Unassociated Document
UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
 
FORM 10-K/A
(Amendment No. 1)

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended March 31, 2006
 
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: 0-21487
 
CARVER BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
  
13-3904174
(State or Other Jurisdiction of Incorporation or Organization)
  
(I.R.S. Employer Identification No.)
     
75 West 125th Street, New York, New York
  
10027
(Address of Principal Executive Offices)
  
(Zip Code)
 
Registrant’s telephone number, including area code: (212) 230-2900
 
Securities Registered Pursuant to Section 12(b) of the Act:
     
Common Stock, par value $.01 per share
  
American Stock Exchange
(Title of Class)
  
(Name of each Exchange on which registered)
 
Securities registered pursuant to Section 12(g) of the Act:
 
None
  

Indicate  by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes   x No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨Yes   x No
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes  o No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer
 
 o Large Accelerated   o Accelerated   x non-accelerated
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes  x No
 
As of June 15, 2006, there were 2,502,247 shares of common stock of the registrant outstanding. The aggregate market value of the Registrant’s common stock held by non-affiliates (based on the closing sales price of $17.39 per share of the registrant’s common stock on June 15, 2006) was approximately $43.5 million.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
Portions of registrant’s proxy statement for the Annual Meeting of stockholders for the fiscal year ended March 31, 2006 are incorporated by reference into Part III of this Form 10-K.
 


 
EXPLANATORY NOTE

Carver Bancorp, Inc. (the “Company”) is filing this amendment No. 1 to its Annual Report on Form 10-K for the year ended March 31, 2006, to reflect the restatement of its Consolidated Statements of Cash Flows, as discussed in Note 1 of the Notes to the Consolidated Financial Statements contained in Part II, Item 8: Financial statements and supplementary data. Except for Items 7, 8 and 9A of Part II, no other information in the Form 10-K is being amended by this amendment. This amendment continues to speak as of the date of the original filing of the Form 10-K, and the Company has not updated the disclosure in this Amendment to speak as of any later date.
 

2
 
CARVER BANCORP, INC.
2006 ANNUAL REPORT ON FORM 10-K
 
TABLE OF CONTENTS

Part I
    
Page
       
 
     
 
Part II
    
 
     
 
 
 
 
     
 
Part III
    
 
     
 
 
     
 
Part IV
    
 
     
 
     
 
     
 

 

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

·  
the Company's success in implementing its new business initiatives, including expanding its product line, adding new branch offices and ATM centers and successfully re-building its brand image;
 
·  
increases in competitive pressure among financial institutions or non-financial institutions;
 
·  
legislative or regulatory changes which may adversely affect the Company’s business;
 
·  
technological changes which may be more difficult or expensive than we anticipate;
 
·  
changes in interest rates which may reduce net interest margins and net interest income;
 
·  
changes in deposit flows, loan demand or real estate values which may adversely affect the Company’s business;
 
·  
changes in accounting principles, policies or guidelines which may cause the Company’s condition to be perceived differently;
 
·  
litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, which may delay the occurrence or non-occurrence of events longer than anticipated;
 
·  
the ability of the Company to originate and purchase loans with attractive terms and acceptable credit quality;
 
·  
success in integrating Community Capital Bank into Carver operations;
 
·  
the ability of the Company to realize cost efficiencies; and
 
·  
general economic conditions, either nationally or locally in some or all areas in which the Company does business, or conditions in the securities markets or the banking industry which could affect liquidity in the capital markets, the volume of loan origination, deposit flows, real estate values, the levels of non-interest income and the amount of loan losses.
 
Any or all of our forward-looking statements in this Annual Report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. We do not intend to update any of the forward-looking statements after the date of this prospectus or to conform these statements to actual events.
 
PART I
 
 
ITEM 1. BUSINESS 
 
OVERVIEW
 
Carver Federal Savings Bank, a wholly owned subsidiary of Carver Bancorp, Inc., is the largest African-American operated savings bank in the nation, with $661 million in assets as of March 31, 2006. Headquartered in the heart of the Harlem community of New York City, Carver Federal Savings Bank has eight branch offices, five stand-alone 24/7 ATM centers, and over 120 employees. Carver Federal Savings Bank’s consumer and commercial offerings include an array of deposit and real estate loan products that facilitate investing, savings and borrowing by its customers. Carver Federal Savings Bank also offers wealth management products through a third party provider.
 
 
2
 
GENERAL DESCRIPTION OF BUSINESS
 
Carver Bancorp, Inc.
 
Carver Bancorp, Inc., a Delaware corporation (on a stand-alone basis, the “Holding Company” or “Registrant”), is the holding company for Carver Federal Savings Bank, a federally chartered savings bank, and its subsidiaries (collectively, the “Bank” or “Carver Federal”), Carver Statutory Trust I (the “Trust”) and Alhambra Holding Corporation, a Delaware corporation (“Alhambra”). The Trust, which was formed in September 2003, exists for the sole purpose of issuing trust preferred debt securities and investing the proceeds in an equivalent amount of subordinated debentures of the Holding Company. The Holding Company formed Alhambra to hold the Holding Company’s investment in a commercial office building that was subsequently sold in March 2000. Alhambra is currently inactive. 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.”
 
On October 24, 1994, Carver Federal converted from mutual to stock form and issued 2,314,275 shares of its common stock at a price of $10 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. Pursuant to an Agreement and Plan of Reorganization, dated May 21, 1996, each share of the Bank’s outstanding common stock was exchanged for one share of common stock of the Holding Company. On January 11, 2000, the Holding Company sold, pursuant to a Securities Purchase Agreement, dated January 11, 2000, in a private placement 40,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”) to Morgan Stanley & Co. Incorporated (“MSDW”) and 60,000 Shares of Series B Convertible Preferred Stock (the “Series B Preferred Stock”) to Provender Opportunities Fund L.P. (“Provender”). On June 1, 2004, Provender sold all 60,000 of its Series B Preferred Stock to Keefe Bruyette & Woods, Inc (“KBW”). On October 15, 2004, both MSDW and KBW elected to convert their Preferred Shares into shares of the Holding Company’s common stock, thus an additional 208,333 shares of common stock were issued to these parties.
 
On April 6, 2006, the Company entered into a definitive merger agreement to acquire Community Capital Bank (‘CCB”), a Brooklyn-based community bank with approximately $162 million in assets, in a cash transaction valued at $11.1 million, or $40.00 per Community Capital share. The agreement has been approved by the Boards of Directors of both companies and, on June 28, 2006, was also approved by the stockholders of Community Capital. The transaction is subject to and is awaiting regulatory approval and is expected to close by September 30, 2006. The acquisition of CCB and its award-winning small business lending platform will expand the Company’s ability to capitalize on substantial growth, especially in the small business market.
 
The Holding Company conducts business as a unitary savings and loan holding company, and the principal business of the Holding Company consists of the operation of its wholly owned subsidiary, the Bank. The Holding Company’s executive offices are located at the home office of the Bank at 75 West 125th Street, New York, New York 10027. The Holding Company’s telephone number is (718) 230-2900.
 
Carver Federal Savings Bank
 
Carver Federal was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally chartered mutual savings and loan association, at which time it obtained federal deposit insurance and became a member of the Federal Home Loan Bank of New York (the “FHLB-NY”). Carver Federal converted to a federal savings bank in 1986 and changed its name at that time to Carver Federal Savings Bank.
 
Carver Federal was founded as an African-American operated institution to provide residents of under-served communities with the ability to invest their savings and obtain credit. Carver Federal’s principal business consists of attracting deposit accounts through its eight branch offices and investing those funds in mortgage loans and other investments permitted to federal savings banks. Based on its asset size as of March 31, 2006, Carver Federal is the largest African-American operated financial institution in the United States.
 
On March 8, 1995, Carver Federal formed CFSB Realty Corp. as a wholly owned subsidiary to hold real estate acquired through foreclosure pending eventual disposition. At March 31, 2006, this subsidiary had $218,000 in total capital and a minimal net operating loss. At March 31, 2006 no foreclosed real estate was held by the Company, however as a result of a property tax redemption, the Bank, through its subsidiary Carver Realty Corp., took fee ownership of a vacant tract of land in Bayshore, NY. See Note 1 of Notes to Consolidated Financial Statements. Carver Federal also owns CFSB Credit Corp., an inactive subsidiary originally formed to undertake the Bank’s credit card issuances. During the fourth quarter of the fiscal year ended March 31, 2003 (“fiscal 2003”), Carver Federal formed Carver Asset Corporation, a wholly owned subsidiary which qualifies as a real estate investment trust (“REIT”) pursuant to the Internal Revenue Code of 1986, as amended. This subsidiary may, among other things, be utilized by Carver Federal to raise capital in the future. As of March 31, 2006 Carver Asset Corporation owned mortgage loans valued at approximately $131 million. On August 18, 2005 Carver Federal formed Carver Community Development Corp. (“CCDC”), a wholly owned community development entity whose purpose is to make qualified business loans in low-income communities. As of March 31, 2006 CCDC had no assets or results from operations.
 
Carver Federal’s current operating strategy consists primarily of: (1) the origination and purchase of one- to four-family residential, commercial, construction and multifamily real estate loans in its primary market area; (2) investing funds not utilized for
 
3
 
loan originations or purchases in the purchase of United States government agency securities and mortgage-backed securities; (3) developing a commercial line of business through the pending acquisition of CCB in the fiscal year ended March 31, 2007 (“fiscal 2007”); (4) generating fee income by attracting and retaining core deposit accounts, and expanding its ATM network and sale of wealth management products; and (5) continuing to monitor and control its expenses by efficiently utilizing personnel, branch facilities and alternative delivery channels (telephone banking, online banking, and ATMs) to service its customers. The business is not operated in such a way that would require segment reporting.
 
Carver Federal’s primary market area for deposits consists of the areas currently served by its eight branch offices with an anticipation of two additional offices with the successful acquisition of CCB. Carver Federal considers its primary lending market to include Bronx, Kings, New York and Queens counties, together comprising New York City, and lower Westchester County, New York. See “Item 2—Properties.”
 
Although Carver Federal’s branch offices are located in areas that were historically underserved by other financial institutions, Carver Federal is facing increasing competition for deposits and residential mortgage lending in its immediate market areas. Management believes that this competition has become more intense as a result of an increased examination emphasis by federal banking regulators on financial institutions’ fulfillment of their responsibilities under the Community Reinvestment Act (“CRA”) and the improving economic conditions in its market area. The Bank’s competition for loans comes principally from mortgage banking companies, commercial banks, savings banks and savings and loan associations. The Bank’s most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions. Competition for deposits also comes from money market mutual funds and other corporate and government securities funds as well as from other financial intermediaries such as brokerage firms and insurance companies. Many of Carver Federal’s competitors have substantially greater resources than Carver Federal and offer a wider array of financial services and products than Carver Federal. At times, these larger financial institutions may offer below market interest rates on mortgage loans and above market interest rates for deposits. These pricing concessions combined with competitors’ larger presence in the New York market add to the challenges Carver Federal faces in expanding its current market share and growing its near term profitability. The Bank believes that it can compete with these institutions by offering a competitive range of products and services through personalized service and community involvement and by growing the customer base and product suite with the pending acquisition of CCB.
 
Carver continues to evaluate acquisition opportunities as part of its strategic objective for long term growth and may acquire directly or indirectly through Carver Federal.
 
As of June 15, 2006, Carver Federal had 126 full-time equivalent employees, none of whom was represented by a collective bargaining agreement. The Bank considers its employee relations to be satisfactory.
 
Available Information
 
The Company makes available on or through its internet website, http://www.carverbank.com, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Such reports are free of charge and are available as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC, 20549. Information may be obtained on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including the Company, at http://www.sec.gov.
 
In addition, certain other basic corporate documents, including our Corporate Governance Principles, Code of Ethics, Code of Ethics for Senior Financial Officers and the charters of our Finance and Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee and the date of our annual meeting are posted on our website. Printed copies of these documents are also available free of charge to any stockholder who requests them. Stockholders seeking additional information should contact the Corporate Secretary’s office by mail at 75 West 125th Street, New York, NY 10027 or by e-mail at corporatesecretary@carverbank.com.

Lending Activities
 
General. Carver Federal’s principal lending activity is the origination or purchase of first mortgage loans for the purpose of purchasing or refinancing one- to four-family residential, multifamily, and commercial properties. Carver Federal also originates or participates in loans for the construction or renovation of commercial properties and residential housing developments. In addition, Carver Federal provides permanent and end loan financing upon completion of construction and, to a lesser extent, originates secured consumer and business loans. First mortgage loan purchases during the fiscal year ended March 31, 2006 (“fiscal 2006”), accounted for 46.5% of loan additions. In order to achieve the Bank’s loan growth objectives, loan purchases are made to supplement originations.
 
4
 
Loan Portfolio Composition. Gross loans receivable increased by $71.4 million, or 16.7%, to $496.2 million at March 31, 2006 compared to $424.7 million at March 31, 2005. Carver Federal’s net loan portfolio as a percentage of total assets increased to 74.7% at March 31, 2006 compared to 67.4% at March 31, 2005. One- to four-family mortgage loans totaled $143.4 million, or 28.9% of Carver Federal’s total gross loan portfolio, multifamily loans totaled $104.7 million, or 21.1% of total gross loans, non-residential real estate loans, which includes commercial and church loans, totaled $154.0 million, or 31.1% of total gross loans, and construction loans, net of loans in process, totaled $92.5 million, or 18.6% of total gross loans. Consumer (credit card loans, personal loans, and home improvement loans) and business loans totaled $1.5 million, or 0.3% of total gross loans.
 
Carver Federal pays a premium when the effective yield on the loans being purchased is greater than the current market rate for comparable loans. These premiums are amortized as the loan is repaid. It is possible that, in a declining interest rate environment, the rate or speed at which loans repay may increase which may have the effect of accelerating the amortization of the premium and therefore reducing the effective yield of the loan. Total premiums Carver paid on purchased loans increased by $147,000 or 8.4%, to $1.9 million at March 31, 2006 compared to $1.7 million at March 31, 2005. The increase was attributable to additional premiums recorded on new loans purchased.
 
Allowance for loan losses was substantially unchanged at $4.0 million at March 31, 2006 compared to $4.1 million at March 31, 2005. During fiscal 2006 $82,000 in net charge-offs were recorded and no additional provisions for loan losses were established. See “—Asset Quality—Asset Classification and Allowance for Losses.”
 
The following table sets forth selected data relating to the composition of Carver Federal’s loan portfolio by type of loan at the dates indicated.
 
   
At March 31,
  
   
2006
    
2005
    
2004
    
2003
    
2002
  
   
Amount
  
Percent
    
Amount
  
Percent
    
Amount
  
Percent
    
Amount
  
Percent
    
Amount
  
Percent
  
   
(Dollars in thousands)
  
                                                   
Real estate loans:
                                                  
One- to four-family
  
$
143,433
    
28.91
%
  
$
155,797
    
36.69
%
  
$
98,645
    
27.80
%
  
$
71,735
    
24.20
%
  
$
122,814
    
41.84
%
Multifamily
    
104,718
   
21.11
%
    
101,899
   
23.99
%
    
120,252
   
33.88
%
    
131,749
   
44.45
%
    
118,589
   
40.39
%
Non-residential
    
154,044
   
31.05
%
    
116,769
   
27.49
%
    
102,641
   
28.92
%
    
79,244
   
26.74
%
    
40,101
   
13.66
%
Construction
    
92,511
   
18.64
%
    
48,579
   
11.43
%
    
27,376
   
7.71
%
    
11,539
   
3.89
%
    
9,742
   
3.32
%
Consumer and business (1)
    
1,453
   
0.29
%
    
1,697
   
0.40
%
    
6,010
   
1.69
%
    
2,125
   
0.72
%
    
2,328
   
0.79
%
Total gross loans
    
496,159
   
100.00
%
    
424,741
   
100.00
%
    
354,924
   
100.00
%
    
296,392
   
100.00
%
    
293,574
   
100.00
%
                                                                       
Add:
                                                                      
Premium on loans
    
1,890
           
1,743
           
1,264
           
867
           
906
       
Less:
                                                                      
                                                                       
Deferred fees and loan discounts
    
(602
)
          
(400
)
          
(163
)
          
(363
)
          
(642
)
      
Allowance for loan Losses
    
(4,015
)
          
(4,097
)
          
(4,125
)
          
(4,158
)
          
(4,128
)
      
Net loan portfolio
  
$
493,432
          
$
421,987
          
$
351,900
          
$
292,738
          
$
289,710
        
                                                                       
(1) Includes personal, credit card, home equity, home improvement and business loans.
 
One- to Four-Family Residential Lending. Traditionally, Carver Federal’s lending activity has been the origination and purchase of loans secured by first mortgages on existing one- to four-family residences. Carver Federal originates and purchases one- to four-family residential mortgage loans in amounts that usually range between $35,000 and $750,000. Approximately 95% of Carver Federal’s one- to four-family residential mortgage loans at March 31, 2006 had adjustable rates and approximately 5% had fixed rates. Over the last fiscal year, Carver Federal has shifted its efforts from primarily originating and purchasing one- to four-family residential loans to more profitable non-residential and construction real estate loans. This has resulted in a $12.4 million reduction in one- to four-family residential real estate loans.
 
Carver Federal’s one- to four-family residential mortgage loans are generally for terms of 30 years, amortized on a monthly basis, with principal and interest due each month. Residential mortgage loans often remain outstanding for significantly shorter periods than their contractual terms. These loans customarily contain “due-on-sale” clauses that permit the Bank to accelerate repayment of a loan upon transfer of ownership of the mortgaged property. Also, borrowers may refinance or prepay one- to four-family residential loans at their option without penalty.
 
The Bank’s lending policies generally limit the maximum loan-to-value (“LTV”) ratio on one- to four-family residential mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised value or purchase price, with private
 
5
 
mortgage insurance required on loans with LTV ratios in excess of 80%. Under certain special loan programs, Carver Federal originates and sells loans secured by single-family homes purchased by first time home buyers where the LTV ratio may be up to 97%.
 
Carver Federal’s fixed-rate, one- to four-family residential mortgage loans are underwritten in accordance with applicable secondary market underwriting guidelines and requirements for sale. From time to time the Bank has sold such loans to Federal National Mortgage Association (“FNMA”), the State of New York Mortgage Agency (“SONYMA”) and other third parties. Loans are generally sold with limited recourse on a servicing retained basis except to SONYMA where the sale is made with servicing released. Carver Federal uses several servicing firms to sub-service mortgage loans, whether held in portfolio or sold with the servicing retained. At March 31, 2006, the Bank, through its sub-servicers, serviced $22.8 million in loans for FNMA and $10.4 million for other third parties.
 
Carver Federal offers one-year, three-year, five/one-year and five/three-year adjustable-rate one- to four-family residential mortgage loans. These loans are generally retained in Carver Federal’s portfolio although they may be sold on the secondary market. They are indexed to the weekly average rate on one-year, three-year and five-year U.S. Treasury securities, respectively, adjusted to a constant maturity (usually one year), plus a margin. The rates at which interest accrues on these loans are adjustable every one, three or five years, generally with limitations on adjustments of two percentage points per adjustment period and six percentage points over the life of a one-year adjustable-rate mortgage and four percentage points over the life of three-year and five-year adjustable-rate mortgages.
 
The retention of adjustable-rate loans in Carver Federal’s portfolio helps reduce Carver Federal’s exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the event of upward repricing of adjustable-rate loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate loans may increase due to increases in interest costs to borrowers. Although adjustable-rate loans allow the Bank to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest rate sensitivity is limited by periodic and lifetime interest rate adjustment limitations. Accordingly, there can be no assurance that yields on the Bank’s adjustable-rate loans will fully adjust to compensate for increases in the Bank’s cost of funds. Adjustable-rate loans increase the Bank’s exposure to decreases in prevailing market interest rates, although decreases in the Bank’s cost of funds would tend to offset this effect.
 
Multifamily Real Estate Lending. Carver Federal continued to originate and purchase multifamily loans during fiscal 2006. Rates offered on this product are considered to be competitive with flexible terms that make this product attractive to borrowers. Multifamily property lending entails additional risks compared to one- to four-family residential lending. For example, such loans are dependent on the successful operation of such buildings and can be significantly impacted by supply and demand conditions in the market for multifamily residential units. Over the past several years, Carver Federal has expanded its presence in the multifamily lending market in the New York City metropolitan area. At March 31, 2006, multifamily loans totaled $104.7 million, or 21.1% of Carver Federal’s gross loan portfolio.
 
Carver Federal’s multifamily product guidelines generally require that the maximum LTV not exceed 80% based on the appraised value of the mortgaged property. The Bank generally requires a debt service coverage ratio (“DSCR”) of at least 1.25 on multifamily loans, which requires the properties to generate cash flow after expenses and allowances in excess of the principal and interest payment. Carver Federal originates and purchases multifamily mortgage loans, which are predominantly adjustable rate loans that generally amortize on the basis of a 15-, 20-, 25- or 30-year period and require a balloon payment after the first five years, or the borrower may have an option to extend the loan for two additional five-year periods. The Bank, on a case-by-case basis, originates ten-year fixed rate loans.
 
To help ensure continued collateral protection and asset quality for the term of multifamily real estate loans, Carver Federal employs a loan risk-rating system. Under the risk-rating system, all commercial real estate loans are risk-rated internally at the time of origination and again annually to evaluate any changes in the credit profile of the borrower and the underlying collateral. Carver Federal’s independent internal loan review personnel prepare written summary reports of multifamily real estate loan relationships of $250,000 to $2.0 million while an independent consulting firm prepares a written report for relationships exceeding $2.0 million. Summary reports are then reviewed by the Internal Asset Review Committee for changes in the credit profile of individual borrowers and the portfolio as a whole.
 
Non-residential Real Estate Lending. Carver Federal’s non-residential real estate lending activity consists predominantly of originating loans for the purpose of purchasing or refinancing office, mixed-use (properties used for both commercial and residential purposes but predominantly commercial), retail and church buildings in its market area. Non-residential real estate lending entails additional risks compared with one- to four-family residential and multifamily lending. For example, such loans typically involve large loan balances to single borrowers or groups of related borrowers, and the payment experience on such loans typically is dependent on the successful operation of the commercial property. Carver Federal’s maximum LTV on non-residential real estate mortgage loans is generally 75% based on the appraised value of the mortgaged property. The Bank generally requires a DSCR of at least 1.30 on non-residential real estate loans. The Bank requires the assignment of rents of all tenants’ leases in the mortgaged
 
6
 
property, which serves as additional security for the mortgage loan. At March 31, 2006, non-residential real estate mortgage loans totaled $154.0 million, or 31.1% of the gross loan portfolio. This balance also reflects a year over year increase of $37.3 million which is in line with the Bank’s objective of investing in higher yielding loans.
 
All non-residential real estate loans are risk rated internally. At least annually, Carver Federal’s loan review personnel prepare written summary reports for relationships of $250,000 to $2.0 million. An independent third party also risk-rates and produce written summary reports for non-residential loans over $2.0 million.
 
Historically, Carver Federal has been a New York City metropolitan area leader in the origination of loans to churches. At March 31, 2006, loans to churches totaled $14.6 million, or 2.9% of the Bank’s gross loan portfolio. These loans generally have five-, seven- or ten-year terms with 15-, 20- or 25-year amortization periods and a balloon payment due at the end of the term and generally have no greater than a 70% LTV ratio. The Bank provides construction financing for churches and generally provides permanent financing upon completion of construction. There are currently 25 church loans in the Bank’s loan portfolio.
 
Loans secured by real estate owned by faith-based organizations generally are larger and involve greater risks than one- to four-family residential mortgage loans. Because payments on loans secured by such properties are often dependent on voluntary contributions by members of the church’s congregation, repayment of such loans may be subject to a greater extent to adverse conditions in the economy. The Bank seeks to minimize these risks in a variety of ways, including reviewing the organization’s financial condition, limiting the size of such loans and establishing the quality of the collateral securing such loans. The Bank determines the appropriate amount and type of security for such loans based in part upon the governance structure of the particular organization, the length of time the church has been established in the community and a cash flow analysis of the church to determine its ability to service the proposed loan. Carver Federal will obtain a first mortgage on the underlying real property and often requires personal guarantees of key members of the congregation and/or key person life insurance on the pastor of the congregation. The Bank may also require the church to obtain key person life insurance on specific members of the church’s leadership. Asset quality in the church loan category has been strong throughout Carver Federal’s history. Management believes that Carver Federal remains a leading lender to churches in its market area.
 
Construction Lending. The Bank originates or participates in construction loans for new construction and renovation of churches, multifamily buildings, residential developments, community service facilities and affordable housing programs. Carver Federal also offers construction loans to qualified individuals and developers for new construction and renovation of one- to four-family, multifamily or mixed use and commercial real estate in the Bank’s market area. The Bank’s construction loans generally have adjustable interest rates and are underwritten in accordance with the same standards as the Bank’s mortgage loans on existing properties. The loans provide for disbursement in stages as construction is completed. Participation in construction loans may be at various stages of funding. Construction terms are usually from 12 to 24 months. The construction loan interest is capitalized as part of the overall project cost and is funded monthly from the loan proceeds. Borrowers must satisfy all credit requirements that apply to the Bank’s permanent mortgage loan financing for the mortgaged property. Carver Federal has established additional criteria for construction loans to include an engineer’s plan and cost review on all construction budgets with appropriate interest reserves for loans in excess of $250,000.
 
Construction financing generally is considered to involve a higher degree of risk of loss than long term financing on improved and occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the mortgaged property’s value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in project delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with a project having a value that is insufficient to assure full repayment of such loan. The ability of a developer to sell developed lots or completed dwelling units will depend on, among other things, demand, pricing, availability of comparable properties and economic conditions. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers in the Bank’s market areas, limiting the aggregate amount of outstanding construction loans and imposing a stricter LTV ratio requirement than that required for one- to four-family mortgage loans.
 
At March 31, 2006, the Bank had $92.5 million (net of $61.0 million of committed but undisbursed funds) in construction loans outstanding, comprising 18.6% of the Bank’s total gross loan portfolio. The balance at March 31, 2006 is reflective of a $43.9 million, or 90.4 % increase over the last fiscal year, consistent with management’s objective to add higher yielding loans to portfolio. Purchased construction loans represent 66.9% of total construction loans in portfolio.
 
Consumer and Business Loans. At March 31, 2006, the Bank had approximately $1.5 million in consumer and business loans, or 0.3% of the Bank’s gross loan portfolio. At March 31, 2006, $1.2 million, or 83.9% of the Bank’s consumer and business loans, was unsecured and $234,000, or 16.1%, was secured by savings deposits. At the end of the fiscal year ended March 31, 2005 (“fiscal 2005”) the Bank froze all undrawn available credit lines on its credit card product in an effort to terminate this product and collect repayments on outstanding balances and related finance charges. Effective March 31, 2006 all unsecured credit card accounts were converted to fixed rate installment loans with an amortization period not to exceed 48 months. The Bank had discontinued the
 
7
 
origination of unsecured commercial business loans during the fourth quarter of the fiscal year ended March 31, 1999. However, during the fourth quarter of the fiscal year ended March 31, 2006, Carver Federal’s Board of Directors approved the launch of an unsecured Overdraft Line of Credit (“ODLOC”) product for personal account relationships only and approved the Bank to provide back-up liquidity for highly rated U.S. corporate commercial paper borrowers (“CP Back-up”) where a minority bank is the administrative agent and is syndicated entirely to a minority bank group. As of March 31, 2006, Carver Federal originated 17 ODLOCs with $25,450 in commitments. The Bank subsequent to the fiscal year end entered into one minority bank CP Back-up facility for $6.325 million with an AAA rated U.S. corporate borrower and more CP Back-up facilities are anticipated for the fiscal year ending March 31, 2007. The Bank is paid a commitment fee for this product.
 
Consumer loans generally involve more risk than first mortgage loans. Collection of a delinquent loan is dependent on the borrower’s continuing financial stability, and thus is more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Further, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered. These loans may also give rise to claims and defenses by a borrower against Carver Federal, and a borrower may be able to assert claims and defenses against Carver Federal which it has against the seller of the underlying collateral. In underwriting secured consumer loans other than secured credit cards, Carver Federal considers the borrower’s credit history, an analysis of the borrower’s income, expenses and ability to repay the loan and the value of the collateral. The underwriting for secured credit cards only takes into consideration the value of the underlying collateral. See “—Asset Quality—Non-performing Assets.”
 
Loan Processing. Carver Federal’s loan originations are derived from a number of sources, including referrals by realtors, builders, depositors, borrowers and mortgage brokers, as well as walk-in customers. Loans are originated by the Bank’s personnel who receive a base salary, commissions and other incentive compensation. Loan application forms are available at each of the Bank’s offices. All real estate loan and unsecured loan applications are forwarded to the Bank’s Lending Department for underwriting pursuant to standards established in Carver’s loan policy.
 
The underwriting and loan processing for residential loans is initiated internally but undergoes subsequent review by an outsourced third party provider for loans with LTV ratios greater 80% that require private mortgage insurance. A commercial real estate loan application is completed for all multifamily and non-residential properties which the Bank finances. Prior to loan approval, the property is inspected by a loan officer. As part of the loan approval process, consideration is given to an independent appraisal, location, accessibility, stability of the neighborhood, environmental assessment, personal credit history of the applicant(s) and the financial capacity of the applicant(s).
 
Upon receipt of a completed loan application from a prospective borrower, a credit report and other verifications are ordered to confirm specific information relating to the loan applicant’s income and credit standing. It is the Bank’s policy to obtain an appraisal of the real estate intended to secure a proposed mortgage loan from an independent fee appraiser approved by the Bank.
 
It is Carver Federal’s policy to record a lien on the real estate securing the loan and to obtain a title insurance policy that insures that the property is free of prior encumbrances. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a flood plain as designated by the Department of Housing and Urban Development, paid flood insurance policies must be obtained. Most borrowers are also required to advance funds on a monthly basis, together with each payment of principal and interest, to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes and hazard insurance.
 
Loan Approval. Except for loans in excess of $5.0 million, mortgage loan approval authority has been delegated by the Bank’s Board of Directors (“Board”) to the Board’s Asset Liability and Interest Rate Risk Committee. The Asset Liability and Interest Rate Risk Committee has delegated to the Bank’s Management Loan Committee, which consists of certain members of executive management, loan approval authority for loans up to and including $2.0 million. All one- to four-family mortgage loans that conform to FNMA standards and limits may be approved by the Residential Mortgage Loan Underwriter. Any loan that represents an exception to the Bank’s lending policies must be ratified by the next higher approval authority. Loans above $5.0 million must be approved by the full Board. Purchased loans are subject to the same approval process as originated loans.
 
Loans to One Borrower. Under the loans-to-one-borrower limits of the Office of Thrift Supervision (“OTS”), with certain limited exceptions, loans and extensions of credit to a single or related group of borrowers outstanding at one time generally may not exceed 15% of the unimpaired capital and surplus of a savings bank. See “—Regulation and Supervision—Federal Banking Regulation—Loans to One Borrower Limitations.” At March 31, 2006, the maximum loan to one borrower under this test would be $9.9 million and the Bank had no relationships that exceeded this limit.
 
Loan Sales. Originations of one- to four-family real estate loans are generally made on properties located within the New York City metropolitan area, although Carver Federal does occasionally fund loans secured by property in other areas. All such loans, however, satisfy the Bank’s underwriting criteria regardless of location. The Bank continues to offer one- to four-family fixed-rate mortgage loans in response to consumer demand but requires that such loans satisfy applicable secondary market guidelines of either FNMA or SONYMA to provide opportunity for subsequent sale in the secondary market as desired to manage interest rate risk exposure.
 
8
 
Loan Originations and Purchases. Loan originations were $111.3 million in fiscal 2006 compared to $85.8 million in fiscal 2005 and $87.1 million in the fiscal year ended March 31, 2004 (“fiscal 2004”). The increase in loan originations in fiscal 2006 can be attributed to the Bank’s commitment to increasing its market share. The market continues to be challenging as new lenders enter the already fiercely competitive marketplace.
 
During fiscal 2006, Carver Federal purchased a total of $96.1 million of mortgage loans, consisting of performing adjustable-rate one- to four-family, construction and non-residential mortgage loans to supplement its origination efforts. This represented 46.5% of Carver Federal’s addition to its loan portfolio during fiscal 2006. The Bank purchases loans in order to increase interest income and to manage its liquidity position. The Bank continues to shift its loan production emphasis to take advantage of the higher yields and better interest rate risk characteristics available on multifamily and non-residential real estate mortgage loans, including those in construction, as well as to increase its participation in multifamily and non-residential real estate mortgage loans with other New York metropolitan area lenders. Loans purchased in fiscal 2006 decreased $8.1 million, or 7.7%, from loan purchases of $104.7 million during fiscal 2005.
 
The following table sets forth certain information with respect to Carver Federal’s loan originations, purchases and sales during the periods indicated.

   
Year Ended March 31,
 
   
2006
    
2005
    
2004
  
   
Amount
 
Percent
 
  
Amount
 
Percent
 
  
Amount
 
Percent
  
   
(Dollars in thousands)
  
Loans Originated:
                              
One- to four-family
  
$
15,132
    
8.18
%
  
$
15,437
    
8.46
%
  
$
14,284
    
8.33
%
Multifamily
    
18,063
   
9.77
     
15,969
   
8.75
     
5,771
   
3.37
 
Non-residential
    
33,582
   
18.16
     
30,823
   
16.89
     
50,373
   
29.38
 
Construction
    
44,040
   
23.80
     
23,351
   
12.79
     
12,050
   
7.02
 
Consumer and business (1)
    
532
   
0.29
     
221
   
0.13
     
4,662
   
2.72
 
Total loans originated
    
111,349
   
60.21
     
85,801
   
47.02
     
87,140
   
50.82
 
Loans purchased (2)
    
96,140
   
51.98
     
104,734
   
57.39
     
93,694
   
54.64
 
Loans sold (3)
    
(22,543
)
  
(12.19
)
    
(8,043
)
  
(4.41
)
    
(9,358
)
  
(5.46
)
Net additions to loan portfolio
  
$
184,946
    
100.00
%
  
$
182,492
    
100.00
%
  
$
171,476
    
100.00
%
 
(1) Comprised of credit card, personal, home improvement and secured business loans.
(2) Comprised primarily of one- to four-family mortgage loans, multifamily mortgage loans and construction loans.
(3)  Comprised primarily of one- to four-family loans.

Loans purchased by the Bank entail certain risks not necessarily associated with loans the Bank originates. The Bank’s purchased loans are generally acquired without recourse and in accordance with the Bank’s underwriting criteria for originations. In addition, purchased loans have a variety of terms, including maturities, interest rate caps and indices for adjustment of interest rates, that may differ from those offered at the time by the Bank in connection with the loans the Bank originates. The Bank initially seeks to purchase loans in its market area, however, the Bank will purchase loans secured by property secured outside its market area to meet its financial objectives. During fiscal 2006, the properties securing purchased loans were concentrated primarily in New York and to a lesser extent, Vermont, New Jersey and Massachusetts. The market areas in which the properties that secure the purchased loans are located may differ from Carver Federal’s market area and may be subject to economic and real estate market conditions that may significantly differ from those experienced in Carver Federal’s market area. There can be no assurance that economic conditions in these out-of-state areas will not deteriorate in the future, resulting in increased loan delinquencies and loan losses among the loans secured by property in these areas.
 
In an effort to reduce these risks, the Bank has sought to ensure that purchased loans satisfy the Bank’s underwriting standards and do not otherwise have a higher risk of collection or loss than loans originated by the Bank. A Lending Department officer monitors the inspection and confirms the review of each purchased loan. Carver Federal also requires appropriate documentation and further seeks to reduce its risk by requiring, in each buy/sell agreement, a series of warranties and representations as to the underwriting standards and the enforceability of the related legal documents. These warranties and representations remain in effect for the life of the loan. Any misrepresentation must be cured within 90 days of discovery or trigger certain repurchase provisions in the buy/sell agreement.
 
Interest Rates and Loan Fees. Interest rates charged by Carver Federal on mortgage loans are primarily determined by competitive loan rates offered in its market area and minimum yield requirements for loans purchased by secondary market sources. Mortgage loan rates reflect factors such as prevailing market interest rate levels, the supply of money available to the banking industry and the demand for such loans. These factors are in turn affected by general economic conditions, the monetary policies of the federal government, including the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the general supply of money in the economy, tax policies and governmental budget matters.
 
 
9
 
Carver Federal charges fees in connection with loan commitments and originations, rate lock-ins, loan modifications, late payments, changes of property ownership and for miscellaneous services related to its loans. Loan origination fees are calculated as a percentage of the loan principal. The Bank typically receives fees of between zero and one point (one point being equivalent to 1% of the principal amount of the loan) in connection with the origination of fixed-rate and adjustable-rate mortgage loans. The loan origination fee, net of certain direct loan origination expenses, is deferred and accreted into income over the estimated life of the loan using the interest method. If a loan is prepaid or sold all remaining deferred fees with respect to such loan are taken into income at such time.
 
In addition to the foregoing fees, Carver Federal receives fees for servicing loans for others, which in turn generally are sub-serviced for Carver Federal by a third party servicer. Servicing activities include the collection and processing of mortgage payments, accounting for loan repayment funds and paying real estate taxes, hazard insurance and other loan-related expenses out of escrowed funds. Income from these activities varies from period to period with the volume and type of loans originated, sold and purchased, which in turn is dependent on prevailing market interest rates and their effect on the demand for loans in the Bank’s market area.
 
Loan Maturity Schedule. The following table sets forth information at March 31, 2006 regarding the amount of loans maturing in Carver Federal’s portfolio, including scheduled repayments of principal, based on contractual terms to maturity. Demand loans, loans having no schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. The table below does not include any estimate of prepayments, which significantly shorten the average life of all mortgage loans and may cause Carver Federal’s actual repayment experience to differ significantly from that shown below.

   
Due During the Year Ending
 
Due three
                  
   
March 31,
  
to five
  
Due five to
  
Due ten to
  
Due after
      
   
2007
  
2008
  
2009
  
years
  
ten years
  
20 years
  
20 years
  
Total
  
   
(Dollars in thousands)
  
Real Estate Loans:
                                  
One- to four-family
 
$
2,251
  
$
2,288
  
$
1,020
  
$
32,744
  
$
456
  
$
2,446
  
$
102,228
  
$
143,433
  
Multifamily
    
4,407
   
6,595
   
16,412
   
22,945
   
17,045
   
11,228
   
26,086
   
104,718
 
Non-residential
    
10,545
   
10,299
   
18,029
   
78,330
   
17,590
   
8,634
   
10,617
   
154,044
 
Construction
    
73,444
   
19,067
   
-
   
-
   
-
   
-
   
-
   
92,511
 
Consumer and business loans
    
14
   
116
   
48
   
938
   
224
   
103
   
10
   
1,453
 
Total
 
$
90,661
  
$
38,365
  
$
35,509
  
$
134,957
  
$
35,315
  
$
22,411
  
$
138,941
  
$
496,159
  
 
The following table sets forth as of March 31, 2006 amounts in each loan category that are contractually due after March 31, 2007 and whether such loans have fixed or adjustable interest rates. Scheduled contractual principal repayments of loans do not necessarily reflect the actual lives of such assets. The average life of long term loans is substantially less than their contractual terms due to prepayments. In addition, due-on-sale clauses in mortgage loans generally give Carver Federal the right to declare a conventional loan due and payable in the event, among other things, that a borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and tends to decrease when current mortgage loan market rates are substantially lower than rates on existing mortgage loans.

   
Due After March 31, 2007
  
   
Fixed
  
Adjustable
 
Total
  
       
( In thousands )
      
Real Estate Loans:
              
One- to four-family
  
$
7,454
  
$
133,728
  
$
141,182
  
Multifamily
    
33,583
   
66,728
   
100,311
 
Non-residential
    
36,526
   
106,973
   
143,499
 
Construction
    
-
   
19,067
   
19,067
 
Consumer and business loans
    
1,085
   
354
   
1,439
 
Total
  
$
78,648
  
$
326,850
  
$
405,498
  
 
Asset Quality
 
General. One of the Bank’s key operating objectives continues to be to maintain a high level of asset quality. Through a variety of strategies, including, but not limited to, monitoring loan delinquencies and borrower workout arrangements, the Bank has been proactive in addressing problem and non-performing assets which, in turn, has helped to build the strength of the Bank’s
 
 
10
 
financial condition. Such strategies, as well as the Bank’s concentration on one- to four-family, commercial mortgage lending (which includes multifamily and non-residential real estate loans) and construction lending, the maintenance of sound credit standards for new loan originations and a strong real estate market, have resulted in the Bank maintaining a low level of non-performing assets.
 
The underlying credit quality of the Bank’s loan portfolio is dependent primarily on each borrower’s ability to continue to make required loan payments and, in the event a borrower is unable to continue to do so, the value of the collateral should be adequate to secure the loan. A borrower’s ability to pay typically is dependent primarily on employment and other sources of income, which, in turn, is impacted by general economic conditions, although other factors, such as unanticipated expenditures or changes in the financial markets, may also impact the borrower’s ability to pay. Collateral values, particularly real estate values, are also impacted by a variety of factors, including general economic conditions, demographics, maintenance and collection or foreclosure delays.
 
Non-performing Assets. When a borrower fails to make a payment on a mortgage loan, immediate steps are taken by Carver Federal and its sub-servicers to have the delinquency cured and the loan restored to current status. With respect to mortgage loans, once the payment grace period has expired (in most instances 15 days after the due date), a late notice is mailed to the borrower within two business days and a late charge is imposed if applicable. If payment is not promptly received, the borrower is contacted by telephone and efforts are made to formulate an affirmative plan to cure the delinquency. Additional calls are made by the 20th and 25th day of the delinquency. If a mortgage loan becomes 30 days delinquent, a letter is mailed to the borrower requesting payment by a specified date. If a mortgage loan becomes 60 days delinquent, Carver Federal seeks to make personal contact with the borrower and also has the property inspected. If a mortgage becomes 90 days delinquent, a letter is sent to the borrower demanding payment by a certain date and indicating that a foreclosure suit will be filed if the deadline is not met. If payment is still not made, the Bank may pursue foreclosure or other appropriate action.
 
When a borrower fails to make a payment on a consumer loan, steps are taken by Carver Federal’s loan servicing department to have the delinquency cured and the loan restored to current status. Once the payment grace period has expired (15 days after the due date), a late notice is mailed to the borrower immediately and a late charge is imposed if applicable. If payment is not promptly received, the borrower is contacted by telephone, and efforts are made to formulate an affirmative plan to cure the delinquency. If a consumer loan becomes 30 days delinquent, a letter is mailed to the borrower requesting payment by a specified date. If the loan becomes 60 days delinquent, the account is given to an independent collection agency to follow up with the collection of the account. If the loan becomes 90 days delinquent, a final warning letter is sent to the borrower and any co-borrower. If the loan remains delinquent, it is reviewed for charge-off. The Bank’s collection efforts generally continue after the loan is charged off. 
 
The following table sets forth information with respect to Carver Federal’s non-performing assets at the dates indicated.

   
At March 31,
  
   
2006
 
2005
 
2004
 
2003
 
2002
  
   
(Dollars in thousands)
  
                       
Loans accounted for on a non-accrual basis (1):
                      
Real estate:
                      
One- to four-family
  
$
1,098
  
$
149
  
$
558
  
$
1,113
  
$
756
  
Multifamily
    
763
   
167
   
1,532
   
-
   
253
 
Non-residential
    
-
   
665
   
-
   
639
   
1,754
 
Construction
    
865
   
-
   
23
   
23
   
23
 
Consumer and business
    
4
   
17
   
10
   
27
   
37
 
Total non-accrual loans
    
2,730
   
998
   
2,123
   
1,802
   
2,823
 
                                 
Accruing loans contractually past due 90 days or more
    
-
   
-
   
-
   
-
   
-
 
                                 
Total of non-accrual and accruing 90-day past due loans
  
$
2,730
  
$
998
  
$
2,123
  
$
1,802
  
$
2,823
  
                                 
Other non-performing assets (2):
                                
Real estate:
                                
Land
    
26
   
-
   
-
   
-
   
-
 
Total other non-performing assets
    
26
   
-
   
-
   
-
   
-
 
Total non-performing assets (3)
  
$
2,756
  
$
998
  
$
2,123
  
$
1,802
  
$
2,823
  
                                 
Non-performing loans to total loans
    
0.55
%
  
0.23
%
  
0.60
%
  
0.61
%
  
0.96
%
Non-performing assets to total assets
    
0.42
%
  
0.16
%
  
0.39
%
  
0.36
%
  
0.63
%
 
 
11

(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 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. During the fiscal year ended March 31, 2006, gross interest income of $79,000 would have been recorded on non-accrual loans had they been current throughout the year.
 
(2)  
Other non-performing assets generally represent property acquired by the Bank in settlement of loans (i.e., through foreclosure, repossession or as an in-substance foreclosure). Although the Bank had no foreclosed real estate, as a result of a property tax redemption, the Bank took fee ownership of a vacant tract of land in Bayshore, NY. These assets are recorded at the lower of their fair value or the cost to acquire.
 
(3)  
Total non-performing assets consist of non-accrual loans, accruing loans 90 days or more past due and property acquired in settlement of loans.
 
 
At March 31, 2006, total non-performing assets increased by $1.8 million to $2.8 million compared to $998,000 at March 31, 2005. At March 31, 2006 other non-performing assets of $26,000 relates to one parcel of land that Carver Federal acquired as a result of a property tax redemption. The increase in total non-performing assets for fiscal 2006 primarily reflects three additional one-to four-family residential real estate loans. Increases in non-performing asset levels are consistent with the growth the Bank experienced in its loan portfolio during the fiscal year. Management believes the Bank’s current level of non-performing assets to total loans remains within the range of its peers.
 
There were no accruing loans contractually past due 90 days or more at March 31, 2006 and March 31, 2005, reflecting the continued practice adopted by the Bank during the fiscal year ended March 31, 2000 to either write off or place on non-accrual status all loans contractually past due 90 days or more.
 
Asset Classification and Allowances for Losses. Federal regulations and the Bank’s policies require the classification of assets on the basis of quality on a quarterly basis. An asset is classified as “substandard” if it is determined to be inadequately protected by the current net worth and paying capacity of the obligor or the current value of the collateral pledged, if any. An asset is classified as “doubtful” if full collection is highly questionable or improbable. An asset is classified as “loss” if it is considered un-collectible, even if a partial recovery could be expected in the future. The regulations also provide for a “special mention” designation, described as assets that do not currently expose a savings institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management’s close attention. Assets classified as substandard or doubtful require a savings institution to establish general allowances for loan losses. If an asset or portion thereof is classified as a loss, a savings institution must either establish specific allowances for loan losses in the amount of the portion of the asset classified loss or charge off such amount. Federal examiners may disagree with a savings institution’s classifications. If a savings institution does not agree with an examiner’s classification of an asset, it may appeal this determination to the OTS Regional Director.
 
At March 31, 2006, Carver Federal had $2.2 million of loans classified as substandard which represented 0.3% of the Bank’s total assets. As of March 31, 2005 the Bank had $1.0 million as loans classified as substandard, representing 0.2% of the Bank’s total assets. There were no loans classified as doubtful or loss at March 31, 2006 and March 31, 2005.
 
The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan losses and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems, that management analyze all significant factors that affect the ability to collect the portfolio in a reasonable manner and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary. Federal examiners may disagree with the savings institution as to the appropriate level of the institution’s allowance for loan losses. While management believes Carver Federal has established its existing loss allowances in accordance with generally accepted accounting principles, there can be no assurance that regulators, in reviewing Carver Federal’s assets, will not require Carver Federal to increase its loss allowance, thereby negatively affecting Carver Federal’s reported financial condition and results of operations.
 
Carver Federal’s methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific loans as well as losses that have not been identified but can be expected to occur. Further, management reviews the ratio of allowances to total loans (including projected growth) and recommends adjustments to the level of allowances accordingly. The Internal Asset Review Committee conducts reviews of the Bank’s loans on at least a quarterly basis and evaluates the need to establish general and specific allowances on the basis of this review. In addition, management actively monitors Carver Federal’s asset quality and charges off loans and properties acquired in settlement of loans against the allowances for losses on loans and such properties when appropriate and provides specific loss reserves when necessary. Although management believes it uses the best information available to make determinations with respect to the allowances for losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations.
 
Additionally, the Internal Asset Review Committee reviews Carver Federal’s assets on a quarterly basis to determine whether any assets require classification or re-classification. The Bank has a centralized loan servicing structure that relies upon
 
 
12
 
outside servicers, each of which generates a monthly report of delinquent loans. The Board has designated the Internal Asset Review Committee to perform quarterly reviews of the Bank’s asset quality, and their report is submitted to the Board for review. The Asset Liability and Interest Rate Risk Committee of the Board establishes policy relating to internal classification of loans and also provides input to the Internal Asset Review Committee in its review of classified assets. In originating loans, Carver Federal recognizes that credit losses will occur and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. It is management’s policy to maintain a general allowance for loan losses based on, among other things, regular reviews of delinquencies and loan portfolio quality, character and size, the Bank’s and the industry’s historical and projected loss experience and current and forecasted economic conditions. In addition, considerable uncertainty exists as to the future improvement or deterioration of the real estate markets in various states, or of their ultimate impact on Carver Federal as a result of its purchased loans in such states. See “—Lending Activities—Loan Purchases and Originations.” Carver Federal increases its allowance for loan losses by charging provisions for possible losses against the Bank’s income. General allowances are established by the Board on at least a quarterly basis based on an assessment of risk in the Bank’s loans, taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, the state of the real estate market and economic conditions generally. Specific allowances are provided for individual loans, or portions of loans, when ultimate collection is considered improbable by management based on the current payment status of the loan and the fair value or net realizable value of the security for the loan.
 
At the date of foreclosure or other repossession or at the date the Bank determines a property is an impaired property, the Bank transfers the property to real estate acquired in settlement of loans at the lower of cost or fair value, less estimated selling costs. Fair value is defined as the amount in cash or cash-equivalent value of other consideration that a real estate parcel would yield in a current sale between a willing buyer and a willing seller. Any amount of cost in excess of fair value is charged-off against the allowance for loan losses. Carver Federal records an allowance for estimated selling costs of the property immediately after foreclosure. Subsequent to acquisition, management periodically evaluates the property and an allowance is established if the estimated fair value of the property, less estimated costs to sell, declines. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of real estate is recorded. At March 31, 2006, the Bank had no foreclosed real estate, however, as a result of a property tax redemption, the Bank took fee ownership of a vacant tract of land in Bayshore, NY. See Note 1 of Notes to Consolidated Financial Statements.
 
The following table sets forth an analysis of Carver Federal’s allowance for loan losses for the periods indicated.

   
Year Ended March 31,
  
   
2006
 
2005
 
2004
 
2003
 
2002
  
   
(Dollars in thousands)
  
                       
Balance at beginning of year
  
$
4,097
  
$
4,125
  
$
4,158
  
$
4,128
  
$
3,551
  
Loans charged-off:
                                
Real Estate:
                                
One- to four-family
    
17
   
8
   
6
   
2
   
-
 
Non-residential
    
-
   
-
   
55
   
-
   
-
 
Consumer and business
    
100
   
65
   
264
   
226
   
500
 
Total Charge-offs
    
117
   
73
   
325
   
228
   
500
 
                                 
Recoveries:
                                
One- to four-family
    
5
   
-
   
107
   
-
   
3
 
Non-residential
    
-
   
-
   
10
   
-
   
-
 
Consumer and business
    
30
   
45
   
175
   
258
   
174
 
Total Recoveries
    
35
   
45
   
292
   
258
   
177
 
Net loans charged-off (recovered)
    
82
   
28
   
33
   
(30
)
  
323
 
Provision for losses
    
-
   
-
   
-
   
-
   
900
 
Balance at end of year
  
$
4,015
  
$
4,097
  
$
4,125
  
$
4,158
  
$
4,128
  
                                 
Ratio of net charge-offs to average loans outstanding
    
0.02
%
  
0.01
%
  
0.01
%
  
-0.01
%
  
0.11
%
Ratio of allowance to total loans
    
0.81
%
  
0.96
%
  
1.16
%
  
1.40
%
  
1.41
%
Ratio of allowance to non-performing assets (1)
    
147.07
%
  
410.65
%
  
194.30
%
  
230.74
%
  
146.23
%
 
(1)  Non-performing assets consist of non-accrual loans, accruing loans 90 days or more past due and property acquired in settlement of loans.
 
 
13
 
The following table allocates the allowance for loan losses by asset category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

   
At March 31,
  
   
2006
    
2005
    
2004
    
2003
    
2002
  
       
% of Loans
        
% of Loans
        
% of Loans
        
% of Loans
        
% of Loans
  
       
in Each
        
in Each
        
in Each
        
in Each
        
in Each
  
       
Category
        
Category
        
Category
        
Category
        
Category
  
       
to Total
        
to Total
        
to Total
        
to Total
        
to Total
  
   
Amount
  
Gross Loans
    
Amount
  
Gross Loans
    
Amount
  
Gross Loans
    
Amount
  
Gross Loans
    
Amount
  
Gross Loans
  
   
(Dollars in thousands)
  
Loans:
                                                  
Real Estate
                                                  
One- to four-family
  
$
565
    
28.91
%
  
$
528
    
36.69
%
  
$
355
    
27.80
%
  
$
298
    
24.20
%
  
$
429
    
41.84
%
Multifamily
    
1,084
   
21.11
%
    
898
   
23.99
%
    
1,240
   
33.88
%
    
656
   
44.45
%
    
1,468
   
40.39
%
Non-residential
    
960
   
31.05
%
    
1,129
   
27.49
%
    
853
   
28.92
%
    
1,967
   
26.74
%
    
729
   
13.66
%
Construction
    
303
   
18.64
%
    
212
   
11.43
%
    
158
   
7.71
%
    
170
   
3.89
%
    
76
   
3.32
%
Consumer and business
    
442
   
0.29
%
    
554
   
0.40
%
    
487
   
1.69
%
    
344
   
0.72
%
    
377
   
0.79
%
Unallocated
    
661
   
N/A
      
776
   
N/A
      
1,032
   
N/A
      
723
   
N/A
      
1,049
   
N/A
  
Total Allowance for loan losses
  
$
4,015
    
100.00
%
  
$
4,097
    
100.00
%
  
$
4,125
    
100.00
%
  
$
4,158
    
100.00
%
  
$
4,128
    
100.00
%
 
 
Investment Activities
 
General. 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.
 
The Bank must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. The Bank’s liquidity policy requires that cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained.
 
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. Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, 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 March 31, 2006, the Bank had no securities classified as trading. At March 31, 2006, $81.9 million, or 75.6% of the Bank’s mortgage-backed and other investment securities, was classified as available-for-sale. The remaining $26.4 million, or 24.4%, was classified as held-to-maturity.
 
Mortgage-Backed Securities. The Bank has invested in mortgage-backed securities in order to achieve its asset/liability management goals and collateral needs. Although mortgage-backed securities generally yield from 60 to 100 basis points less than whole loans, they present substantially lower credit risk, are more liquid than individual mortgage loans and may be used to collateralize obligations of the Bank. Because Carver Federal receives regular payments of principal and interest from its mortgage-backed securities, these investments provide more consistent cash flows than investments in other debt securities, which generally only pay principal at maturity. Mortgage-backed securities also help the Bank meet certain definitional tests for favorable treatment under federal banking and tax laws. See “—Regulation and Supervision—Federal Banking Regulation—QTL Test” and “Federal and State Taxation.”
 
At March 31, 2006, mortgage-backed securities constituted 14.6% of total assets, as compared to 20.2% of total assets at March 31, 2005. Carver Federal maintains a significant portfolio of mortgage-backed securities in the form of Government National Mortgage Association (“GNMA”) pass-through certificates, FNMA and FHLMC participation certificates. GNMA pass-through certificates are guaranteed as to the payment of principal and interest by the full faith and credit of the United States Government while FNMA and FHLMC certificates are each guaranteed by their respective agencies as to principal and interest. Mortgage-backed securities generally entitle Carver Federal to receive a pro rata portion of the cash flows from an identified pool of mortgages. The
 
 
14
 
cash flows from such pools are segmented and paid in accordance with a predetermined priority to various classes of securities issued by the entity. Carver Federal has also invested in pools of loans guaranteed as to principal and interest by the Small Business Administration (“SBA”).
 
The Bank seeks to manage interest rate risk by investing in adjustable-rate mortgage-backed securities, which at March 31, 2006 constituted $91.7 million, or 95.6% of the mortgage-backed securities portfolio. Mortgage-backed securities, however, expose Carver Federal to certain unique risks. In a declining rate environment, accelerated prepayments of loans underlying these securities expose Carver Federal to the risk that it will be unable to obtain comparable yields upon reinvestment of the proceeds. In the event the mortgage-backed security has been funded with an interest-bearing liability with maturity comparable to the original estimated life of the mortgage-backed security, the Bank’s interest rate spread could be adversely affected. Conversely, in a rising interest rate environment, the Bank may experience a lower than estimated rate of repayment on the underlying mortgages, effectively extending the estimated life of the mortgage-backed security and exposing the Bank to the risk that it may be required to fund the asset with a liability bearing a higher rate of interest.
 
The following table sets forth the carrying value of Carver Federal’s mortgage-backed securities at the dates indicated.

   
At March 31,
 
 
 
2006
 
2005
 
2004
 
 
 
(In thousands)
  
Available-for-Sale:
              
GNMA
  
$
63,007
  
$
83,425
  
$
55,512
  
Fannie Mae
    
4,589
   
8,149
   
12,626
 
FHLMC
    
2,209
   
3,908
   
6,712
 
Total available-for-sale
    
69,805
   
95,482
   
74,850
 
Held-to-Maturity:
                    
GNMA
  
$
809
  
$
1,070
  
$
1,465
  
Fannie Mae
    
7,900
   
10,780
   
20,386
 
FHLMC
   
17,372
   
19,115
   
21,305
 
Other
    
323
   
337
   
318
 
Total held-to-maturity
   
26,404
   
31,302
   
43,474
 
Total mortgage-backed securities
  
$
96,209
  
$
126,784
  
$
118,324
  

 
The following table sets forth the scheduled final maturities, book and fair values for Carver Federal’s mortgage-backed securities at March 31, 2006. Expected maturities will differ from contractual maturities due to scheduled repayments and because borrowers may have the right to call or prepay obligations with or without prepayment penalties. The following table does not take into consideration the effects of scheduled repayments or the effects of possible prepayments.

   
 
 
 
 
Weighted
 
 
 
Book
 
Fair
 
Average
 
 
 
Value
 
Value
 
Rate
  
   
(Dollars in thousands)
      
               
Available-for-sale :
             
One through five years
  
$
300
  
$
303
    
6.23
%
Five through ten years
    
1,524
   
1,471
   
4.53
%
After ten years
    
68,600
   
68,031
   
3.78
%
   
$
70,424
  
$
69,805
    
3.81
%
Held-to-maturity:
                    
One through five years
  
$
50
  
$
50
    
5.69
%
After ten years
    
26,354
   
25,830
   
5.65
%
   
$
26,404
  
$
25,880
    
5.65
%
 
Other Investment Securities. In addition to mortgage-backed securities, the Bank also invests in high-quality assets (primarily government and agency obligations) with short and intermediate terms (typically seven years or less) to maturity. Carver Federal is permitted under federal law to make certain investments, including investments in securities issued by various federal agencies and state and municipal governments, deposits at the Federal Home Loan Bank (“FHLB”), certificates of deposit in federally insured institutions, certain bankers’ acceptances and federal funds. The Bank may also invest, subject to certain limitations, in
 
 
15
 
commercial paper having one of the two highest investment ratings of a nationally recognized credit rating agency, and certain other types of corporate debt securities and mutual funds. In fiscal 2005, as a result of the attempted acquisition of Independence Federal Savings Bank (“IFSB”), Carver invested in 150,000 shares of IFSB common stock totaling $3.1 million. However, on May 11, 2005, subsequent to the termination of that acquisition agreement, the Company sold its entire equity investment in IFSB for an aggregate price of $1.6 million.
 
The following table sets forth the carrying value of Carver Federal’s other securities available-for-sale at the dates indicated.

   
At March 31,
 
 
 
2006
 
2005
 
2004
  
   
(In thousands)
  
U.S. Government and Equity securities:
                    
Available-for-sale
  
$
12,077
  
$
22,551
  
$
21,553
  
 
The following table sets forth by scheduled maturities the book and fair values for Carver Federal’s other securities available -for-sale at March 31, 2006.

   
 
 
 
 
Weighted
 
 
 
Book
 
Fair
 
Average
 
 
 
Value
 
Value
 
Rate
 
 
 
(In thousands)
 
 
  
Available-for-sale:
              
Less than one year
 
$
2,000
  
$
1,982
    
2.43
%
One through five years
    
10,386
   
10,095
   
3.85
%
   
$
12,386
  
$
12,077
    
3.62
%
 
Other Earning Assets. Federal regulations require the Bank to maintain an investment in FHLB stock and a sufficient amount of liquid assets which may be invested in cash and specified securities. For additional information, see “—Regulation and Supervision—Federal Banking Regulation—Liquidity.”
 
The following table sets forth the carrying value of Carver Federal’s investment in FHLB stock and liquid assets at the dates indicated.

   
At March 31,
  
   
2006
 
2005
 
2004
  
   
(In thousands)
  
               
FHLB stock
  
$
4,627
  
$
5,125
  
$
4,576
  
Federal funds sold
    
8,700
   
6,800
   
8,200
 
 
 
Deposit Activity and Other Sources of Funds
 
General. Deposits are the primary source of Carver Federal’s funds for lending and other investment purposes. In addition to deposits, Carver Federal derives funds from loan principal repayments, loan and investment interest payments, maturing investments and fee income. Loan and mortgage-backed securities repayments and interest payments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by prevailing market interest rates, pricing of deposits, competition and general economic conditions. Borrowed money may be used to supplement the Bank’s available funds, and from time to time the Bank borrows funds from the FHLB and has borrowed funds through repurchase agreements.
 
Deposits. Carver Federal attracts deposits principally from within its market area by offering a variety of deposit instruments, including passbook and statement accounts and certificates of deposit, which range in term from 91 days to seven years. Deposit terms vary, principally on the basis of the minimum balance required, the length of time the funds must remain on deposit and the interest rate. Carver Federal also offers Individual Retirement Accounts. Carver Federal’s policies are designed primarily to attract deposits from local residents and businesses through the Bank’s branch offices. Carver Federal also holds deposits from
 
 
16
 
various governmental agencies or authorities and corporations. At March 31, 2006 the Bank held $10.6 million in brokered deposits, specifically certificates of deposits. 
 
Deposit interest rates, maturities, service fees and withdrawal penalties on deposits are established based on the Bank’s funds acquisition and liquidity requirements, the rates paid by the Bank’s competitors, current market rates, the Bank’s growth goals and applicable regulatory restrictions and requirements.
 
The following table sets forth the change in dollar amount of deposits accounts offered by Carver Federal between the dates indicated. In fiscal 2006 the Bank opened one additional stand-alone ATM in Bedford Stuyvesant, Brooklyn. During fiscal 2005 the Bank opened two branch offices as well as two stand-alone ATMs. The first branch office and ATM were opened in July 2004 at Atlantic Terminal in Fort Greene, Brooklyn. A second ATM at 116th Street and a branch office at 145th Street in Harlem were opened in December 2004 and January 2005, respectively. During fiscal 2004 the Bank opened two stand-alone ATMs in Harlem and a new branch office in Jamaica, Queens. The Bank’s branch offices on 116th Street and 145th Street in Harlem and in Jamaica operate in New York State designated Banking Development Districts (“BDD”), which allow Carver Federal to participate in BDD-related activities, including acquiring New York City and New York State deposits. As of March 31, 2006, Carver Federal held $136.1 million in BDD deposits.

   
Year Ended March 31,
  
   
2006
 
2005
 
2004
  
   
(Dollars in thousands)
  
               
Deposits at beginning of year
  
$
455,870
  
$
375,519
  
$
349,066
  
Net increase before interest credited
   
39,847
   
74,896
   
21,804
 
Interest credited
    
8,921
   
5,455
   
4,649
 
Deposits at end of year
  
$
504,638
  
$
455,870
  
$
375,519
  
                     
Net increase during the year:
                    
Amount
  
$
48,768
  
$
80,351
  
$
26,453
  
Percent
    
10.7
%
  
21.4
%
  
7.6
%
 
The following table sets forth the distribution in the various types of the Bank’s deposit accounts and the related weighted average interest rates paid at the dates indicated.
 
   
At March 31,
  
   
2006
    
2005
    
2004
  
   
Amount
  
Percent of Total Deposits
  
Weighted Average Rate
    
Amount
  
Percent of Total Deposits
  
Weighted Average Rate
    
Amount
  
Percent of Total Deposits
  
Weighted Average Rate
  
   
(Dollars in thousands)
  
                                           
Non-interest-bearing demand
  
$
31,085
    
6.2
%
  
-
%
  
$
25,570
    
5.6
%
  
-
%
  
$
20,966
    
5.6
%
  
-
%
NOW demand
    
27,904
   
5.5
   
0.31
     
24,095
   
5.3
   
0.30
     
22,671
   
6.0
   
0.30
 
Savings and clubs
    
139,724
   
27.7
   
0.68
     
137,810
   
30.2
   
0.62
     
131,120
   
34.9
   
0.60
 
Money market savings
    
40,045
   
7.9
   
2.41
     
36,294
   
8.0
   
1.34
     
30,842
   
8.2
   
0.74
 
Certificates of deposit
    
263,963
   
52.3
   
3.76
     
229,685
   
50.4
   
2.30
     
168,066
   
44.8
   
1.97
 
Other
    
1,917
   
0.4
   
1.47
     
2,416
   
0.5
   
1.13
     
1,854
   
0.5
   
1.46
 
Total
  
$
504,638
    
100.0
%
  
2.37
%
  
$
455,870
    
100.0
%
  
1.47
%
  
$
375,519
    
100.0
%
  
1.18
%
 
 
17
 
The following table sets forth the amount and maturities of certificates of deposit in specified weighted average interest rate categories at March 31, 2006.

   
Period to Maturity
  
March 31,
  
   
Less Than
         
After
  
Total
  
Percent
          
Rate
  
One Year
  
1-2 Years
  
2-3 Years
  
3 Years
  
2006
  
of Total
  
2005
  
2004
  
   
(Dollars in thousands)
  
0% - 0.99%
  
$
635
  
$
16
  
$
10
  
$
85
  
$
746
    
0.28
%
$
688
  
$
29,848
  
1% - 1.99%
    
8,826
   
304
   
7
   
-
   
9,137
   
3.46
    
122,459
   
69,434
 
2% - 3.99%
    
105,120
   
14,943
   
7,862
   
9,677
   
137,602
   
52.13
    
92,181
   
53,294
 
4% and over
    
102,997
   
4,932
   
2,577
   
5,972
   
116,478
   
44.13
    
14,357
   
15,490
 
Total
  
$
217,578
  
$
20,195
  
$
10,456
  
$
15,734
  
$
263,963
    
100.00
%
$
229,685
  
$
168,066
  
 
Carver Federal’s certificates of deposit of $100,000 or more were $183.5 million as of March 31, 2006 compared to $161.7 million at March 31, 2005. These certificates of deposit over $100,000 include BDD deposits of $136.1 million and $101.0 million at March 31, 2006 and 2005, respectively. Other deposits with balances of $100,000 or more totaled $ 80.9 million and $64.8 million at March 31, 2006 and 2005, respectively.
 
Borrowed Money. Deposits are the primary source of funds for Carver Federal’s lending, investment and general operating activities. Carver Federal is authorized, however, to use advances and securities sold under agreements to repurchase (“Repos”) from the FHLB and approved primary dealers to supplement its supply of funds and to meet deposit withdrawal requirements. The FHLB functions as a central bank providing credit for savings institutions and certain other member financial institutions. As a member of the FHLB system, Carver Federal is required to own stock in the FHLB and is authorized to apply for advances. Advances are made pursuant to several different programs, each of which has its own interest rate and range of maturities. Advances from the FHLB are secured by Carver Federal’s stock in the FHLB and a pledge of Carver Federal’s mortgage loan and mortgage-backed securities portfolios. One of the elements of Carver Federal’s investment strategy is to leverage the balance sheet by increasing liabilities with FHLB advances and Repos and investing borrowed funds primarily in adjustable-rate mortgage loan and mortgage-backed securities products.
 
On September 17, 2003, Carver Federal Trust I issued 13,000 shares, liquidation amount $1,000 per share, of floating rate capital securities. Gross proceeds from the sale of these trust preferred debt securities were $13.0 million and, together with the proceeds from the sale of the trust's common securities, were used to purchase approximately $13.4 million aggregate principal amount of the Holding Company's floating rate junior subordinated debt securities due 2033. The trust preferred debt securities are redeemable quarterly at the option of the Company beginning on or after July 7, 2007 and have a mandatory redemption date of September 17, 2033. Cash distributions on the trust preferred debt securities are cumulative and payable at a floating rate per annum (reset quarterly) equal to 3.05% over 3-month LIBOR, with a rate at March 31, 2006 of 7.97%. The subordinated debt securities amounted to $12.9 million at March 31, 2006 and are included in other borrowed money on the consolidated statement of financial condition. The Bank takes into consideration the term of borrowed money with the repricing cycle of the mortgage loans on the balance sheet. At March 31, 2006, Carver Federal had outstanding $93.8 million in total borrowed money, consisting of the subordinated debt securities and advances from FHLB.
 
 
18
 
The following table sets forth certain information regarding Carver Federal’s borrowed money at the dates and for the periods indicated:
 
     
At or for the Year Ended
March 31,  
  
     
2006 
    
2005 
    
2004 
  
Amounts outstanding at the end of year:
    
(Dollars in thousands) 
  
FHLB-NY advances
  
$
80,935
  
$
102,500
  
$
91,516
  
Guaranteed preferred beneficial interest in junior subordinated debentures
    
12,857
   
12,799
   
12,741
 
Loan for employee stock ownership plan
    
-
   
-
   
25
 
                     
Rate paid at year end:
                    
FHLB-NY advances
    
4.13
%
  
3.78
%
  
3.92
%
Guaranteed preferred beneficial interest in junior subordinated debentures
    
7.97
%
  
6.08
%
  
4.16
%
Loan for employee stock ownership plan
    
-
   
-
   
4.00
%
                     
Maximum amount of borrowing outstanding at any month end:
                    
FHLB-NY advances
  
$
112,488
  
$
112,506
  
$
112,030
  
Guaranteed preferred beneficial interest in junior subordinated debentures
    
12,857
   
12,799
   
12,742
 
Loan for employee stock ownership plan
    
-
   
-
   
207
 
                     
Approximate average amounts outstanding for year:
                    
FHLB-NY advances
  
$
94,798
  
$
97,013
  
$
99,359
  
Guaranteed preferred beneficial interest in junior subordinated debentures
    
12,827
   
12,768
   
6,854
 
Loan for employee stock ownership plan
    
-
   
-
   
137
 
                     
Approximate weighted average rate paid during the year (1):
                    
FHLB-NY advances
    
3.81
%
  
3.71
%
  
3.74
%
Guaranteed preferred beneficial interest in junior subordinated debentures
    
7.50
%
  
5.49
%
  
4.78
%
Loan for employee stock ownership plan
    
-
   
-
   
4.07
%
                     
(1)  The approximate weighted average rate paid during the year was computed by dividing the average amounts outstanding into the related interest expense for the year.
 
 
REGULATION AND SUPERVISION
 
General
 
The Bank is subject to extensive regulation, examination and supervision by its primary regulator, the OTS. The Bank’s deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”) under the Savings Association Insurance Fund (“SAIF”), and it is a member of the FHLB. The Bank must file reports with the OTS concerning its activities and financial condition, and it must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The Holding Company, as a unitary savings and loan holding company, is subject to regulation, examination and supervision by the OTS and is required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and of the Securities and Exchange Commission (the “SEC”) under the federal securities laws. The OTS and the FDIC periodically perform safety and soundness examinations of the Bank and the Holding Company and test our compliance with various regulatory requirements. The OTS has primary enforcement responsibility over federally chartered savings banks and has substantial discretion to impose enforcement action on an institution that fails to comply with applicable regulatory requirements, particularly with respect to its capital requirements. In addition, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular federally chartered savings bank and, if action is not taken by the Director, the FDIC has authority to take such action under certain circumstances.
 
This regulation and supervision establishes a comprehensive framework to regulate and control the activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. This structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such laws and regulations whether by the OTS, the FDIC or through legislation could have a material adverse impact on the Bank and the Holding Company and their operations and stockholders.
 
 
19
 
The description of statutory provisions and regulations applicable to federally chartered savings banks and their holding companies and of tax matters set forth in this document does not purport to be a complete description of all such statutes and regulations and their effects on the Bank and the Holding Company.
 
Federal Banking Regulation
 
Activity Powers. The Bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended (“HOLA”), and the regulations of the OTS. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. The Bank’s authority to invest in certain types of loans or other investments is limited by federal law.
 
Loans to One Borrower Limitations. The Bank is generally subject to the same limits on loans to one borrower as a national bank. With specified exceptions, the Bank’s total loans or extension of credit to a single borrower or group of related borrowers may not exceed 15% of the Bank’s unimpaired capital and unimpaired surplus, which does not include accumulated other comprehensive income. The Bank may lend additional amounts up to 10% of its unimpaired capital and unimpaired surplus if the loans or extensions of credit are fully secured by readily marketable collateral. The Bank currently complies with applicable loans to one borrower limitations. At March 31, 2006, the Bank’s limit on loans to one borrower based on its unimpaired capital and surplus was $9.9 million.
 
QTL Test. Under HOLA, the Bank must comply with a qualified thrift lender (“QTL”) test. Under this test, the Bank is required to maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” on a monthly basis in at least nine months of the most recent twelve-month period. “Portfolio assets” means, in general, an association’s total assets less the sum of (a) specified liquid assets up to 20% of total assets, (b) goodwill and other intangible assets and (c) the value of property used to conduct the Bank’s business. “Qualified thrift investments” include various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities and consumer loans. If the Bank fails the QTL test, it must either operate under certain restrictions on its activities or convert from a thrift charter to a bank charter. In addition, if the Bank does not requalify under the QTL test within three years after failing the test, the institution would be prohibited from engaging in any activity not permissible for a national bank and would have to repay any outstanding advances from the FHLB as promptly as possible. At March 31, 2006, the Bank maintained approximately 69.3% of its portfolio assets in qualified thrift investments. The Bank had also met the QTL test in each of the prior 12 months and was, therefore, a qualified thrift lender.
 
Capital Requirements. OTS regulations require the Bank to meet three minimum capital ratios:
 
(1) a tangible capital ratio requirement of 1.5% of total assets, as adjusted under OTS regulations;
 
(2) a leverage ratio requirement of 4% of core capital to such adjusted total assets; and
 
(3) a risk-based capital ratio requirement of 8% of core and supplementary capital to total risk-weighted assets.
 
In determining compliance with the risk-based capital requirement, the Bank must compute its risk-weighted assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the U.S. government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulations based on the risks that the OTS believes are inherent in the type of asset.
 
Generally, tangible capital is defined as common stockholders’ equity (including retained earnings), certain non-cumulative perpetual preferred stock and related earnings and minority interests in equity accounts of fully consolidated subsidiaries, less intangibles (other than certain mortgage servicing rights) and investments in and loans to subsidiaries engaged in activities not permissible for a national bank.
 
Core capital is defined similarly to tangible capital, but also includes certain qualifying supervisory goodwill less certain disallowed assets. Supplementary capital includes cumulative and other perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. In addition, up to 45% of unrealized gains on available-for-sale equity securities with a readily determinable fair value may be included in supplementary capital. The allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital.
 
In assessing an institution’s capital adequacy, the OTS takes into consideration not only these numeric factors but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where necessary. The Bank, as a matter of prudent management, targets as its goal the maintenance of capital ratios which exceed these minimum requirements and are consistent with the Bank’s risk profile. At March 31, 2006, the Bank exceeded each of its capital requirements with a tangible capital ratio of 9.4%, leverage capital ratio of 9.4% and total risk-based capital ratio of 13.2%.
 
The Federal Deposit Insurance Corporation Improvement Act, as amended (“FDICIA”), requires that the OTS and other federal banking agencies revise their risk-based capital standards, with appropriate transition rules, to ensure that they take into
 
 
20
 
account interest rate risk, concentrations of risk and the risks of non-traditional activities. The OTS adopted regulations, effective January 1, 1994, that set forth the methodology for calculating an interest rate risk (“IRR”) component to be incorporated into the OTS risk-based capital regulations. On May 10, 2002, the OTS adopted an amendment to its capital regulations which eliminated the IRR component of the risk-based capital requirement. Pursuant to the amendment, the OTS will continue to monitor the IRR of individual institutions through the OTS requirements for IRR management, the ability of the OTS to impose individual minimum capital requirements on institutions that exhibit a high degree of IRR, and the requirements of Thrift Bulletin 13a, which provides guidance on the management of IRR and the responsibility of boards of directors in that area. In addition, the OTS monitors the IRR of individual institutions through a variety of means, including an analysis of the change in portfolio value, or NPV. NPV is defined as the net present value of the expected future cash flows of an entity’s assets and liabilities and therefore, hypothetically represents the value of an institution’s net worth. The OTS has also used this NPV analysis as part of its evaluation of certain applications or notices submitted by thrift institutions. In addition, OTS Bulletin 13a provides guidance on the management of IRR and the responsibility of boards of directors in that area. The OTS, through its general oversight of the safety and soundness of savings associations, retains the right to impose minimum capital requirements on individual institution to the extent the institution is not in compliance with certain written guidelines established by the OTS regarding NPV analysis. The OTS has not imposed any such requirements on the Bank.
 
Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the OTS is authorized and, in some cases, required to take supervisory actions against undercapitalized savings banks. For this purpose, a savings bank would be placed in one of the following five categories based on the bank’s regulatory capital: well-capitalized; adequately capitalized; undercapitalized; significantly undercapitalized; or critically undercapitalized.
 
The severity of the action authorized or required to be taken under the prompt corrective action regulations increases as a bank’s capital decreases within the three undercapitalized categories. All banks are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person if, following such distribution, the bank would be undercapitalized. Generally, a capital restoration plan must be filed with the OTS within 45 days of the date a bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” In addition, various mandatory supervisory actions become immediately applicable to the institution, including restrictions on growth of assets and other forms of expansion. Under the OTS regulations, generally, a federally chartered savings bank is treated as well capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, and its leverage ratio is 5% or greater, and it is not subject to any order or directive by the OTS to meet a specific capital level. When appropriate, the OTS can require corrective action by a savings association holding company under the “prompt corrective action” provisions of federal law. At March 31, 2006, the Bank was considered well-capitalized by the OTS.
 
Limitation on Capital Distributions. The OTS imposes various restrictions on the Bank’s ability to make capital distributions, including cash dividends, payments to repurchase or otherwise acquire its shares and other distributions charged against capital. A savings institution that is the subsidiary of a savings and loan holding company, such as the Bank, must file a notice with the OTS at least 30 days before making a capital distribution. However, the Bank must file an application for prior approval if the total amount of its capital distributions (including each proposed distribution), for the applicable calendar year would exceed the Bank’s net income for that year plus the Bank’s retained net income for the previous two years.
 
The Bank may not pay dividends to the Holding Company if, after paying those dividends, the Bank would fail to meet the required minimum levels under risk-based capital guidelines and the minimum leverage and tangible capital ratio requirements or the OTS notified the Bank that it was in need of more than normal supervision.
 
The Bank is prohibited from making capital distributions if:
 
(1)  
the Bank would be undercapitalized following the distribution;
 
(2)  
the proposed capital distribution raises safety and soundness concerns; or
 
(3)  
the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
 
Liquidity. The Bank maintains liquidity levels to meet operational needs. In the normal course of business, the levels of liquid assets during any given period are dependent on operating, investing and financing activities. Cash and due from banks, federal funds sold and repurchase agreements with maturities of three months or less are the Bank’s most liquid assets. The Bank maintains a liquidity policy to maintain sufficient liquidity to ensure its safe and sound operations.
 
Branching. Subject to certain limitations, federal law permits the Bank to establish branches in any state of the United States. The authority for the Bank to establish an interstate branch network would facilitate a geographic diversification of the Bank’s activities. This authority under federal law and OTS regulations preempts any state law purporting to regulate branching by federal savings associations.
 
 
21
 
Community Reinvestment. Under the Community Reinvestment Act, as amended (“CRA”), as implemented by OTS regulations, the Bank has a continuing and affirmative obligation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for the Bank nor does it limit the Bank’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA does however require the OTS, in connection with its examination of the Bank, to assess the Bank’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the Bank.
 
In particular, the system focuses on three tests:
 
(1)  
a lending test, to evaluate the institution’s record of making loans in its assessment areas;
 
(2)  
an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing and programs benefiting low or moderate income individuals and businesses; and
 
(3)  
a service test, to evaluate the institution’s delivery of banking services through its branch offices, ATM centers and other offices.
 
The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received an “Outstanding” CRA rating in its most recent examination conducted in 2004.
 
Regulations require that we publicly disclose certain agreements that are in fulfillment of CRA. The Holding Company has no such agreements in place at this time.
 
Transactions with Related Parties. The Bank’s authority to engage in transactions with its “affiliates” and insiders is limited by OTS regulations and by Sections 23A, 23B, 22 (g) and 22 (h) of the Federal Reserve Act (“FRA”). In general, these transactions must be on terms which are as favorable to the Bank as comparable transactions with non-affiliates. Additionally, certain types of these transactions are restricted to an aggregate percentage of the Bank’s capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from the Bank. In addition, OTS regulations prohibit a savings bank from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate other than a subsidiary.
 
The Bank’s authority to extend credit to its directors, executive officers, and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board (“FRB”). Among other things, these provisions require that extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital. In addition, extensions of credit in excess of certain limits must be approved by the Bank’s board of directors. At March 31, 2006, there were no loans to officers or directors.
 
The FRB has confirmed its previous interpretations of Sections 23A and 23B of the FRA with Regulation W. The OTS has also conformed its regulations to agree with Regulation W. Regulation W made various changes to existing law regarding Sections 23A and 23B, including expanding the definition of what constitutes an “affiliate” subject to Sections 23A and 23B and exempting certain subsidiaries of state-chartered banks from the restrictions of Sections 23A and 23B.
 
The OTS regulations provide for additional restrictions imposed on savings associations under Section 11 of HOLA, including provisions prohibiting a savings association from making a loan to an affiliate that is engaged in non-bank holding company activities and provisions prohibiting a savings association from purchasing or investing in securities issued by an affiliate that is not a subsidiary. The OTS regulations also include certain specific exemptions from these prohibitions. The FRB and the OTS expect each depository institution that is subject to Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W and the OTS regulation. These regulations have had no material adverse effect on our business.
 
Section 402 of the Sarbanes-Oxley Act prohibits the extension of personal loans to directors and executive officers of issuers (as defined in the Sarbanes-Oxley Act). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as the Bank, that is subject to the insider lending restrictions of Section 22(h) of the FRA.
 
Assessment. The OTS charges assessments to recover the cost of examining savings associations and their affiliates. These assessments are based on three components: the size of the association, on which the basic assessment is based; the association’s supervisory condition, which results in an additional assessment based on a percentage of the basic assessment for any savings institution with a composite rating of 3, 4, or 5 in its most recent safety and soundness examination; and the complexity of the association’s operations, which results in an additional assessment based on a percentage of the basic assessment for any savings association that managed over $1 billion in trust assets, serviced for others loans aggregating more than $1 billion, or had certain off-balance sheet assets aggregating more than $1 billion. Effective July 1, 2004, the OTS adopted a final rule replacing examination
 
 
22
 
fees for savings and loan holding companies with semi-annual assessments. For fiscal 2006, Carver paid $143,000 in OTS assessments.
 
Enforcement. The OTS has primary enforcement responsibility over the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices.
 
Standards for Safety and Soundness. The OTS has adopted guidelines prescribing safety and soundness standards. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. In addition, OTS regulations authorize, but do not require, the OTS to order an institution that has been given notice that it is not satisfying these safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the “prompt corrective action” provisions of federal law. If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties.
 
Insurance of Deposit Accounts. The Bank is a member of the SAIF and pays its deposit insurance assessments to the SAIF. The FDIC also maintains another insurance fund, BIF, which primarily insures the deposits of banks and state chartered savings banks. Under federal law, the FDIC established a risk-based assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. Under the assessment system, the FDIC assigns an institution to one of three capital categories based on the institution’s financial information as of the quarter ending three months before the beginning of the assessment period: (1) well-capitalized, (2) adequately capitalized and (3) undercapitalized. An institution’s assessment rate depends on the capital category and supervisory category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates currently range from 0.0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.27% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern). The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of the deposit insurance fund to 1.25%.
 
In addition, all FDIC insured institutions are required to pay assessments to the FDIC at an annual rate of approximately 1.44% per $100,000 of insured deposits to fund interest payments on the bonds issued by the Financing Corporation (“FICO”), an agency of the federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the FICO bonds mature in 2017. The Bank’s total expense in fiscal 2006 for FDIC assessment for FICO bonds interest payments was $61,000. Due to the Bank’s favorable assessment risk classification there was no deposit insurance assessment on our deposits for fiscal 2006.
 
Federal Home Loan Bank System. The Bank is a member of the FHLB -NY which is one of the twelve regional FHLBs composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank, as an FHLB member, is required to acquire and hold shares of capital stock in the FHLB-NY in an amount equal to the greater of (i) 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, and (ii) 5% (or such greater fraction as established by the FHLB) of its outstanding advances from the FHLB. The Bank was in compliance with this requirement with an investment in the capital stock of the FHLB at March 31, 2006 of $4.6 million. Any advances from a FHLB must be secured by specified types of collateral, and all long term advances may be obtained only for the purpose of providing funds for residential housing finance.
 
FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, the Bank’s net interest income would be adversely affected. Dividends from FHLB-NY to the Bank amounted to $274,000 for fiscal 2006, $130,000 for fiscal 2005 and $126,000 for fiscal 2004. In the third quarter of fiscal 2004, the FHLB-NY suspended dividend payments to stockholders due to losses in its securities portfolio, but resumed payment in the fourth quarter. The dividend rate paid on FHLB stock at March 31, 2006 was 5.25%.
 
Under the Gramm-Leach-Bliley Act, as amended (“Gramm-Leach”), which repeals historical restrictions and eliminates many federal and state law barriers to affiliations among banks and securities firms, insurance companies and other financial service providers, membership in the FHLB system is now voluntary for all federally-chartered savings banks such as the Bank. Gramm-Leach also replaces the existing redeemable stock structure of the FHLB system with a capital structure that requires each FHLB to meet a leverage limit and a risk-based permanent capital requirement. Two classes of stock are authorized: Class A (redeemable on six months notice) and Class B (redeemable on five years notice). Pursuant to regulations promulgated by the Federal Housing
 
 
23
 
Finance Board, as required by Gramm-Leach, the FHLB-NY has adopted a capital plan that will change the foregoing minimum stock ownership requirements for FHLB-NY stock. Under the new capital plan, each member of the FHLB-NY will have to maintain a minimum investment in FHLB-NY capital stock in an amount equal to the sum of (1) the greater of $1,000 or 0.20% of the member’s mortgage-related assets and (2) 4.50% of the dollar amount of any outstanding advances under such member’s Advances, Collateral Pledge and Security Agreement with the FHLB-NY. The FHLB-NY, however, has postponed the implementation of the new capital plan, and the new implementation date has not yet been determined.
 
Federal Reserve System. Under the FRB’s regulations, the Bank is required to maintain non-interest-earning reserves against its transaction accounts. FRB regulations generally require that (a) reserves of 3% must be maintained against aggregate transaction accounts between $7.0 million and $48.3 million (subject to adjustment by the FRB), and (b) a reserve of $1.2 million and 10% (subject to adjustment by the FRB between 8% and 14%) must be maintained against that portion of total transaction accounts in excess of $48.3 million. The first $7.0 million of otherwise reservable balances are exempted from the reserve requirements. The Bank is in compliance with these reserve requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank, or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the Bank’s interest-earning assets to the extent that the requirement exceeds vault cash.
 
Privacy Protection. Carver Federal is subject to OTS regulations implementing the privacy protection provisions of Gramm-Leach. These regulations require the Bank to disclose its privacy policy, including identifying with whom it shares “nonpublic personal information,” to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require the Bank to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, to the extent its sharing of such information is not exempted, the Bank is required to provide its customers with the ability to “opt-out” of having the Bank share their nonpublic personal information with unaffiliated third parties before they can disclose such information, subject to certain exceptions.
 
The Bank is subject to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of Gramm-Leach. The guidelines describe the agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to insure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. The Bank has a policy to comply with the foregoing guidelines.
 
Holding Company Regulation. The Holding Company is a savings and loan holding company regulated by the OTS. As such, the Holding Company is registered with and is subject to OTS examination and supervision, as well as certain reporting requirements. In addition, the OTS has enforcement authority over the Holding Company and its subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings institution. Unlike bank holding companies, federal savings and loan holding companies are not subject to any regulatory capital requirements or to supervision by the FRB.
 
Gramm-Leach restricts the powers of new unitary savings and loan holding companies. Unitary savings and loan holding companies that are “grandfathered,” i.e., unitary savings and loan holding companies in existence or with applications filed with the OTS on or before May 4, 1999, such as Carver, retain their authority under the prior law. All other unitary savings and loan holding companies are limited to financially related activities permissible for bank holding companies, as defined under Gramm-Leach. Gramm-Leach also prohibits non-financial companies from acquiring grandfathered unitary savings and loan holding companies.
 
Restrictions Applicable to All Savings and Loan Holding Companies. Federal law prohibits a savings and loan holding company, including the Holding Company, directly or indirectly, from acquiring:
 
(1)  
control (as defined under HOLA) of another savings institution (or a holding company parent) without prior OTS approval;
 
(2)  
through merger, consolidation, or purchase of assets, another savings institution or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company), without prior OTS approval; or
 
(3)  
control of any depository institution not insured by the FDIC (except through a merger with and into the holding company’s savings institution subsidiary that is approved by the OTS).
 
A savings and loan holding company may not acquire as a separate subsidiary an insured institution that has a principal office outside of the state where the principal office of its subsidiary institution is located, except:  
 
(1)  
in the case of certain emergency acquisitions approved by the FDIC;
 
 
24
 
(2)  
if such holding company controls a savings institution subsidiary that operated a home or branch office in such additional state as of March 5, 1987; or
 
(3)  
if the laws of the state in which the savings institution to be acquired is located specifically authorize a savings institution chartered by that state to be acquired by a savings institution chartered by the state where the acquiring savings institution or savings and loan holding company is located or by a holding company that controls such a state chartered association.
 
The HOLA prohibits a savings and loan holding company (directly or indirectly, or through one or more subsidiaries) from acquiring another savings association or holding company thereof without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by holding companies to acquire savings associations, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.
 
Federal Securities Laws. The Holding Company is subject to the periodic reporting, proxy solicitation, tender offer, insider trading restrictions and other requirements under the Securities Exchange Act of 1934, as amended (“Exchange Act”).
 
Delaware Corporation Law. The Holding Company is incorporated under the laws of the State of Delaware. Thus, it is subject to regulation by the State of Delaware and the rights of its shareholders are governed by the General Corporation Law of the State of Delaware.
 
New York State Banking Regulations. The New York State Banking Department has adopted Section 6-L to the banking law and regulations which impose restrictions and limitations on certain high cost home loans made by any individual or entity, including a federally-chartered savings bank, that originates more than one high cost home loan in New York State in a 12-month period. Among other things, the regulations and statute prohibit certain mortgage loan provisions and certain acts and practices by originators and impose certain disclosure and reporting requirements. It is unclear whether these provisions would be preempted by Section 5(a) of HOLA, as implemented by the lending and investment regulations of the OTS. The OTS has not yet adopted regulations regarding high-cost mortgage loans and is currently considering whether it will do so. Although the Bank does not originate loans that meet the definition of “high-cost mortgage loan” under the proposed regulations, in the event the Bank determines to originate such loans in the future, the Bank may be subject to such regulation, if adopted as proposed.
 
Other Federal Regulation. The Bank is subject to OTS regulations implementing the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.
 
Title III of the USA PATRIOT Act and the related OTS regulations impose the following requirements with respect to financial institutions:
 
 
•
Establishment of anti-money laundering programs.

 
•
Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time.

 
•
Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering.

 
•
Prohibition on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect to correspondent accounts of foreign banks.
 
 
FEDERAL AND STATE TAXATION
 
Federal Taxation
 
General. The Holding Company and the Bank currently file consolidated federal income tax returns, report their income for
 
 
25
 
tax return purposes on the basis of a taxable-year ending March 31st, using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including in particular the Bank’s tax reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Holding Company.
 
Bad Debt Reserves. Prior to fiscal 2004 the Bank met the requirement as a “small bank” (one with assets having an adjusted tax basis of $500 million or less) and was permitted to maintain a reserve for bad debts with respect to “qualifying loans,” which, in general, are loans secured by certain interests in real property, and to make, within specified formula limits, annual additions to the reserve which are deductible for purposes of computing the Bank’s taxable income. In fiscal years 2006, 2005 and 2004 the Bank was not considered to be a small bank as total assets exceeded $500 million.
 
Distributions. To the extent that the Bank makes “non-dividend distributions” to shareholders, such distributions will be considered to result in distributions from the Bank’s “base year reserve,” i.e., its reserve as of March 31, 1988, to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the Bank’s taxable income. Non-dividend distributions include distributions in excess of the Bank’s current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Bank’s current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute non-dividend distributions and, therefore, will not be included in the Bank’s taxable income.
 
The amount of additional taxable income created from a non-dividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the non-dividend distribution would be includable in gross income for federal income tax purposes, assuming a 34% federal corporate income tax rate.
 
Elimination of Dividends; Dividends-Received Deduction. The Holding Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Holding Company and the Bank will not file a consolidated tax return, except that if the Holding Company or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted.
 
 
State and Local Taxation
 
State of New York. The Bank and the Holding Company are subject to New York State franchise tax on their entire net income or one of several alternative bases, whichever results in the highest tax. “Entire net income” means federal taxable income with adjustments. The Bank and the Holding Company file combined returns and are subject to taxation in the same manner as other corporations with some exceptions, including the Bank’s deductions for additions to its reserve for bad debts. The New York State franchise tax rate based upon entire net income for both fiscal years 2006 and 2005 was 9.03%, (including the Metropolitan Commuter Transportation District Surcharge) of net income. In general, the Holding Company is not required to pay New York State tax on dividends and interest received from the Bank or on gains realized on the sale of Bank stock. 60% of dividend income, and gains and losses from subsidiary capital are excluded from New York State entire net income. Distributions to Carver Federal received from Carver Asset Corporation are eligible for the New York State dividends received deduction. However, the Holding Company has been subject to a franchise tax rate of 3.51% (including the Metropolitan Commuter Transportation District Surcharge) for both fiscal years 2006 and 2005 based upon alternative entire net income. For this purpose, alternative entire net income is determined by adding back 60% of dividend income, and gains and losses from subsidiary capital to New York State entire net income.
 
New York State has enacted legislation that enabled the Bank to avoid the recapture of the New York State tax bad debt reserves that otherwise would have occurred as a result of the changes in federal law and to continue to utilize either the federal method or a method based on a percentage of its taxable income for computing additions to its bad debt reserve.
 
New York City. The Bank and the Holding Company are also subject to a similarly calculated New York City banking corporation tax of 9% on income allocated to New York City. In this connection, legislation was enacted regarding the use and treatment of tax bad debt reserves that is substantially similar to the New York State legislation described above. The Bank and the Holding Company are subject to New York City banking corporation tax of 3% on alternative entire net income allocated to New York City.
 
Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Holding Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware.
 
 
26
 
EXECUTIVE OFFICERS OF THE HOLDING COMPANY
 
The name, position, term of office as officer and period during which he or she has served as an officer is provided below for each executive officer of the Holding Company as of June 15, 2006. Each of the persons listed below is an executive officer of the Holding Company and the Bank, holding the same office in each.
 
Deborah C. Wright, age 48, has served as President and Chief Executive Officer and a Director of the Holding Company and Carver Federal since June 1, 1999. In February 2005, Ms. Wright was elected Chairman of the Board. Prior to joining Carver, Ms. Wright was President & Chief Executive Officer of the Upper Manhattan Empowerment Zone Development Corporation, a position she held since May 1996.
 
Roy Swan, age 42, has served Senior Vice President, Corporate Secretary and Chief of Staff since May 2005. Prior to joining Carver, Mr. Swan served as Vice President, Finance & Administration at Time Warner Inc. since March 2003.
 
James H. Bason, age 51, has served as Senior Vice President and Chief Lending Officer since March 2003. Previously Mr. Bason was Vice President and Real Estate Loan Officer at The Bank of New York where he had been employed since 1991. At the Bank of New York, Mr. Bason was responsible for developing and maintaining relationships with developers, builders, real estate investors and brokers to provide construction and permanent real estate financing.
 
Frank Deaton, age 37, has served as Senior Vice President of Operations since January 2005 and formerly served as Chief Auditor since May 2001. Mr. Deaton was previously Vice President and Risk Review Manager with Key Bank in Cleveland, Ohio where he was responsible for developing the scope and overseeing completion of credit, operational and regulatory compliance audits for a variety of business units.
 
Carmelo Felix, age 56, has served as Senior Vice President and Chief Auditor since January 2005. Mr. Felix was previously Deputy General Manager at Korea Exchange Bank’s Regional Headquarters for the Americas where he was responsible for the administration of the bank’s Internal Audit Department in the Western Hemisphere.
 
William Gray, age 50, has served as Senior Vice President and Chief Financial Officer since February 2002. Mr. Gray had been employed at the Dime Savings Bank of New York since 1992, most recently serving as Vice President/Director of Business Unit Planning and Support in the Controller’s Department where he was responsible for identifying and evaluating strategic initiatives for several businesses.
 
Margaret D. Peterson, age 54, has served as Senior Vice President and Chief Human Resources Officer since June 2002. She joined Carver in October 1999 as Senior Vice President and Chief Administrative Officer. Ms. Peterson came to Carver from Deutsche Bank where she had served as a Compensation Planning Consultant in Corporate Human Resources.
 
 
ITEM IA. RISK FACTORS
 
Risk is an inherent part of Carver’s business and activities. The following is a summary of risk factors relevant to the Company’s operations which should be carefully reviewed. These risk factors do not necessarily appear in the order of importance.
 
Changes in interest rate environment may negatively affect Carver’s net income, mortgage loan originations and valuation of available for sale securities. The Company’s earnings depend largely on the relationship between the yield on interest-earning assets, primarily our mortgage loans and mortgage-backed securities, and the cost of deposits and borrowings. This relationship, known as the interest rate spread, is subject to fluctuation and is affected by economic and competitive factors which influence market interest rates, the volume and mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. Fluctuations in market interest rates affect customer demand for products and services. Carver is subject to interest rate risk to the degree that its interest-bearing liabilities reprice or mature more slowly or more rapidly or on a different basis than its interest-earning assets.
 
In addition, the actual amount of time before mortgage loans and mortgage-backed securities are repaid can be significantly impacted by changes in mortgage prepayment rates and prevailing market interest rates. Mortgage prepayment rates will vary due to a number of factors, including the regional economy in the area where the underlying mortgages were originated, seasonal factors, demographic variables and the ability to assume the underlying mortgages. However, the major factors affecting prepayment rates are prevailing interest rates, related mortgage refinancing opportunities and competition.
 
The Company’s objective is to fund its liquidity needs primarily through lower costing deposit growth. However, from time to time Carver Federal borrows from the FHLB. More recently, the cost of deposits and the rate to borrow have become significantly higher with the rising interest rate environment, which has negatively impacted net interest income.
 
During fiscal 2006, the Federal Open Market Committee (“FOMC”) raised the federal funds rate eight times (a total of 200 basis points). U.S. Treasury yields have increased in fiscal 2006 from fiscal 2005 with the exception of the 30-year U.S. Treasury yield, which has decreased. Although U.S. Treasury yields have risen, yields on the longer term maturities have not risen to the same degree as shorter term yields. This has resulted in a significant flattening of the U.S. Treasury yield curve. The Bank’s short-term borrowings, as well as its deposits, are generally priced relative to short-term U.S. Treasury yields; whereas its
 
 
27
 
mortgage loans and mortgage-backed securities are generally priced relative to medium-term (two-to-five years) U.S. Treasury yields. The flattening of the yield curve reduces the spread between the yield on our interest-earning assets and the cost of deposits and borrowings, thereby reducing net income.
 
Interest rates are expected to continue to fluctuate and the Company cannot predict future Federal Reserve Board actions or other factors that will cause rates to change.
 
The estimated fair value of our available-for-sale securities portfolio may increase or decrease depending on changes in interest rates. Carver Federal’s securities portfolio is comprised primarily of adjustable rate securities. As interest rates have continued to rise, there has been an improvement in the valuation of the Bank’s available for sale securities.
 
Carver’s results of operations are affected by economic conditions in the New York metropolitan area. At March 31, 2006, a significant portion of the Bank’s lending portfolio was concentrated in the New York metropolitan area. As a result of this geographic concentration, Carver’s results of operations are largely dependent on economic conditions in this area. Decreases in real estate values could adversely affect the value of property used as collateral for loans to its borrowers. Adverse changes in the economy caused by inflation, recession, unemployment or other factors beyond our control may also have a negative effect on the ability of borrowers to make timely loan payments, which would have an adverse impact on our earnings. Consequently, deterioration in economic conditions in the New York metropolitan area could have a material adverse impact on the quality of the Bank’s loan portfolio, which could result in increased delinquencies, decreased interest income results as well as an adverse impact on loan loss experience with probable increased allowance for loan losses. Such deterioration also could adversely impact the demand for products and services, and, accordingly, further negatively affect results of operations.
 
Strong competition within Carver’s market areas could hurt expected profits and slow growth. The New York metropolitan area has a high density of financial institutions, a number of which are significantly larger and with greater financial resources. Additionally, various large out-of-state financial institutions continue to enter the New York metropolitan area market. All are considered competitors to varying degrees.
 
Carver Federal faces intense competition both in making loans and attracting deposits. Competition for loans, both locally and in the aggregate, comes principally from mortgage banking companies, commercial banks, savings banks and savings and loan associations. Most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions. The Bank also faces competition for deposits from money market mutual funds and other corporate and government securities funds as well as from other financial intermediaries such as brokerage firms and insurance companies. Market area competition is a factor in pricing the Bank’s loans and deposits, which could reduce net interest income. Competition also makes it more challenging to effectively grow loan and deposit balances. The Company’s profitability depends upon its continued ability to successfully compete in its market areas.
 
The Bank’s increased emphasis on non-residential and construction real estate lending may create increased exposure to lending risks. At March 31, 2006, $246.6 million, or 49.7%, of our total loan portfolio consisted of non-residential and construction real estate loans compared to $165.3 million, or 38.9% at March 31, 2005. Non-residential and construction real estate loans generally involve a greater degree of credit risk than one- to-four family loans because they typically have larger balances and are more sensitive to changes in the economy. Payments on these loans often depend upon the successful operation and management of the underlying properties and the businesses which operate from within them; repayment of such loans may be affected by factors outside the borrower's control, such as adverse conditions in the real estate market or the economy or changes in government regulation.
 
Carver Federal's ability to pay dividends or lend funds to the Company is subject to regulatory limitations which may prevent the Company from making future dividend payments or principal and interest payments on its debt obligation. Carver is a unitary savings and loan association holding company regulated by the OTS and almost all of its operating assets are owned by Carver Federal. Carver relies primarily on dividends from the Bank to pay cash dividends to its stockholders, to engage in share repurchase programs and to pay principal and interest on its trust preferred debt obligation. The OTS regulates all capital distributions by the Bank to the Company, including dividend payments. As the subsidiary of a savings and loan association holding company, Carver Federal must file a notice or an application (depending on the proposed dividend amount) with the OTS prior to each capital distribution. The OTS will disallow any proposed dividend that would result in failure to meet the OTS’ minimum capital requirements. Based on Carver Federal's current financial condition, it is not expected that this provision will have any impact on the Company’s receipt of dividends from the Bank. Payment of dividends by Carver Federal also may be restricted at any time, at the discretion of the OTS, if it deems the payment to constitute an unsafe or unsound banking practice.
 
The Company operates in a highly regulated industry which limits the manner and scope of its business activities.
 
Acquisitions may not produce revenue enhancements and may result in unforeseen integration difficulties. The Company periodically explores acquisition opportunities through which it seeks to expand market share. Recently, the Company entered into a definitive agreement to acquire CCB in an effort to expand its product line by entering the small business market. Difficulty in integrating this and any other acquired business may result in the Company not being able to realize expected revenue increases and cost savings, and may cause disruption of its business, and may otherwise adversely affect its ability to achieve the anticipated benefits of the acquisition.
 
 
28
 
Changes in laws, government regulation and monetary policy may have a material effect on our results of operations. Financial institution regulation has been the subject of significant legislation and may be the subject of further significant legislation in the future, none of which is in the Company’s control. Significant new laws or changes in, or repeals of, existing laws, including with respect to federal and state taxation, may cause results of operations to differ materially. In addition, cost of compliance could adversely affect Carver’s ability to operate profitably. Further, federal monetary policy significantly affects credit conditions for Carver Federal, particularly as implemented through the Federal Reserve System. A material change in any of these conditions could have a material impact on Carver Federal, and therefore on the Company’s results of operations.
 
Carver faces system failure risks and security risks. The computer systems and network infrastructure the Company and its third party service providers use could be vulnerable to unforeseen problems. Fire, power loss or other failures may effect Carver’s computer equipment and other technology. Also, the Company’s computer systems and network infrastructure could be damaged by "hacking" and "identity theft."
 
Our business could suffer if we fail to retain skilled people. The Company’s success depends on its ability to attract and retain key employees reflecting current market opportunities and challenges. Competition for the best people is intense, and the Company’s size and limited resources may present additional challenges in being able to retain the best possible employees.
 
Acts or threats of terrorism, military activity, and other political actions could adversely affect general economic or industry conditions. Geopolitical conditions may affect the Company’s earnings. Furthermore, acts of terrorism, and the government's reaction to such acts, could affect business and earnings.
 
A natural disaster could harm Carver’s business. Natural disasters could harm the Company’s operations directly through interference with communications, as well as through the destruction of facilities and financial information systems.
 
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
 
ITEM 2. PROPERTIES. 
 
The Bank currently conducts its business through one administrative office and eight branch offices (including the 125th Street office) and five stand-alone ATM centers and stand-alone ATMs. Carver Federal entered into a license agreement with Essex Corporation on March 23, 2004 to operate an Investment Center at the Bank’s Malcolm X Boulevard branch office but does not share any other owned or leased spaces with any other businesses. The following table sets forth certain information regarding Carver Federal’s offices and other material properties at March 31, 2006. The Bank believes that such facilities are suitable and adequate for its operational needs.
 
 
29
 
           
Lease
  
Percentage
  
Net Book
  
   
Year
 
Owned or
 
Expiration