2011.6.30 -10Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 1-13007
CARVER BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(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)
Registrant’s telephone number, including area code: (718) 230-2900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes         o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ Yes        oNo
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
x Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, par value $0.01
 
2,488,922
Class
 
Outstanding at June 30, 2011

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TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Exhibit 11
 
 Exhibit 31.1
 
 Exhibit 31.2
 
 Exhibit 32.1
 
 Exhibit 32.2
 
 Exhibits 101
 

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PART I. FINANCIAL INFORMATION

CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except per share data)
 
June 30, 2011

 
March 31, 2011
 
(unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents:
 
 
 
Cash and due from banks
$
33,493

 
$
36,725

Money market investments
649

 
7,352

Total cash and cash equivalents
34,142

 
44,077

 
 
 
 
Restricted cash
6,214

 

Investment securities:
 
 
 
Available-for-sale, at fair value
57,141

 
53,551

Held-to-maturity, at amortized cost (fair value of $14,415 and $18,124 at June 30, 2011 and March 31, 2011, respectively)
13,879

 
17,697

Total investments
71,020

 
71,248

 
 
 
 
Loans held-for-sale (“HFS”)
18,068

 
9,205

Loans receivable:
 
 
 
Real estate mortgage loans
493,217

 
525,894

Commercial business loans
49,636

 
53,060

Consumer loans
1,297

 
1,349

Loans, net
544,150

 
580,303

Allowance for loan losses
(23,764
)
 
(23,147
)
Total loans receivable, net
520,386

 
557,156

Premises and equipment, net
10,719

 
11,040

Federal Home Loan Bank of New York (“FHLB-NY”) stock, at cost
2,799

 
3,353

Accrued interest receivable
2,409

 
2,854

Other assets
12,591

 
10,282

Total assets
678,348

 
$
709,215

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Savings
$
106,310

 
$
106,906

Non-Interest Bearing Checking
102,357

 
123,706

NOW
26,011

 
27,297

Money Market
67,479

 
74,329

Certificates of Deposit
189,466

 
228,460

Total deposits
491,623

 
560,698

Advances from the FHLB-NY and other borrowed money
101,571

 
112,641

Other liabilities
11,834

 
8,159

Total liabilities
605,028

 
681,498

 
 
 
 
Mezzanine Equity:
 
 
 
55,000 Series C mandatorily convertible preferred stock,(par value $0.01, per share) with a liquidation preference of $1,000, issued and outstanding
51,432

 

Stockholders’ equity:
 
 
 
Preferred stock (par value $0.01 per share, 2,000,000 shares authorized; 18,980 Series B shares, with a liquidation preference of $1,000.00 per share, issued and outstanding.
18,980

 
18,980

Common stock (par value $0.01 per share: 10,000,000 shares authorized; 2,524,691 shares issued; 2,488,922 and 2,484,263 shares outstanding at June 30, 2011 and March 31, 2011, respectively)
25

 
25

Additional paid-in capital
27,719

 
27,026

Accumulated deficit
(27,689
)
 
(21,464
)
Non-controlling interest
3,438

 
4,038

Treasury stock, at cost (35,769 shares at June 30, 2011 and 40,428 and March 31, 2011, respectively)
(506
)
 
(569
)
Accumulated other comprehensive income
(79
)
 
(319
)
Total stockholders’ equity
21,888

 
27,717

Total liabilities, mezzanine equity and stockholders equity
$
678,348

 
709,215

See accompanying notes to consolidated financial statements
 
 
 

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CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
June 30,
 
 
2011
 
2010
Interest Income:
 
 
 
 
Loans
 
$
6,702

 
$
8,948

Mortgage-backed securities
 
397

 
586

Investment securities
 
110

 
64

Money market investments
 
25

 
21

Total interest income
 
7,234

 
9,619

Interest expense:
 
 
 
 
Deposits
 
1,006

 
1,517

Advances and other borrowed money
 
950

 
1,041

Total interest expense
 
1,956

 
2,558

Net interest income
 
5,278

 
7,061

Provision for loan losses
 
5,170

 
6,248

Net interest income after provision for loan losses
 
108

 
813

Non-interest income:
 
 
 
 
Depository fees and charges
 
721

 
757

Loan fees and service charges
 
278

 
221

Gain on sale of securities, net
 

 
24

Gain on sales of loans, net
 
1

 
3

New Market Tax Credit (“NMTC”) fees
 

 
812

Lower of cost or market adjustment on loans held for sale
 
(100
)
 

Other
 
192

 
46

Total non-interest income
 
1,092

 
1,863

Non-interest expense:
 
 
 
 
Employee compensation and benefits
 
3,045

 
3,206

Net occupancy expense
 
932

 
977

Equipment, net
 
543

 
538

Consulting fees
 
90

 
219

Federal deposit insurance premiums
 
454

 
356

Other
 
2,230

 
2,168

Total non-interest expense
 
7,294

 
7,464

Loss before income taxes
 
(6,094
)
 
(4,788
)
Income tax benefit
 
(109
)
 
(2,297
)
Non Controlling interest, net of taxes
 
146

 

Net loss
 
$
(6,131
)
 
$
(2,491
)
Loss per common share:
 
$
(2.51
)
 
$
(1.09
)

 
 
See accompanying notes to consolidated financial statements

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CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
Three months ended June 30, 2011

(In thousands)
(Unaudited)
 
 
Preferred Stock
 
Common
Stock
 
Additional Paid-
In Capital
 
Treasury
Stock
 
Non-
controlling
interest
 
Accumulated deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
Balance—March 31, 2011
 
$
18,980

 
$
25

 
$
27,026

 
$
(569
)
 
$
4,038

 
$
(21,464
)
 
$
(319
)
 
$
27,717

Net loss
 

 

 

 

 

 
(6,131
)
 

 
(6,131
)
Minimum pension liability adjustment
 

 

 

 

 

 

 

 

Reclassification of gains included net of taxes
 

 

 

 

 

 

 

 

Change in net unrealized gain on available-for-sale securities, net of taxes
 

 

 

 

 

 

 
240

 
240

Comprehensive income (loss), net of taxes:
 

 

 

 

 

 
(6,131
)
 
240

 
(5,891
)
Transfer between Controlling and Non Controlling Interest
 

 

 
600

 

 
(600
)
 

 

 

Accrued Preferred Dividends
 

 

 
96

 

 

 
(96
)
 

 

Treasury stock activity
 

 

 
(3
)
 
63

 

 
2

 

 
62

Balance—June 30, 2011
 
$
18,980

 
$
25

 
$
27,719

 
$
(506
)
 
$
3,438

 
$
(27,689
)
 
$
(79
)
 
$
21,888

See accompanying notes to consolidated financial statements.

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CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
Three Months Ended June 30,
 
 
2011
 
2010
OPERATING ACTIVITIES
 
 
 
 
Net loss
 
$
(6,131
)
 
$
(2,491
)
Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
Provision for loan losses
 
5,170

 
6,248

Provision for REO losses
 

 
37

Stock based compensation expense
 

 
16

Depreciation and amortization expense
 
372

 
410

Amortization of intangibles
 
38

 
38

Loss from sale of real estate owned
 

 
8

Gain on sale of securities, net
 

 
(24
)
Gain on sale of loans, net
 
(1
)
 
(3
)
Market adjustment on held for sale loans
 
100

 

Proceeds from sale of loans held-for-sale
 
3,125

 

(Increase) decrease in accrued interest receivable
 
(445
)
 
(169
)
(Increase) decrease in loan premiums and discounts and deferred charges
 
311

 
(129
)
(Increase) decrease in premiums and discounts — securities
 
115

 
173

(Increase) decrease in other assets
 
(1,181
)
 
(3,261
)
Increase (decrease) in other liabilities
 
3,675

 
(106
)
Net cash provided by operating activities
 
5,148

 
747

INVESTING ACTIVITIES
 
 
 
 
Purchases of securities:
 
 
 
 
Available-for-sale
 
(7,315
)
 
(11,000
)
Held-to-maturity
 

 
(7,970
)
Proceeds from calls of AFS securities
 
3,000

 

Proceeds from principal payments, maturities and sales of securities:
 

 

Available-for-sale
 
1,117

 
9,890

Held-to-maturity
 
3,748

 
296

Originations of loans held-for-investment
 
(2,380
)
 
(4,559
)
Loans purchased from third parties
 

 

Principal collections on loans
 
20,846

 
23,662

Proceeds on sale of loans
 

 
1,171

Increase in restricted cash
 
(6,214
)
 

Redemption of FHLB-NY stock
 
554

 
393

Additions to premises and equipment
 
(51
)
 
(517
)
Proceeds from sale of real estate owned
 
326

 
21

Net cash provided by investing activities
 
13,631

 
11,387

FINANCING ACTIVITIES
 
 
 
 
Net decrease in deposits
 
(69,076
)
 
11,883

Net change in FHLB-NY advances and other borrowings
 
(11,070
)
 
(11,007
)
Increase in capital
 
51,432

 

Dividends paid
 

 
(237
)
Net cash (used in) provided by financing activities
 
(28,714
)
 
639

Net (decrease) increase in cash and cash equivalents
 
(9,935
)
 
12,773

Cash and cash equivalents at beginning of period
 
44,077

 
38,347

Cash and cash equivalents at end of period
 
$
34,142

 
$
51,120

Supplemental information:
 
 
 
 
Noncash Transfers-
 
 
 
 
Change in unrealized loss on valuation of available-for-sale investments, net
 
$
240

 
$
438

Transfers from loans held-for-investment to loans held-for-sale
 
$
11,988

 
$

Cash paid for-
 
 
 
 
Interest
 
$
1,941

 
$
2,500

Income taxes
 
$
775

 
$
995


See accompanying notes to consolidated financial statements

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CARVER BANCORP, INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1. ORGANIZATION
Nature of operations
Carver Bancorp, Inc. (on a stand-alone basis, the “Holding Company” or “Registrant”), was incorporated in May 1996 and its principal wholly-owned subsidiaries are Carver Federal Savings Bank (the “Bank” or “Carver Federal”), Alhambra Holding Corp, an inactive Delaware corporation, and Carver Federal’s wholly-owned subsidiaries, Carver Federal Savings Bank (“CFSB”)Realty Corp, Carver Community Development Corp. (“CCDC”) and CFSB Credit Corp, which is currently inactive. The Bank has a majority owned interest in Carver Asset Corporation, a real estate investment trust formed in February 2004.
“Carver,” the “Company,” “we,” “us” or “our” refers to the Holding Company along with its consolidated subsidiaries. The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally chartered mutual savings and loan association. The Bank converted to a federal savings bank in 1986. On October 24, 1994, the Bank converted from a mutual holding company to stock form and issued 2,314,275 shares of its common stock, par value $0.01 per share. On October 17, 1996, the Bank completed its reorganization into a holding company structure (the “Reorganization”) and became a wholly owned subsidiary of the Holding Company. Collectively, the Holding Company, the Bank and the Holding Company’s other direct and indirect subsidiaries are referred to herein as the “Company” or “Carver.”
In September 2003, the Holding Company formed Carver Statutory Trust I (the “Trust”) for the sole purpose of issuing trust preferred securities and investing the proceeds in an equivalent amount of floating rate junior subordinated debentures of the Holding Company. In accordance with Accounting Standards Codification (“ASC”) 810, “Consolidations,” Carver Statutory Trust I is unconsolidated for financial reporting purposes.
Carver Federal’s principal business consists of attracting deposit accounts through its branches and investing those funds in mortgage loans and other investments permitted by federal savings banks. The Bank has nine branches located throughout the City of New York that primarily serve the communities in which they operate.
On February 10, 2011, Carver Federal Savings Bank and Carver Bancorp, Inc. consented to enter into Cease and Desist Orders (“Orders”) with the OTS. The OTS issued these Orders based upon its findings that the Company is operating with an inadequate level of capital for the volume, type and quality of assets held by the Company, that it is operating with an excessive level of adversely classified assets and that its earnings are inadequate to augment its capital. The raising of additional capital to address the finding of inadequate capital may dilute the capital holdings of existing shareholders.

On June 29, 2011 the Company raised $55 million of capital by issuing 55,000 shares of mandatorily convertible Series C preferred stock. The $55 million resulted in a $51.4 million increase in liquidity after considering the effect of various expenses associated with the capital raise. The capital raise enabled the Company on June 30, 2011 to make a capital injection of $37 million in Carver Federal Savings Bank, the Company's wholly owned bank subsidiary, retaining the remainder of the net capital raised for future strategic purposes. No assurances can be given that the amount of capital raised is sufficient to absorb the expected losses emanating from the Bank's loan portfolio. Should the losses be greater than expected additional capital may be necessary in the future.

In addition, no assurances can be given that the Bank and the Company will continue to comply with all provisions of the Order. Failure to comply with these provisions could result in further regulatory actions to be taken by the regulators.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts of the Holding Company, the Bank and the Bank’s wholly owned or majority owned subsidiaries, Carver Asset Corporation, CFSB Realty Corp, Carver Community Development Corporation, and CFSB Credit Corp. All significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial

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condition and revenues and expenses for the period then ended. These unaudited consolidated financial statements should be read in conjunction with the March 31, 2011 Annual Report to Stockholders on Form 10-K. Amounts subject to significant estimates and assumptions are items such as the allowance for loan losses, realization of deferred tax assets, and the fair value of financial instruments. Management believes that prepayment assumptions on mortgage-backed securities and mortgage loans are appropriate and the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses or future write downs of real estate owned may be necessary based on changes in economic conditions in the areas where Carver Federal has extended mortgages and other credit instruments. Actual results could differ significantly from those assumptions. Current market conditions increase the risk and complexity of the judgments in these estimates.
The Company has adjusted the presentation of restricted cash deposits in the Consolidated Statement of Financial Condition at June 30, 2011 to present restricted cash as a separate financial statement caption. The Company reported restricted cash in total cash and cash equivalents at March 31, 2011. The Company has recognized this adjustment in presentation as an investing activities cash flow in the Consolidated Statements of Cash Flows in the quarterly period ending June 30, 2011.
In addition, the Office of Thrift Supervision (“OTS”), Carver Federal’s regulator, as an integral part of its examination process, periodically reviews Carver Federal’s allowance for loan losses and, if applicable, real estate owned valuations. The OTS may require Carver Federal to recognize additions to the allowance for loan losses or additional write-downs of real estate owned based on their judgments about information available to them at the time of their examination. On July 21, 2011, the OTS was integrated into the Office of the Comptroller of the Currency ("OCC").
In June 2009, the Financial Accounting Standards Board (“FASB”) released the Accounting Standards Codification (“ASC” or “Codification”) as the single source of authoritative non-governmental GAAP. The Codification is effective for interim and annual periods ended after September 15, 2009. All previously existing non Securities and Exchange Commission (“SEC”) accounting standards documents are superseded. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. Rules and interpretive releases of the SEC are also sources of authoritative GAAP for SEC registrants. The Company’s policies were not affected by the conversion to ASC. However, references to specific accounting guidance in the Company’s financial statements have been changed to the appropriate section of the ASC.

Investment Securities
When purchased, investment securities are designated as either investment securities held-to-maturity or investment securities available-for-sale.  Securities are classified as held-to-maturity and carried at amortized cost only if the Bank has a positive intent and ability to hold such securities to maturity.  Securities held-to-maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity.
If not classified as held-to-maturity, securities are classified as available-for-sale demonstrating management's ability to sell in response to actual or anticipated changes in interest rates and resulting prepayment risk or any other factors.  Available-for-sale securities are reported at fair value.  Estimated fair values of securities are based on either published or security dealers' market value if available.  If quoted or dealer prices are not available, fair value is estimated using quoted or dealer prices for similar securities.
The Company conducts periodic reviews to identify and evaluate each investment that has an unrealized holding loss. Unrealized holding gains or losses for securities available-for-sale are excluded from earnings and reported net of deferred income taxes in accumulated other comprehensive income (loss), a component of Stockholders' Equity.  Any other-than-temporary impairment 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. Prior to April 1, 2009 the guidance did not require a separate determination of the credit-related and non credit-related components of unrealized gains and losses. During fiscal 2011 and fiscal 2010 no impairment charges were recorded. Gains or losses on sales of securities of all classifications are recognized based on the specific identification method.

Loans Held-for-Sale
Loans held-for-sale are carried at the lower of cost or market value. The valuation methodology for loans held for sale are based upon offered purchase prices, broker price opinions, appraisals or discounted cash flows.


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Loans Receivable

Loans receivable are carried at unpaid principal balances plus unamortized premiums, purchase accounting mark-to-market adjustments, certain deferred direct loan origination costs and deferred loan origination fees and discounts, less the allowance for loan losses.
The Bank defers loan origination fees and certain direct loan origination costs and accretes such amounts as an adjustment of yield over the contractual lives of the related loans using methodologies which approximate the interest method.  Premiums and discounts on loans purchased are amortized or accreted as an adjustment of yield over the contractual lives, of the related loans, adjusted for prepayments when applicable, using methodologies which approximate the interest method.
Loans are placed on non-accrual status when they are past due 90 days or more as to contractual obligations or when other circumstances indicate that collection is not probable.  When a loan is placed on non-accrual status, any interest accrued but not received is reversed against interest income.  Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on an assessment of the ability to collect the loan.  A non-accrual loan is restored to accrual status when principal and interest payments become less than 90 days past due and its future collectability is reasonably assured.
The Company defines an impaired loan as a loan for which it is probable, based on current information, that the lender will not collect all amounts due under the contractual terms of the loan agreement. Collateral dependent impaired loans are assessed individually to determine if the loan's current estimated fair value of the property that collateralizes the impaired loan, if any, is less than the recorded investment in the loan. Cash flow dependent loans are assessed individually to determine if the present value of the expected future cash flows is less than the recorded investment in the loan. Smaller balance homogeneous loans are evaluated for impairment collectively unless they are modified in a trouble debt restructure. Such loans include one-to four family residential mortgage loans and consumer loans.

Allowance for Loan and Lease Losses
The adequacy of the Bank's ALLL is determined, in accordance with the Interagency Policy Statement on the Allowance for Loan and Lease Losses (the “Interagency Policy Statement”) released by the Office of Thrift Supervision on December 13, 2006 and in accordance with Accounting Standards Codification (“ASC”) Topic 450 and ASC Topic 310. Compliance with the Interagency Policy Statement includes management's review of the Bank's loan portfolio, including the identification and review of individual problem situations that may affect a borrower's ability to repay.  In addition, management reviews the overall portfolio quality through an analysis of delinquency and non-performing loan data, estimates of the value of underlying collateral, current charge-offs and other factors that may affect the portfolio, including a review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and composition of the loan portfolio are all taken into consideration. 
The ALLL reflects management's evaluation of the loans presenting identified loss potential, as well as the risk inherent in various components of the portfolio.  There is a great amount of judgment applied to developing the ALLL.  As such, there can never be assurance that the ALLL accurately reflects the actual loss potential embedded in a loan portfolio.  Any change in the judgments utilized to develop the ALLL can change the ALLL.  Further, any change in the size of the loan portfolio or any of its components could necessitate an increase in the ALLL even though there may not be a decline in credit quality or an increase in potential problem loans.
General Reserve Allowance
Carver's maintenance of a general reserve allowance in accordance with ASC Topic 450 includes Carver's evaluating the risk to loss potential of pools of loans based upon a review of 10 different factors that are then applied to each pool.  The pools of loans (“Loan Type”) are:
1-4 Family
Construction
Multifamily
Commercial Real Estate
Business Loans
SBA Loans
Other (Consumer and Overdraft Accounts)

The pools are further segregated into the following risk rating classes:


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Pass and Pass with Care
Special Mention
Substandard
Doubtful

The Bank next applies to each pool a risk factor that determines the level of general reserves for that specific pool.  The risk factors are comprised of actual losses for the most recent four quarters as a percentage of each respective Loan Type plus qualitative factors.  As the loss experience for a Loan Type increases or decreases, the level of reserves required for that particular Loan Type also increases or decreases.  Because actual loss experience may not adequately predict the level of losses embedded in a portfolio, the Bank reviews nine qualitative factors to determine if reserves should be increased based upon any of those factors.  As the risk ratings worsen some of the qualitative factors tend to increase.  The nine qualitative factors the Bank considers and may utilize are:
1.
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses (Policy & Procedures).
2.
Changes in relevant economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments. (Economy).
3.
Changes in the nature or volume of the loan portfolio and in the terms of loans (Nature & Volume).
4.
Changes in the experience, ability, and depth of lending management and other relevant staff (Management).
5.
Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans (Problem Assets).
6.
Changes in the quality of the loan review system (Loan Review).
7.
Changes in the value of underlying collateral for collateral-dependent loans (Collateral Values).
8.
The existence and effect of any concentrations of credit and changes in the level of such concentrations (Concentrations).
9.
The effect of other external forces such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio (External Forces).

Specific Reserve Allowance
Carver also maintains a specific reserve allowance for Criticized & Classified loans individually reviewed for impairment in accordance with ASC Topic 310 guidelines and deemed to be impaired.  ASC Topic 310 (formerly known as SFAS No. 114) is the primary basis for determining if a loan is impaired, and if impaired, valuing the impairment amount of specific loans whose collectability has been called into question.  The amount assigned to this aspect of the ALLL is the individually-determined (i.e., loan-by-loan) portion thereof.  The standard requires the use of one of three approved methods to estimate the amount to be reserved and/or charged off for such credits.  The three methods are as follows:

1.The present value of expected future cash flows discounted at the loan's effective interest rate,
2.The loan's observable market price, or
3.The fair value of the collateral if the loan is collateral dependent.

The institution may choose the appropriate ASC Topic 310 measurement on a loan-by-loan basis for an individually impaired loan, except for an impaired collateral-dependent loan.  Guidance requires impairment of a collateral dependent loan to be measured using the fair value of collateral method. A loan is considered "collateral dependent" when the repayment of the debt will be provided solely by the underlying collateral, and there are no other available and reliable sources of repayment.
Criticized and Classified loans with at risk balances of $1,000M or more and loans below $1,000M that the Credit Officer deems appropriate for review, are identified and reviewed for individual evaluation for impairment in accordance with ASC Topic 310 (formerly known as SFAS 114), Accounting by Creditors for Impairment of a Loan.  Carver also performs impairment analysis for all trouble debt restructuring (“TDRs”).  If it is determined that it is probable the Bank will be unable to collect all amounts due according with the contractual terms of the loan agreement, the loan is categorized as impaired. 
If the loan is determined to be not impaired, it is then placed in the appropriate pool of Criticized & Classified loans to be evaluated for potential losses.  Loans determined to be impaired are then evaluated to determine the measure of impairment amount based on one of the three measurement methods noted above.  If it is determined that there is an impairment amount, the Bank then determines whether the impairment amount is permanent (that is a confirmed loss), in which case the impairment is written down, or if it is other than permanent, in which case the Bank establishes a specific valuation reserve that is included in the total ALLL.  In accordance with guidance, if there is no impairment amount, no reserve is established for the loan.

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Trouble Debt Restructured Loans
Troubled debt restructured loans are those loans whose terms have been modified because of deterioration in the financial condition of the borrower. Modifications could include extension of the terms of the loan, reduced interest rates, and forgiveness of accrued interest and/or principal. Once an obligation has been restructured because of such credit problems, it continues to be considered restructured until paid in full. For a cash flow dependent loans the Company records an impairment charge equal to the difference between the present value of estimated future cash flows under the restructured terms discounted at the original loans effective interest rate, and the original loans carrying value. For a collateral dependent loan, the Company records an impairment when the current estimated fair value of the property that collateralizes the impaired loan, if any, is less than the recorded investment in the loan. TDR loans remain on non-accrual status until they have perform in accordance with the restructured terms for a period of at least 6 months.


NOTE 3. LOSS PER SHARE
The following table reconciles the loss available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted loss per share for years ended June 30 (in thousands):


 
 
Three Months Ended
June 30,
 
 
2011
 
2010
Loss per common share — basic
 
 
 
 
Net loss
 
$(6,131)
 
$(2,491)
Less: Capital Purchase Program "CPP" Preferred Dividends
 
96
 
237
Dividends paid and undistributed (losses)/earnings allocated to participating securities
 
 
(22)
Net Loss Available to Common Shareholders
 
$(6,227)
 
$(2,706)
Weighted average common shares outstanding
 
2,485,815
 
2,482,740
Loss per common share
 
$(2.51)
 
$(1.09)
Diluted Loss per common share
 
N/A
 
N/A

There was no diluted amount per share reported in either period due to the losses incurred.

NOTE 4. ACCOUNTING FOR STOCK BASED COMPENSATION
All stock-based compensation is recognized as an expense measured at the fair value of the award. The accounting guidance also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows in the consolidated statement of cash flows. There was no stock-based compensation expense recognized for the three months ended June 30, 2011 and for the period ended June 30, 2010 the Company recognized $16,000.
NOTE 5. BENEFIT PLANS
Carver Federal has a non-contributory defined benefit pension plan covering all who were participants prior to curtailment of the plan. The benefits are based on each employee’s term of service through the date of curtailment. The plan was curtailed during the fiscal year ended March 31, 2001.


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NOTE 6. COMMON STOCK DIVIDEND
As previously disclosed in a Form 8-K filed with the SEC on October 29, 2010, the Company’s Board of Directors announced that, based on highly uncertain economic conditions and the desire to preserve capital, Carver was suspending payment of the quarterly cash dividend on its common stock. In accordance with the Cease and Desist Order Carver Federal entered into with the OTS, the Bank and Company are also prohibited from paying any dividends without prior regulatory approval, and, as such, have suspended the regularly quarterly cash dividend payments on the Company's fixed-rate cumulative perpetual preferred stock issued under the Capital Purchase Program to the United States Department of Treasury and have deferred Carver Statutory Trust I debenture interest payments. There are no assurances that the payments of dividends will resume.

NOTE 7. INVESTMENT SECURITIES
The Bank utilizes mortgage-backed and other investment securities in its asset/liability management strategy. In making investment decisions, the Bank considers, among other things, its yield and interest rate objectives, its interest rate and credit risk position and its liquidity and cash flow.
Generally, the investment policy of the Bank is to invest funds among categories of investments and maturities based upon the Bank’s asset/liability management policies, investment quality, loan and deposit volume and collateral requirements, liquidity needs and performance objectives. ASC subtopic 320-942 requires that securities be classified into three categories: trading, held-to-maturity, and available-for-sale. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value with unrealized gains and losses included in earnings. Debt securities for which the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. All other securities not classified as trading or held-to-maturity are classified as available-for-sale and reported at fair value with unrealized gains and losses included, on an after-tax basis, in a separate component of stockholders’ equity. At June 30, 2011, the Bank had no securities classified as trading. At June 30, 2011, $57.1 million, or 80.5% of the Bank’s mortgage-backed and other investment securities, were classified as available-for-sale. The remaining $13.9 million or 19.5% were classified as held-to-maturity.
The following table sets forth the amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at June 30, 2011 (in thousands):
 
 
Amortized
 
Gross Unrealized
 
Estimated
 
 
Cost
 
Gains
 
Losses
 
Fair-Value
Available-for-Sale:
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
Government National Mortgage Association
 
$
29,228

 
$
222

 
$
(36
)
 
$
29,414

Federal Home Loan Mortgage Corporation
 
1,817

 
15

 

 
1,832

Federal National Mortgage Association
 
4,097

 

 

 
4,097

Other
 
45

 

 

 
45

Total mortgage-backed securities
 
35,187

 
237

 
(36
)
 
35,388

U.S. Government Agency Securities
 
19,039

 
4

 
(97
)
 
18,946

U.S. Government Securities
 
2,799

 
8

 

 
2,807

Total available-for-sale
 
57,025

 
249

 
(133
)
 
57,141

Held-to-Maturity:
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
Government National Mortgage Association
 
7,288

 
327

 

 
7,615

Federal Home Loan Mortgage Corporation
 
4,765

 
122

 

 
4,887

Federal National Mortgage Association
 
1,826

 
87

 

 
1,913

Total mortgage-backed securities
 
13,879

 
536

 

 
14,415

Other
 

 

 

 

Total held-to-maturity
 
13,879

 
536

 

 
14,415

Total securities
 
$
70,904

 
$
785

 
$
(133
)
 
$
71,556



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The following table sets forth the amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at March 31, 2011 (in thousands):
 
 
Amortized
 
Gross Unrealized
 
Estimated
 
 
Cost
 
Gains
 
Losses
 
Fair-Value
Available-for-Sale:
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
Government National Mortgage Association
 
$
30,162

 
$
150

 
$
(115
)
 
$
30,197

Federal Home Loan Mortgage Corporation
 
1,864

 

 
(13
)
 
1,851

Federal National Mortgage Association
 
4,286

 

 
(63
)
 
4,223

Other
 
45

 

 

 
45

Total mortgage-backed securities
 
36,357

 
150

 
(191
)
 
36,316

U.S. Government Agency Securities
 
14,968

 

 
(277
)
 
14,691

U.S. Government Securities
 
2,547

 

 
(3
)
 
2,544

Total available-for-sale
 
53,872

 
150

 
(471
)
 
53,551

Held-to-Maturity:
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
Government National Mortgage Association
 
7,598

 
206

 

 
7,804

Federal Home Loan Mortgage Corporation
 
8,210

 
131

 

 
8,341

Federal National Mortgage Association
 
1,889

 
90

 

 
1,979

Total mortgage-backed securities
 
17,697

 
427

 

 
18,124

Other
 

 

 

 

Total held-to-maturity
 
17,697

 
427

 

 
18,124

Total securities
 
$
71,569

 
$
577

 
$
(471
)
 
$
71,675


The following table sets forth the unrealized losses and fair value of securities at June 30, 2011 for less than 12 months and 12 months or longer (in thousands):
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
(36
)
 
$
5,435

 
$

 
$

 
$
(36
)
 
$
5,435

Agencies
 
(97
)
 
13,023

 

 

 
$
(97
)
 
$
13,023

Total available-for-sale
 
$
(133
)
 
$
18,458

 
$

 
$

 
$
(133
)
 
$
18,458

Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$

 
$
334

 
$

 
$

 
$

 
$
334

Total held-to-maturity
 
$

 
$
334

 
$

 
$

 
$

 
$
334

Total securities
 
$
(133
)
 
$
18,792

 
$

 
$

 
$
(133
)
 
$
18,792







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The following table sets forth the unrealized losses and fair value of securities at March 31, 2011 for less than 12 months and 12 months or longer (in thousands):
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
(191
)
 
$
11,534

 
$

 
$

 
$
(191
)
 
$
11,534

Agencies
 
(280
)
 
17,235

 

 

 
(280
)
 
17,235

Total available-for-sale
 
$
(471
)
 
$
28,769

 
$

 
$

 
$
(471
)
 
$
28,769

Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 

 
345

 

 

 

 
345

Total held-to-maturity
 
$

 
$
345

 
$

 
$

 
$

 
$
345

Total securities
 
$
(471
)
 
$
29,114

 
$

 
$

 
$
(471
)
 
$
29,114

A total of ten available for sale securities had an unrealized loss at June 30, 2011 compared to sixteen at March 31, 2011, based on estimated fair value. There was one security in the held to maturity portfolio which had an insignificant unrealized loss in both periods. The majority of the securities in an unrealized loss position were mortgage backed securities and agency securities, which represented 29.4% and 70.6% of total securities which had an unrealized loss at June 30, 2011, respectively. The cause of the temporary impairment is directly related to changes in interest rates.  In general, as interest rates decline, the fair value of securities will rise, and conversely as interest rates rise, the fair value of securities will decline.  Management considers fluctuations in fair value as a result of interest rate changes to be temporary, which is consistent with the Bank's experience.  The impairments are deemed temporary based on the direct relationship of the rise in fair value to movements in interest rates, the life of the investments and their high credit quality. Unrealized losses identified as other than temporary are recognized in earnings when there are losses on a debt security which management does not intend to sell, and for which it is more-likely-than-not that the entity will not be required to sell the security prior to the recovery of the non-credit impairment. 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. At June 30, 2011, the Bank did not have any securities that would be classified as having other than temporary impairment in its investment portfolio.

The following is a summary of the carrying value (amortized cost) and fair value of securities at June 30, 2011, by remaining period to contractual maturity (ignoring earlier call dates, if any).  Actual maturities may differ from contractual maturities because certain security issuers have the right to call or prepay their obligations.  The table below does not consider the effects of possible prepayments or unscheduled repayments.



 
Amortized
Cost
 
Fair Value
 
Weighted
Avg Rate
Available-for-Sale:
 
 
 
 
 
Less than one year
998

 
999

 
0.22
%
One through five years
12,971

 
12,970

 
1.04
%
Five through ten years
10,573

 
10,488

 
1.88
%
After ten years
32,438

 
32,639

 
2.79
%
 
56,980

 
57,096

 
2.18
%
 
 
 
 
 
 
Held-to-maturity:
 
 
 
 
 
Five through ten years
271

 
284

 
4.31
%
After ten years
13,266

 
13,788

 
3.97
%
 
13,537

 
14,072

 
3.98
%

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NOTE 8. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The loans receivable portfolio is segmented into One-to-Four Family, Multifamily Mortgage, Commercial Real-Estate, Construction, Business, Small Business Administration & Consumer and Other Loans.
The Allowance for Loan and Lease Losses (“ALLL”) reflects management’s judgment in the evaluation of probable loan losses inherent in the portfolio at the balance sheet date. Management uses a disciplined process and methodology to calculate the ALLL each quarter. To determine the total ALLL, management estimates the reserves needed for each segment of the loan portfolio, including loans analyzed individually and loans analyzed on a pooled basis.
The General Allowance for Pass rated loans and Criticized and Classified loans is determined in accordance with ASC Topic 450 whereby management evaluates the risk of loss potential of pools of loans which are segmented by loan type and then by risk rating. The loan types include; i) One-to-Four family mortgages, ii) Multifamily, iii) Commercial Real Estate, iv) Construction, v) Business, vi) Small Business Administration, and vii) Consumer and other loans.
To determine the balance of the ALLL, management evaluates the risk of potential loss to these pools of pass rated or criticized and classified loans, which are risk rated special mention, substandard or doubtful. This analysis is based upon a review of 10 different factors that are then applied to the pools of loans. The first factor utilized is actual historical loss experience by loan type expressed as a percentage of the average outstanding of all loans within the loan type over the prior four quarters. Because actual loss experience alone may not adequately predict the level of losses embedded in a portfolio, management also reviews nine qualitative factors to determine if reserves should be increased based upon any of those factors. These nine factors are reviewed and analyzed for each loan type and each risk rating. The lower the risk rating, the greater the risk for potential loss.
The Specific Allowance for Classified loans is determined in accordance with ASC Topic 310 which is the primary basis for individually determining if a loan is impaired, and if impaired, valuing the impairment amount of specific loans whose collectability is questionable. The standard requires the use of one of the following three approved methods to estimate the amount to be reserved and/or charged off: i) the present value of expected future cash flow discounted at the loan’s effective interest rate, ii) the loan’s observable market price, or iii) the fair value of the collateral if the loan is collateral dependent.
Classified loans with at risk balances of $1 million or more are identified and reviewed for individual evaluation for impairment. Carver also performs an impairment analysis on all trouble debt restructurings (“TDRs”). If it is determined that it is probable the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement, the loan is impaired. If the loan is determined not to be impaired, it is then placed in the appropriate pool of Classified loans to be evaluated for potential losses. The impaired loans are then evaluated to determine the measure of impairment amount based on one of the three measurement methods noted above. If it is determined that there is an impairment amount, the Bank then determines whether the impairment amount is permanent, in which case the loan balance is written down, or if it is other than permanent, the Bank establishes a specific valuation reserve that is included in the total ALLL. Also, in accordance with guidance, if there is no impairment amount, no reserve is established for the loan.
From time to time, events or economic factors may affect the loan portfolio, causing management to provide additional amounts or release balances from the ALLL. The ALLL is sensitive to risk ratings assigned to individually evaluated loans and economic assumptions and delinquency trends. Individual loan risk ratings are evaluated based on the specific facts related to that loan. Additions to the ALLL are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible

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are charged against the ALLL, while recoveries of previously charged off amounts are credited to the ALLL.

The following is a summary of loans receivable, net of allowance for loan losses at June 30, 2011 and March 31, 2011 (dollars in thousands).
 
 
June 30, 2011
 
March 31, 2011
 
 
Amount
 
Percent
 
Amount
 
Percent
Gross loans receivable: (1)
 
 
 
 
 
 
 
 
One- to four-family
 
$
81,462

 
14.43
%
 
$
82,061

 
14
%
Multifamily
 
121,628

 
21.55
%
 
123,791

 
21
%
Commerical real estate
 
241,697

 
42.81
%
 
252,991

 
43
%
Construction
 
68,291

 
12.10
%
 
78,055

 
13
%
Business
 
50,141

 
8.88
%
 
53,248

 
9
%
Consumer and other (2)
 
1,297

 
0.23
%
 
1,349

 
%
Total loans receivable
 
564,516

 
100.00
%
 
591,495

 
100.00
%
Add:
 
 
 
 
 
 
 
 
Premium on loans
 
116

 
 
 
120

 
 
Less:
 
 
 
 
 
 
 
 
Deferred fees and loan discounts
 
(2,414
)
 
 
 
(2,107
)
 
 
Allowance for loan losses
 
(23,764
)
 
 
 
(23,147
)
 
 
Total loans receivable, net
 
538,454

 
 
 
566,361

 
 

(1)
Includes loans held for sale of $14.1 million, $2.1 million and $1.9 million in the multifamily, commercial real estate and construction loan portfolios respectively, at June 30, 2011.
Includes $9.2 million loans held for sale in the multifamily loan portfolio at March 31, 2011.

(2)
Includes personal, credit card, and home improvement.
Substantially all of the Bank’s real estate loans receivable are principally secured by properties located in New York City. Accordingly, as with most financial institutions in the market area, the ultimate collectability of a substantial portion of the Company’s loan portfolio is susceptible to changes in the market conditions in this area.

The following is an analysis of the allowance for loan losses and loans receivable as of and for the three month period ended June 30, 2011 (in thousands).

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One-to-four
family
Residential
 
Multi-Family
Mortgage
 
Commercial Real
Estate
 
Construction
 
Business
 
Consumer and
Other
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
2,923

 
6,223

 
3,999

 
6,944

 
2,965

 
93

 
23,147

Charge-offs:
 
20

 
2,408

 
19

 
2,124

 

 

 
4,571

Recoveries:
 

 

 
2

 

 
16

 

 
18

Provision for Loan Losses
 
(77
)
 
3,684

 
733

 
1,210

 
(372
)
 
(8
)
 
5,170

Ending Balance
 
2,826

 
7,499

 
4,715

 
6,030

 
2,609

 
85

 
23,764

Ending Balance: collectively evaluated for impairment
 
2,220

 
6,516

 
3,903

 
4,250

 
2,468

 
85

 
19,442

Ending Balance: individually evaluated for impairment
 
606

 
983

 
812

 
1,780

 
141

 

 
4,322

Loan Receivables Ending Balance:
 
81,394

 
107,376

 
238,079

 
66,368

 
49,636

 
1,297

 
544,150

Ending Balance: collectively evaluated for impairment
 
70,110

 
100,383

 
227,614

 
34,026

 
43,582

 
1,297

 
477,012

Ending Balance: individually evaluated for impairment
 
11,284

 
6,993

 
10,465

 
32,342

 
6,054

 

 
67,138


The following is an analysis of the allowance for loan losses as of and for the three month period ended June 30, 2010 (in thousands).

 
 
One-to-four family Residential
 
Multi-Family Mortgage
 
Commercial Real Estate
 
Construction
 
Business
 
Consumer and Other
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
1,094

 
$
1,566

 
$
2,613

 
$
4,059

 
$
2,208

 
$
60

 
400

 
$
12,000

Charge-offs:
 
539

 

 
134

 
1,154

 
871

 

 

 
2,698

Recoveries:
 

 
 
 

 

 
4

 
5

 
 
 
9

Provision for Loan Losses
 
(916
)
 
(634
)
 
(181
)
 
(3,814
)
 
(1,118
)
 
22

 
400

 
(6,241
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
 
$
1,471

 
$
2,200

 
$
2,660

 
$
6,719

 
$
2,459

 
$
43

 
 
 
$
15,552




The following is an analysis of the loan receivables as of March 31, 2011 (in thousands).

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One-to-four family Residential
 
Multi-Family Mortgage
 
Commercial Real Estate
 
Construction
 
Business
 
Consumer and Other
 
Total
Ending Balance: collectively evaluated for impairment
 
2,316

 
5,510

 
3,840

 
4,379

 
2,832

 
93

 
18,970

Ending Balance: individually evaluated for impairment
 
607

 
713

 
159

 
2,565

 
133

 

 
4,177

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan Receivables Ending Balance :
 
81,988

 
123,571

 
242,317

 
78,017

 
53,060

 
1,350

 
580,303

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance: collectively evaluated for impairment
 
70,679

 
116,064

 
233,697

 
41,454

 
46,789

 
1,350

 
510,033

Ending Balance: individually evaluated for impairment
 
11,309

 
7,507

 
8,620

 
36,563

 
6,271

 

 
70,270


The following is a summary of non-performing loans at June 30, and March 31, 2011 (in thousands).
 
June 30, 2011
March 31, 2011
Loans accounted for on a non-accrual basis:
 
 
Gross loans receivable:
 
 
One- to four-family
$
16,421

$
15,993

Multifamily
9,307

6,786

Commercial real estate
25,893

10,078

Construction
54,425

37,218

Business
9,159

7,289

Consumer
22

42

Total non-accrual loans
115,227

77,406


Non-performing loans totaled $115.2 million at June 30, 2011 versus $77.4 million at March 31, 2011. Non-performing loans at June 30, 2011, were comprised of $84.5 million of loans 90 days or more past due and non-accruing, $9.8 million of loans that are either performing or less than 90 days past due and have been deemed to be impaired and $20.9 million of loans classified as a troubled debt restructuring and either not consistently performing in accordance with their modified terms or not performing in accordance with their modified terms for at least six months.
Non-performing loans at March 31, 2011, were comprised of $48.8 million of loans 90 days or more past due and non-accruing, $4.9 million of loans that are either performing or less than 90 days past due and have been deemed to be impaired and $23.8 million of loans classified as a troubled debt restructuring and either not consistently performing in accordance with their modified terms or not performing in accordance with their modified terms for at least six months.

The Bank utilizes an internal loan classification system as a means of reporting problem loans within its loans categories. Loans may be classified as "Pass", “Special Mention”, “Substandard”, “Doubtful”, and “Loss.” Loans rated Pass have demonstrated satisfactory asset quality, earning history, liquidity, and other adequate margins of creditor protection. They represent a moderate credit risk and some degree of financial stability. Loans are considered collectible in full, but perhaps require greater than average amount of loan officer attention. Borrowers are capable of absorbing normal setbacks without failure. Loans rated Special Mention have a potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result

16

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in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date. Loans rated Substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Loans rated Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable. Loans classified as Loss are those considered uncollectible with insignificant value and are charged-off immediately to the allowance for loan losses.

One-to-Four Family Residential Loans and Consumer and Other Loans are rated non-performing if they are delinquent in payments ninety or more days, a troubled debt restructuring with less than six months contractual performance and loans past maturity. All other One-to-Four Family Residential Loans and Consumer and Other Loans are performing loans.

As of June 30, 2011, and based on the most recent analysis performed, the risk category by class of loans is as follows (in thousands):
 
 
Multi-Family
Mortgage
 
Commercial
Real Estate
 
Construction
 
Business
Credit Risk Profile by Internally Assigned Grade:
 
 
 
 
 
 
 
 
Pass
 
97,940

 
187,037

 
4,440

 
34,095

Special Mention
 
1,669

 
14,183

 
18,103

 
4,102

Substandard
 
775

 
26,394

 
11,482

 
5,297

Doubtful
 

 

 

 
88

Total
 
$
100,384

 
$
227,614

 
$
34,025

 
$
43,582

 
 
One-to-four family
Residential
 
Consumer and
Other
Credit Risk Profile Based on Payment Activity:
 
 
 
 
Performing
 
64,973

 
1,275

Non-Performing
 
16,421

 
22

Total
 
$
81,394

 
$
1,297
























As of March 31, 2011, and based on the most recent analysis performed, the risk category by class of loans is as follows

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(in thousands):
 
Multi-Family Mortgage
 
Commercial Real Estate
 
Construction
 
Business
Credit Risk Profile by Internally Assigned Grade:
 
 
 
 
 
 
Pass
110,837

 
199,581

 

 
39,017

Special Mention
2,126

 
8,726

 
25,105

 
3,857

Substandard
3,101

 
25,099

 
16,349

 
3,787

Doubtful

 
291

 

 
128

Total
116,064

 
233,697

 
41,454

 
46,789

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family Residential
 
Consumer and Other
 
 
 
 
Credit Risk Profile Based on Payment Activity:
 
 
 
 
 
 
Performing
65,995

 
1,308

 
 
 
 
Non-Performing
15,993

 
42

 
 
 
 
Total
81,988

 
1,350

 
 
 
 

The following table presents an aging analysis of the recorded investment of past due financing receivable as of June 30, 2011. Also included are loans that are 90 days or more past due as to interest and principal and still accruing because they are well-secured and in the process of collection (in thousands).
 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater Than
90 Days
 
Total Past
Due
 
Impaired (1)
 
TDR (2)
 
Current
 
Total Financing
Receivables
One-to-four family residential
 

 
1,855

 
5,314

 
7,169

 

 
11,107

 
63,118

 
$
81,394

Multi-family mortgage
 

 
868

 
5,833

 
6,701

 
3,276

 
198

 
97,201

 
107,376

Commercial real estate
 

 
1,659

 
18,932

 
20,591

 
439

 
6,521

 
210,528

 
238,079

Construction
 

 

 
47,201

 
47,201

 
4,998

 
2,226

 
11,943

 
66,368

Business
 

 
2,600

 
7,213

 
9,813

 
1,099

 
848

 
37,876

 
49,636

Consumer and other
 
6

 
15

 
22

 
43

 

 
 
 
1,254

 
1,297

Total
 
$
6

 
$
6,997

 
$
84,515

 
$
91,518

 
$
9,812

 
$
20,900

 
$
421,920

 
$
544,150


(1)
Consists of loans which are less than 90 days past due but impaired due to other risk characteristics.
(2)
$0.4 million is a TDR loan that has performed in accordance with its modified terms for at least six months and is considered performing. $20.5 million have not performed in accordance with their modified terms for more than six months and are considered non performing.











18

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The following table presents an aging analysis of the recorded investment of past due financing receivable as of March 31, 2011. Also included are loans that are 90 days or more past due as to interest and principal and still accruing because they are well-secured and in the process of collection (in thousands).
 
30-59 Days Past Due
 
60-89 Days Past Due
 
Greater Than 90 Days
 
Total Past Due
 
Impaired (1)
 
TDR (2)
 
Current
 
Total Financing Receivables
One-to-four family residential
$
4,852

 
$
601

 
4,859

 
10,312

 

 
11,134

 
60,542

 
81,988

Multi-family mortgage
6,866

 

 
5,452

 
12,318

 
1,135

 
200

 
109,918

 
123,571

Commercial real estate
12,360

 
5,457

 
3,095

 
20,912

 
442

 
6,541

 
214,422

 
242,317

Construction
19,509

 

 
32,158

 
51,667

 
923

 
4,137

 
21,290

 
78,017

Business
7,981

 
117

 
3,175

 
11,273

 
2,362

 
1,752

 
37,673

 
53,060

Consumer and other
15

 
37

 
42

 
94

 

 

 
1,256

 
1,350

Total
51,583

 
6,212

 
48,781

 
106,576

 
4,862

 
23,764

 
445,101

 
580,303

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Consists of loans which are less than 90 days past due but impaired due to other risk characteristics.
(2) $0.4 million are TDR loans that have performed in accordance with their modified terms for at least six months and are
are considered performing.
$23.9 million have not performed in accordance with their modified terms for more than six months and are considered non performing. Currently they are represented in the following TDR categories:
$17.6 million loans are non accrual as they are not performing in accordance with their modified terms
$5.8 million are 30-59 days past due.
$0.5 million loans are 60-89 days past due.

The following table presents the recorded investment and unpaid principal balances for impaired loans and TDR loans ($20.9 million) with the associated allowance amount, if applicable. Management determined the specific allowance based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling costs was used to determine the specific allowance recorded. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received, under the cash basis method.

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Impaired Loans by Class
As of and for the three month period ended June 30, 2011
(In thousands)
 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Associated
Allowance
 
Average Balance
 
Interest income recognized
With no specific allowance recorded:
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
3,816

 
3,933

 
 
 
3,855

 
23

Multi-family mortgage
 
198

 
198

 
 
 
2,488

 
12

Commercial real estate
 
5,265

 
5,265

 
 
 
10,695

 
4

Construction
 
19,692

 
22,655

 
 
 
20,641

 
325

Business
 
4,434

 
4,434

 
 
 
4,569

 
72

Consumer and other
 

 

 
 
 

 

Total
 
33,405

 
36,485

 
 
 
42,248

 
436

 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
7,468

 
8,140

 
606

 
7,434

 
34

Multi-family mortgage
 
6,794

 
7,924

 
983

 
7,304

 
65

Commercial real estate
 
5,200

 
5,665

 
812

 
5,215

 
35

Construction
 
12,650

 
17,337

 
1,780

 
14,013

 

Business
 
1,620

 
1,830

 
141

 
1,688

 
8

Consumer and other
 

 

 
 
 
 
 
 
Total
 
33,732

 
40,896

 
4,322

 
35,654

 
142

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
11,284

 
12,073

 
606

 
11,289

 
57

Multi-family mortgage
 
6,992

 
8,122

 
983

 
9,792

 
77

Commercial real estate
 
10,465

 
10,930

 
812

 
15,910

 
39

Construction
 
32,342

 
39,992

 
1,780

 
34,654

 
325

Business
 
6,054

 
6,264

 
141

 
6,257

 
80

Consumer and other
 

 

 

 

 

Total
 
67,137

 
77,381

 
4,322

 
77,902

 
578






20

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Impaired Loans by Class
 
 
 
As of March 31, 2011
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
Recorded Investment
 
Unpaid Principal Balance
 
Associated Allowance
With no specific allowance recorded:
 
 
 
 
 
 
 
One-to-four family residential
 
 
3,752

 
3,869

 
 
Multi-family mortgage
 
 
814

 
844

 
 
Commercial real estate
 
 
5,266

 
5,266

 
 
Construction
 
 
12,567

 
14,602

 
 
Business
 
 
4,651

 
4,651

 
 
Consumer and other
 
 

 

 
 
Total
 
 
27,050

 
29,232

 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
One-to-four family residential
 
 
7,557

 
8,209

 
607

Multi-family mortgage
 
 
6,693

 
7,108

 
713

Commercial real estate
 
 
3,354

 
3,800

 
159

Construction
 
 
23,996

 
27,486

 
2,565

Business
 
 
1,620

 
1,830

 
133

Consumer and other
 
 

 

 
 
Total
 
 
43,220

 
48,433

 
4,177

 
 
 
 
 
 
 
 
One-to-four family residential
 
 
11,309

 
12,078

 
607

Multi-family mortgage
 
 
7,507

 
7,922

 
713

Commercial real estate
 
 
8,620

 
9,066

 
159

Construction
 
 
36,563

 
42,088

 
2,565

Business
 
 
6,271

 
6,481

 
133

Consumer and other
 
 

 

 
 
Total
 
 
70,270

 
77,635

 
4,177


NOTE 9. INCOME TAXES
The components of income tax expense for the three months ended June 30, 2011 are as follows (in thousands):

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June 30, 2011
Federal income tax expense (benefit):
 
Current
$
(1
)
Deferred
(1,986
)
Valuation Allowance
1,840

 
(147
)
State and local income tax expense (benefit):
 
Current
38

Deferred
(445
)
Valuation Allowance
445

 
38

 
 
Total income tax benefit:
$
(109
)
The following is a reconciliation of the expected Federal income tax rate to the consolidated effective tax rate for the three months ended June 30, 2011 (dollars in thousands):
 
 
June 30, 2011
 
 
Amount
 
Percent
Statutory Federal income tax
 
$
(2,121
)
 
34
 %
State and local income taxes, net of Federal tax benefit
 
(268
)
 
4
 %
General business credit
 
(8
)
 
 %
Valuation allowance
 
2,284

 
(37
)%
Other
 
3

 
 %
Total income tax expense
 
$
(109
)
 
2
 %
Carver Federal stockholders’ equity includes a $0.1 million tax benefit for the period ended June 30, 2011, which has been segregated for federal income tax purposes as a bad debt reserve.















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Tax effects of existing temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are included in other assets at June 30, 2011 and March 31, 2011 are as follows (in thousands):
 
 
June 30,
2011
 
March 31,
2011
Deferred Tax Assets:
 
 
 
 
Allowance for loan losses
 
$
7,432

 
$
7,253

Deferred loan fees
 
567

 
601

Compensation and benefits
 

 

Non-accrual loan interest
 
2,969

 
2,556

Capital loss carryforward
 

 

Purchase accounting adjustment
 
202

 
186

Net operating loss carry forward
 
1,923

 
121

New markets tax credit
 
6,875

 
6,867

Depreciation
 
511

 
511

Minimum pension liability
 
110

 
110

Market value adjustment on HFS loans
 
931

 
893

Other
 
226

 
216

Unrealized gain on available-for-sale securities
 

 
1

Total Deferred Tax Assets
 
21,746

 
19,315

Deferred Tax Liabilities:
 
 
 
 
Income from affiliate
 
445

 
445

Unrealized gain on available-for-sale securities
 
146

 

Total Deferred Tax Liabilities
 
591

 
445

Valuation Allowance
 
(21,155
)
 
(18,870
)
Net Deferred Tax Assets
 
$

 
$

Where applicable, deferred tax assets are reduced by a valuation allowance for any portion determined not likely to be realized. This valuation allowance would subsequently be adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant. A valuation allowance of $18.9 million was recorded during fiscal year 2011 as management concluded that it is “more likely than not” that the Company will not be able to fully realize the benefit of its deferred tax assets. The change in valuation allowance for the quarter ended June 30, 2011 amounted to $2.3 million due to a reduction in the recognized deferred tax asset for the corresponding period.

On June 29, 2011, the Company raised $55 million of equity. The capital raise triggered a change in control  under Section 382 of the Internal Revenue Code.  Generally,  Section 382 limits the utilization of an entity's net operating loss carry forwards, general business credits, and recognized built-in losses upon a change in ownership. The Company has filed an extension for its tax return for the fiscal year ended March 31, 2011 and has not yet determined the potential tax attributes that may be subject to limitation under section 382. However, based on information available as of the ownership change date the Company anticipates a substantial portion of the tax attributes to be available over the life of such attributes.

At March 31, 2011, the Company had net operating carryovers for state purposes of approximately $5.3 million which are available to offset future state income and which expire over varying periods from March 2028 through March 2029.

The Company has no uncertain tax positions.  The Company and its subsidiaries are subject to U.S. Federal, New York State and New York City income taxation.  The Company is no longer subject to examination by taxing authorities for years before March 31, 2006. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  



23

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NOTE 10. FAIR VALUE MEASUREMENTS
Accounting literature ASC 820 clarifies that fair value is an “exit” price, representing the amount that would be received when selling an asset, or paid when transferring a liability, in an orderly transaction between market participants. Fair value is thus a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1— Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2— Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3— Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s categorization within this valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following table presents, by valuation hierarchy, assets that are measured at fair value on a recurring basis as of June 30, 2011 and March 31, 2011, and that are included in the Company’s Consolidated Statements of Financial Condition at these dates:
 
 
Fair Value Measurements at June 30, 2011, Using
 
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Total Fair
Value
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$

 
$

 
$
611

 
$
611

Investment securites:
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
U.S. Treasuries
 
2,807

 
 
 
 
 
$
2,807

Government National Mortgage Association
 
 
 
$
29,414

 

 
$
29,414

Federal Home Loan Mortgage Corporation
 
 
 
1,832

 

 
1,832

Federal National Mortgage Association
 
 
 
4,097

 

 
4,097

Other
 
 
 
18,946

 
45

 
18,991

Total available for sale securities
 
$
2,807

 
$
54,289

 
$
45

 
$
57,141

Total assets
 
$
2,807

 
$
54,289

 
$
656

 
$
57,752


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Fair Value Measurements at March 31, 2011, Using
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair
Value
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$

 
$

 
$
626

 
$
626

Investment securites:
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
U.S. Treasuries
 
2,544

 
 
 
 
 
2,544

Government National Mortgage Association
 
 
 
30,197

 
 
 
30,197

Federal Home Loan Mortgage Corporation
 

 
1,851

 

 
1,851

Federal National Mortgage Association
 

 
4,223

 
 
 
4,223

Other
 

 
14,691

 
45

 
14,736

Total available for sale securities
 
$
2,544

 
$
50,962

 
$
45

 
$
53,551

Total assets
 
$
2,544

 
$
50,962

 
$
671

 
$
54,177

Instruments for which unobservable inputs are significant to their fair value measurement (i.e., Level 3) include mortgage servicing rights. Level 3 assets accounted for 0.1% of the Company’s total assets at June 30, 2011 and March 31, 2011.
The Company reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next that are related to the observable inputs to a fair value measurement may result in a reclassification from one hierarchy level to another.
A description of the methods and significant assumptions utilized in estimating the fair value of available-for-sale securities and mortgage servicing rights (“MSR”) follows:
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and exchange-traded securities.
If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to market information, models also incorporate transaction details, such as maturity and cash flow assumptions. Securities valued in this manner would generally be classified within Level 2 of the valuation hierarchy and primarily include such instruments as mortgage-related securities and corporate debt.
In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. In valuing certain securities, the determination of fair value may require benchmarking to similar instruments or analyzing default and recovery rates. Quoted price information for MSR is not available. Therefore, MSR are valued using market-standard models to model the specific cash flow structure. Key inputs to the model consist of principal balance of loans being serviced, servicing fees and prepayment rate.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The following table presents information for assets classified by the Company within Level 3 of the valuation hierarchy for the three months ended June 30, 2011 and 2010:

25

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Mortgage
Servicing
 
Securities
Available for
(in thousands)
 
Rights
 
Sale
Beginning balance, April 1, 2011
 
626

 
45

Activities:
 

 

Unrealized gain (loss)
 
(15
)
 

Ending balance, June 30, 2011
 
$
611

 
$
45

 
 
Mortgage
Servicing
 
Securities
Available for
(in thousands)
 
Rights
 
Sale
Beginning April 1, 2010
 
721

 
141

Additions
 
 
 
(96
)
Unrealized gain
 
(99
)
 

Ending balance, June 30, 2010
 
622

 
45

Certain assets are measured at fair value on a non-recurring basis. Such instruments are subject to fair value adjustments under certain circumstances (e.g. when there is evidence of impairment). The following table presents assets and liabilities that were measured at fair value on a non-recurring basis as of June 30, 2011 and March 31, 2011 and that are included in the Company’s Consolidated Statements of Financial Condition as these dates:
 
 
Fair Value Measurements at June 30, 2011, Using
 
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
 
Total Fair
(in thousands)
 
(Level 1)
 
(Level 2)
 
Inputs (Level 3)
 
Value
Held For Sale Loans
 
$

 
$
18,068

 
$

 
$
18,068

Impaired loans with a specific reserve allocated
 
$

 
$
29,410

 
$

 
$
29,410

 
 
Fair Value Measurements at March 31, 2011, Using
 
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
 
Total Fair
(in thousands)
 
(Level 1)
 
(Level 2)
 
Inputs (Level 3)
 
Value
Held For Sale Loans
 
$

 
$
9,205

 
$

 
$
9,205

Impaired loans with a specific reserve allocated
 
$

 
$
38,962

 
$

 
$
38,962

Loans held-for-sale are carried at the lower of cost or market value. The valuation methodology for loans held for sale for the period ended June 30, 2011 was based upon offered purchase prices, broker price opinions, appraisals or discounted cash flows.
The fair value of collateral-dependent impaired loans are determined using various valuation techniques, including consideration of appraised values and other pertinent real estate market data.
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
According to current GAAP, disclosures regarding the fair value of financial instruments are required to include, in addition to the carrying value, the fair value of certain financial instruments, both assets and liabilities recorded on and off balance sheet, for which it is practicable to estimate fair value. Accounting guidance defines financial instruments as cash, evidence of ownership of an entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. The fair value of a financial instrument is discussed below. In cases where quoted

26

Table of Contents




market prices are not available, estimated fair values have been determined by the Bank using the best available data and estimation methodology suitable for each such category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate their recorded carrying value. The estimated fair values and carrying values of the Bank’s financial instruments and estimation methodologies are set forth below:
The carrying amounts and estimated fair values of the Bank’s financial instruments at June 30, 2011 and March 31, 2011 are as follows (in thousands):
 
 
June 30, 2011
 
March 31, 2011
 
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Financial Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
34,142

 
$
34,142

 
$
44,077

 
$
44,077

Restricted Cash
 
6,214

 
6,214

 

 

Securities available-for-sale
 
57,141

 
57,141

 
53,551

 
53,551

FHLB Stock
 
2,799

 
2,807

 
3,353

 
3,353

Securities held-to-maturity
 
13,879

 
14,415

 
17,697

 
18,124

Loans receivable
 
520,386

 
528,506

 
557,156

 
572,059

Loans Held For Sale
 
18,068

 
18,068

 
9,205

 
9,205

Accrued interest receivable
 
2,409

 
2,409

 
2,854

 
2,854

Mortgage servicing rights
 
611

 
611

 
626

 
626

Financial Liabilities:
 
 
 
 
 
 
 
 
Deposits
 
$
491,623

 
$
472,638

 
$
560,698

 
$
536,046

Advances from FHLB of New York
 
39,049

 
39,358

 
50,057

 
50,372

Repurchase agreement
 
30,000

 
30,352

 
30,000

 
29,970

Other borrowed money
 
32,522

 
31,428

 
32,471

 
30,895

Cash and cash equivalents and accrued interest receivable
The carrying amounts for cash and cash equivalents and accrued interest receivable approximate fair value because they mature in three months or less.
Securities
The fair values for securities available-for-sale, mortgage-backed securities held-to-maturity and investment securities held-to-maturity are based on quoted market or dealer prices, if available. If quoted market or dealer prices are not available, fair value is estimated using quoted market or dealer prices for similar securities.
Loans receivable
The fair value of loans receivable is estimated by discounting future cash flows, using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities of such loans. The method used to estimate the fair value of loans is extremely sensitive to the assumptions and estimates used. While management has attempted to use assumptions and estimates that best reflect the Company's loan portfolio and current market conditions, a greater degree of objectivity is inherent in these values than in those determined in active markets. The loan valuations thus determined do not necessarily represent an “exit” price that would be achieved in an active market.

Loans held-for-sale
Loans held-for-sale are carried at the lower of cost or market value. The valuation methodology for loans held for sale are based upon offered purchase prices, broker price opinions, appraisals or discounted cash flows.
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.

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Table of Contents






Deposits

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

The fair values of advances from the Federal Home Loan Bank of New York and other borrowed money are estimated using the rates currently available to the Bank for debt with similar terms and remaining maturities.
Repurchase agreements
The fair values of advances from Repurchase agreements are estimated using the rates currently available to the Bank for debt with similar terms and remaining maturities.
Commitments to Extend Credits, Commercial, and Standby Letters of Credit
The fair value of the commitments to extend credit was estimated to be insignificant as of June 30, 2011 and March 31, 2011. The fair value of commitments to extend credit and standby letters of credit was evaluated using fees currently charged to enter into similar agreements, taking into account the risk characteristics of the borrower, and estimated to be insignificant as of the reporting date.
Limitations

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

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

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

NOTE 12. VARIABLE INTEREST ENTITIES
The Holding Company's subsidiary, Carver Statutory Trust I, is not consolidated with Carver Bancorp Inc. for financial reporting purposes.  Carver Statutory Trust I was formed in 2003 for the purpose of issuing $13.0 million aggregate liquidation amount of floating rate Capital Securities due September 17, 2033 (“Capital Securities”) and $0.4 million of common securities (which are the only voting securities of Carver Statutory Trust I), which are 100% owned by Carver Bancorp Inc., and using the proceeds to acquire Junior Subordinated Debentures issued by Carver Bancorp Inc.  Carver Bancorp Inc. has fully and

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unconditionally guaranteed the Capital Securities along with all obligations of Carver Statutory Trust I under the trust agreement relating to the Capital Securities.

The Bank's subsidiary, Carver Community Development Corporation (“CCDC”), was formed to facilitate its participation in local economic development and other community-based activities. Per the NMTC Award's Allocation Agreement between the CDFI Fund and CCDC, CCDC is permitted to form and sub-allocate credits to subsidiary Community Development Entities (“CDEs”) to facilitate investments in separate development projects. The Bank was originally awarded $59.0 million of NMTC. In fiscal 2008, the Bank transferred rights to an investor in a NMTC project totaling $19.2 million, of which $19.0 million was a qualified equity investment, and recognized a gain on the transfer of rights of $1.7 million. The Bank was required to maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity was called CDE-10.  For financial reporting purposes, the $19.2 million transfer of rights to an investor in a NMTC project was reflected in the other assets and the minority interest sections of the balance sheet as the entity to which the rights were transferred was required to be consolidated under the then existing accounting guidance based on an evaluation of certain contractual arrangements between the Bank and the investor. In fiscal 2009, following certain amendments to the agreement between CCDC and the investor that resulted in a reconsideration event, the Bank deconsolidated the entity for financial statement reporting purposes. However, under the current arrangement, the Bank has a contingent obligation to reimburse the investor for any loss or shortfall incurred as a result of the 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 June 30, 2011, Carver has not recorded any liability with respect to this obligation in accordance with accounting guidance related to accounting for contingencies.

With respect to the remaining $40 million of the original NMTC award, the Bank has established various special purpose entities through which its investments in NMTC eligible activities are conducted.   As the Bank is exposed to all of the expected losses and residual returns from these investments the Bank is deemed the primary beneficiary. Accordingly, all of these special purpose entities were consolidated in the Bank's Statement of Financial Condition as of June 30, 2011 and 2010 resulting in the consolidation of assets of approximately $39 million and $40 million, respectively. During December 2010 Carver transferred its equity ownership in the CDEs and the associated rights to an investor in exchange for $6.7 million in cash. Since Carver continues to be exposed to the majority of the variability associated with the entities, management has determined that Carver continues to be the primary beneficiary of the entities. As a result, the CDEs have been consolidated and the investor's equity investment of $6.7 million has been reflected as non-controlling interest in the Statement of Financial Condition. The sale of the equity interest in the CDEs provides the investor with rights to the new market tax credit on a prospective basis. A portion of non-controlling interest is transferred to the controlling interest as the investor earns the tax credits. Under the current arrangement, the Bank has a contingent obligation to reimburse the investor for any loss or shortfall incurred as a result of the NMTC project not being in compliance with certain regulations that would void the investor's ability to otherwise utilize tax credits stemming from the award. The maximum possible loss to Carver from such an arrangement is approximately $7.8 million. At June 30, 2011, Carver has not recorded any liability with respect to this obligation in accordance with accounting guidelines related to accounting for contingencies.
In May 2009, the Bank received an additional NMTC award in the amount of $65 million.
In December 2009, the Bank transferred rights to an investor in a NMTC project totaling $10.5 million of the second NMTC award and recognized a gain on the transfer of rights of $0.5 million. The Bank was required to maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity was called CDE-13. This entity has been reviewed for possible consolidation under the accounting guidance related to variable interest entities and found to not be a consolidating entity for financial statement reporting purposes. The Bank has a contingent obligation to reimburse the investor for any loss or shortfall incurred as a result of the 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 $4.1 million.  At June 30, 2011, Carver has not recorded any liability with respect to this obligation in accordance with accounting guidance related to accounting for contingencies.

In March 2010, the Bank transferred rights to investors in NMTC projects totaling $20.5 million and recognized a gain on the transfer of rights of $0.5 million. The Bank received additional income of $0.4 million when the project closings were finalized in March 2011. The Bank was required to maintain a 0.01% interest in each of the newly created entities with the investor owning the remaining 99.99%. The entities were called CDE-15, CDE-16 and CDE-17. These entities have been reviewed for possible consolidation under the accounting guidance related to variable interest entities and found to not be consolidating entities

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for financial statement reporting purposes as Carver does not have the power to direct the activities that most significantly impact its economic performance.  The Bank has a contingent obligation to reimburse the investor for any loss or shortfall incurred as a result of the NMTC projects 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 $8.0 million.  At June 30, 2011, Carver has not recorded any liability with respect to this obligation in accordance with accounting guidance related to accounting for contingencies. 

In June 2010, the Bank transferred rights to an investor in a NMTC project totaling $10.0 million of the second NMTC award and recognized a gain on the transfer of rights of $0.4 million. The Bank was required to maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity was called CDE-14. This entity has been reviewed for possible consolidation under the accounting guidance related to variable interest entities and found to not be a consolidating entity for financial statement reporting purposes as Carver does not have the power to direct the activities that most significantly impact its economic performance. The Bank has a contingent obligation to reimburse the investor for any loss or shortfall incurred as a result of the NMTC project not being in compliance with certain regulations that would void the investor's ability to otherwise utilize tax credits stemming from the award. The maximum possible loss to Carver from such an arrangement is approximately $3.9 million.  At June 30, 2011, Carver has not recorded any liability with respect to this obligation in accordance with accounting guidance related to accounting for contingencies.

In June 2010, the Bank transferred rights to an investor in a NMTC project totaling $8.7 million and recognized a gain on the transfer of rights of $0.4 million. The Bank was required to maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity was called CDE-18. In December 2010, the Bank transferred the remaining $4.6 million rights to an investor in the same NMTC project and recognized a gain of $0.2 million. This entity has been reviewed for possible consolidation under the accounting guidance related to variable interest entities and found to not be a consolidating entity for financial statement reporting purposes as Carver does not have the power to direct the activities that most significantly impact its economic performance. The Bank has a contingent obligation to reimburse the investor for any loss or shortfall incurred as a result of the NMTC project not being in compliance with certain regulations that would void the investor's ability to otherwise utilize tax credits stemming from the award. The maximum possible loss to Carver from such an arrangement is approximately $5.2 million.  At June 30, 2011, Carver has not recorded any liability with respect to this obligation in accordance with accounting guidance related to accounting for contingencies.

In August 2010, the Bank transferred rights to an investor in a NMTC project totaling $6.6 million and recognized a gain on the transfer of rights of $0.3 million. The Bank was required to maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity was called CDE-19. In December 2010, the Bank transferred the remaining $4.1 million rights to an investor in the same NMTC project and recognized an additional gain of $0.2 million. This entity has been reviewed for possible consolidation under the accounting guidance related to variable interest entities and found to not be a consolidating entity for financial statement reporting purposes as Carver does not have the power to direct the activities that most significantly impact its economic performance. The Bank has a contingent obligation to reimburse the investor for any loss or shortfall incurred as a result of the NMTC project not being in compliance with certain regulations that would void the investor's ability to otherwise utilize tax credits stemming from the award. The maximum possible loss to Carver from such an arrangement is approximately $4.2 million.  At June 30, 2011, Carver has not recorded any liability with respect to this obligation in accordance with accounting guidance related to accounting for contingencies.

In February 2011, the Bank announced that it had been selected to receive a third NMTC award in the amount of $25 million.


NOTE 13. IMPACT OF ACCOUNTING STANDARDS AND INTERPRETATIONS

Accounting Standard Update (“ASU”) No. 2010-06 under ASC Topic 820, “Fair Value Measurements and Disclosures,” requires new disclosures and clarifies certain existing disclosure requirements about fair value measurement. Specifically, the update requires an entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for such transfers. A reporting entity is required to present separately

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information about purchases, sales, issuances, and settlements in the reconciliation of fair value measurements using Level 3 inputs. In addition, the update clarifies the following requirements of the existing disclosures: (i) for the purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets; and (ii) a reporting entity is required to include disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy were adopted by 'The Company' on January 1, 2011. The remaining disclosure requirements and clarifications made by ASU No. 2010-06 became effective for 'the Company' on April 1, 2010. In May 2011, the FASB issued guidance which results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. This guidance is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. The adoption of this guidance is not expected to have a material effect on the Company's consolidated statement of condition or results of operations.

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

In July 2010, the FASB issued guidance related to disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, ASU No. 2010-20, Receivables (Topic 310) which requires significant new disclosures about the credit quality of financing receivables and the allowance for credit losses. The objective of these disclosures is to improve financial statement users' understanding of (i) the nature of an entity's credit risk associated with its financing receivables and (ii) the entity's assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio's risk and performance. The required disclosures include, among other things, a roll forward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU No. 2010-20 disclosures related to period-end information (e.g., credit-quality information and the ending financing receivables balance segregated by impairment method) were required in all interim and annual reporting periods ending on or after December 15, 2010. Disclosures of activity that occurs during a reporting period (e.g., modifications and the roll forward of the allowance for credit losses by portfolio segment) were required in interim or annual periods beginning on or after December 15, 2010. The required disclosures for the period have been included in footnote 5 to the financial statements.

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

In June 2009, the FASB issued a revision to earlier guidance on Transfers of Financial Assets (ASC Subtopic 860-10) (formerly SFAS No. 166), which eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets and includes additional disclosures requiring more information about transfers of financial

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assets in which entities have continuing exposure to the risks related to the transferred financial assets. This guidance must be applied as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period and for interim and annual reporting periods thereafter. Earlier application was prohibited. The Company adopted this guidance for transfers of financial assets on April 1, 2010 and there was no material effect on its consolidated financial statements.

In April 2011, the FASB issued a revision to earlier guidance for accounting for troubled debt restructurings (ASU 2011-02). The ASU clarifies the guidance on a creditor's evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties, such as:
Creditors cannot assume that debt extensions at or above a borrower's original contractual rate do not constitute troubled debt restructurings.
If a borrower doesn't have access to funds at a market rate for debt with characteristics similar to the restructured debt, that may indicate that the creditor has granted a concession.
A borrower that is not currently in default may still be considered to be experiencing financial difficulty when payment default is considered probable in the foreseeable future.


The guidance will be effective for the for interim and annual periods ending on or after June 15, 2011 and is to be applied retrospectively to restructurings occurring on or after April 1, 2011. The Company is currently evaluating the potential impact of adopting the ASU.

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

In April 2011, the FASB issued guidance to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments to this guidance remove from the assessment of effective control: (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective control are not changed by this new guidance. Those criteria indicate that the transferor is deemed to have maintained effective control over the financial assets transferred (and thus must account for the transaction as a secured borrowing) for agreements that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity if all of the following conditions are met: (1) the financial assets to be repurchased or redeemed are the same or substantially the same as those transferred; (2) the agreement is to repurchase or redeem them before maturity, at a fixed or determinable price; and (3) the agreement is entered into contemporaneously with, or in contemplation of, the transfer. This guidance is effective for the first interim or annual period beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of this guidance is not expected to have a material effect on the Company's consolidated statement of condition or results of operations.


In June 2011, the Financial Accounting Standards Board (“FASB”) issued guidance regarding the presentation of comprehensive income. Under this guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. It does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. The Company is currently evaluating the potential impact of adopting the ASU.



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NOTE 14. SUBSEQUENTS EVENTS
In accordance with ASC Topic 855, the Company has evaluated whether any subsequent events that require recognition or disclosure in the accompanying financial statements and notes thereto have taken place through the date these financial statements were issued. The Company has determined that there are no such subsequent events to report.


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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 which may be identified by the use of such words as “may,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate,” “predict,” “continue,” and “potential” or the negative of these terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to, estimates with respect to the Company’s financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include but are not limited to the following:
On February 10, 2011, Carver Federal Savings Bank and Carver Bancorp, Inc. consented to enter into Cease and Desist Orders (“Orders”) with the OTS. The OTS issued these Orders based upon its findings that the Company is operating with an inadequate level of capital for the volume, type and quality of assets held by the Company, that it is operating with an excessive level of adversely classified assets and that its earnings are inadequate to augment its capital. The raising of additional capital to address the finding of inadequate capital may dilute the capital holdings of existing shareholders.
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;
changes in existing loan portfolio composition and credit quality, and changes in loan loss requirements;
legislative or regulatory changes which may adversely affect the Company’s business, including but not limited to the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act;
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;
changes in interest rates which may reduce net interest margin and net interest income;
increases in competitive pressure among financial institutions or non-financial institutions;
technological changes which may be more difficult to implement or expensive than anticipated;
changes in deposit flows, loan demand, real estate values, borrowing facilities, capital markets and investment opportunities which may adversely affect the business;
changes in accounting principles, policies or guidelines which may cause conditions to be perceived differently;
litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, which may delay the occurrence or non-occurrence of events longer than anticipated;
the ability to originate and purchase loans with attractive terms and acceptable credit quality;
the ability to attract and retain key members of management; and
the ability to realize cost efficiencies.
Any or all of the Company’s forward-looking statements in this Quarterly Report on Form 10-Q and in any other public statements that the Company or management makes may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and the Company assumes no obligation to, and expressly disclaims any obligation to, update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements, except as legally required. For a discussion of additional factors that could adversely affect the Company’s future performance, see “(Part I. Financial Information) Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “(Part II. Other information) Item 1A — Risk Factors.
Overview
Carver Bancorp, Inc., a Delaware corporation (the “Holding Company”, or “Registrant” is the holding company for Carver Federal Savings Bank (“Carver Federal” or the “Bank”), a federally chartered savings bank, and, on a parent-only basis,

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had minimal results of operations. The Holding Company is headquartered in New York, New York. The Holding Company conducts business as a unitary savings and loan holding company, and the principal business of the Holding Company consists of the operation of its wholly-owned subsidiary, Carver Federal. Carver Federal was founded in 1948 to serve African-American communities whose residents, businesses and institutions had limited access to mainstream financial services. The Bank remains headquartered in Harlem, and predominantly all its nine branches and nine stand-alone 24/7 ATM Centers are located in low- to moderate-income neighborhoods. Many of these historically underserved communities have experienced unprecedented growth and diversification of incomes, ethnicity and economic opportunity, after decades of public and private investment.
Carver Federal is the largest African-American operated bank in the United States. The Bank remains dedicated to expanding wealth enhancing opportunities in the communities it serves by increasing access to capital and other financial services for consumers, businesses and non-profit organizations, including faith-based institutions. A measure of its progress in achieving this goal includes the Bank’s “Outstanding” rating, awarded by the OTS following its most recent Community Reinvestment Act (“CRA”) examination in 2009. The examination report noted that 76.1% of Carver’s community development lending and 55.4% of Carver’s Home-Owners Mortgage Disclosure Act (“HMDA”) reportable loan originations were within low- to moderate-income geographies, which far exceeded peer institutions. The Bank had approximately $678 million in assets as of June 30, 2011 and employed approximately 135 employees as of June 30, 2011.

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

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

The Bank's primary market area for deposits consists of the areas served by its nine branches in the Brooklyn, Manhattan and Queens boroughs of New York City.  The neighborhoods in which the Bank's branches are located have historically been low- to moderate-income areas. 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 had become more intense as a result of increased examination emphasis by federal banking regulators on financial institutions' fulfillment of their responsibilities under the CRA and more recently due to the decline in demand for loans by qualified borrowers. Carver Federal's market area has a high density of financial institutions, many of which have greater financial resources, name recognition and market presence, and all of which are competitors to varying degrees. The Bank's competition for loans comes principally from mortgage banking companies, commercial banks, and savings institutions. The Bank's most direct competition for deposits comes from commercial banks, savings institutions and credit unions. Competition for deposits also comes from money market mutual funds, corporate and government securities funds, and financial intermediaries such as brokerage firms and insurance companies. Many of the Bank's competitors have substantially greater resources and offer a wider array of financial services and products.  This combined with competitors' larger presence in the New York market add to the challenges the Bank faces in expanding its current market share and growing its near-term profitability.

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

The Bank formalized its many community focused investments on August 18, 2005, by forming Carver Community Development Corporation ("CCDC"). CCDC oversees the Bank's participation in local economic development and other community-based initiatives, including financial literacy activities. CCDC coordinates the Bank's development of an innovative approach to reach the unbanked customer market in Carver Federal's communities. Importantly, CCDC spearheads the Bank's applications for grants and other resources to help fund these important community activities. In this connection, Carver Federal has successfully competed with large regional and global financial institutions in a number of competitions for government grants and other awards.
New Markets Tax Credit Award


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In June 2006, Carver Federal 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 Carver Federal against Federal income taxes when the Bank makes qualified investments.  The credits are allocated over seven years from the time of the qualified investment. 

Recognition of the Bank's $59.0 million NMTC award began in December 2006 when the Bank invested $29.5 million, one-half of its $59 million award.  In December 2008, the Bank invested an additional $10.5 million and transferred rights to $19.2 million to an investor in a NMTC project.  The Bank's NMTC allocation was fully invested as of December 31, 2008. In December 2010, the Company divested its interest in the remaining $7.8 million NMTC tax credits that it would have received through the period ending March 31, 2014, by exchanging its equity interests in the special purpose entities holding the qualified investments for a cash payment of $6.7 million from a special purposes entity, controlled by an unrelated investor, set up to acquire these equity interests. CCDC continues to provide certain administrative services to the special purpose entity that acquired the equity interests. In addition, Carver still provides the funding to the underlying projects. The $6.7 million investor equity was classified as non-controlling interest in the Statement of Financial Condition. At June 30, 2011 the balance of non-controlling interest was $3.4 million.

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

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

In June 2010, the Bank transferred rights to an investor in a NMTC project totaling $10.0 million and recognized a gain on the transfer of rights of $0.4 million. The Bank and CCDC have involvements with special purpose entities that were created to facilitate the ultimate investment made by the investor. In addition, CCDC has retained a 0.01% interest in another entity created to facilitate the investment with the investor owning the remaining 99.99%. CCDC also provides certain administrative services to these special purpose entities. The Bank has determined that it and CCDC do not have the sole power to direct activities of these special purpose entities that significantly impact their performance therefore it is not the primary beneficiary of these entities.

In August 2010, the Bank transferred rights to an investor in a NMTC project totaling $6.6 million and recognized a gain on the transfer of rights of $0.3 million. The Bank and CCDC have involvements with special purpose entities that were created to facilitate the ultimate investment made by the investor. In addition, CCDC has retained a 0.01% interest in another entity created to facilitate the investment with the investor owning the remaining 99.99%. CCDC also provides certain administrative services to these special purpose entities. The Bank has determined that it and CCDC do not have the sole power to direct activities of these special purpose entities that significantly impact their performance therefore it is not the primary beneficiary of these entities.

In February 2011, the Company announced that Carver Federal had been selected to receive a third NMTC award in the amount of $25 million.

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Critical Accounting Policies
Note 2 to the Company’s audited Consolidated Financial Statements for fiscal year-end 2011 included in its 2011 Form 10-K, as supplemented by this report, contains a summary of significant accounting policies and is incorporated by reference. The Company believes its policies, with respect to the methodology for determining the allowance for loan losses, the evaluation of realization of deferred tax assets and the fair value of financial instruments involve a high degree of complexity and require management to make subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. The following description of these policies should be read in conjunction with the corresponding section of the Company’s fiscal 2011 Form 10-K.
Allowance for Loan Losses

The adequacy of the Bank's ALLL is determined, in accordance with the Interagency Policy Statement on the Allowance for Loan and Lease Losses (the “Interagency Policy Statement”) released by the Office of Thrift Supervision on December 13, 2006 and in accordance with Accounting Standards Codification (“ASC”) Topic 450 and ASC Topic 310.  Compliance with the Interagency Policy Statement includes management's review of the Bank's loan portfolio, including the identification and review of individual problem situations that may affect a borrower's ability to repay.  In addition, management reviews the overall portfolio quality through an analysis of delinquency and non-performing loan data, estimates of the value of underlying collateral, current charge-offs and other factors that may affect the portfolio, including a review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and composition of the loan portfolio are all taken into consideration. 

The ALLL reflects management's evaluation of the loans presenting identified loss potential, as well as the risk inherent in various components of the portfolio.  There is a great amount of judgment applied to developing the ALLL.  As such, there can never be assurance that the ALLL accurately reflects the actual loss potential embedded in a loan portfolio.  Any change in the judgments utilized to develop the ALLL can change the ALLL.  Further, any change in the size of the loan portfolio or any of its components could necessitate an increase in the ALLL even though there may not be a decline in credit quality or an increase in potential problem loans.

General Reserve Allowance
Carver's maintenance of a general reserve allowance in accordance with ASC Topic 450 includes Carver's evaluating the risk to loss potential of pools of loans based upon a review of 10 different factors that are then applied to each pool.  The pools of loans (“Loan Type”) are:
1-4 Family
Construction
Multifamily
Commercial Real Estate
Business Loans
SBA Loans
Other (Consumer and Overdraft Accounts)

The pools are further segregated into the following risk rating classes:

Pass and Pass with Care
Special Mention
Substandard
Doubtful

The Bank next applies to each pool a risk factor that determines the level of general reserves for that specific pool.  The risk factors are comprised of actual losses for the most recent four quarters as a percentage of each respective Loan Type plus qualitative factors.  As the loss experience for a Loan Type increases or decreases, the level of reserves required for that particular Loan Type also increases or decreases.  Because actual loss experience may not adequately predict the level of losses embedded in a portfolio, the Bank reviews nine qualitative factors to determine if reserves should be increased based upon any of those factors.  As the risk ratings worsen some of the qualitative factors tend to increase.  The nine qualitative factors the Bank considers and may utilize are:

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1.
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses (Policy & Procedures).
2.
Changes in relevant economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments. (Economy).
3.
Changes in the nature or volume of the loan portfolio and in the terms of loans (Nature & Volume).
4.
Changes in the experience, ability, and depth of lending management and other relevant staff (Management).
5.
Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans (Problem Assets).
6.
Changes in the quality of the loan review system (Loan Review).
7.
Changes in the value of underlying collateral for collateral-dependent loans (Collateral Values).
8.
The existence and effect of any concentrations of credit and changes in the level of such concentrations (Concentrations).
9.
The effect of other external forces such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio (External Forces).

Specific Reserve Allowance

Carver also maintains a specific reserve allowance for Criticized & Classified loans individually reviewed for impairment in accordance with ASC Topic 310 guidelines and deemed to be impaired.  ASC Topic 310 (formerly known as SFAS No. 114) is the primary basis for determining if a loan is impaired, and if impaired, valuing the impairment amount of specific loans whose collectability has been called into question.  The amount assigned to this aspect of the ALLL is the individually-determined (i.e., loan-by-loan) portion thereof.  The standard requires the use of one of three approved methods to estimate the amount to be reserved and/or charged off for such credits.  The three methods are as follows:

1.The present value of expected future cash flows discounted at the loan's effective interest rate,
2.The loan's observable market price, or
3.The fair value of the collateral if the loan is collateral dependent.

The institution may choose the appropriate ASC Topic 310 measurement on a loan-by-loan basis for an individually impaired loan, except for an impaired collateral-dependent loan.  Guidance requires impairment of a collateral dependent loan to be measured using the fair value of collateral method. A loan is considered "collateral dependent" when the repayment of the debt will be provided solely by the underlying collateral, and there are no other available and reliable sources of repayment.

Criticized and Classified loans with at risk balances of $1 million or more and loans below $1 million that the Credit Officer deems appropriate for review, are identified and reviewed for individual evaluation for impairment in accordance with ASC Topic 310, Accounting by Creditors for Impairment of a Loan.  Carver also performs impairment analysis for all trouble debt restructuring (“TDRs”).  If it is determined that it is probable the Bank will be unable to collect all amounts due according with the contractual terms of the loan agreement, the loan is categorized as impaired. 

If the loan is determined to be not impaired, it is then placed in the appropriate pool of Criticized & Classified loans to be evaluated for potential losses.  Loans determined to be impaired are then evaluated to determine the measure of impairment amount based on one of the three measurement methods noted above.  If it is determined that there is an impairment amount, the Bank then determines whether the impairment amount is permanent (that is a confirmed loss), in which case the impairment is written down, or if it is other than permanent, in which case the Bank establishes a specific valuation reserve that is included in the total ALLL.  In accordance with guidance, if there is no impairment amount, no reserve is established for the loan.

Securities Impairment
The Bank’s available-for-sale securities portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity. Securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. The fair values of securities in portfolio are based on published or securities dealers’ market values and are affected by changes in interest rates. The Bank quarterly reviews and evaluates the securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary. The Bank generally views changes in fair value caused by changes in interest rates as temporary, which is consistent with its experience. In April 2009, the FASB issued guidance that changes the amount of another-than-temporary impairment that is recognized in earnings when there are non-credit losses on a debt security which management

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does not intend to sell, and for which it is more-likely-than-not that the entity will not be required to sell the security prior to the recovery of the non-credit impairment. In those situations, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and the remaining difference between the debt security’s amortized cost basis and its fair value would be included in other comprehensive income. This guidance also requires additional disclosures about investments in an unrealized loss position and the methodology and significant inputs used in determining the recognition of other-than-temporary impairment. At June 30, 2011, the Bank does not have any other securities that may be classified as having other than temporary impairment in its investment portfolio.

Deferred Income Taxes

The Company records income taxes in accordance with ASC 740 “Income Taxes,” as amended, using the asset and liability method. Income tax expense (benefit) consists of income taxes currently payable/(receivable) and deferred income taxes.  Temporary differences between the basis of assets and liabilities for financial reporting and tax purposes are measured as of the balance sheet date.  Deferred tax liabilities or recognizable deferred tax assets are calculated on such differences, using current statutory rates, which result in future taxable or deductible amounts.  The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Where applicable, deferred tax assets are reduced by a valuation allowance for any portion determined not likely to be realized. This valuation allowance would subsequently be adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant.

On June 29, 2011, the Company raised $55 million of equity. The capital raise triggered a change in control  under Section 382 of the Internal Revenue Code.  Generally,  Section 382 limits the utilization of an entity's net operating loss carry forwards, general business credits, and recognized built-in losses upon a change in ownership. The Company has filed an extension for its tax return for the fiscal year ended March 31, 2011 and has not yet determined the potential tax attributes that may be subject to limitation under section 382. However, based on information available as of the ownership change date the Company anticipates a substantial portion of the tax attributes to be available over the life of such attributes.

Stock Repurchase Program
On August 6, 2002, the Holding Company announced a stock repurchase program to repurchase up to 231,635 shares of its outstanding common stock. As of June 30, 2011, 176,174 shares of its common stock have been repurchased in open market transactions at an average price of $15.72 per share. The Holding Company intends to use repurchased shares to fund its stock-based benefit and compensation plans and for any other purpose the Board deems advisable in compliance with applicable law. No shares were repurchased during the three months ended June 30, 2011. As a result of the Company’s participation in the Trouble Asset Relief Program Capital Purchase Program (“TARP CPP”) (Series B) and Community Development Capital Initiative (“CDCI”) (Series B), the U.S. Treasury’s prior approval is required to make further repurchases.
Liquidity and Capital Resources
Liquidity is a measure of the Bank's ability to generate adequate cash to meet its financial obligations.  The principal cash requirements of a financial institution are to cover potential deposit outflows, fund increases in its loan and investment portfolios and ongoing operating expenses.  The Bank's primary sources of funds are deposits, borrowed funds and principal and interest payments on loans, mortgage-backed securities and investment securities.  While maturities and scheduled amortization of loans, mortgage-backed securities and investment securities are predictable sources of funds, deposit flows and loan and mortgage-backed securities prepayments are strongly influenced by changes in general interest rates, economic conditions and competition. Carver Federal monitors its liquidity utilizing guidelines that are contained in a policy developed by its management and approved by its Board of Directors.  Carver Federal's several liquidity measurements are evaluated on a frequent basis.  The Bank was in compliance with this policy as of June 30, 2011.
While maturities and scheduled amortization of loans, mortgage-backed securities and investment securities are predictable sources of funds, deposit flows, loan and mortgage-backed securities prepayments are strongly influenced by changes in general interest rates, economic conditions and competition. Carver Federal monitors its liquidity utilizing guidelines that are contained in a policy developed by its management and approved by its Board of Directors. Carver Federal’s several liquidity measurements are evaluated on a frequent basis. The Bank was in compliance with this policy as of June 30, 2011.
Management believes Carver Federal’s short-term assets have sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash requirements. Additionally, Carver Federal has other sources of liquidity including the ability to borrow from the FHLB-NY utilizing unpledged mortgage-backed securities and certain mortgage

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loans, the sale of available-for-sale securities and the sale of certain mortgage loans. Net borrowings decreased $11.1 million during the first quarter of fiscal year 2012 primarily as a result of the bank utilizing excess liquidity to paydown its maturing borrowings. At June 30, 2011, the Bank had $83.1 million in borrowings with a weighted average rate of 3.32% maturing over the next three years. Due to the recent deterioration in asset quality, the FHLB —NY has limited new borrowings to a tenor of thirty days. At June 30, 2011, based on available collateral held at the FHLB-NY, Carver Federal had the ability to borrow from the FHLB-NY an additional $86 million on a secured basis, utilizing mortgage-related loans and securities as collateral.
The Bank’s most liquid assets are cash and short-term investments. The level of these assets is dependent on the Bank’s operating, investing and financing activities during any given period. At June 30, 2011 and 2010, assets qualifying for short-term liquidity, including cash and short-term investments, totaled $27.9 million  and $51.1 million, respectively.
The most significant liquidity challenge the Bank faces is variability in its cash flows as a result of mortgage refinance activity. When mortgage interest rates decline, customers’ refinance activities tend to accelerate, causing the cash flow from both the mortgage loan portfolio and the mortgage-backed securities portfolio to accelerate. In contrast, when mortgage interest rates increase, refinance activities tend to slow, causing a reduction of liquidity. However, in a rising rate environment, customers generally tend to prefer fixed rate mortgage loan products over variable rate products. Because Carver Federal generally sells its one-to-four family 15-year and 30-year fixed rate loan production into the secondary mortgage market, the origination of such products for sale does not significantly reduce Carver Federal’s liquidity.
The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During the three month period, ended June 30, 2011 total cash and cash equivalents decreased $9.9 million reflecting cash used in financing activities of $28.7 million, cash provided by operating activities of $5.1 million, and cash provided by investing activities of $13.6 million.
Net cash used in financing activities was $28.7 million, primarily resulting from decreases in deposits of $69.1 million and the maturity of a fixed-rate note of $11.0 million in the first quarter. These decreases were offset by the inflow of $51.4 million from the capital raise on June 29, 2011. Net cash used provided by operating activities during this period was $5.1 million and was primarily the result of an increase in provision for loan losses offset by an increase in other assets and proceeds received on those held for sale loans sold during the period. Net cash provided by investing activities was $13.6 million and was primarily the result of loan pay downs and payoffs of $20.8 million offset by $6.2 million of restricted cash posted as collateral.
The OTS requires that the Bank meet minimum capital requirements. Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system.
The table below presents the capital position of the Bank at June 30, 2011 (dollars in thousands):
 
 
Tier 1 Core
Capital
 
Tier 1 Risk-
Based
Capital
 
Total Risk-
Based
Capital
 
 
Ratio
 
Ratio
 
Ratio
GAAP Capital at June 30, 2011
 
$
70,023

 
$
70,023

 
$
70,023

Add:
 
 
 
 
 
 
General valuation allowances
 

 

 
6,429

Qualifying subordinated debt
 

 

 
5,000

Other
 
234

 
234

 
234

Deduct:
 
 
 
 
 
 
Unrealized gains on securities available-for-sale, net
 
155

 
155

 
155

Goodwill and qualifying intangible assets, net
 
38

 
38

 
38

Regulatory Capital
 
$
70,064

 
$
70,064

 
$
81,493

Minimum Capital requirement
 
10,168

 
27,114

 
40,103

Regulatory Capital Excess
 
$
59,896

 
$
42,950

 
$
41,390

Capital Ratios
 
10.34
%
 
13.98
%
 
16.26
%
Bank Regulatory Matters
As previously announced on February 10, 2011, Carver Federal Savings Bank and Carver Bancorp, Inc. consented to enter into Cease and Desist Orders (“Orders”) with the OTS. The OTS is issuing these Orders based upon its findings that the

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Company is operating with an inadequate level of capital for the volume, type and quality of assets held by the Company, that it is operating with an excessive level of adversely classified assets and that its earnings are inadequate to augment its capital. On June 29, 2011 the Company raised $55 million of capital. The $55 million resulted in a $51.4 million increase in liquidity net of the effect of various expenses associated with the capital raise. In addition, the Company downstreamed $37 million to Carver Federal Savings Bank, the Company's wholly owned bank subsidiary. No assurances can be given that the amount of capital raised is sufficient to absorb the expected losses emanating from the Bank's loan portfolio. Should the losses be greater than expected additional capital may be necessary in the future.
The Orders included a capital directive requiring the Bank to achieve and maintain minimum regulator capital levels. Carver's capital level now exceeds regulatory requirements, with a Tier 1 leverage capital ratio of 10.34% versus the required 9% and total risk-based capital ratio of 16.26% versus the required 13%.
In addition, no assurances can be given that the Bank and the Company will continue to comply with all provisions of the Order. Failure to comply with these provisions could result in further regulatory actions to be taken by the regulators.
Under the Orders, the Bank and Company are also prohibited from paying any dividends without prior OTS approval, and, as such, have suspended the regularly quarterly cash dividend payments on the Company's fixed-rate cumulative perpetual preferred stock issued under the Capital Purchase Program to the United States Department of Treasury and have deferred Carver Statutory Trust I debenture interest payments.


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Comparison of Financial Condition at June 30, 2011 and March 31, 2011
Assets
At June 30, 2011, total assets decreased $30.9 million or (4.4)% to $678.3 million compared to $709.2 million at March 31, 2011. Cash and cash equivalents decreased $9.9 million, investment securities decreased $0.2 million, total loans receivable decreased $36.2 million, and the allowance for loan losses decreased $0.6 million. These increases were partially offset by loans held for sale which increased by $8.9 million and other assets increased $2.3 million.
Cash and cash equivalents decreased $9.9 million, or (22.5)% to $34.1 million at June 30, 2011 compared to $44.1 million at March 31, 2011. This decrease was primarily driven by the repayment of institutional deposits totaling $61 million and the repayment of the maturing borrowing of $11 million offset by the capital raise inflow of $55 million and net loan payoffs, pay downs and sales of $22 million.
Investment securities is flat at $71.0 million at June 30, 2011 compared to $71.2 million at March 31, 2011. This change reflected an increase of $3.6 million in available-for-sale securities and a $3.8 million decrease in held-to-maturity securities as the Company reinvested cash flows from held to maturity securities back in to the available for sale portfolio.
Net loans receivable decreased $36.8 million or (6.6)% , to $520.4 million at June 30, 2011 compared to $557.2 million at March 31, 2011. Principal repayments across all loan classifications contributed to the majority of the decrease, with the largest impact from Commercial Real Estate, Construction and Business loans. Additionally $8.9 million of loans were transferred from held for investment to held for sale as the Company works down its problem loans.

Liabilities and Stockholders’ Equity
Total liabilities decreased $76.5 million, or (11.2)%, to $605.0 million at June 30, 2011 compared to $681.5 million at March 31, 2011. The decrease in total liabilities is primarily due to the decline in total deposits of $69.1 million and the maturity of one fixed-rate notes from the FHLB-NY totaling $11.1 million.
Deposits decreased $69.1 million or (12.3)%, to $491.6 million at June 30, 2011 compared to $560.7 million at March 31, 2011. Certificates of deposit and NOW balances have declined due to repayments of institutional deposits.
Advances from the FHLB-NY and other borrowed money decreased $11.1 million , or (9.8)%, to $101.6 million at June 30, 2011 compared to $112.6 million at March 31, 2011. The decrease was the result of the maturity of a fixed-rate notes in July 2010 ($11.0 million).
Total stockholders’ equity increased $45.6 million, or 164.5%, to $73.3 million at June 30, 2011 compared to $27.7 million at March 31, 2011. The key component of this increase was a $55 million capital raise closed on June 29, 2011 as previously reported in the Form 8-K filed with the Securities and Exchange Commission on June 29, 2011. The increase in stockholders' equity from the capital raise was partially offset by expenses of approximately $3.6 million related to the capital raise and the net loss for the quarter of $6.1 million.
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

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varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are not recorded in the consolidated financial statements. Such instruments primarily include lending obligations, including commitments to originate mortgage and consumer loans and to fund unused lines of credit.
Lending commitments include commitments to originate mortgage and consumer loans and commitments to fund unused lines of credit. The Bank has contractual obligations related to operating leases as well as a contingent liability related to a standby letter of credit.The Bank also has a commitment to fund an investment related to a private equity partnership. See the table below for the Bank’s outstanding lending commitments and contractual obligations at June 30, 2011.
The following table reflects the outstanding commitments as of June 30, 2011 (in thousands):
Commitments to fund construction mortgage loans
$
4,732

Commitments to fund commercial and consumer loans
75

Lines of credit
5,708

Letters of credit
144

Commitment to fund Private Equity investment
500

 
$
11,159



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Comparison of Operating Results for the Three Months Ended June 30, 2011 and 2010
Overview
The Company reported a net loss of $6.1 million for the first quarter of fiscal 2012 compared to net loss of $2.5 million for the first quarter of fiscal 2011. Net loss per share for the quarter was $2.51 compared to net loss per share of $1.09 for the first quarter of fiscal 2011. The net loss is primarily the result of $5.2 million in provision for loan losses which is $1.1 million less than the provision set aside in the prior year quarter.
The following table reflects selected operating ratios for the three months ended June 30, 2011 and 2010:

CARVER BANCORP, INC. AND SUBSIDIARIES
SELECTED KEY RATIOS
(Unaudited)
 
 
Three Months Ended
June 30,
Selected Financial Data:
 
2011
 
2010
Return on average assets (1)
 
(3.52
)%
 
(1.22
)%
Return on average equity (2)
 
(84.16
)%
 
(13.91
)%
Net interest margin (3)
 
3.19
 %
 
3.89
 %
Interest rate spread (4)
 
2.90
 %
 
3.78
 %
Efficiency ratio (5)
 
114.50
 %
 
83.64
 %
Operating expenses to average assets (6)
 
4.19
 %
 
3.67
 %
Average equity to average assets (7)
 
4.18
 %
 
8.80
 %
Average interest-earning assets to average interest-bearing liabilities
 
1.24x

 
1.08x

(1)
Net income, annualized, divided by average total assets.
(2)
Net income, annualized, divided by average total equity.
(3)
Net interest income, annualized, divided by average interest-earning assets.
(4)
Combined weighted average interest rate earned less combined weighted average interest rate cost.
(5)
Operating expenses divided by sum of net interest income plus non-interest income.
(6)
Non-interest expenses less loss on real estate owned, annualized, divided by average total assets.
(7)
Total average equity divided by total average assets for the period.
Analysis of Net Interest Income
The Company’s profitability is primarily dependent upon net interest income and further affected by provisions for loan losses, non-interest income, non-interest expense and income taxes. Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned and paid. The Company’s net interest income is significantly impacted by changes in interest rate and market yield curves.
Net interest income decreased $1.8 million to $5.3 million compared to $7.1 million for the prior year quarter. The variance was predominantly in interest income which declined $2.4 million partially offset by a decrease in interest expense of $0.6 million.
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 months ended June 30, 2011 and 2010. 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.

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CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCES
(In thousands)
(Unaudited)
 
 
For the Three Months Ended June 30,
 
 
2011
 
2010
 
 
Average
Balance
 
Interest
 
Average
Yield/Cost
 
Average
Balance
 
Interest
 
Average
Yield/Cost
Interest Earning Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1)
 
$
580,145

 
$
6,702

 
4.62
%
 
$
657,443

 
$
8,948

 
5.44
%
Investment securities
 
71,365

 
455

 
2.55
%
 
62,925

 
620

 
3.94
%
Equity securities (2)
 
3,339

 
72

 
8.63
%
 
4,009

 
46

 
4.59
%
Other investments and federal funds sold
 
7,107

 
5

 
0.28
%
 
1,368

 
5

 
1.58
%
Total interest-earning assets
 
661,956

 
7,234

 
4.37
%
 
725,745

 
9,619

 
5.30
%
Non-interest-earning assets
 
34,774

 
 
 
 
 
88,541

 
 
 
 
Total assets
 
$
696,730

 
 
 
 
 
$
814,286

 
 
 
 
Interest Bearing Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Now demand
 
$
27,081

 
11

 
0.16
%
 
$
42,096

 
31

 
0.30
%
Savings and clubs
 
107,389

 
70

 
0.26
%
 
116,141

 
73

 
0.25
%
Money market
 
67,648

 
169

 
1.00
%
 
70,814

 
223

 
1.26
%
Certificates of deposit
 
214,510

 
744

 
1.39
%
 
316,975

 
1,177

 
1.49
%
Mortgagors deposits
 
2,863

 
12

 
1.68
%
 
3,173

 
13

 
1.64
%
Total deposits
 
419,491

 
1,006

 
0.96
%
 
549,199

 
1,517

 
1.10
%
Borrowed money
 
112,514

 
950

 
3.38
%
 
124,542

 
1,041

 
3.34
%
Total interest-bearing liabilities
 
532,005

 
1,956

 
1.47
%
 
673,741

 
2,558

 
1.52
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Demand
 
128,292

 
 
 
 
 
60,322

 
 
 
 
Other liabilities
 
7,293

 
 
 
 
 
8,601

 
 
 
 
Total liabilities
 
667,590

 
 
 
 
 
742,664

 
 
 
 
Minority Interest
 

 
 
 
 
 

 
 
 
 
Stockholders’ equity
 
29,140

 
 
 
 
 
71,622

 
 
 
 
Total liabilities & stockholders’ equity
 
$
696,730

 
 
 
 
 
$
814,286

 
 
 
 
Net interest income
 
 
 
$
5,278

 
 
 
 
 
$
7,061

 
 
Average interest rate spread
 
 
 
 
 
2.90
%
 
 
 
 
 
3.78
%
Net interest margin
 
 
 
 
 
3.19
%
 
 
 
 
 
3.89
%
(1)
Includes non-accrual loans
(2)
Includes FHLB-NY stock

Interest Income
Interest income decreased $2.4 million to $7.2 million for the quarter ended June 30, 2011 compared to $9.6 million for the prior year period. The change in interest income was primarily the result of a decrease in interest income on loans of  $2.2 million and a decline in the interest income on mortgage-backed securities of $0.2 million. Interest income decreased $2.4 million in the first quarter, compared to the prior year quarter, due to the decrease in yields on interest bearing asset and the decrease in the average balance of interest earning assets. $1.4 million of the decrease in interest income was due to the lower yields and $1.0 million was due to the decrease in the average balances. The average yield on investment securities decreased 139 basis points to 2.55% from 3.94% as new securities purchased to replace securities called and pay downs in the portfolio carried lower rates. The average yield on loans decreased 82 basis points to 4.62% from 5.44% due to the growth in non-accrual loans. The decline in average loans was the result of management's efforts to reduce the level of non-performing loans, the majority of which are real

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estate loans. It is anticipated that the reduction in real estate loans will continue over the next several quarters until troubled debt resolutions are complete and the Company's concentration in real estate assets meets regulatory guidelines. The current low interest rate environment combined with elevated levels of non-performing assets and a reduction in interest earning assets continues to constrain net interest income.
Interest Expense
Interest expense decreased by $0.6 million, or 23.5%, to $2.0 million for the first quarter, compared to $2.6 million for the prior year quarter. The decrease was primarily due to a decline in deposit interest expense of $0.5 million. The decrease in interest expense reflects a 5 basis point decrease in the average cost of interest-bearing liabilities to 1.47% for the first quarter, compared to an average cost of 1.52% for the prior year period. The decrease in the average cost of interest bearing liabilities was primarily due to the continued downward re-pricing of certificates of deposits and the deleveraging of the Certificate of Deposit Account Registry Service "CDARS" portfolio.
Provision for Loan Losses and Asset Quality
The Bank maintains an ALLL that management believes is adequate to absorb inherent and probable losses in its loan portfolio. The adequacy of the ALLL is determined by management’s continuous review of the Bank’s loan portfolio, which includes identification and review of individual factors that may affect a borrower’s ability to repay. Management reviews overall portfolio quality through an analysis of delinquency and non-performing loan data, estimates of the value of underlying collateral and current charge-offs. A review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and composition of the loan portfolio are all taken into consideration. The ALLL reflects management’s evaluation of the loans presenting identified loss potential as well as the risk inherent in various components of the portfolio. As such, an increase in the size of the portfolio or any of its components could necessitate an increase in the ALLL even though there may not be a decline in credit quality or an increase in potential problem loans.
The Bank’s provision for loan loss methodology is consistent with the Interagency Policy Statement on the Allowance for Loan and Lease Losses (the “Interagency Policy Statement”) released by the Federal Financial Regulatory Agencies on December 13, 2006. For additional information regarding the Bank’s ALLL policy, refer to Note 2 of Notes to Consolidated Financial Statements, “Summary of Significant Accounting Policies” included in the Holding Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011.
The following table summarizes the activity in the ALLL for the three month period ended June 30, 2011 and fiscal year-end March 31, 2011 (dollars in thousands):
 
 
Three Months
Ended
June 30, 2011
 
Fiscal Year
Ended
March 31, 2011
Beginning Balance
 
23,147

 
12,000

Less: Charge-offs
 
(4,571
)
 
(16,019
)
Add: Recoveries
 
18

 
52

Provision for Loan Losses
 
5,170

 
27,114

Ending Balance
 
$
23,764

 
$
23,147

Ratios:
 
 
 
 
Net charge-offs to average loans outstanding
 
0.78
%
 
2.54
%
Allowance to total loans
 
4.37
%
 
3.99
%
Allowance to non-performing loans
 
20.62
%
 
29.90
%
The Bank recorded a $5.2 million provision for loan losses in the quarter ended June 30, 2011 compared to $6.2 million for the prior year period. The increased provision is in response to the Company’s current levels of delinquencies and non-performing loans and the uncertainty caused by the uneven economic recovery in the real estate market and the New York City economy. At June 30, 2011, non-performing loans totaled $115.2 million, or 17.02% of total assets compared to $77.4 million or 10.99% of total assets at March 31, 2011. The ALLL was $23.8 million at June 30, 2011, which represents a ratio of the ALLL to non-performing loans of 20.62% compared to 29.90% at March 31, 2011. The ratio of the ALLL to total loans was 4.37% at June 30, 2011 up from 3.99% at March 31, 2011.


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Non-performing Assets
Non-performing assets consist of non-accrual loans and property acquired in settlement of loans, including foreclosure. When a borrower fails to make a payment on a loan, the Bank and/or its loan servicers takes prompt steps to have the delinquency cured and the loan restored to current status. This includes a series of actions such as phone calls, letters, customer visits and, if necessary, legal action. In the event the loan has a guarantee, the Bank may seek to recover on the guarantee, including, where applicable, from the SBA. Loans that remain delinquent are reviewed for reserve provisions and charge-off. The Bank’s collection efforts continue after the loan is charged off, except when a determination is made that collection efforts have been exhausted or are not productive.
The Bank may from time to time agree to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). Loans modified in a TDR are placed on non-accrual status until the Bank determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for a minimum of six months. At June 30, 2011, loans classified as a TDR totaled $21.3 million.
At June 30, 2011, non-performing assets totaled $115.5 million, or 17.02%, of total assets compared to $78.0 million, or 10.99%, of total assets at March 31, 2011. The increase in non-performing loans impacted all loan types except consumer loans, with the largest increase in construction and commercial loans. Uncertainty still remains with respect to the timing of a sustained economic recovery which may affect the ability of borrowers to stay current with their loans.






















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The following table sets forth information with respect to the Bank’s non-performing assets for the past five quarter end periods (dollars in thousands):
CARVER BANCORP, INC. AND SUBSIDIARIES
Non Performing Asset Table
(In thousands)
 
 
June
 
March
 
December
 
September
 
June
 
 
2011
 
2011
 
2010
 
2010
 
2010
Loans accounted for on a non-accrual basis (1):
 
 
 
 
 
 
 
 
 
 
Gross loans receivable:
 
 
 
 
 
 
 
 
 
 
One- to four-family
 
$
16,421

 
$
15,993

 
$
16,290

 
$
14,583

 
$
14,320

Multifamily
 
9,307

 
6,786

 
14,076

 
14,103

 
16,923

Non-residential
 
25,893

 
10,078

 
12,231

 
11,189

 
13,249

Construction
 
54,425

 
37,218

 
40,060

 
36,145

 
34,792

Business
 
9,159

 
7,289

 
7,471

 
3,699

 
7,031

Consumer
 
22

 
42

 
20

 
37

 
15

Total non-accrual loans
 
115,227

 
77,406

 
90,148

 
79,756

 
86,330

Other non-performing assets (2):
 
 
 
 
 
 
 
 
 
 
Real estate owned
 
237

 
564

 

 
19

 
1

Total other non-performing assets
 
237

 
564

 

 
19

 
1

Total non-performing assets (3)
 
$
115,464

 
$
77,970

 
$
90,148

 
$
79,775

 
$
86,331

Accruing loans contractually past due > 90 days (4)
 

 

 

 
1,765

 
478

Non-performing loans to total loans
 
21.18
%
 
13.34
%
 
14.97
%
 
12.88
%
 
13.34
%
Non-performing assets to total assets
 
17.02
%
 
10.99
%
 
12.12
%
 
10.57
%
 
10.74
%
(1)
Non-accrual status denotes any loan where the delinquency exceeds 90 days past due and in the opinion of management the collection of additional interest and/or principal is doubtful. Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on assessment of the ability to collect on the loan.
(2)
Other non-performing assets generally represent property acquired by the Bank in settlement of loans less costs to sell (i.e., through foreclosure, repossession or as an in-substance foreclosure). These assets are recorded at the lower of their cost or fair value.
(3)
Troubled debt restructured loans performing in accordance with their modified terms for less than six months and those not performing in accordance with their modified terms are considered non-accrual and are included in the non-accrual category in the table above. TDR loans that have performed in accordance with their modified terms for a period of at least six months are generally considered performing loans and are not presented in the table above.
(4)
Loans 90 days or more past due and still accruing, which were not included in the non-performing category, are presented in the above table.
Subprime Loans
In the past, the Bank originated a limited amount of subprime loans; however, such lending has been discontinued. At June 30, 2011, the Bank had $8.0 million in subprime loans, or 1.5%, of its total loan portfolio of which $4.9 million are non-performing loans.
Non-Interest Income
Non-interest income decreased $0.8 million, or (41.4)%, to $1.1 million for the first quarter, compared to $1.9 million for the prior year period. The decrease is primarily due to non-recurring fees that were earned on New Market Tax Credit (NMTC) transactions in the prior period.
Non-Interest Expense
Non-interest expense decreased $0.2 million, or (2.3)%, to $7.3 million compared to $7.5 million for the prior year period. The decline is primarily due to lower consulting fees and a reduction in employee compensation expenses incurred in the current period.

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Income Tax Benefit
The income tax benefit was $0.1 million for the quarter ended June 30, 2011 compared to an income tax benefit of $2.3 million for the prior year period. The benefit for the three month period ending June 30, 2011 is primarily related to loan write-offs taken in the quarter.



Item 3.
Quantitative and Qualitative Disclosure about Market Risk
Quantitative and qualitative disclosure about market risk is presented at March 31, 2011 in Item 7A of the Company’s 2011 Form 10-K and is incorporated herein by reference. The Company believes that there has been no material change in the Company’s market risk at June 30, 2011 compared to March 31, 2011.

Item 4.
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. As of June 30, 2011, the Company’s management, including the Company’s Chief Executive Officer (Principal Executive Officer) and Controller (Principal Accounting Officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Controller concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Controller, as appropriate, to allow timely decisions regarding required disclosure.

(b) Management's Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's system of internal control is designed under the supervision of management, including the Company's Chief Executive Officer and Principal Accounting Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with U.S. Generally Accepted Accounting Principles ("GAAP").

The Company's internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are made only in accordance with the authorization of management and the Boards of Directors of the Parent Company and the subsidiary banks; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the Company's financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate.

As of June 30, 2011, management assessed the effectiveness of the Company's internal control over financial reporting based upon the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon its assessment, management believes that the Company's internal control over financial reporting as of June 30, 2011 is effective using these criteria.

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

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PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

From time to time, Carver Federal is a party to various legal proceedings incident to its business.  Certain claims, suits, complaints and investigations (collectively “proceeding”) involving Carver Federal, arising in the ordinary course of business, have been filed or are pending.  The Company is unable at this time to determine the ultimate outcome of each proceeding, but believes, after discussions with legal counsel representing Carver Federal in these proceedings, that it has meritorious defenses to each proceeding and Carver Federal is taking appropriate measures to defend its  interests.  Carver Federal is a defendant in one lawsuit brought by a purported fifty percent loan participant on a multifamily loan, alleging grossly negligence and breach of contract in the manner in which Carver Federal serviced the loan.  Plaintiff asserts damages in excess of $500,000.  Carver Federal brought a counter claim against the plaintiff and a third party complaint against the original loan participant seeking recovery of funds Carver Federal advanced on their behalf, such as real estate taxes, in connection with servicing of the multifamily loan.  In another matter, in September 2010, the New York State Department of Labor ("DOL") Unemployment Insurance Division, based on claims for unemployment benefits made by two individuals formerly engaged as independent contractors by Carver Federal, determined that these two individuals were employees and not independent contractors for Unemployment Insurance purposes.  Carver Federal requested a hearing before the Unemployment Insurance Appeal Board (“Appeal Board”).  On July 18, 2011, an Appeal Board's Administrative Judge sustained the DOL's determination.  Carver Federal continues to believe it has a meritorious case and has recently filed an appeal with the Appeals Board.  In accordance with ASC Topic 450 Carver has accrued $340,537.



Item 1A.
Risk Factors
The following risk factors represent material updates and additions to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011 (“Form 10-K”). The risk factors below should be read in conjunction with the risk factors and other information disclosed in our Form 10-K. The risks described below and in our Form 10-K are not the only risks facing the Company. Additional risks not presently known to the Company, or that we currently deem immaterial, may also adversely affect the Company’s business, financial condition or results of operations.
An investment in our securities is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below, in addition to the risk factors previously disclosed in ‘the Company’s Annual Report on Form 10-K for the year ended March 31, 2011.

Carver may not be able to utilize its income tax benefits  

The Company's ability to utilize the deferred tax asset generated by New Markets Tax Credit income tax benefits as well as other deferred tax assets depends on its ability to meet the NMTC compliance requirements and its ability to generate sufficient taxable income from operations to generate taxable income in the future. Since the Bank has not generated sufficient taxable income to utilize tax credits as they were earned, a deferred tax asset has been recorded in the Company's financial statements. For additional information regarding Carver's NMTC, refer to Item 7, “New Markets Tax Credit Award.”

The future recognition of Carver's deferred tax asset is highly dependent upon Carver's ability to generate sufficient taxable income. A valuation allowance is required to be maintained for any deferred tax assets that we estimate are more likely than not to be unrealizable, based on available evidence at the time the estimate is made. In assessing Carver's need for a valuation allowance, we rely upon estimates of future taxable income. Although we use the best available information to estimate future taxable income, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances influencing our projections. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, statutory rates, and future taxable income levels. The Company determined that it would not be able to realize all of its net deferred tax assets in the future, as such a charge to income tax expense in the second quarter of fiscal 2011 was made. Conversely, if the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of the net carrying amounts, the Company would decrease the recorded valuation allowance through a decrease in income tax expense in the period in which that determination was made.

On June 29, 2011, the Company raised $55 million of equity. The capital raise triggered a change in control  under Section

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382 of the Internal Revenue Code.  Generally,  Section 382 limits the utilization of an entity's net operating loss carry forwards, general business credits, and recognized built-in losses upon a change in ownership. The Company has filed an extension for its tax return for the fiscal year ended March 31, 2011 and has not yet determined the potential tax attributes that may be subject to limitation under section 382. However, based on information available as of the ownership change date the Company anticipates a substantial portion of the tax attributes to be available over the life of such attributes.

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act implements significant changes in the financial regulatory landscape and will impact all financial institutions. This impact may materially affect our business activities, financial position and profitability by, among other things. Increasing our regulatory compliance burden and associated costs, placing restrictions on certain products and services, and limiting our future capital raising strategies.
Among the Dodd-Frank Act’s significant regulatory changes, it creates a new financial consumer protection agency, known as the Bureau of Consumer Financial Protection (the “Bureau”), that is empowered to promulgate new consumer protection regulations and revise existing regulations in many areas of consumer protection. The Bureau has exclusive authority to issue regulations, orders and guidance to administer and implement the objectives of federal consumer protection laws. The Dodd-Frank Act also eliminates our primary regulator, the OTS and designates the Comptroller of the Currency to become our primary bank regulator. Moreover, the Dodd-Frank Act permits States to adopt stricter consumer protection laws and authorizes State attorney generals’ to enforce consumer protection rules issued by the Bureau. The Dodd-Frank Act also may affect the preemption of State laws as they affect subsidiaries and agents of federally chartered banks, changes the scope of federal deposit insurance coverage, and increases the FDIC assessment payable by the Bank. We expect that the Bureau and these other changes will significantly increase our regulatory compliance burden and costs and may restrict the financial products and services we offer to our customers.
The Dodd-Frank Act also imposes more stringent capital requirements on bank holding companies by, among other things, imposing leverage ratios on bank holding companies and prohibiting new trust preferred issuances from counting as Tier I capital. These restrictions will limit our future capital strategies. Under the Dodd-Frank Act, our outstanding trust preferred securities will continue to count as Tier I capital but we will be unable to issue replacement or additional trust preferred securities that would count as Tier I capital. Because many of the Dodd-Frank Act’s provisions require subsequent regulatory rulemaking, we are uncertain as to the impact that some of the provisions will have on the Company and cannot provide assurance that the Dodd-Frank Act will not adversely affect our financial condition and results of operations for other reasons.
Any future FDIC special assessments or increases in insurance premiums will adversely impact the Company’s earnings.
     The Standard & Poor's downgrade in the U.S. government's sovereign credit rating, and in the credit ratings of instruments issued, insured or guaranteed by certain related institutions, agencies and instrumentalities, could result in risks to the Company and general economic conditions that we are not able to predict.

     On August 5, 2011, Standard & Poor's downgraded the United States long-term debt rating from its AAA rating to AA+. On August 8, 2011, Standard & Poor's downgraded the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term U.S. debt. Instruments of this nature are key assets on the balance sheets of financial institutions, including the Bank. These downgrades could adversely affect the market value of such instruments, and could adversely impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. We cannot predict if, when or how these changes to the credit ratings will affect economic conditions. These ratings downgrades could result in a significant adverse impact to the Company, and could exacerbate the other risks to which the Company is subject, including those described under Risk Factors in the Company's 2011 Annual Report on Form 10-K.


Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
As previously disclosed on the Form 8-K, on June 29, 2011, Carver Bancorp, Inc. entered into stock purchase agreements with several institutional investors pursuant to which the investors agreed to purchase an aggregate of 55,000 shares of the Company's Mandatorily Convertible Non-Voting Participating Preferred Stock, Series C for an aggregate purchase price of $55,000,000.


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Item 3.
Defaults Upon Senior Securities
Not applicable.

Item 4.
Reserved

Item 5.
Other Information
Not applicable.

Item 6.
Exhibits
The following exhibits are submitted with this report:
 
Exhibit 11.  
Computation of Loss Per Share.
 
 
 
 
Exhibit 31.1
Certification of Chief Executive Officer.
 
 
 
 
Exhibit 31.2
Certification of Chief Accounting Officer.
 
 
 
 
Exhibit 32.1
Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
 
 
 
 
Exhibit 32.2
Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
 
 
 
 
Exhibits 101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements Changes in Stockholders Equity, (v) the Consolidated Statements of Cash Flows, (vi) the Notes to the Consolidated Financial Statements tagged as blocks of texts and in detail (1)
 
 
(1) As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CARVER BANCORP, INC.
 
 
Date: August 15, 2011
/s/ Deborah C. Wright  
 
 
Deborah C. Wright 
 
 
Chairman and Chief Executive Officer
(Principal Executive Officer) 
 

Date: August 15, 2011
/s/ David L. Toner
 
 
David L. Toner
 
 
Senior Vice President & Controller
(Principal Accounting Officer) 
 

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