	)	$	22,476

A total of six securities had an unrealized loss at September 30, 2010 compared to seven at March 31, 2010, based on estimated fair value. The composition of securities in the unrealized loss position were a U.S. Treasury Bill, three Federal National Mortgage Association mortgage backed securities and two Small Business Association loan pools, which represented 71%, 28% and 1% of securities which had an unrealized loss at September 30, 2010, respectively. The cause of the temporary impairment is directly related to changes 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. Unrealized losses identified as other than temporary are recognized in earnings. When there are losses on a debt security which management does not intend to sell, and for which it is more-likely-than-not that the entity will not be required to sell the security prior to the recovery of the non-credit impairment, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and the remaining difference between the debt security’s amortized cost basis and its fair value would be included in other comprehensive income. At September 30, 2010, the Bank did not have any securities that would be classified as having other than temporary impairment in its investment portfolio.

NOTE 8. LOANS RECEIVABLE, NET

The following is a summary of loans receivable, net of allowance for loan losses at September 30, 2010 and March 31, 2010 (dollars in thousands).


	September 30, 2010						March 31, 2010
	Amount			Percent			Amount			Percent
Gross loans receivable:
One- to four-family	$	85,253			13.71	%	$	90,150			13.40	%
Multifamily		140,234			22.56	%		141,702			21.06	%
Non-residential		253,732			40.82	%		259,619			38.59	%
Construction		82,751			13.31	%		111,348			16.55	%
Business		58,275			9.37	%		68,523			10.19	%
Consumer and other ⁽¹⁾		1,388			0.22	%		1,403			0.21	%

Total loans receivable		621,633			100.00	%		672,745			100.00	%


Add:
Premium on loans		120						130
Less:
Deferred fees and loan discounts		(2,540	)					(2,864	)
Allowance for loan losses		(17,425	)					(12,000	)

Total loans receivable, net	$	601,788					$	658,011


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

Substantially all of the Bank’s real estate loans receivable are principally secured by properties located in New York City. Accordingly, as with most financial institutions in the market area, the ultimate collectability of a substantial portion of the Company’s loan portfolio is susceptible to changes in the market conditions in this area.

The following is an analysis of the allowance for loan losses for the periods indicated (in thousands).


	Six Months
	Ended			Fiscal Year
	September 30,			Ended March 31,
	2010			2010

Beginning Balance	$	12,000		$	7,049

Less charge-offs:
One-to-four family		(136	)		(580	)
Construction		(4,003	)		(1,648	)
Non-residential		(2,253	)		—
Business		(2,285	)		(646	)
Consumer and other		(0	)		(84	)

Total Charge- Offs:		(8,677	)		(2,958	)

Add Recoveries:
One-to-four family		—			12
Non-residential		—			—
Business		15			6
Consumer and other		10			46

Total Recoveries:		25			64

Provision for Loan Losses		14,077			7,845


Ending Balance	$	17,425		$	12,000


Ratios:
Net charge-offs to average loans outstanding		2.67	%		0.43	%
Allowance to total loans		2.81	%		1.79	%
Allowance to non-performing loans		21.85	%		25.23	%

Non-performing loans totaled $79.8 million at September 30, 2010 versus $47.6 million at March 30, 2010. Non-performing loans at September 30, 2010, were comprised of $49.9 million of loans 90 days or more past due and non-accruing, $11.2 million of loans that have been deemed to be impaired and $18.7 million of loans classified as a troubled debt restructuring and either not consistently performing in accordance with their modified terms or not performing in accordance with their modified terms for at least six months. Non-performing loans at March 31, 2010, were comprised of $14.2 million of loans 90 days or more past due and non-accruing, $21.9 million of loans that have been deemed to be impaired, $11.5 million of loans classified as a troubled debt restructuring and either not consistently performing in accordance with their modified terms or not performing in accordance with their modified terms for at least six months.

NOTE 9. INCOME TAXES

The components of income tax expense for the six months ended September 30, 2010 are as follows (in thousands):


	September 30,
	2010
Federal income tax expense (benefit):
Current	$	—
Deferred		(4,571	)
Valuation Allowance		18,378

		13,807

State and local income tax expense (benefit):
Current		177
Deferred		(1,588	)
Valuation Allowance		2,306

		895


Total income tax expense:	$	14,702

The following is a reconciliation of the expected Federal income tax rate to the consolidated effective tax rate for the six month ended September 30, 2010 (dollars in thousands):


	September 30,
	2010
	Amount			Percent

Statutory Federal income tax	$	(3,792	)		34.0	%
State and local income taxes, net of Federal tax benefit		(424	)		3.8	%
New markets tax credit		(1,200	)		10.8	%
General business credit		(16	)		0.1	%
Valuation adjustment		20,684			(185.5	)%
Other		(550	)		4.9	%

Total income tax expense	$	14,702			(131.8	)%

Carver Federal stockholders’ equity includes a $15.3 million tax expense at the period ended September 30, 2010, which has been segregated for federal income tax purposes as a bad debt reserve. For the period ended September 30, 2010, the total income tax expense of $14.7 million includes a $20.7 million valuation reserve taken on the Bank’s deferred tax assets. For the year ended March 31, 2010, the total income tax benefit of $2.9 million included a $0.5 million tax receivable deemed no longer collectible.

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 September 30, 2010 and March 31, 2010 are as follows (in thousands):


	September 30,			March 31,
	2010			2010
Deferred Tax Assets:
Allowance for loan losses	$	6,662		$	4,080
Deferred loan fees		634			686
Compensation and benefits		27			58
Non-accrual loan interest		2,218			1,344
Capital loss carryforward		130			84
Purchase accounting adjustment		156			131
Net operating loss carry forward		1,697			112
New markets tax credit		8,538			7,322
Depreciation		448			316
Minimum pension liability		—			110
Market value adjustment on HFS loans		628			817
Other		282			180

Total Deferred Tax Assets		21,421			15,240


Deferred Tax Liabilities:
Income from affiliate		738			738
Unrealized gain on available-for-sale securities		—			181

Total Deferred Tax Liabilities		738			919


Valuation Allowance		(20,684	)		—

Net Deferred Tax Assets	$	—		$	14,321

Where applicable, deferred tax assets are reduced by a valuation allowance for any portion determined not likely to be realized. This valuation allowance would subsequently be adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant. A valuation allowance of $20.7 million was recorded during the quarter as management concluded that it is “more likely than not” that the Company will not be able to fully realize the benefit of its deferred tax assets.

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, 2006.

The Company has adopted the FASB guidance related to accounting for uncertainty in income taxes as of April 1, 2008. 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. This adoption had no affect on the Company’s financial statements.

NOTE 10. FAIR VALUE MEASUREMENTS

On April 1, 2008, the Company adopted ASC Topic 820 (formerly SFAS No. 157, “Fair Value Measurements”) which, among other things, defines fair value; establishes a consistent framework for measuring fair value; and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. ASC 820 clarifies that fair value is an “exit” price, representing the amount that would be received when selling an asset, or paid when transferring a liability, in an orderly transaction between market participants. Fair value is thus a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

•

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

•

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

•

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

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

The following table presents, by ASC 820 valuation hierarchy, assets that are measured at fair value on a recurring basis as of September 30, 2010 and March 31, 2010, and that are included in the Company’s Consolidated Statements of Financial Condition at these dates:


	Fair Value Measurements at September 30, 2010, Using
	Quoted Prices
	in Active
	Markets for		Significant Other		Significant
	Identical Assets		Observable Inputs		Unobservable Inputs		Total Fair
	(Level 1)		(Level 2)		(Level 3)		Value
	(in thousands)
Assets:
Mortgage servicing rights	$	—	$	—	$	606	$	606
Investment securites:
Available for sale:
Government National Mortgage Association	$	30,595	$	1,880	$	—	$	32,475
Federal Home Loan Mortgage Corporation		2,061		—		—		2,061
Federal National Mortgage Association		4,115		1,770		—		5,885
Other		2,000		—		45		2,045

Total Mortgage-Back Securities	$	38,772	$	3,650	$	45	$	42,467
U.S. Government Security		14,999		—		—	$	14,999

Total available for sale	$	53,770	$	3,650	$	45	$	57,465

Total assets	$	53,770	$	3,650	$	651	$	58,071


	Fair Value Measurements at March 31, 2010, Using
	Quoted Prices in				Significant
	Active Markets for		Significant Other		Unobservable
	Identical Assets		Observable Inputs		Inputs		Total Fair
	(Level 1)		(Level 2)		(Level 3)		Value
	(in thousands)
Assets:
Mortgage servicing rights	$	—	$	—	$	721	$	721
Investment securites:
Available for sale:
U.S. Government Agency Securities	$	—	$	1,484	$	—	$	1,484
Residential Mortgage-Back Securities		—		41,181				41,181
Other		—		244		141		385

Total available for sale	$	—	$	42,909	$	141	$	43,050

Total assets	$	—	$	42,909	$	862	$	43,771

Instruments for which unobservable inputs are significant to their fair value measurement (i.e., Level 3) include mortgage servicing rights. Level 3 assets accounted for 0.1% of the Company’s total assets at September 30, 2010 and March 31, 2010.

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

A description of the methods and significant assumptions utilized in estimating the fair value of available-for-sale securities and mortgage servicing rights (“MSR”) follows:

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

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

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

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

The following table presents information for assets classified by the Company within Level 3 of the valuation hierarchy for the three months ended September 30, 2010:


	Mortgage			Securities
	Servicing			Available for
(in thousands)	Rights			Sale
Beginning balance, July 1, 2010	$	622		$	45
Activities:		—			—
Transfer in		—			—
Sales		—			—
Unrealized gain (loss)		(16	)		—


Ending balance, September 30, 2010	$	606		$	45

Certain assets are measured at fair value on a non-recurring basis. Such instruments are subject to fair value adjustments under certain circumstances (e.g. when there is evidence of impairment). The following table presents assets and liabilities that were measured at fair value on a non-recurring basis as of September 30, 2010 and March 31, 2010 and that are included in the Company’s Consolidated Statements of Financial Condition as these dates:


	Fair Value Measurements at September 30, 2010, Using
	Quoted Prices in				Significant
	Active Markets for		Significant Other		Unobservable
	Identical Assets		Observable Inputs		Inputs		Total Fair
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Value
Held For Sale Loans	$	—	$	550	$	—	$	550
Certain impaired loans	$	—	$	44,576	$	—	$	44,576

Fair Value Measurements at March 31, 2010, Using

Quoted Prices in

Significant

Active Markets for

Significant Other

Unobservable

Identical Assets

Observable Inputs

Inputs

Total Fair

(in thousands)

(Level 1)

(Level 2)

(Level 3)

Value

Certain impaired loans

—

23,487

—

23,487

The valuation methodology for loans held for sale for the period ended September 30, 2010 was based upon the exit price from an executed sales agreement.

The fair value of collateral-dependent impaired loans are determined using various valuation techniques, including consideration of appraised values and other pertinent real estate market data.

NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS

According to current GAAP disclosures regarding the fair value of financial instruments are required to include, in addition to the carrying value, the fair value of certain financial instruments, both assets and liabilities recorded on and off balance sheet, for which it is practicable to estimate fair value. Accounting guidance defines financial instruments as cash, evidence of ownership of an entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. The fair value of a financial instrument is discussed below. In cases where quoted market prices are not available, estimated fair values have been determined by the Bank using the best available data and estimation methodology suitable for each such category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate their recorded carrying value. The estimated fair values and carrying values of the Bank’s financial instruments and estimation methodologies are set forth below:

The carrying amounts and estimated fair values of the Bank’s financial instruments at September 30, 2010 and March 31, 2010 are as follows (in thousands):


	September 30, 2010				March 31, 2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial Assets:
Cash and cash equivalents	$	35,814	$	35,814	$	38,346	$	38,346
Securities available-for-sale		57,465		57,465		43,050		43,050
FHLB Stock		3,353		3,353		4,107		4,107
Securities held-to-maturity		19,623		20,243		12,343		12,603
Loans Held For Sale		550		550		—		—
Loans receivable		601,238		607,175		658,011		664,522
Accrued interest receivable		3,217		3,217		3,539		3,539
Mortgage servicing rights		606		606		721		721
Financial Liabilities:
Deposits	$	598,933	$	584,202	$	603,249	$	579,023
Advances from FHLB of New York		50,071		50,387		69,086		69,339
Repurchase agreement		30,000		30,123		30,000		30,180
Other borrowed money		32,471		31,009		32,471		33,325

Cash and cash equivalents and accrued interest receivable

The carrying amounts for cash and cash equivalents and accrued interest receivable approximate fair value because they mature in three months or less.

Securities

The fair values for securities available-for-sale, mortgage-backed securities held-to-maturity and investment securities held-to-maturity are based on quoted market or dealer prices, if available. If quoted market or dealer prices are not available, fair value is estimated using quoted market or dealer prices for similar securities.

Loans receivable

The fair value of loans receivable is estimated by discounting future cash flows, using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities of such loans. The method used to estimate the fair value of loans is extremely sensitive to the assumptions and estimates used. While management has attempted to use assumptions and estimates that best reflect the Company’s loan portfolio and current market conditions, a greater degree of objectivity is inherent in these values than in those determined in active markets. The loan valuations thus determined do not necessarily represent an “exit” price that would be achieved in an active market.

Loans held-for-sale

The valuation methodology for loans held for sale for the period ended September 30, 2010 was based upon the exit price from an executed sales agreement.

Mortgage servicing rights

The fair value of mortgage servicing rights is determined by discounting the present value of estimated future servicing cash flows using current market assumptions for prepayments, servicing costs and other factors.

Deposits

The fair value of demand, savings and club accounts is equal to the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market.

Advances from FHLB-NY and other borrowed money

The fair values of advances from the Federal Home Loan Bank of New York and other borrowed money are estimated using the rates currently available to the Bank for debt with similar terms and remaining maturities.

Repurchase agreements

The fair values of advances from Repurchase agreements are estimated using the rates currently available to the Bank for debt with similar terms and remaining maturities.

Commitments to Extend Credits, Commercial, and Standby Letters of Credit

The fair value of the commitments to extend credit was estimated to be insignificant as of September 30, 2010 and March 31, 2010. The fair value of commitments to extend credit and standby letters of credit was evaluated using fees currently charged to enter into similar agreements, taking into account the risk characteristics of the borrower, and estimated to be insignificant as of the reporting date.

Limitations

The fair value estimates are made at a discrete point in time based on relevant market information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no quoted market value exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

In addition, the fair value estimates are based on existing off balance sheet financial instruments without attempting to value anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values.

NOTE 12. VARIABLE INTEREST ENTITIES

The Holding Company’s subsidiary, Carver Statutory Trust I, is not consolidated with Carver Bancorp Inc. for financial reporting purposes. Carver Statutory Trust I was formed in 2003 for the purpose of issuing $13.0 million aggregate liquidation amount of floating rate Capital Securities due September 17, 2033 (“Capital Securities”) and $0.4 million of common securities (which are the only voting securities of Carver Statutory Trust I), which are 100% owned by Carver Bancorp Inc., and using the proceeds to acquire Junior Subordinated Debentures issued by Carver Bancorp Inc. Carver Bancorp Inc. has fully and unconditionally guaranteed the Capital Securities along with all obligations of Carver Statutory Trust I under the trust agreement relating to the Capital Securities.

The Bank’s subsidiary, Carver Community Development Corporation (“CCDC”), was formed to facilitate its participation in local economic development and other community-based activities. Per the NMTC Award’s Allocation Agreement between the CDFI Fund and CCDC, CCDC is permitted to form and sub-allocate credits to subsidiary Community Development Entities (“CDEs”) to facilitate investments in separate development projects. The Bank was originally awarded $59.0 million of NMTC. In fiscal 2008, the Bank transferred rights to an investor in a NMTC project totaling $19.2 million, of which $19.0 million was a qualified equity investment, and recognized a gain on the transfer of rights of $1.7 million. The Bank was required to maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity was called CDE-10. For financial reporting purposes, the $19.2 million transfer of rights to an investor in a NMTC project was reflected in the other assets and the non controlling interest sections of the balance sheet as the entity to which the rights were transferred was required to be consolidated under the then existing accounting guidance based on an evaluation of certain contractual arrangements between the Bank and the investor. In fiscal 2009, following certain amendments to the agreement between CCDC and the investor that resulted in a reconsideration event, the Bank deconsolidated the entity for financial statement reporting purposes. However, under the current arrangement, the Bank has a contingent obligation to reimburse the investor for any loss or shortfall incurred as a result of the NMTC project not being in compliance with certain regulations that would void the investor’s ability to otherwise utilize tax credits stemming from the award. The maximum possible loss to Carver from such an arrangement is approximately $7.4 million.

At September 30, 2010, Carver has not recorded any liability with respect to this obligation in accordance with accounting guidance related to accounting for contingencies.

With respect to the remaining $40 million of the original NMTC award, the Bank has established various special purpose entities through which its investments in NMTC eligible activities are conducted. As the Bank is exposed to all of the expected losses and residual returns from these investments the Bank is deemed the primary beneficiary. Accordingly, all of these special purpose entities were consolidated in the Bank’s Statement of Financial Condition as of September 30, 2010 and 2009 resulting in the consolidation of assets of approximately $39 million and $40 million, respectively. At September 30, 2010, Carver has not recorded any liability with respect to this obligation in accordance with accounting guidelines related to accounting for contingencies.

In May 2009, the Bank received an additional NMTC award in the amount of $65 million.

In December 2009, the Bank transferred rights to an investor in a NMTC project totaling $10.5 million of the second NMTC award and recognized a gain on the transfer of rights of $0.5 million. The Bank was required to maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity was called CDE-13. This entity has been reviewed for possible consolidation under the accounting guidance related to variable interest entities and found to not be a consolidating entity for financial statement reporting purposes. The Bank has a contingent obligation to reimburse the investor for any loss or shortfall incurred as a result of the NMTC project not being in compliance with certain regulations that would void the investor’s ability to otherwise utilize tax credits stemming from the award. The maximum possible loss to Carver from such an arrangement is approximately $4.1 million. At September 30, 2010, Carver has not recorded any liability with respect to this obligation in accordance with accounting guidance related to accounting for contingencies.

In March 2010, the Bank transferred rights to investors in NMTC projects totaling $20.5 million and recognized a gain on the transfer of rights of $0.5 million and expects to receive additional income of $0.5 million in the future contingent upon certain events occurring. The Bank was required to maintain a 0.01% interest in each of the newly created entities with the investor owning the remaining 99.99%. The entities were called CDE-15, CDE-16 and CDE-17. These entities have been reviewed for possible consolidation under the accounting guidance related to variable interest entities and found to not be consolidating entities for financial statement reporting purposes.

In June 2010, the Bank transferred rights to an investor in a NMTC project totaling $10.0 million of the second NMTC award and recognized a gain on the transfer of rights of $0.4 million. The Bank was required to maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity was called CDE-14. This entity has been reviewed for possible consolidation under the accounting guidance related to variable interest entities and found to not be a consolidating entity for financial statement reporting purposes. The Bank has a contingent obligation to reimburse the investor for any loss or shortfall incurred as a result of the NMTC project not being in compliance with certain regulations that would void the investor’s ability to otherwise utilize tax credits stemming from the award. The maximum possible loss to Carver from such an arrangement is approximately $3.9 million. At September 30, 2010, Carver has not recorded any liability with respect to this obligation in accordance with accounting guidance related to accounting for contingencies.

In June 2010, the Bank transferred rights to an investor in a NMTC project totaling $8.7 million and recognized a gain on the transfer of rights of $0.4 million and expects to receive additional income of $0.2 million in the future contingent upon certain events occurring. The Bank was required to maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity was called CDE-18. This entity has been reviewed for possible consolidation under the accounting guidance related to variable interest entities and found to not be a consolidating entity for financial statement reporting purposes. The Bank has a contingent obligation to reimburse the investor for any loss or shortfall incurred as a result of the NMTC project not being in compliance with certain regulations that would void the investor’s ability to otherwise utilize tax credits stemming from the award. The maximum possible loss to Carver from such an arrangement is approximately $3.4 million. At September 30, 2010, Carver has not recorded any liability with respect to this obligation in accordance with accounting guidance related to accounting for contingencies.

In August 2010, the Bank transferred rights to an investor in a NMTC project totaling $6.6 million and recognized a gain on the transfer of rights of $0.3 million and expects to receive additional income of $0.2 million in the future contingent upon certain events occurring. The Bank was required to maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity was called CDE-19. This entity has been reviewed for possible consolidation under the accounting guidance related to variable interest entities and found to not be a consolidating entity for financial statement reporting purposes. The Bank has a contingent obligation to reimburse the investor for any loss or shortfall incurred as a result of the NMTC project not being in compliance with certain regulations that would void the investor’s ability to otherwise utilize tax credits stemming from the award. The maximum possible loss to Carver from such an arrangement is approximately $2.6 million. At September 30, 2010, Carver has not recorded any liability with respect to this obligation in accordance with accounting guidance related to accounting for contingencies.

NOTE 13. IMPACT OF ACCOUNTING STANDARDS AND INTERPRETATIONS

ASU No. 2010-06 under ASC Topic 820, “Fair Value Measurements and Disclosures,” requires new disclosures and clarifies certain existing disclosure requirements about fair value measurement. Specifically, the update requires an entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for such transfers. A reporting entity is required to present separately information about purchases, sales, issuances, and settlements in the reconciliation of fair value measurements using Level 3 inputs. In addition, the update clarifies the following requirements of the existing disclosures: (i) for the purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets; and (ii) a reporting entity is required to include disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for ‘The Company’ beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU No. 2010-06 became effective for ‘the Company’ on April 1, 2010.

ASU No. 2010-18, “Receivables (Topic 310)—Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset,” codifies the consensus reached by the EITF that modifications of loans that are accounted for within a pool under ASC Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU No. 2010-18 does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40. ASU No. 2010-18 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of ASU No. 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with evidence of credit deterioration. The new guidance is not expected to have a material impact on ‘The Company’s consolidated financial statements.

ASU No. 2010-20, “Receivables (Topic 310)—Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”, requires significant new disclosures about the credit quality of financing receivables and the allowance for credit losses. The objective of these disclosures is to improve financial statement users’ understanding of (i) the nature of an entity’s credit risk associated with its financing receivables and (ii) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. The required disclosures include, among other things, a roll forward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU No. 2010-20 disclosures related to period-end information (e.g., credit-quality information and the ending financing receivables balance segregated by impairment method) will be required in all interim and annual reporting periods ending on or after December 15, 2010. Disclosures of activity that occurs during a reporting period (e.g., modifications and the roll forward of the allowance for credit losses by portfolio segment) will be required in interim or annual periods beginning on or after December 15, 2010.

In June 2009, the FASB issued guidance on Variable Interest Entities (ASC Subtopic 860-10) (formerly SFAS No. 167), which amended the previous guidance applicable to variable interest entities and changed how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. ASC Subtopic 860-10 requires reporting entities to evaluate former qualifying special purpose entities for consolidation, changes the approach to determining a variable interest entity’s (“VIE”) primary beneficiary, increases the frequency of required assessments to determine whether a company is the primary beneficiary of a VIE, clarifies the characteristics that identify a VIE, and requires additional annual and interim disclosures. This standard is effective for fiscal years beginning after November 15, 2009. The Company adopted this guidance on April 1, 2010 and there was no material impact on the Company’s financial condition, results of operations or financial statement disclosures.

In June 2009, the FASB issued a revision to earlier guidance on Transfers of Financial Assets (ASC Subtopic 860-10) (formerly SFAS No. 166), which eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets and includes additional disclosures requiring more information about transfers of financial assets in which entities have continuing exposure to the risks related to the transferred financial assets. This guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period and for interim and annual reporting periods thereafter. Earlier application was prohibited. The Company adopted this guidance for transfers of financial assets on April 1, 2010 and there was no material effect on its consolidated financial statements.

In May 2009, the FASB issued guidance related to Subsequent Events (ASC Subtopic 855-10) (formerly SFAS No. 165) which established general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued. Specifically, this standard sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. Carver has evaluated subsequent events for potential recognition and/or disclosure through the date the consolidated financial statements included in this Form 10-Q were issued.

NOTE 14. SUBSEQUENTS EVENTS

In accordance with ASC Topic 855, the Company has evaluated whether any subsequent events that require recognition or disclosure in the accompanying financial statements and notes thereto have taken place through the date these financial statements were issued. The Company has determined that there are no such subsequent events to report.

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

Forward-Looking Statements

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

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general economic conditions, either nationally or locally in some or all areas in which business is conducted, or conditions in the real estate or 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.

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changes in existing loan portfolio composition and credit quality, and changes in loan loss requirements;

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legislative or regulatory changes which may adversely affect the Company’s business, including but not limited to the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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

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changes in interest rates which may reduce net interest margin and net interest income;

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

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

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changes in deposit flows, loan demand, real estate values, borrowing facilities, capital markets and investment opportunities which may adversely affect the business;

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changes in accounting principles, policies or guidelines which may cause conditions to be perceived differently;

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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;

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

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the ability to attract and retain key members of management; and

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the ability to realize cost efficiencies.

Any or all of the Company’s forward-looking statements in this Quarterly Report on Form 10-Q and in any other public statements that the Company or management makes may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and the Company assumes no obligation to, and expressly disclaims any obligation to, update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements, except as legally required. For a discussion of additional factors that could adversely affect the Company’s future performance, see “(Part I. Financial Information) Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “(Part II. Other information) Item 1A — Risk Factors

Overview

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

Carver Federal is the largest African-American operated bank in the United States. The Bank remains dedicated to expanding wealth enhancing opportunities in the communities it serves by increasing access to capital and other financial services for consumers, businesses and non-profit organizations, including faith-based institutions. A measure of its progress in achieving this goal includes the Bank’s “Outstanding” rating, awarded by the Office of Thrift Supervision following its most recent Community Reinvestment Act (“CRA”) examination in 2009. The examination report noted that 76.1% of Carver’s community development lending and 55.4% of Carver’s Home-Owners Mortgage Disclosure Act (“HMDA”) reportable loan originations were within low- to moderate-income geographies, which far exceeded peer institutions. The Bank had approximately $755 million in assets as of September 30, 2010 and employed approximately 132 employees as of September 30, 2010.

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

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

The Bank’s primary market area for deposits consists of the areas served by its nine branches in the Brooklyn, Manhattan and Queens boroughs of New York City. The neighborhoods in which the Bank’s branches are located have historically been low- to moderate-income areas. However, the shortage of housing in New York City, combined with population shifts from the suburbs into the city, has helped stimulate significant real estate and commercial development in the Bank’s market area, which has supported the Bank’s strategy to provide commercial banking products.

The Bank’s primary lending market includes Bronx, Kings, New York and Queens counties in New York City, and lower Westchester County, New York. Although the Bank’s branches are primarily located in areas that were historically underserved by other financial institutions, the Bank faces significant competition for deposits and mortgage lending in its market areas. Management believes that this competition has become more intense as a result of increased examination emphasis by federal banking regulators on financial institutions’ fulfillment of their responsibilities under the CRA. Carver Federal’s market area has a high density of financial institutions, many of which have greater financial resources, name recognition and market presence, and all of which are competitors to varying degrees. The Bank’s competition for loans comes principally from mortgage banking companies, commercial banks, and savings institutions. The Bank’s most direct competition for deposits comes from commercial banks, savings institutions and credit unions. Competition for deposits also comes from money market mutual funds, corporate and government securities funds, and financial intermediaries such as brokerage firms and insurance companies. Many of the Bank’s competitors have substantially greater resources and offer a wider array of financial services and products. At times, these larger financial institutions may offer below market interest rates on mortgage loans and above market interest rates for deposits. These pricing concessions combined with competitors’ larger presence in the New York market add to the challenges the Bank faces in expanding its current market share and growing its near-term profitability.

Carver Federal’s 60 year history in its market area, its community involvement and relationships, targeted products and services and personal service consistent with community banking, help the Bank compete with other competitors that have entered its market.

The Bank formalized its many community focused investments on August 18, 2005, by forming Carver Community Development Corporation (“CCDC”). CCDC oversees the Bank’s participation in local economic development and other community-based initiatives, including financial literacy activities. CCDC is now coordinating the Bank’s development of an innovative approach to reach the unbanked customer market in Carver Federal’s communities. Importantly, CCDC spearheads the Bank’s applications for grants and other resources to help fund these important community activities. In this connection, Carver Federal has successfully competed with large regional and global financial institutions in a number of competitions for government grants and other awards. In June 2006, Carver Federal was selected by the United States Department of Treasury (“US Treasury”) to receive an award of $59 million in NMTC. In May 2009, Carver Federal received another NMTC award in the amount of $65 million. 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 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. In addition to the tax benefits previously recognized from such awards, the Company expects to receive additional NMTC tax benefits of approximately $6.6 million from the June 2006 award over approximately the next four years. The Company’s ability to utilize the benefit of the tax credits is dependent upon the Company generating sufficient taxable income. As of September 30, 2010, Carver Federal has transferred rights to investors of the full $65.0 million of New Market Tax Credits from the May 2009 award. $8.7 million in qualified investments related to the May 2009 award have not yet been made by the investors and are expected to be made in the third quarter of Fiscal 2011.

The Company is currently exploring options to divest its interest in the remaining $6.6 million of additional NMTC tax credits it expects to receive through the period ending March 31, 2014. The Company’s ability to utilize the deferred tax asset generated by NMTC as well as other deferred tax assets depends on its ability to generate sufficient taxable income from operations or from potential tax strategies to generate taxable income in the future. Since the Company has established a valuation allowance on the total amount of its net deferred tax asset, management believes there is greater economic benefit to the Company in divesting its interest in these tax credits.

New Markets Tax Credit Award

In June 2006, Carver Federal was selected by the US Treasury, in a highly competitive process, 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 $59.0 million NMTC award began in December 2006 when the Bank invested $29.5 million, one-half of its $59 million award. In December 2008, the Bank invested an additional $10.5 million and transferred rights to $19.2 million to an investor in a NMTC project. The Bank’s NMTC allocation was fully invested as of December 31, 2008. During the seven year period beginning December 2006, 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 $6.6 million from its $40.0 million investment over the next four years.

In May 2009, the Bank received an additional award of $65 million in NMTC. In December 2009, the Bank transferred rights to an investor in a NMTC project totaling $10.5 million and recognized a gain on the transfer of rights of $0.4 million. The Bank and CCDC have involvements with special purpose entities that were created to facilitate the ultimate investment made by the investor. Specifically, the Bank has funded, on a secured basis, $7.7 million of the investor’s $10.5 million investment in the NMTC project. In addition, CCDC has retained a 0.01% interest in another entity created to facilitate the investment with the investor owning the remaining 99.99%. CCDC also provides certain administrative services to these special purpose entities. The Bank has determined that its and CCDC does not have the sole power to direct activities of these special purpose entities that most significant impact their performance therefore it is not the primary beneficiary of these entities.

In March 2010, the Bank transferred rights to investors in NMTC projects totaling $44.5 million and recognized a gain on the transfer of rights of $0.4 million. The Bank and CCDC have involvements with special purpose entities that were created to facilitate the ultimate investments to be made by the investors. The Bank also recorded deferred income of $0.6 million related to the transfer that is expected to be recognized into income in future periods after the ultimate investments are made. In June 2010, the investors made qualifying investments of $8.7 million of the $44.5 million noted above. The Bank released into earnings $0.2 million of the deferred income and also recognized additional income of $0.2 million related to these investments. In August 2010, the investors made qualifying investments of $6.6 million of the $44.5 million noted above. The Bank released into earnings $0.2 million of the deferred income and also recognized additional income of $0.2 million related to these investments. In addition, CCDC has retained a 0.01% interest in three other entities created to facilitate the investments with the investor owning the remaining 99.99%. CCDC also provides certain administrative services to these special purpose entities. The Bank has determined that its and CCDC’s involvement with these special purpose entities does not expose it to the majority of expected loss or residual returns and therefore it is not the primary beneficiary of these entities.

In June 2010, the Bank transferred rights to an investor in a NMTC project totaling $10.0 million and recognized a gain on the transfer of rights of $0.4 million. The Bank and CCDC have involvements with special purpose entities that were created to facilitate the ultimate investment made by the investor. In addition, CCDC has retained a 0.01% interest in another entity created to facilitate the investment with the investor owning the remaining 99.99%. CCDC also provides certain administrative services to these special purpose entities. The Bank has determined that its and CCDC’s involvement with these special purpose entities does not expose it to the majority of expected loss or residual returns and therefore it is not the primary beneficiary of these entities.

Critical Accounting Policies

Note 1 to the Company’s audited Consolidated Financial Statements for fiscal year-end 2010 included in its 2010 Form 10-K, as supplemented by this report, contains a summary of significant accounting policies and is incorporated by reference. The Company believes its policies, with respect to the methodology for determining the allowance for loan losses, the evaluation of realization of deferred tax assets and the fair value of financial instruments involve a high degree of complexity and require management to make subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. The following description of these policies should be read in conjunction with the corresponding section of the Company’s fiscal 2010 Form 10-K.

Allowance for Loan Losses

The adequacy of the Bank’s ALLL is determined by the Bank, in consideration of the Interagency Policy Statement on the Allowance for Loan and Lease Losses (the “Interagency Policy Statement”) released by the Office of Thrift Supervision on December 13, 2006 and in accordance with Accounting Standards Codification (“ASC”) Topic 450 (formerly known as Statement of Financial Account Standards (“SFAS”) No. 5, Accounting for Contingencies) and ASC Topic 310 (formerly known as SFAS No. 114, Accounting by Creditors for Impairment of a Loan). The ALLL reflects management’s evaluation of the loans presenting identified loss potential, as well as the risk inherent in various components of the portfolio. There is a great amount of judgment applied to developing the ALLL. As such, there can never be assurance that the ALLL provision accurately reflects the actual loss potential embedded in a loan portfolio. Further, an increase in the size of the portfolio or any of its components could necessitate an increase in the ALLL even though there may not be a decline in credit quality or an increase in potential problem loans.

Compliance with the Interagency Policy Statement includes management’s review of the Bank’s loan portfolio, including the identification and review of individual problem situations that may affect a borrower’s ability to repay. In addition, management reviews the overall portfolio quality through an analysis of delinquency and non-performing loan data, estimates of the value of underlying collateral, current charge-offs and other factors that may affect the portfolio, including a review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and composition of the loan portfolio are all taken into consideration.

The Bank maintains a general reserve allowance in accordance with ASC Topic 450 that is comprised of two principal components: (1) a general reserve allowance for performing loans and (2) an allocation of a general reserve allowance for certain Criticized and Classified loans. The Bank believes that the loan review of Criticized and Classified loans provides a more accurate general reserve provision.

The Bank also maintains a specific reserve allowance for Criticized and Classified loans that are reviewed for impairment in accordance with ASC Topic 310 guidelines and deemed to be impaired.

In accordance with the Interagency and GAAP guidance, the Bank maintains a general allowance for performing loans based upon a review of 10 different factors. The first factor utilized is actual historical loss experience by major loan category expressed as a percentage of performing loans. As the loss experience for a particular loan category increases or decreases, the level of reserves required for that particular loan category also increases or decreases. Because actual loss experience may not adequately predict the level of losses inherent in a portfolio, the Bank reviews nine qualitative factors (policy & procedures, economy, nature & volume, management, loan review, collateral value, concentrations and external forces) to determine if reserves should be increased based upon any of those factors.

All non-performing loans and certain delinquent loans, as identified through the ALLL review process, are evaluated individually for potential losses in accordance with Interagency and GAAP guidance and consistent with the Bank’s ALLL policy and methodology. The individuals evaluating the loans include the Chief Risk Officer, Chief Lending Officer, Credit Officer, Workout Officer, Loan Officers and consultants. The conclusions reached as a result of the evaluation process are submitted to management and Board of Directors committees for their review and approval. Management believes that this review provides a better assessment of the possible losses imbedded in this portion of the portfolio. The resulting reserves under this review still constitute a general allowance that has been allocated to the loans reviewed in this section and may be utilized in accordance with ASC Topic 450.

ASC Topic 310 is the primary basis for valuing the impairments of specific loans whose collectability has been called into question. The amount assigned to this aspect of the ALLL is the individually determined (i.e., loan by loan) portion. The standard permits the use of one of three approved methods to estimate the amount to be reserved for such credits. The three methods are as follows: i) the present value of expected future cash flows discounted at the loan’s effective interest rate, ii) the loan’s observable market price, or iii) the fair value of the collateral if the loan is collateral dependent.

For loans individually evaluated for impairment under ASC Topic 310, the standard requires the institution to calculate the level of allowance utilizing the appropriate measurement basis, except for an impaired collateral-dependent loan. This guidance requires impairment of a collateral dependent loan to be measured using the fair value of collateral method.

Criticized and Classified loans with at risk balances of $1,000,000 or more and trouble debt restructurings are identified and reviewed for individual evaluation for impairment in accordance with ASC Topic 310. If it is determined that it is probable the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement, the loan is impaired. If the loan is determined to be not impaired, it is then grouped with the other loans to be individually evaluated for potential losses. The impaired loans are then evaluated to determine the measure of impairment amount based on one of the three measurement methods noted above. If it is determined that there is an impairment amount, the Bank then determines whether the impairment amount is permanent (that is a confirmed loss), in which case the impairment is charged off, or if it is other than permanent, in which case the Bank establishes a specific valuation reserve that is included in the total ALLL. However, in accordance with GAAP guidance, if there is no impairment amount, no reserve is established for the loan.

The Company has historically been primarily a commercial real estate (“CRE”) and multi-family mortgage lender, with a significant portion of its loan portfolio secured by buildings in the New York City metropolitan area. Payments on multi-family and CRE loans generally depend on the income produced by the underlying properties which, in turn, depends on their successful operation and management. Accordingly, the ability of the Company’s borrowers to repay these loans may be impacted by adverse conditions in the local real estate market and the local economy. While the Company generally requires that such loans be qualified on the basis of the collateral property’s current cash flows, appraised value, and debt service coverage ratio, among other factors, there can be no assurance that the Bank’s underwriting policies will protect the Bank from credit-related losses or delinquencies.

The Company seeks to minimize the risks involved in commercial small business lending by underwriting such loans on the basis of the cash flows produced by the business; by requiring that such loans be collateralized by various business assets, including inventory, equipment, and accounts receivable, among others; and by requiring personal guarantees. However, the capacity of a borrower to repay a commercial small business loan is substantially dependent on the degree to which his or her business is successful. In addition, the collateral underlying such loans may depreciate over time, may not be conducive to appraisal, or may fluctuate in value, based upon the business’ results.

Although the New York City metropolitan area fared better in fiscal 2010 than many other parts of the country, the Bank’s marketplace was nonetheless impacted by the widespread economic decline. The ability of the Bank’s borrowers to repay their loans, and the value of the collateral securing such loans, could be adversely impacted by further significant changes in local economic conditions, such as a decline in real estate values or a rise in unemployment. This, in turn, could not only result in the Company experiencing an increase in charge-offs and/or non-performing assets, but could also necessitate an increase in the provision for loan losses. These events would have an adverse impact on the Company’s results of operations and capital, if they were they to occur.

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 quarterly 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. In April 2009, the FASB issued guidance that changes the amount of another-than-temporary impairment that is recognized in earnings when there are non-credit losses on a debt security which management does not intend to sell, and for which it is more-likely-than-not that the entity will not be required to sell the security prior to the recovery of the non-credit impairment. In those situations, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and the remaining difference between the debt security’s amortized cost basis and its fair value would be included in other comprehensive income. This guidance also requires additional disclosures about investments in an unrealized loss position and the methodology and significant inputs used in determining the recognition of other-than-temporary impairment. At September 30, 2010, the Bank does not have any other securities that may be classified as having other than temporary impairment in its investment portfolio.

Deferred Income Taxes

The Company records income taxes in accordance with ASC 740, “Income Taxes,” as amended, using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled.

On a periodic basis, we assess whether, based on available evidence, that a valuation allowance is required for any portions of deferred tax assets that we estimate are not more likely than not to be realized. In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of tax planning strategies and the reliability of tax loss carry forwards. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, statutory tax rates, and future taxable income levels. The valuation allowance is adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant. (see below PART II, ITEM 1A. Risk Factors)

Stock Repurchase Program

On August 6, 2002 the Holding Company announced a stock repurchase program to repurchase up to 231,635 shares of its outstanding common stock. As of September 30, 2010, 176,174 shares of its common stock have been repurchased in open market transactions at an average price of $15.72 per share. The Holding Company intends to use repurchased shares to fund its stock-based benefit and compensation plans and for any other purpose the Board deems advisable in compliance with applicable law. No shares were repurchased during the six months ended September 30, 2010. As a result of the Company’s participation in the TARP CPP (Series A) and CDCI (Series B), the U.S. Treasury’s prior approval is required to make further repurchases.

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.

The Bank’s policies are designed primarily to attract deposits from local residents and businesses through the Bank’s branches. The Bank also holds large deposits from various governmental agencies or authorities and corporations. The Bank’s branches on 116th Street and 145th Street in Harlem and its Jamaica branches operate in New York State designated Banking Development Districts (“BDD”), which allows Carver Federal to participate in BDD-related activities, including acquiring New York City and New York State deposits. As of September 30, 2010, Carver Federal held $85 million in BDD deposits. BDD deposits are used by various municipal agencies to encourage banking operations in low- to moderate-income areas. The BDD deposits are subject to renewal during the third and fourth quarters of fiscal 2011. There is no guarantee that the deposits will be renewed.

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 September 30, 2010.

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 September 30, 2010, the Bank had $59.1 million in borrowings with a weighted average rate of 3.26% maturing over the next three years. Due to the recent deterioration in asset quality, the FHLB-NY has limited new borrowings to a tenor of one year. At September 30, 2010, based on available collateral held at the FHLB-NY, Carver Federal had the ability to borrow from the FHLB-NY an additional $1.5 million on a secured basis, utilizing mortgage-related loans and securities as collateral. An additional $15.8 million of borrowing capacity will become available on October 1, 2010 when the FHLB-NY applies additional securities collateral pledged by the Company.

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 September 30, 2010 and 2009, assets qualifying for short-term liquidity, including cash and short-term investments, totaled $35.8 million and $14.4 million, respectively.

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 September 30, 2010, the Bank exceeded all regulatory minimum capital requirements and qualified, under OTS regulations, as a well-capitalized institution.

The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During the six month, ended September 30, 2010 total cash and cash equivalents decreased $2.5 million reflecting cash used in financing activities of $23.9 million, cash used in operating activities of $0.8 million, and cash provided by investing activities of $21.4 million.

Net cash used in financing activities was $23.9 million, primarily resulting from decreases in core deposits of $4.3 million and the maturity of a fixed-rate note of $11.0 million in the first quarter and $8.0 million in the second. Net cash used in operating activities during this period was $0.8 million and was primarily the result of an increase in provision for loan losses offset by an increase in other assets and a non-cash valuation allowance taken on the deferred tax assets. Net cash provided by investing activities was $21.4 million is the result of loan pay downs and payoffs during the quarter.

At September 30, 2010, the Bank exceeded all regulatory minimum capital requirements and qualified, under OTS regulations, as a well-capitalized institution. The table below presents the capital position of the Bank at September 30, 2010 (dollars in thousands):


				Tier 1 Risk-
	Tier 1 Core			Based			Total Risk-
	Capital			Capital			Based Capital
	Ratio			Ratio			Ratio
GAAP Capital at September 30, 2010	$	48,480		$	48,480		$	48,480

Add:
General valuation allowances		—			—			7,130
Qualifying subordinated debt		—			—			5,000
Other		292			292			292
Deduct:
Unrealized gains on securities available-for-sale, net		133			133			133
Goodwill and qualifying intangible assets, net		152			152			152

Regulatory Capital	$	48,488		$	48,488		$	60,618
Minimum Capital requirement		11,316			30,175			45,113

Regulatory Capital Excess	$	37,172		$	18,313		$	15,505


Capital Ratios		6.43	%		8.60	%		10.75	%

In February 2010, the United States (“U.S.”)Treasury announced the creation of the Community Development Capital Initiative (“CDCI”), in recognition of the unique role of Community Development Financial Institutions (“CDFI’s”) as lenders in disadvantaged communities. CDFI’s that are participants in the Trouble Asset Relief Program Capital Purchase Program (“TARP CPP”), may apply to exchange existing TARP CPP for CDCI capital. Carver received final approval of its application by the U.S. Treasury in August 2010 and exchanged its shares. This exchange of capital will decrease Carver’s dividend payments by $560,000 annually as the coupon rate declined from 5% to 2% and the term was extended from 5 additional years to seven from issuance.

Bank Regulatory Matters

As previously disclosed in a Form 10-Q filed with the Securities and Exchange commission on February 16, 2010, the Holding Company and Bank agreed with the Office of Thrift Supervision (“OTS”) to take certain actions related to its operations and regulatory compliance. The agreement provides that the Bank will take certain actions including adoption of an enhanced loan concentration policy, which includes reducing the level of commercial real estate loans relative to capital, limiting the level of brokered deposits and enhancing Bank Secrecy Act (“BSA”) compliance. Management believes the Holding Company and Bank are currently in substantial compliance with the agreement and believes that they will continue to satisfy the terms of the agreement. While the Bank continues to meet the regulatory definition of a well-capitalized bank, the OTS has communicated to management that they should significantly raise the Bank’s capital ratios in light of its current asset quality and earnings level, in order to avoid additional regulatory oversight in the future. As a result, the Company is in an active process with several private equity investors to raise new capital. There can be no assurance that any of these efforts will be successful.

Comparison of Financial Condition at September 30, 2010 and March 31, 2010

Assets

At September 30, 2010, total assets decreased $50.6 million, or 6.3%, to $754.8 million compared to $805.5 million at March 31, 2010. The decline in total assets is primarily due to decreases in loans receivable of $56.2 million, cash of $2.5 million and deferred tax assets of $14.3 million, partially offset by increases in investment securities of $21.7 million and other assets of $1.4 million.

Cash and cash equivalents decreased $2.5 million, or 6.6%, to $35.8 million at September 30, 2010 compared to $38.3 million at March 31, 2010. The variance is due to a decrease in cash and due from banks of $9.5 million resulting from the utilization of cash generated from loan pay downs to repay borrowed funds. This was partially offset by an increase in money market investments of $7.0 million resulting from additional funds pledged to the Federal Home Loan Bank of New York (“FHLB-NY”).

Investment securities increased $21.7 million, or 39.2%, to $77.1 million at September 30, 2010 compared to $55.4 million at March 31, 2010. The variance is due to the purchase of Agency securities with the excess cash inflows from the loan activities.

Net loans receivable decreased $56.2 million, or 8.5%, to $601.8 million at September 30, 2010 compared to $658.0 million at March 31, 2010. Principal repayments net of advances and originations across all loan classifications contributed to the majority of the decrease including, Construction ($24.7 million), Commercial ($12.7 million) and Business ($12.7 million), coupled with an increase in the allowance for loan loss of $5.4 million.

Premises and equipment decreased $0.3 million or 2.1%, on a net basis, to $11.8 million at September 30, 2010 from $12.1 million at March 31, 2010.

Liabilities and Stockholders’ Equity

Total liabilities decreased $24.0 million, or 3.2%, to $719.7 million at September 30, 2010 compared to $743.8 million at March 31, 2010. The decrease in total liabilities is due to the decrease in total deposits of $4.3 million and the maturity of two fixed-rate notes from the FHLB-NY totaling $19.0 million.

Deposits decreased $4.3 million, or 0.7%, to $598.9 million at September 30, 2010 compared to $603.2 million at March 31, 2010. The decrease in deposits is the result of the withdrawal of institutional deposits of $10.5 million partially offset by a growth in core deposits.

Advances from the FHLB-NY and other borrowed money decreased $19.0 million, or 14.5%, to $112.5 million at September 30, 2010 compared to $131.6 million at March 31, 2010. The decrease was the result of the maturities of fixed-rate notes in May 2010 ($11.0 million) and July 2010 ($8.0 million).

Total stockholders’ equity decreased $26.5 million, or 43%, to $35.0 million at September 30, 2010 compared to $61.7 million at March 31, 2010. The decrease in stockholders’ equity is primarily due to the valuation allowance recorded on the deferred tax asset and the loan loss provisions recorded in the period.

Asset/Liability Management

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

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

Off-Balance Sheet Arrangements and Contractual Obligations

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

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 the table below for the Bank’s outstanding lending commitments and contractual obligations at September 30, 2010.

The following table reflects the outstanding loan commitments as of September 30, 2010 (in thousands):


Commitments to fund construction mortgage loans	$	14,502
Commitments to fund commercial and consumer loans		3,365
Lines of credit		5,944
Letters of credit		4,154

	$	27,964

Comparison of Operating Results for the Three and Six Months Ended September 30, 2010 and 2009

Overview

The Company reported a net loss of $23.4 million for the second quarter of fiscal 2011 compared to a net loss of $0.3 million for the second quarter of fiscal 2010. Net loss per share for the quarter was $9.44 compared to a net loss per share of $0.22 for the second quarter of fiscal 2010. For the six month period ended September 30, 2010, the Company reported a net loss of $25.9 million, or $10.53 per share, compared to net income of $0.4 million, or a loss per share of $0.04 for the prior year period. The losses for both periods are due primarily to a higher provision for loan losses and a $20.7 million non-cash charge to establish a valuation allowance on the Company’s deferred tax asset.

The following table reflects selected operating ratios for the three and six months ended September 30, 2010 and 2009:

CARVER BANCORP, INC. AND SUBSIDIARIES
SELECTED KEY RATIOS
(Unaudited)


	Three Months Ended						Six Months Ended
	September 30,						September 30,
Selected Financial Data:	2010			2009			2010			2009
Return on average assets (1)		(11.61	)%		(0.15	)%		(6.39	)%		0.10	%
Return on average equity (2)		(157.82	)		(1.89	)		(79.09	)		1.21
Net interest margin (3)		3.86			4.12			3.88			3.91
Interest rate spread (4)		3.78			3.96			3.78			3.73
Efficiency ratio (5)		83.91			97.62			83.78			92.38
Operating expenses to average assets (6)		3.79			3.44			3.73			3.49
Average equity to average assets (7)		7.35			8.08			8.08			7.96
Average interest-earning assets to average interest-bearing liabilities		1.06	x		1.12	x		1.07	x		1.12	x


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

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

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

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

(5)		Operating expenses divided by sum of net interest income plus non-interest income.

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

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

Analysis of Net Interest Income

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. 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. The Company’s net interest income is significantly impacted by changes in interest rate and market yield curves.

Net interest income decreased $0.9 million, or 11.9%, to $6.9 million for the quarter ended September 30, 2010 compared to $7.8 million for the prior year period. The decrease in net interest income resulted from a $1.2 million, or 11.08%, decline in interest income, which was partially offset by a moderate decrease in interest expense. The decrease in interest income reflects a decrease in the yield on interest-earning assets of 30 basis points (“bps”) to 5.26%, compared to 5.56% for the prior year period. The decline in yield on interest-earning assets is a result of the low interest rate environment and overall market conditions.

For the six month period ended September 30, 2010 net interest income decreased $0.8 million to $13.9 million compared to $14.7 million for the prior year period. The decrease in net interest income resulted from a $1.5 million, or 7.1%, decline in interest income which was partially offset by a $0.7 million decrease in interest expense. This decrease in interest income was primarily due to lower average loan volumes. The decrease in interest expense is due to a decline of 21 bps in the cost of interest bearing liabilities.

The following table sets forth, for the periods indicated, certain information about average balances of the Company’s interest-earning assets and interest-bearing liabilities and their related average yields and the average costs for the three and six months ended September 30, 2010 and 2009. Average yields 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.

CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCES
(In thousands)
(Unaudited)


	For the Three Months Ended September 30,
	2010							2009
	Average				Average			Average				Average
	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost

Interest Earning Assets:
Loans (1)	$	641,156	$	8,686		5.42	%	$	683,189	$	9,689		5.67	%
Mortgage-backed securities		61,838		525		3.40	%		66,689		687		4.11	%
Investment securities (2)		3,469		127		14.61	%		5,008		129		10.21	%
Other investments and federal funds sold		3,980		5		0.51	%		1,017		2		0.73	%

Total interest-earning assets		710,443		9,343		5.26	%		755,903		10,507		5.56	%
Non-interest-earning assets		94,681							50,928

Total assets	$	805,124						$	806,831


Interest Bearing Liabilities:
Deposits:
Now demand	$	61,917		32		0.20	%	$	49,900		19		0.15	%
Savings and clubs		109,254		74		0.27	%		117,820		65		0.22	%
Money market		69,967		192		1.10	%		46,697		155		1.32	%
Certificates of deposit		312,460		1,198		1.53	%		332,723		1,529		1.82	%
Mortgagors deposits		2,257		8		1.49	%		2,286		9		1.60	%

Total deposits		555,855		1,504		1.08	%		549,426		1,777		1.28	%
Borrowed money		114,110		983		3.45	%		125,114		951		3.01	%

Total interest-bearing liabilities		669,965		2,487		1.48	%		674,540		2,728		1.60	%
Non-interest-bearing liabilities:
Demand		68,257							58,517
Other liabilities		7,691							8,552

Total liabilities		745,913							741,609
Minority Interest		—							—
Stockholders’ equity		59,211							65,222

Total liabilities & stockholders’ equity	$	805,124						$	806,831

Net interest income			$	6,856						$	7,779


Average interest rate spread						3.78	%						3.96	%


Net interest margin						3.86	%						4.12	%


(1)		Includes non-accrual loans

(2)		Includes FHLB-NY stock

CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCES
(In thousands)
(Unaudited)


	For the Six Months Ended September 30,
	2010							2009
	Average				Average			Average				Average
	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost

Interest Earning Assets:
Loans (1)	$	649,255	$	17,635		5.43	%	$	675,253	$	18,788		5.56	%
Mortgage-backed securities		62,379		1,112		3.56	%		69,262		1,431		4.13	%
Investment securities (2)		3,737		206		11.01	%		4,901		194		7.89	%
Other investments and federal funds sold		2,681		10		0.78	%		1,023		8		1.56	%

Total interest-earning assets		718,052		18,963		5.28	%		750,439		20,421		5.44	%
Non-interest-earning assets		91,628							50,989

Total assets	$	809,680						$	801,428


Interest Bearing Liabilities:
Deposits:
Now demand	$	52,061		63		0.24	%	$	52,025		41		0.16	%
Savings and clubs		112,679		147		0.26	%		118,526		131		0.22	%
Money market		70,388		415		1.18	%		45,194		302		1.33	%
Certificates of deposit		314,705		2,374		1.51	%		329,187		3,320		2.01	%
Mortgagors deposits		2,712		22		1.65	%		2,587		21		1.60	%

Total deposits		552,545		3,021		1.09	%		547,519		3,815		1.39	%
Borrowed money		119,298		2,024		3.39	%		122,708		1,936		3.15	%

Total interest-bearing liabilities		671,843		5,045		1.50	%		670,227		5,751		1.71	%
Non-interest-bearing liabilities:
Demand		64,311							59,237
Other liabilities		8,142							8,184

Total liabilities		744,296							737,648
Minority Interest		—							—
Stockholders’ equity		65,384							63,780

Total liabilities & stockholders’ equity	$	809,680						$	801,428

Net interest income			$	13,918						$	14,670


Average interest rate spread						3.78	%						3.73	%


Net interest margin						3.88	%						3.91	%


(1)		Includes non-accrual loans

(2)		Includes FHLB-NY stock

Interest Income

Interest income decreased $1.2 million to $9.3 million for the quarter ended September 30, 2010 compared to $10.5 million for the prior year period. The change in interest income was primarily the result of a decrease in interest income on loans of $1.0 million and a decline in the interest income on mortgage-backed securities of $0.2 million. The decrease in interest income reflects a decline in the yield on interest-earning assets of 30 basis points to 5.26%, compared to 5.36% for the prior year period. The yield on loans decreased 25 basis points to 5.42% as the average loan balance decreased $42.0 million. The yield on mortgage-backed securities declined 71 basis points to 3.41% as the average balance decreased $4.9 million. The decline in yield on interest-earning assets is a result of the low interest rate environment and overall market and credit conditions.

For the six-month period, ended September 30, 2010 interest income decreased $1.4 million to $19.0 million from the prior year period of $20.4 million. Interest income on loans declined $1.4 million, or 6.4%, interest income on mortgage back securities declined $0.3 million, or 22.3%. The decrease in interest income on loans reflected a decrease in the yield on average loans of 13bps to 5.43% for the six month ended September 30, 2010 compared to 5.56% for the prior year period. The yield on mortgage back securities declined 57 bps to 3.56% for the six month ended September compared to 4.13% for the prior year period.

Interest Expense

Interest expense decreased by $0.2 million, or 8.8%, to $2.5 million for the second quarter, compared to $2.7 million for the prior year period. The decrease in interest expense resulted primarily from a 20 bps decrease in the average cost of interest-bearing deposits to 1.08% for the quarter ended September 30, 2010 compared to an average cost of 1.28% for the prior year period as higher cost institutional deposits were replaced with lower cost core deposits and transactional accounts.

For the six month period ended September 30, 2010, interest expense decreased $0.8 million, or 12.28% to $5.0 million, compared to $5.8 million for the prior year period. The decrease in interest expense resulted primarily from a 21 bps decrease in the average cost of interest bearing liabilities to 1.50%, compared to 1.71% for the prior year period. The decrease reflects a 30 bps reduction in the average cost of deposits to 1.09% compared to 1.39% for the prior year period.

Interest expense on borrowed money increased $0.1 million, or 4.55%, to $2.0 million for six months ended September 30, 2010, compared to $1.9 million for the prior year period. The increased expense is primarily due to an increase in the average cost of borrowed money of 24 bps to 3.39%, compared to 3.15% for the prior year period.

Provision for Loan Losses and Asset Quality

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

The Bank’s provision for loan loss methodology is consistent with the Interagency Policy Statement on the Allowance for Loan and Lease Losses (the “Interagency Policy Statement”) released by the Federal Financial Regulatory Agencies on December 13, 2006. For additional information regarding the Bank’s ALLL policy, refer to Note 2 of Notes to Consolidated Financial Statements, “Summary of Significant Accounting Policies” included in the Holding Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

The following table summarizes the activity in the ALLL for the six month period ended September 30, 2010 and fiscal year-end March 31, 2010 (dollars in thousands):


	Six Months
	Ended			Fiscal Year
	September 30,			Ended March
	2010			31, 2010

Beginning Balance	$	12,000		$	7,049

Less: Charge-offs:		(8,677	)		(2,958	)

Add: Recoveries		25			64

Provision for Loan Losses		14,077			7,845


Ending Balance	$	17,425		$	12,000


Ratios:
Net charge-offs to average loans outstanding		2.67	%		0.43	%
Allowance to total loans		2.81	%		1.79	%
Allowance to non-performing loans		21.85	%		25.23	%

The Bank recorded a $7.8 million provision for loan losses in the quarter ended September 30, 2010 compared to $1.3 million for the prior year period. The increased provision is in response to the Company’s current levels of delinquencies and non-performing loans and the uncertainty caused by the uneven economic recovery in the real estate market and the New York City economy. At September 30, 2010, non-performing loans totaled $79.8 million, or 10.56% of total assets compared to $47.6 million or 5.91% of total assets at March 31, 2010. Total delinquencies increased quarter-over-quarter by 1.3% to $116.7 million or 15.5% of total assets. The ALLL was $17.4 million at September 30, 2010, which represents a ratio of the ALLL to non-performing loans of 21.85% compared to 25.23% at March 31, 2010. The ratio of the ALLL to total loans was 2.81% at September 30, 2010 up from 1.79% at March 31, 2010.

For the six-month period ended September 30, 2010, the Company recorded a $14.1 million provision for loan losses compared to $2.0 million for the prior year period. This increase in required provision was due to an increase in non-accruals loans of $32.2 million, or 67.7%, to $79.8 million compared to the March 31, 2010 as well as the increased level of delinquencies.

Non-performing Assets

Non-performing assets consist of non-accrual loans and property acquired in settlement of loans, including foreclosure. When a borrower fails to make a payment on a loan, the Bank and/or its loan servicers takes prompt steps to have the delinquency cured and the loan restored to current status. This includes a series of actions such as phone calls, letters, customer visits and, if necessary, legal action. In the event the loan has a guarantee, the Bank may seek to recover on the guarantee, including, where applicable, from the Small Business Administration (“SBA”). Loans that remain delinquent are reviewed for reserve provisions and charge-off. The Bank’s collection efforts continue after the loan is charged off, except when a determination is made that collection efforts have been exhausted or are not productive.

The Bank may from time to time agree to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). Loans modified in a troubled debt restructuring are placed on non-accrual status until the Bank determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for a minimum of six months. At September 30, 2010, loans classified as a troubled debt restructuring totaled $18.7 million.

At September 30, 2010, non-performing assets totaled $79.8 million, or 10.57%, of total assets compared to $47.6 million or 5.91% of total assets at March 31, 2010. The increase in non-performing loans impacted all loan types except business loans with the largest increase in construction loans. The Bank continues its proactive approach to working with borrowers to resolve early stage delinquencies; however, given the continued distressed economic climate there has been an increase in the 30-89 day delinquency category of $13.8 million to $36.9 million or 5.97% of loans receivable at September 30, 2010 compared to $23.1 million or 3.45% at March 31, 2010. Uncertainty still remains with respect to the timing of a sustained economic recovery which may affect the ability of borrowers to stay current with their loans.

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


	September			June			March			December			September
	2010			2010			2010			2009			2009
Loans accounted for on a non-accrual basis (1):
Gross loans receivable:
One- to four-family	$	14,583		$	14,320		$	7,682		$	5,009		$	3,297
Multifamily		14,103			16,923			10,334			6,406			5,988
Non-residential		11,189			13,249			6,315			3,831			4,933
Construction		36,145			34,792			17,413			12,719			9,808
Business		3,699			7,031			5,799			5,138			2,760
Consumer		37			15			28			35			31

Total non-accrual loans		79,756			86,330			47,571			33,138			26,817


Other non-performing assets (2):
Real estate owned		19			1			66			28			67

Total other non-performing assets		19			1			66			28			67

Total non-performing assets (3)	$	79,775		$	86,331		$	47,637		$	33,166		$	26,884


Accruing loans contractually past due > 90 days (4)		1,765			478			1,411			305			987


Non-performing loans to total loans		12.88	%		13.34	%		7.10	%		4.86	%		3.92	%
Non-performing assets to total assets		10.57	%		10.74	%		5.91	%		4.12	%		3.33	%


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

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

(3)		Troubled debt restructured loans performing in accordance with their modified terms for less than six months and those not performing in accordance with their modified terms are considered non-accrual and are included in the non-accrual category in the table above. TDR loans that have performed in accordance with their modified terms for a period of at least six months are generally considered performing loans and are not presented in the table above.

(4)		Loans 90 days or more past due and still accruing, which were not included in the non-performing category, are presented in the above table.

Subprime Loans

In the past, the Bank originated a limited amount of subprime loans; however, such lending has been discontinued. At September 30, 2010, the Bank had $8.6 million in subprime loans, or 1.4%, of its total loan portfolio of which $4.4 million are non-performing loans.

Non-Interest Income

Non-interest income increased $2.9 million, or 433.6%, to $2.2 million for the second quarter, compared to a loss of $0.7 million for the prior year period. The increase is primarily due to lower valuation adjustments on loans held for sale of $2.1 million to reflect loans held for sale at the lower of cost or fair value, a gain on the sale of investment securities of $0.7 million and higher fee income on New Market Tax Credit (NMTC) transactions of $0.3 million, partially offset by lower loan and deposit fees of $0.2 million.

Non- interest income increased $3.6 million during the six month period ending September 30, 2010 to $4.1 million compared to $0.5 million in the prior year period. The increase was primarily due to fees of $1.1 million received on three NMTC transactions as well as a reduction of $2.1 million in the amount required to reflect loans held for sale at the lower of cost or fair value.

Non-Interest Expense

Non-interest expense increased $0.7 million, or 10.1%, to $7.6 million compared to $6.9 million for the prior year period. This change was primarily due to increased loan related expenses of $0.4 million, increased consulting expenses of $0.2 million and increased FDIC insurance premium charges of $0.1 million.

Non-interest expense increased $1.1 million during the six month period ending September 30, 2010 to $15.1 million compared to $14.0 million in the prior period. The increase was primarily due to loan related expenses of $0.5 million and increased consulting expenses of $0.2 million.

Income Tax Benefit

The income tax expense was $17.0 million for the quarter ended September 30, 2010 compared to an income tax benefit of $0.8 million for the prior year period. The income tax expense for the three month period ending September 30, 2010 consisted of an income tax benefit of $3.7 million, primarily due to the Company’s loss before income taxes in the current quarter compared to the smaller loss in the prior year period. This benefit is offset by an income tax expense that is associated with the establishment of a $20.7 million valuation allowance against the deferred tax asset recorded during the quarter. In addition, the current quarter reflects the utilization of credits of $0.6 million on NMTC transactions. Management has concluded that it is “more likely than not” that the Company will not be able to fully realize the benefit of its deferred tax asset and thus, a valuation allowance of $20.7 million was recorded during the quarter. This valuation allowance does not preclude the Company from utilizing the accumulated deferred tax asset to offset future earnings.

The income tax benefit was $6.0 million for the six month period ended September 30, 2010, compared to a prior year benefit of $1.2 million. The income tax expense recorded for the six month period ended September 30, 2010 consisted of an income tax benefit of $6.0 million primarily due to the Company’s loss before income taxes in the first six months of the year compared to the prior year. This benefit is offset by an income tax expense that is associated with establishment of a $20.7 million valuation allowance against the Company’s deferred tax asset recorded during the period. In addition, the current period reflects utilization of credits of $1.2 million on NMTC transactions. Management has concluded that it is “more likely than not” that the Company will not be able to fully realize the benefit of its deferred tax asset and thus, a valuation allowance of $20.7 million was recorded during the quarter.

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

Quantitative and qualitative disclosure about market risk is presented at March 31, 2010 in Item 7A of the Company’s 2010 Form 10-K and is incorporated herein by reference. The Company believes that there has been no material change in the Company’s market risk at September 30, 2010 compared to March 31, 2010.

ITEM 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. As of September 30, 2010, the Company’s management, including the Company’s Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Accounting Officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

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

(b) Changes in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

There have been no material changes with regard to legal proceedings since the filing of the 2010 Form 10-K.

ITEM 1A. Risk Factors

The following risk factors represent material updates and additions to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010 (“Form 10-K”). The risk factors below should be read in conjunction with the risk factors and other information disclosed in our Form 10-K. The risks described below and in our Form 10-K are not the only risks facing the Company. Additional risks not presently known to the Company, or that we currently deem immaterial, may also adversely affect the Company’s business, financial condition or results of operations.

An investment in our securities is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below, in addition to the risk factors previously disclosed in ‘The Companys’ Annual Report on Form 10-K for the year ended March, 31 2010.

The Company’s ability to utilize the deferred tax asset generated by New Markets Tax Credit income tax benefits as well as other deferred tax assets depends on its ability to meet the NMTC compliance requirements and its ability to generate sufficient taxable income from operations to generate taxable income in the future. Since the Bank has not generated sufficient taxable income to utilize tax credits as they were earned, a deferred tax asset has been recorded in the Company’s financial statements.

The future recognition of Carver’s deferred tax asset is highly dependent upon Carver’s ability to generate sufficient taxable income. A valuation allowance is required to be maintained for any deferred tax assets that we estimate are more likely than not to be unrealizable, based on available evidence at the time the estimate is made. In assessing Carver’s need for a valuation allowance, we rely upon estimates of future taxable income. Although we use the best available information to estimate future taxable income, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances influencing our projections. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, statutory tax rates, and future taxable income levels. In the event that we were to determine that we would not be able to realize all or a portion of our net deferred tax assets in the future, we would reduce such amounts through a charge to income tax expense in the period in which that determination was made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through a decrease in income tax expense in the period in which that determination was made. No assurances can be made that the company will be able to generate sufficient taxable income in the future to realize the deferred tax asset.

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act implements significant changes in the financial regulatory landscape and will impact all financial institutions. This impact may materially affect our business activities, financial position and profitability by, among other things. Increasing our regulatory compliance burden and associated costs, placing restrictions on certain products and services, and limiting our future capital raising strategies.

Among the Dodd-Frank Act’s significant regulatory changes, it creates a new financial consumer protection agency, known as the Bureau of Consumer Financial Protection (the “Bureau”), that is empowered to promulgate new consumer protection regulations and revise existing regulations in many areas of consumer protection. The Bureau has exclusive authority to issue regulations, orders and guidance to administer and implement the objectives of federal consumer protection laws. The Dodd-Frank Act also eliminates our primary regulator, the Office of Thrift Supervision and designates the Comptroller of the Currency to become our primary bank regulator. Moreover, the Dodd-Frank Act permits States to adopt stricter consumer protection laws and authorizes State attorney generals’ to enforce consumer protection rules issued by the Bureau. The Dodd-Frank Act also may affect the preemption of State laws as they affect subsidiaries and agents of federally chartered banks, changes the scope of federal deposit insurance coverage, and increases the FDIC assessment payable by the Bank. We expect that the Bureau and these other changes will significantly increase our regulatory compliance burden and costs and may restrict the financial products and services we offer to our customers.

The Dodd-Frank Act also imposes more stringent capital requirements on bank holding companies by, among other things, imposing leverage ratios on bank holding companies and prohibiting new trust preferred issuances from counting as Tier I capital. These restrictions will limit our future capital strategies. Under the Dodd-Frank Act, our outstanding trust preferred securities will continue to count as Tier I capital but we will be unable to issue replacement or additional trust preferred securities which would count as Tier I capital. Because many of the Dodd-Frank Act’s provisions require subsequent regulatory rulemaking, we are uncertain as to the impact that some of the provisions will have on the Company and cannot provide assurance that the Dodd-Frank Act will not adversely affect our financial condition and results of operations for other reasons.

Any future FDIC special assessments or increases in insurance premiums will adversely impact the Company’s earnings.

ITEM 2. Issuer Purchases of Equity Securities

None.

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 4. Reserved

ITEM 5. Other Information

Not applicable.

ITEM 6. Exhibits

The following exhibits are submitted with this report:


Exhibit 11.		Computation of Earnings Per Share.

Exhibit 31.1		Certification of Chief Executive Officer.

Exhibit 31.2		Certification of Chief Accounting Officer.

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

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

SIGNATURES

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


		CARVER BANCORP, INC.

Date: November 15, 2010		/s/ Deborah C. Wright Deborah C. Wright
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

Date: November 15, 2010		/s/ Chris A. McFadden Chris A. McFadden
		Executive Vice President & Chief Financial Officer
		(Principal Accounting Officer)