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

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

Commission File Number: 1-13007

CARVER BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		13-3904174 (I.R.S. Employer Identification No.)
75 West 125th Street, New York, New York (Address of Principal Executive Offices)		10027 (Zip Code)

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).

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		2,474,719
Class		Outstanding at February 16, 2010

 

 

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of December 31, 2009 (unaudited) and March 31, 2009			2
Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2009 and 2008 (unaudited)			3
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income for the Nine Months Ended December 31, 2009 (unaudited)			4
Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2009 and 2008 (unaudited)			5
Notes to Consolidated Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			36
Item 4. Controls and Procedures			36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			37
Item 1A. Risk Factors			37
Item 2. Issuer Purchases of Equity Securities			38
Item 3. Defaults Upon Senior Securities			38
Item 4. Submission of Matters to a Vote of Security Holders			38
Item 5. Other Information			38
Item 6. Exhibits			38
SIGNATURES			39
EXHIBITS
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)

		December 31,				March 31,
		2009				2009
		(unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks		$	18,540			$	8,251
Money market investments			768				5,090
Total cash and cash equivalents			19,308				13,341
Investment securities:
Available-for-sale, at fair value			47,402				59,973
Held-to-maturity, at amortized cost (fair value of $12,847 and $14,528 at December 31, 2009 and March 31, 2009, respectively)			12,570				14,808
Total securities			59,972				74,781
Loans held-for-sale			—				21,105
Loans receivable:
Real estate mortgage loans			615,565				581,987
Commercial business loans			71,179				57,398
Consumer loans			1,468				1,674
Loans, net			688,212				641,059
Allowance for loan losses			(8,962	)			(7,049	)
Total loans receivable, net			679,250				634,010
Premises and equipment, net			12,014				15,237
Federal Home Loan Bank of New York stock, at cost			5,097				4,174
Bank owned life insurance			9,725				9,481
Accrued interest receivable			3,416				3,697
Core deposit intangibles, net			266				380
Other assets			22,697				15,222
Total assets		$	811,745			$	791,428
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Savings		$	113,242			$	117,438
Non-Interest Bearing Checking			61,639				56,505
NOW			43,168				48,371
Money Market			65,879				43,190
Certificates of Deposit			301,058				337,912
Total Deposits			584,986				603,416
Advances from the FHLB-New York and other borrowed money			153,564				115,017
Other liabilities			8,184				8,657
Total liabilities			746,734				727,090
Stockholders’ equity:
Preferred stock (CPP) (par value $0.01 per share, 2,000,000 shares authorized; 18,980 shares, with a liquidation preference of $1,000.00 per share, issued and outstanding as of December 31, 2009 and March 31, 2009)			18,980				18,980
Common stock (par value $0.01 per share: 10,000,000 shares authorized; 2,524,691 shares issued; 2,474,719 and 2,475,037 shares outstanding at December 31, 2009 and March 31, 2009, respectively)			25				25
Additional paid-in capital			24,174				24,214
Retained earnings			22,730				21,898
Treasury stock, at cost (49,972 and 49,654 shares at December 31, 2009 and March 31, 2009, respectively)			(687	)			(760	)
Accumulated other comprehensive loss			(211	)			(19	)
Total stockholders’ equity			65,011				64,338
Total liabilities and stockholders’ equity		$	811,745			$	791,428

See accompanying notes to consolidated financial statements

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Interest Income:
Loans		$	9,361			$	9,800			$	28,149			$	30,093
Mortgage-backed securities			633				578				2,063				1,742
Investment securities			72				39				259				209
Money market investments			114				4				129				44
Total interest income			10,180				10,421				30,600				32,088
Interest expense:
Deposits			1,637				3,016				5,452				10,516
Advances and other borrowed money			1,063				991				2,999				2,699
Total interest expense			2,700				4,007				8,451				13,215
Net interest income			7,480				6,414				22,149				18,873
Provision for loan losses			1,286				431				3,290				770
Net interest income after provision for loan losses			6,194				5,983				18,859				18,103
Non-interest income:
Depository fees and charges			757				732				2,256				2,114
Loan fees and service charges			186				264				753				1,070
Gain on sale of securities, net			446				—				446				—
(Loss) Gain on sale of loans, net			(223	)			(208	)			(220	)			38
Other			1,788				407				2,025				1,293
Total non-interest income			2,954				1,195				5,260				4,515
Non-interest expense:
Employee compensation and benefits			3,053				2,968				9,366				9,998
Net occupancy expense			1,624				1,223				3,765				3,142
Equipment, net			569				794				1,569				2,103
Consulting fees			193				548				562				978
Federal deposit insurance premiums			255				233				1,303				389
Goodwill Impairment			—				7,055				—				7,055
Other			3,240				1,967				6,364				5,762
Total non-interest expense			8,934				14,788				22,929				29,427
Income before income taxes and minority interest			214				(7,610	)			1,190				(6,809	)
Income tax benefit			(574	)			(550	)			(1,111	)			(1,293	)
Minority interest, net of taxes			—				124				—				361
Net income		$	788			$	(7,184	)		$	2,301			$	(5,877	)
Earnings per common share:
Basic		$	0.22			$	(2.91	)		$	0.64			$	(2.38	)
Diluted		$	0.22			$	(2.91	)		$	0.64			$	(2.38	)

See accompanying notes to consolidated financial statements

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
For the nine months ended December 31, 2009
(In thousands)
(Unaudited)

																						Accumulated
		Preferred								Additional												Other				Total
		Stock				Common				Paid-In				Treasury				Retained				Comprehensive				Stockholders’
		(CPP)				Stock				Capital				Stock				Earnings				Income (Loss)				Equity
Balance — March 31, 2009		$	18,980			$	25			$	24,214			$	(760	)		$	21,898			$	(19	)		$	64,338
Net income			—				—				—				—				2,301				—				2,301
Change in net unrealized loss on available-for-sale securities, net of taxes			—				—				—				—				—				(192	)			(192	)
Comprehensive income (loss), net of taxes:			—				—				—				—				2,301				(192	)			2,109
Common Dividends paid			—				—				—				—				(745	)			—				(745	)
CPP Preferred Dividends paid			—				—				—				—				(712	)			—				(712	)
Treasury stock activity			—				—				(47	)			73				—				—				26
Stock based compensation			—				—				7				—				(12	)			—				(5	)
Balance — December 31, 2009		$	18,980			$	25			$	24,174			$	(687	)		$	22,730			$	(211	)		$	65,011

See accompanying notes to consolidated financial statements

CARVER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

		Nine Months Ended December 31,
		2009				2008
OPERATING ACTIVITIES
Net income		$	2,301			$	(5,877	)
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses			3,290				770
Provision for REO losses			—				53
Goodwill impairment charge			—				7,055
Stock based compensation expense			5				3
Depreciation and amortization expense			1,371				1,340
Amortization of premiums and discounts			(387	)			—
Amortization of other intangibles			—				141
Gain on sale of building			(1,172	)			—
Loss from sale of real estate owned			14				—
Gain on sale of securities			(446	)			—
Loss (Gain) on sale of loans			220				(38	)
Originations of loans held-for-sale			(1,464	)			(9,097	)
Proceeds from sale of loans held-for-sale			1,635				10,600
Changes in assets and liabilities:
Decrease in accrued interest receivable			281				418
Decrease in loan premiums and discounts and deferred charges			428				174
Increase in premiums and discounts — securities			698				4
(Increase) decrease in other assets			(7,562	)			3,201
Decrease in other liabilities			(515	)			(231	)
Net cash (used in) provided by operating activities			(1,300	)			8,516
INVESTING ACTIVITIES
Purchase of available-for-sale securities			(23,657	)			(12,446	)
Proceeds from sales of securities			23,479				—
Proceeds from principal payments, maturities, and calls:
Available-for-sale			12,122				4,153
Held-to-maturity			2,208				1,107
Originations of loans held-for-investment			(96,360	)			(103,290	)
Loans purchased from third parties			(10,760	)			—
Principal collections on loans			78,634				99,374
Purchase of FHLB-NY stock			(923	)			(1,492	)
Disposals (Additions) to premises and equipment			3,302				(1,181	)
Proceeds from sale of real estate owned			562				949
Net cash used in investing activities			(11,393	)			(12,826	)
FINANCING ACTIVITIES
Net decrease in deposits			(18,431	)			(33,129	)
Net borrowing of FHLB advances and other borrowings			38,548				32,872
Common stock repurchased			—				(159	)
Dividends paid			(1,457	)			(741	)
Net cash provided by (used in) financing activities			18,660				(1,157	)
Net increase (decrease) in cash and cash equivalents			5,967				(5,467	)
Cash and cash equivalents at beginning of period			13,341				27,368
Cash and cash equivalents at end of period		$	19,308			$	21,901
Supplemental information:
Noncash Transfers—
Change in unrealized loss on valuation of available-for-sale investments, net		$	(192	)		$	276
Cash paid for—
Interest		$	11,359			$	13,152
Income taxes		$	199			$	129

See accompanying notes to consolidated financial statements

CARVER BANCORP, INC AND SUBSIDIARIES

1. Organization

Nature of operations

Carver Bancorp, Inc. (on a stand-alone basis, the “Holding Company” or “Registrant”), incorporated in May 1996, is the holding company for Carver Federal Savings Bank (the “Bank”). The Bank’s material subsidiaries include Carver Community Development Corp. (“CCDC”) and CFSB Realty Corp. The Bank also has a majority owned interest in Carver Asset Corporation, a real estate investment trust formed in February 2004.

The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally chartered mutual savings and loan association. The Bank converted to a federal savings bank in 1986. On October 24, 1994, the Bank converted from mutual to stock form and issued 2,314,275 shares of its common stock, par value $0.01 per share. On October 17, 1996, the Bank completed its reorganization into a holding company structure (the “Reorganization”) and became a wholly owned subsidiary of the Holding Company.

The Bank was founded to serve African-American communities whose residents, businesses and institutions had limited access to mainstream financial services. Today, the Bank is the largest African-American operated bank in the United States. The Bank remains dedicated to expanding wealth and 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. The Bank remains headquartered in Harlem, New York, and predominantly all of its eight branches and eleven 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. The Bank’s principal business consists of attracting deposit accounts through its branches and investing those funds in mortgage loans, small business loans and other investments permitted by federal savings banks.

The Bank formalized its many community focused investments on August 18, 2005, by forming 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 the Bank’s communities. Importantly, CCDC spearheads the Bank’s applications for grants and other resources to help fund these important community activities. In this regard, the Bank has successfully competed with large regional and global financial institutions in a number of competitions for government grants and other awards. In June 2006, the Bank was selected by the U.S. Department of the Treasury (the “Treasury”) to receive an award of $59 million in New Market Tax Credits (“NMTC”). In May 2009, the Bank was selected to receive a second NMTC award in the amount of $65 million. These credits enable 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. The NMTC award provides substantive credits to the Bank against Federal income taxes when the Bank makes qualified investments.

2. Basis of Presentation

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

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Amounts subject to significant estimates and assumptions are items such as the allowance for loan losses and lending-related commitments, valuation of mortgage servicing rights (“MSR”), goodwill and intangibles, pensions, assessment of other than temporary impairment and the fair value of financial instruments and recoverability of deferred tax assets. The Company’s ability to utilize deferred tax assets generated by NMTC income tax benefits over the next five years, 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 or from potential tax strategies to generate taxable income in the future. The Company has $11.0 million of deferred tax assets as of December 31, 2009. The current economic environment has increased the uncertainty inherent in these estimates. Actual results could differ from these estimates.

Effective July 1, 2009, we adopted the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification^TM, (the “FASB ASC”), which is now the source of authoritative, nongovernmental GAAP. While the FASB ASC did not change GAAP, all existing authoritative accounting literature, with certain exceptions, was superseded and codified into the FASB ASC. The references to authoritative accounting literature contained in our disclosures have been modified to refer to general accounting topics within the FASB ASC.

The unaudited consolidated financial statements presented herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Holding Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009, as previously filed with the SEC. The consolidated results of operations and other data for the three- and nine-month periods ended December 31, 2009 are not necessarily indicative of results that may be expected for the entire fiscal year ending March 31, 2010 (“fiscal 2010”).

Reclassifications

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

3. Earnings per Share

In June 2008, the FASB issued additional accounting guidance, which we adopted on January 1, 2009, related to participating securities which clarified the treatment of such securities for earnings per share (“EPS”) computation purposes. The guidance concluded that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and are to be included in the computation of EPS pursuant to the two-class method. Our restricted stock awards are considered participating securities pursuant to this guidance. The two-class method excludes from EPS calculations any dividends paid to participating securities and any undistributed earnings attributable to participating securities from the numerator and excludes the dilutive impact of the participating securities from the denominator. Prior period EPS data has been presented in accordance with this guidance.

Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding. In calculating EPS for the quarter ended December 31, 2009, dividends paid pursuant to the Company’s participation in the United States, Department of Treasury Capital Purchase Program (“CPP”) reduced the income available to common shareholders, thereby reducing EPS for December 31, 2009 compared to December 31, 2008. Further, income available to common shareholders was reduced by the dividend paid to unvested restricted shares granted under the Company’s Management Recognition Plan (“MRP”) which are participating securities in accordance with the FASB guidance noted above. Diluted earnings per common share includes any additional common shares as if all potentially dilutive common shares were issued (for instance, stock options with an exercise price that is less than the average market price of the common shares for the periods stated). For the purpose of these calculations, unreleased Employee Stock Ownership Program (“ESOP”) shares are not considered to be outstanding. For the quarters ended December 31, 2009 and 2008, respectively, 18,223 and 28,557 shares of common stock were potentially issuable from the exercise of stock options with an exercise price that is less than the average market price of the common shares and unvested restricted stock grants for the same period. The effects of these potentially dilutive common shares were considered in determining the diluted earnings per common share.

4. Accounting for Stock Based Compensation

The Company follows FASB issued accounting guidance on stock-based compensation, which requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. 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 and the related tax benefit recognized for the quarters ended December 31, 2009 and 2008 totaled $0 and $11,000, respectively, and for the nine months ended December 31, 2009 and 2008 totaled $5,000 and $3,000, respectively.

5. Benefit Plans

Employee Pension Plan

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

Under the FASB guidance on employers’ disclosures about plan assets of a defined benefit pension or other postretirement plan, the employers of public and nonpublic entities are required to: (a) disclose more information about how investment allocation decisions are made; (b) provide more information about major categories of plan assets, including concentrations of risk and fair-value measurements, and the fair-value techniques and inputs used to measure plan assets. In accordance with the guidance, the Company has adopted a measurement date as of the fiscal year-end of March 31.

6. Common Stock Dividend

On February 4, 2010, the Board of Directors of the Holding Company declared, for the quarter ended December 31, 2009, a cash dividend of ten cents ($0.10) per common share outstanding. The dividend is payable on March 1, 2010 to stockholders of record at the close of business on February 16, 2010.

7. Investment Securities

In April 2009, the FASB issued guidance that changes the amount of an other-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. This guidance is effective for interim and annual reporting periods ending after June 15, 2009. Our adoption of this guidance did not have a material impact on our financial condition or results of operations.

The following table sets forth the amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at December 31, 2009 (in thousands):

		Amortized				Gross Unrealized								Estimated
		Cost				Gains				Losses				Fair-Value
Available-for-Sale:
Mortgage-backed securities:
Government National Mortgage Association		$	26,147			$	19			$	(260	)		$	25,906
Federal Home Loan Mortgage Corporation			4,834				211				(1	)			5,044
Federal National Mortgage Association			13,186				207				(225	)			13,168
Other			346				—				(46	)			300
Total mortgage-backed securities			44,513				437				(532	)			44,418
U.S. Government Agency Securities			2,996				—				(12	)			2,984
Total available-for-sale		$	47,509			$	437			$	(544	)		$	47,402
Held-to-Maturity:
Mortgage-backed securities:
Government National Mortgage Association		$	444			$	34			$	—			$	478
Federal Home Loan Mortgage Corporation			8,937				68				(1	)			9,004
Federal National Mortgage Association			3,045				178				(0	)			3,223
Total mortgage-backed securities			12,426				280				(1	)			12,705
Other			144				—				(2	)			142
Total held-to-maturity			12,570				280				(3	)			12,847
Total securities		$	60,079			$	717			$	(547	)		$	60,249

The following table sets forth the amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at March 31, 2009 (in thousands):

		Amortized				Gross Unrealized								Estimated
		Cost				Gains				Losses				Fair-Value
Available-for-Sale:
Mortgage-backed securities:
Government National Mortgage Association		$	39,252			$	26			$	(486	)		$	38,792
Federal Home Loan Mortgage Corporation			5,847				185				(2	)			6,030
Federal National Mortgage Association			13,872				493				(8	)			14,357
Other			571				—				(37	)			534
Total mortgage-backed securities			59,542				704				(533	)			59,713
U.S. Government Agency Securities			254				6				—				260
Total available-for-sale			59,796				710				(533	)			59,973
Held-to-Maturity:
Mortgage-backed securities:
Government National Mortgage Association			488				27				—				515
Federal Home Loan Mortgage Corporation			10,292				17				(153	)			10,156
Federal National Mortgage Association			3,870				80				(248	)			3,702
Total mortgage-backed securities			14,650				124				(401	)			14,373
Other			158				—				(3	)			155
Total held-to-maturity			14,808				124				(404	)			14,528
Total securities		$	74,604			$	834			$	(937	)		$	74,501

The following table sets forth the unrealized losses and fair value of securities at December 31, 2009 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		$	(468	)		$	21,194			$	(64	)		$	1,239			$	(532	)		$	22,433
Agencies		$	(12	)		$	1,485			$	—			$	—			$	(12	)		$	1,485
Total available-for-sale		$	(480	)		$	22,679			$	(64	)		$	1,239			$	(544	)		$	23,918
Held-to-Maturity:
Mortgage-backed securities		$	—			$	—			$	(1	)		$	282			$	(1	)		$	282
Other			—				—				(2	)			(142	)			(2	)			(142	)
Total held-to-maturity			—				—				(3	)			140				(3	)			140
Total securities		$	(480	)		$	22,679			$	(67	)		$	1,379			$	(547	)		$	24,058

The review of the portfolio for other-than-temporary impairment considers the percentage and length of time the market value of an investment is below book value as well as general market conditions, changes in interest rates, credit risk and whether the Company has the intent to sell the securities and whether it is not more likely than not that the Company would be required to sell the securities before the anticipated recovery. The unrealized losses on the above investment securities was primarily caused by movements in market interest rates and spread volatility rather than credit risk. The securities with unrealized losses comprises of mainly mortgage backed securities issued by government-sponsored enterprises.

Because the Company does not have the intent to sell the investments and it is not more likely than not that the Company will be required to sell the investments before anticipated recovery of fair value, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2009.

The following table sets forth the unrealized losses and fair value of securities at March 31, 2009 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		$	(441	)		$	30,008			$	(92	)		$	2,938			$	(533	)		$	32,946
Total available-for-sale		$	(441	)		$	30,008			$	(92	)		$	2,938			$	(533	)		$	32,946
Held-to-Maturity:
Mortgage-backed securities		$	(246	)		$	2,119			$	(155	)		$	8,682			$	(401	)		$	10,801
Other			—				—				(3	)			155				(3	)			155
Total held-to-maturity			(246	)			2,119				(158	)			8,837				(404	)			10,956
Total securities		$	(687	)		$	32,127			$	(250	)		$	11,775			$	(937	)		$	43,902

8. Fair Value Measurements

In April 2009, the FASB issued guidance regarding the estimation of fair value when the volume and level of activity for the asset or liability has significantly decreased, including guidance on identifying circumstances that indicate a transaction is not orderly. Under this guidance, if the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, transactions or quoted prices may not be determinative of fair value. Further analysis is required and significant adjustments to the transactions or quoted prices may be necessary. This guidance is effective for interim and annual reporting periods ending after June 15, 2009. The Company considered this guidance in estimating the fair value of assets and liabilities at December 31, 2009.

The FASB accounting guidance 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 assets that are measured at fair value on a recurring basis as of December 31, 2009 and March 31, 2009, and that are included in the Company’s Consolidated Statement of Financial Condition:

		Fair Value Measurements at December 31, 2009, Using
		Quoted Prices in Active				Significant Other				Significant
		Markets for Identical				Observable Inputs				Unobservable				Total Fair
(in thousands)		Assets (Level 1)				(Level 2)				Inputs (Level 3)				Value
Mortgage servicing rights		$	—			$	—			$	680			$	680
Securities available for sale		$	—			$	47,357			$	45			$	47,402

		Fair Value Measurements at March 31, 2009, Using
		Quoted Prices in Active				Significant Other				Significant
		Markets for Identical				Observable Inputs				Unobservable				Total Fair
(in thousands)		Assets (Level 1)				(Level 2)				Inputs (Level 3)				Value
Mortgage servicing rights		$	—			$	—			$	452			$	452
Securities available for sale		$	—			$	59,928			$	45			$	59,973

Instruments for which unobservable inputs are significant to their fair value measurement (i.e., Level 3) include mortgage servicing rights and certain securities available-for-sale. Level 3 assets accounted for less than 0.1% of the Company’s total assets at December 31, 2009.

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 of a fair value measurement may result in a reclassification from one hierarchy level to another.

A description of the methods and significant assumptions utilized in estimating the fair value of available-for-sale securities follows:

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

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

In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Quoted price information for mortgage servicing rights (“MSR”) is not available. Therefore, MSR are valued using market-standard models to model the specific cash flow structure. Key inputs to the model consist of principal balance of loans being serviced, servicing fees and prepayment rate.

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

The following table presents information for assets classified by the Company within Level 3 of the valuation hierarchy for the three months ended December 31, 2009:

		Mortgage				Securities
		Servicing				Available for
(in thousands)		Rights				Sale
Beginning balance, April 1, 2009		$	451			$	45
Additions			177				—
Total unrealized gain			52				—
Ending balance, December 31, 2009		$	680			$	45

9. Fair Value of Financial Instruments

In April 2009, the FASB issued guidance requiring disclosures about fair value of financial instruments for interim reporting periods of a publicly traded company, as well as in annual financial statements. The disclosure requirements are effective for interim reporting periods ending after June 15, 2009, and are included in Note 8 to the unaudited consolidated financial statements. Since this guidance is disclosure related, our adoption did not have an impact on our financial condition or results of operations.

Quoted market prices available in formal trading marketplaces are typically the best evidence of fair value of financial instruments. In many cases, financial instruments we hold are not bought or sold in formal trading market places. Accordingly, fair values are derived or estimated based on a variety of valuation techniques in the absence of quoted market prices. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any possible tax ramifications, estimated transaction costs, or any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument. Because no market exists for a certain portion of our financial instruments, fair value estimates are based on judgments regarding future loss experience, current economic conditions, risk characteristics, and other such factors. These estimates are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. For these reasons and others, the estimated fair value disclosures presented herein do not represent our entire underlying value. As such, readers are cautioned in using this information for purposes of evaluating our financial condition and/or value either alone or in comparison with any other company.

The carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2009 and March 31, 2009 are as follows:

		December 31, 2009								March 31, 2009
		Carrying				Estimated				Carrying				Estimated
		Amount				Fair Value				Amount				Fair Value
Financial Assets:
Cash and cash equivalents		$	19,308			$	19,308			$	13,341			$	13,341
Investment securities available-for-sale			—				—				260				260
Mortgage backed securities available-for-sale			47,402				47,402				59,713				59,713
FHLB Stock			5,097				5,097				4,174				4,174
Mortgage backed securities held-to-maturity			12,570				12,847				14,808				14,528
Loans receivable			679,250				684,537				634,010				649,219
Loans held-for-sale			—				—				21,105				22,467
Accrued interest receivable			3,416				3,416				3,697				3,697
Mortgage servicing rights			680				680				452				452
Financial Liabilities:
Deposits		$	584,986			$	556,524			$	603,416			$	610,455
Advances from FHLB of New York			121,093				122,795				71,614				71,592
Other borrowed money			32,471				32,471				43,403				46,179

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 investment securities available-for-sale and mortgage-backed securities available-for-sale and held-to-maturity and 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 and loan held-for-sale

The fair value of loans receivable and held-for-sale 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.

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.

Borrowings

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.

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.

10. Variable Interest Entities

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. Accordingly, Carver Statutory Trust I is not consolidated in Carver Bancorp, Inc. for financial reporting purpose.

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 and recognized a gain on the transfer of rights of $1.7 million. The Bank was required to maintain a .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 minority interest sections of the balance sheet as the entity to which the rights were transferred was required to be consolidated. 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 NTMC 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 December 31, 2009, Carver had not recorded any liability with respect to this obligation in accordance with the FASB guidance on recognition of commitments and contingencies.

With respect to the remaining $40 million of the $59 million NMTC award, the Bank has established various special purpose entities through which its investments in NMTC eligible activities are conducted. Accordingly, all of these special purpose entities were consolidated in the Bank’s Statement of Financial Condition as of December 31, 2009 and March 31, 2009 resulting in the consolidation of assets of approximately $45.9 million and $36.9 million, respectively.

In May 2009, the Bank received an additional award of $65 million 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'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.

11. Impact of Accounting Standards and Interpretations

In June 2009, the Financial Accounting Standards Board (“FASB”) issued a standard that establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative GAAP for nongovernmental entities. The Codification supersedes all existing non-SEC accounting and reporting standards. Rules and interpretative releases of the SEC under the authority of Federal securities laws remain authoritative GAAP for SEC registrants. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of the Codification did not have any impact on the Company’s financial condition, results of operations or amounts reported in financial statement disclosures.

In June 2009, the FASB issued a standard that 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 adoption of this standard is not expected to have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.

In June 2009, the FASB issued a standard that eliminates the concept of a qualifying special purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the derecognition criteria, revises how retained interests are initially measured, removes the guaranteed mortgage securitization recharacterization provisions, and requires additional annual and interim disclosures. This standard is effective for fiscal years beginning after November 15, 2009. The adoption of this standard is not expected to have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.

In April 2009, the FASB issued guidance regarding the estimation of fair value when the volume and level of activity for the asset or liability have significantly decreased, including guidance on identifying circumstances that indicate a transaction is not orderly. Under this guidance, if the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, transactions or quoted prices may not be determinative of fair value. Further analysis is required and significant adjustments to the transactions or quoted prices may be necessary. This guidance is effective for interim and annual reporting periods ending after June 15, 2009. The Company considered this guidance in estimating the fair value of assets and liabilities at December 31, 2009.

In April 2009, the FASB issued guidance that changes the amount of an other-than-temporary impairment (“OTTI”) 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. This guidance is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance is reflected in the unaudited consolidated financial statements and in Note 7 thereto.

In April 2009, the FASB issued guidance requiring disclosures about fair value of financial instruments for interim reporting periods of a publicly traded company, as well as in annual financial statements. The disclosure requirements are effective for interim reporting periods ending after June 15, 2009, and are included in Note 9 to the unaudited consolidated financial statements.

In June 2008, the FASB issued guidance that requires unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents to be treated as participating securities and, therefore, included in the earnings allocation in computing earnings per share under the two-class method. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, all previously reported earnings per share data must be retroactively adjusted to conform with the requirements of this guidance. The adoption of this guidance did not have a material impact on the Company’s calculation of earnings per share for the periods presented.

In December 2007, the FASB issued a standard that establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This standard clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as a minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, this standard requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. This standard became effective on January 1, 2009. The adoption of this standard did not have a significant impact on the Company’s financial condition, results of operations or financial statement disclosures.

12. Subsequent Events

In May 2009, the FASB issued new accounting guidance to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. These new guidelines define: (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events. Under the FASB guidance, 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 February 16, 2010.

On February 8, 2010, the president of a money services firm which the Bank uses to service its remote ATM locations was arrested on charges of defrauding another financial institution. The Bank has a claim pending for $850,000 for funds which we had advanced to the money services firm. Carver is in the process of submitting insurance claims but there is no assurance of the amount, if any, the Bank will receive. The matter is currently pending investigation by the appropriate legal authorities and at the present time we do not know the timing of the resolution of the matter or any potential impact on Carver. There will be no adverse impact on the operations of our remote ATMs.

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 our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include but are not limited to the following:

•		the Company’s success in implementing its new business initiatives, including expanding its product line, adding new branches and ATM centers and successfully building its brand image;
•		increases in competitive pressure among financial institutions or non-financial institutions;
•		legislative or regulatory changes which may adversely affect the Company’s business;
•		technological changes which may be more difficult to implement or expensive than anticipated;
•		changes in interest rates which may reduce net interest margin and net interest income;
•		changes in deposit flows, loan demand, real estate values, borrowing facilities, capital markets and investment opportunities which may adversely affect the business;
•		changes in existing loan portfolio composition and credit quality, and changes in loan loss requirements;
•		changes in accounting principles, policies or guidelines which may cause conditions to be perceived differently;
•		litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, which may delay the occurrence or non-occurrence of events longer than anticipated;
•		the ability to originate and purchase loans with attractive terms and acceptable credit quality;
•		the ability to attract and retain key members of management;
•		the ability to realize cost efficiencies; and
•		general economic conditions, either nationally or locally in some or all areas in which business is conducted, or conditions in the 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.

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 we might make or by known or unknown risks and uncertainties. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and the Company assumes no obligation to, and expressly disclaims any obligation to, update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. For a discussion of additional factors that could adversely affect the Company’s future performance, see “Item 1A — Risk Factors”.

Overview

The following should be read in conjunction with the audited Consolidated Financial Statements, the notes thereto and other financial information included in the Company’s 2009 Form 10-K.

Carver Bancorp, Inc. (“Holding Company”), a Delaware corporation, is the holding company for Carver Federal Savings Bank, a federally chartered savings bank, and, on a parent-only basis, had minimal results of operations. The Holding Company is headquartered in New York, New York. The Holding Company conducts business as a unitary savings and loan holding company, and the principal business of the Holding Company consists of the operation of its wholly-owned subsidiary, the Bank.

The Bank’s net income, like others in the banking industry, is dependent primarily on net interest income, which is the difference between interest income earned on its interest-earning assets such as loans, investment and mortgage-backed securities portfolios and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. The Bank’s earnings are also affected by general economic and competitive conditions, particularly changes in market interest rates and government and regulatory policies. Additionally, net income is affected by incremental provisions for loan losses, if any, non-interest income, operating expenses and tax benefits from the NMTC award. The Bank engages in a wide range of consumer and commercial banking services. The Bank 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, the Bank offers a number of other consumer and commercial banking products and services, including debit cards, online banking including online bill pay, and telephone banking.

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

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 Community Reinvestment Act (“CRA”). The Bank’s larger competitors have greater financial resources, name recognition and market presence. 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 increasing its near-term profitability. The Bank’s 60 year history in its market area, its community involvement, relationships with key constituents, targeted products and services and personal service consistent with community banking, help the Bank compete with competitors that have entered its market.

The national economy remains unstable, highlighted by the uneven recovery of the housing and real estate markets and rising unemployment. Although there was a continued instability in the economy in the third quarter of 2010, this period represented an improvement over prior quarters, during which time the disruption and volatility in the financial and capital markets reached a crisis level as national and global credit markets ceased to function effectively. Concern for the stability of the banking and financial systems resulted in unprecedented government intervention including, but not limited to, the passage of the Emergency Economic Stabilization Act of 2008, or (“EESA”), the implementation of the Capital Purchase Program, or (“CPP”), the Temporary Liquidity Guarantee Program, or(“TLGP”), the Troubled Asset Relief Program, or (“TARP”), the Commercial Paper Funding Facility, or (“CPFF”), the Capital Assistance Program, or (“CAP”), the Supervisory Capital Assessment Program, or (“SCAP”), and the Public-Private Investment Program, or (“PPIP”), which are described in greater detail in Part II, “Item 1A — Risk Factors”.

New Markets Tax Credit Award

In June 2006, the Bank was selected by the U.S. Department of 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 the Bank against Federal income taxes when the Bank makes qualified investments. The credits are allocated over seven years from the time of the qualified investment. In May 2009, the Bank received another award in the amount of $65 million NMTC.

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, 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 $8.4 million from its $40.0 million investment over the next five years. The Company’s ability to utilize deferred tax assets generated by NMTC income tax benefits over the next five years, 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 or from potential tax strategies to generate taxable income in the future.

In December 2009, the Bank closed the first transaction under the $65 million NMTC allocation. As part of the financing of a retail and community facility in the Bronx, which also included a $7.7 million loan from the Bank, the Bank transferred approximately $10.5 million in NMTC allocation to an investor in this project.

Critical Accounting Policies

Note 1 to the Company’s audited Consolidated Financial Statements for fiscal year-end 2009 included in its 2009 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, evaluation of realization of deferred tax assets and assessment of asset impairment judgments, including other than temporary declines in the value of the Company’s investment securities, involve a high degree of complexity and require management to make subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. The following description of these policies should be read in conjunction with the corresponding section of the Company’s fiscal 2009 Form 10-K.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level considered adequate to provide for probable loan losses inherent in the portfolio as of December 31, 2009. Management is responsible for determining the adequacy of the allowance for loan losses and the periodic provisioning for estimated losses included in the consolidated financial statements. The evaluation process is undertaken on a quarterly basis, but may increase in frequency should conditions arise that would require management’s prompt attention, such as business combinations and opportunities to dispose of non-performing and marginally performing loans by bulk sale or any development which may indicate an adverse trend.

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

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

	•		Establishment of loan loss allowance amounts for all specifically identified criticized and classified loans that have been designated as requiring attention by management’s internal loan review process, bank regulatory examinations or the Bank’s external auditors.
	•		An average loss factor, giving effect to historical loss experience over several years and other qualitative factors, is applied to all loans not subject to specific review.
	•		Evaluation of any changes in risk profile brought about by business combinations, customer knowledge, the results of ongoing credit quality monitoring processes and the cyclical nature of economic and business conditions. An important consideration in performing this evaluation is the concentration of real estate related loans located in the New York City metropolitan area.

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

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

	•		Amount and trend of criticized loans;
	•		Actual losses;
	•		Peer comparisons with other financial institutions; and
	•		Economic data associated with the real estate market in the Company’s lending market areas.

A loan is considered to be impaired, when it is probable that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. The Bank tests loans for impairment if they are on non-accrual status or have been restructured. Consumer credit non-accrual loans are not tested for impairment because they are included in large groups of smaller-balance homogeneous loans that, by definition, are excluded from the scope of FASB accounting guidance. Impaired loans are required to be measured based upon (i) the present value of expected future cash flows, discounted at the loan’s initial effective interest rate, (ii) the loan’s market price, or (iii) fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, an allowance must be established for the difference. The allowance is established by either an allocation of the existing allowance for loan losses or by a provision for loan losses, depending on various circumstances. Allowances are not needed when credit losses have been recorded so that the recorded investment in an impaired loan is less than the loan valuation.

Securities Impairment

The Bank’s available-for-sale securities portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity. Securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. The fair values of securities in the portfolio are based on published or securities dealers’ market values and are affected by changes in interest rates. On a quarterly basis the Bank 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. When a company intends to sell an investment security, the company recognizes an impairment loss equal to the full difference between amortized cost basis and fair value of that security. When the company does not intend to sell a security in an unrealized loss position, potential OTTI is considered based on a variety of factors, including the length of time and extent to which the fair value has been less than cost; adverse conditions specifically related to the industry, the geographic area or the financial condition of the issuer or the underlying collateral of a security; the payment structure of the security; changes to the rating of the security by a rating agency; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet date. The Bank generally views changes in fair value caused by changes in interest rates as temporary, which is consistent with its experience. However, if such a decline is deemed to be other-than-temporary, the security is written down to a new cost basis and the credit related portion of the OTTI is charged to earnings with the non-credit related portion recorded in other comprehensive income. At December 31, 2009, the Bank does not have any securities that may be classified as having other than temporary impairment in its investment securities 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 realizability 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.

Stock Repurchase Program

In August 2002, the Company’s Board of Directors authorized a stock repurchase program to acquire up to 231,635 shares of the Company’s outstanding common stock, or approximately 10 percent of the then outstanding shares. Through December 31, 2009, the Company purchased a total of 176,174 shares at an average price of $15.72. For the quarter ended December 31, 2009, the Company did not engage in stock repurchase transactions. Pursuant to Carver’s participation in the CPP, the Company is prohibited from repurchasing shares of common stock without the Treasury’s prior consent until the third anniversary of the investment or until the senior preferred stock issued to the Treasury has been redeemed or transferred.

Liquidity and Capital Resources

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

The Bank monitors its liquidity utilizing guidelines that are contained in a policy developed by its management and approved by its Board of Directors. The Bank monitors its cash flow position and has set, and closely monitors, targets for liquid assets, levels of borrowings and brokered deposits. The Bank was in compliance with this policy as of December 31, 2009. Management believes the Bank’s short-term assets have sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash requirements. Additionally, the Bank has other sources of liquidity including the ability to borrow from the 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 December 31, 2009, based on available collateral held at the FHLB-NY, the Bank had the ability to borrow from the FHLB-NY an additional $32.7 million on a secured basis, utilizing mortgage-related loans and securities as collateral.

The unaudited Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During the quarter ended December 31, 2009, total cash and cash equivalents increased by $6.0 million reflecting cash used in operating activities of $1.3 million, cash used in investing activities of $11.4 million, which was more than offset by cash provided by financing activities of $18.7 million.

Net cash used in investing activities was $11.4 million, primarily representing cash disbursed to fund loan originations of $96.4 million, offset partially by principal collections on loans of $78.6 million and proceeds from principal payments/maturities/sales/calls of securities of $35.2 million. Net cash provided by financing activities was $18.7 million and primarily resulted from increases in borrowings of $38.5 million, offset by a decrease in deposits of $18.4 million. Net cash used in operating activities during this period was $1.3 million, primarily representing net income, provision for loan losses and an increase in other assets.

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

The OTS requires that the Bank meet the 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. The minimum regulatory requirements are a tangible capital ratio of 1.50%, leverage capital ratio of 4.00% and total risk-based capital ratio of 8.00%.

At December 31, 2009, 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 December 31, 2009 (dollars in thousands):

		GAAP				Tangible				Leverage				Risk-Based
		Capital				Equity				Capital				Capital
Stockholders’ Equity at December 31, 2009		$	78,027			$	78,027			$	78,027			$	78,027
Add:
General valuation allowances							—				—				8,406
Other							218				218				218
Deduct:
Disallowed deferred tax assets							10,105				10,105				10,105
Unrealized gains on securities available-for-sale, net							8				8				8
Goodwill and qualifying intangible assets, net							266				266				266
Regulatory Capital							67,866				67,866				76,272
Minimum Capital requirement							12,015				32,040				53,753
Regulatory Capital Excess						$	55,851			$	35,826			$	22,520
Capital Ratios							8.46	%			8.47	%			11.35	%

Bank Regulatory Matters

The Holding Company and Bank agreed with the Office of Thrift Supervision 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. The Holding Company and Bank believes that they will be able to satisfy the terms of the agreement and have already implemented aggressive steps to address these matters.

Comparison of Financial Condition at December 31, 2009 and March 31, 2009

At December 31, 2009, total assets increased $20.3 million, or 2.6%, to $811.7 million compared to $791.4 million at March 31, 2009. The increase in total assets is primarily a result of increases in loans receivable of $26.0 million and other assets of $7.3 million, offset by decreases in investment securities of $14.8 million and premises and equipment of $3.2 million. $4 million of the increase in other assets is prepayments of deposit insurance assessments required by the FDIC.

Cash and cash equivalents increased $6.0 million, or 45%, to $19.3 million at December 31, 2009 compared to $13.3 million at March 31, 2009, primarily due to an increase of $10.3 million in cash and due from banks, offset by a decrease of $4.3 million in money market investments. The increase in cash and cash equivalents is the result of liquidity stemming primarily from principal pay downs of investment securities.

Investment securities decreased $14.8 million, or 20%, to $60.0 million at December 31, 2009 compared to $74.8 million at March 31, 2009. The decrease in both available-for-sale and held to maturity securities was primarily due to collection of principal repayments and maturities. The liquidity arising from the decrease in investment securities was partially used to fund loan demand. However, the Bank may invest in securities from time to time to help diversify its investment portfolio, manage liquidity and satisfy collateral requirements for certain deposits. During December 2009, the Bank sold approximately $24 million in available for sale securities, primarily mortgage-backed securities. The proceeds of the sale were reinvested in $24 million in available for sale securities, primarily mortgage-backed and agency securities. The sale and reinvestment resulted in an increase in the duration of the available for sale portfolio.

The Bank reclassified all loans previously reported as held for sale to loans held for investment during the quarter. These loans were moved primarily into 1-4 family loans held for investment at the lower of their cost or market value.

Loans receivable, including loans previously held for sale, increased $26.0 million, or 4%, to $688.2 million at December 31, 2009 compared to $662.2 million at March 31, 2009. The increase was primarily the result of increases in commercial mortgages of $27.8 million, multifamily loans of $10.8 million, and commercial business loans of $15.4 million, offset by decreases in construction loans of $18.2 million, and 1-4 family loans of $9.6 million (after adjusting for the reclassification from loans held for sale). The Bank continues to utilize prudent pricing and underwriting standards in originating new loans. This ongoing commitment demonstrates Carver’s belief in the stability of its local communities during these difficult economic times and its commitment to making credit available to qualified homeowners and business owners.

At December 31, 2009, construction loans represented 17.9% of the Bank’s total loan portfolio. Approximately 69% of the Bank’s construction loans are participations in loans originated by Community Preservation Corporation (“CPC”). CPC is a non-profit mortgage lender whose mission is to enhance the quality and quantity of affordable housing in the New York, New Jersey, and Connecticut tri-state area. The Bank’s construction lending activity is concentrated in the New York City market. In addition to real estate collateral, security for these loans consist of a personal guarantee of the developer, a letter of credit or cash deposits “in lieu of” in an amount equal to 10% of construction cost, and a rental conversion option insured by SONYMA which allows completed and leased developments to be sold to the NYC Pension Fund. See the Company’s Form 10-K for further details.

Although the New York City real estate market has been more resilient than other real estate markets in certain parts of the U.S., the local economic environment is experiencing significant unemployment, led by job losses on Wall Street and continued constraint in credit markets. During the quarter ended December 31, 2009, local real estate market indicators showed increasing inventories, longer marketing periods for sales, and price reductions. The Bank will continue to closely monitor these and other relevant trends.

Premises and equipment decreased $3.2 million or 21%, on a net basis, to $12.0 million at December 31, 2009 from $15.2 million at March 31, 2009. Most of this net decrease was related to the closing of one branch and sale of a building as part of the Bank’s strategy to consolidate and optimize branch locations.

Total liabilities increased $19.6 million, or 3%, to $746.7 million at December 31, 2009 compared to $727.1 million at March 31, 2009. The increase in total liabilities was primarily the result of a decrease in total deposits of $18.4 million offset by an increase in FHLB-NY advances and other borrowed money of $38.5 million.

Deposits decreased $18.4 million, or 3.0%, to $585.0 million at December 31, 2009 compared to $603.4 million at March 31, 2009. The branch consolidation resulted in the release of $32 million in Business Development District deposits and the Bank also declined to renew $25 million in higher cost institutional deposits. These reductions were partially offset by new deposits of $38.6 million of which $16.3 million were generated by deposit promotions.

Advances from the FHLB-NY and other borrowed money increased $38.5 million, or 34%, to $153.6 million at December 31, 2009 compared to $115.1 million at March 31, 2009. The increase in advances and other borrowed money was primarily the result of an increase in FHLB-NY advances which were used in funding the growth in loans. The Bank also issued a $14.1 million two-year term borrowing under the FDIC’s Temporary Liquidity Guarantee Program via a private placement.

Total stockholders’ equity increased $0.7 million, or 0.8%, to $65.0 million at December 31, 2009 compared to $64.3 million at March 31, 2009. The increase in total stockholders’ equity was primarily attributable to net income for the nine months ended December 31, 2009 totaling $2.3 million, partially offset by dividends paid of $1.4 million and a increase in accumulated other comprehensive loss of $0.2 million. The Bank’s capital levels exceed all regulatory requirements of a well-capitalized financial institution.

Asset/Liability Management

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

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

Off-Balance Sheet Arrangements and Contractual Obligations

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

The following table reflects the outstanding loan commitments as of December 31, 2009 (in thousands):

Commitments to fund construction mortgage loans		$	30,125
Commitments to fund commercial and consumer loans			7,938
Lines of credit			6,138
Letters of credit			4,154
		$	48,355

Comparison of Operating Results for the Three and Nine Months Ended December 31, 2009 and 2008

Overview

The Company reported net income of $0.8 million for the third quarter of fiscal 2010 compared to a net loss of $(7.2) million for the third quarter of fiscal 2009. Net income per diluted share for the quarter was $0.22 compared to a net loss per diluted share of $(2.91) for the third quarter of fiscal 2009. For the nine months ended December 31, 2009, the Company reported net income of $2.3 million compared to a net loss of $(5.9) million for the prior year period. Net income per diluted share for the nine month period ended December 31, 2009 was $0.64 compared to a net loss per diluted share for the prior year period of $(2.38). Earnings per share during fiscal 2010 were reduced by $0.10 per diluted share in the current quarter and $0.29 per diluted share year-to-date by the payment of preferred dividends pursuant to Carver’s participation in the U.S. Treasury Department’s CPP.

The following table reflects the selected operating ratios for the three and nine months ended December 31, 2009 and 2008:

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

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Selected Financial Data:
Return on average assets (1)			0.39	%		NM					0.38	%		NM
Return on average equity (2)			4.83			NM					4.77			NM
Net interest margin (3)			3.96				3.61	%			3.93				3.54	%
Interest rate spread (4)			3.82				3.44				3.76				3.34
Efficiency ratio (5)			85.62				101.61				83.66				95.66
Operating expenses to average assets (6)			4.40				7.52				3.80				4.97
Average equity to average assets (7)			8.03				6.98				7.98				6.90
Average interest-earning assets to average interest-bearing liabilities			1.11	x			1.09	x			1.12	x			1.06	x

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 increased $1.1 million, or 17%, to $7.5 million for the quarter ended December 31, 2009 compared to $6.4 million for the prior year period. The increase in net interest income resulted from a moderate decrease in interest income offset by a $1.3 million, or 33%, decline in interest expense. The decrease in interest income reflects a decrease in the yield on interest-earning assets of 48 basis points to 5.39%, compared to 5.87% for the prior year period. The yield on loans, including non-accrual loans, decreased 54 basis points while the yield on mortgage-backed securities declined 106 basis points. The average balance of loans increased $33.0 million versus the prior year period. This growth reflects the Company’s commitment to provide access to credit for qualified borrowers in its local communities. The decline in yield on interest-earning assets is a result of the low interest rate environment and overall market conditions.

For the nine month period ended December 31, 2009, net interest income increased $3.3 million, or 17%, to $22.1 million, compared to $18.9 million for the prior year period. The increase in net interest income was primarily related to a $4.8 million decrease in interest expense offset by a $1.5 million decrease in interest income. Of the decrease in interest income, loan income declined $1.9 million or 6% while the income on mortgage-backed securities increased $0.3 million or 18%. The decrease in interest income on loans reflects a reduction in yield of 59 basis points to 5.52% for the nine month period ended December 31, 2009 compared to 6.11% for the prior year period. Although the yield on mortgage-backed securities declined 107 basis points, this was partially offset by an increase in average balances of mortgage-backed securities of $22.0 million. The yield on interest earning assets declined 60 basis points during the nine month period, primarily driven by the low current interest rate environment.

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 nine months ended December 31, 2009 and 2008. 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 December 31,
		2009												2008
		Average								Average				Average								Average
		Balance				Interest				Yield/Cost				Balance				Interest				Yield/Cost
Interest Earning Assets:
Loans (1)		$	688,316			$	9,361				5.44	%		$	655,324			$	9,800				5.98	%
Mortgage-backed securities			61,469				633				4.12	%			44,636				578				5.18	%
Investment securities (2)			4,946				78				6.28	%			6,382				39				2.42	%
Other investments and federal funds sold			1,004				108				42.69	%			4,025				4				0.39	%
Total interest-earning assets			755,735				10,180				5.39	%			710,367				10,421				5.87	%
Non-interest-earning assets			56,721												76,436
Total assets		$	812,456											$	786,803
Interest Bearing Liabilities:
Deposits:
Now demand		$	46,516				20				0.17	%		$	25,820				13				0.20	%
Savings and clubs			114,301				63				0.22	%			118,456				145				0.49	%
Money market			52,999				183				1.37	%			44,424				218				1.95	%
Certificates of deposit			327,502				1,362				1.65	%			359,731				2,627				2.90	%
Mortgagors deposits			2,186				9				1.66	%			2,965				14				1.87	%
Total deposits			543,504				1,637				1.20	%			551,396				3,017				2.17	%
Borrowed money			138,879				1,063				3.04	%			101,996				991				3.85	%
Total interest-bearing liabilities			682,383				2,700				1.57	%			653,392				4,008				2.43	%
Non-interest-bearing liabilities:
Demand			58,420												52,442
Other liabilities			6,429												6,869
Total liabilities			747,232												712,703
Minority Interest			—												19,150
Stockholders’ equity			65,224												54,950
Total liabilities & stockholders’ equity		$	812,456											$	786,803
Net interest income						$	7,480											$	6,413
Average interest rate spread											3.82	%											3.44	%
Net interest margin											3.96	%											3.61	%