INCOME TAXES

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



	June 30, 2011
Federal income tax expense (benefit):
Current	$	(1	)
Deferred	(1,986		)
Valuation Allowance	1,840
	(147		)
State and local income tax expense (benefit):
Current	38
Deferred	(445		)
Valuation Allowance	445
	38

Total income tax benefit:	$	(109	)

The following is a reconciliation of the expected Federal income tax rate to the consolidated effective tax rate for the three months ended June 30, 2011 (dollars in thousands):



	June 30, 2011
	Amount			Percent
Statutory Federal income tax	$	(2,121	)	34	%
State and local income taxes, net of Federal tax benefit	(268		)	4	%
General business credit	(8		)	—	%
Valuation allowance	2,284			(37	)%
Other	3			—	%
Total income tax expense	$	(109	)	2	%

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

Tax effects of existing temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are included in other assets at June 30, 2011 and March 31, 2011 are as follows (in thousands):



	June 30, 2011			March 31, 2011
Deferred Tax Assets:
Allowance for loan losses	$	7,432		$	7,253
Deferred loan fees	567			601
Compensation and benefits	—			—
Non-accrual loan interest	2,969			2,556
Capital loss carryforward	—			—
Purchase accounting adjustment	202			186
Net operating loss carry forward	1,923			121
New markets tax credit	6,875			6,867
Depreciation	511			511
Minimum pension liability	110			110
Market value adjustment on HFS loans	931			893
Other	226			216
Unrealized gain on available-for-sale securities	—			1
Total Deferred Tax Assets	21,746			19,315
Deferred Tax Liabilities:
Income from affiliate	445			445
Unrealized gain on available-for-sale securities	146			—
Total Deferred Tax Liabilities	591			445
Valuation Allowance	(21,155		)	(18,870		)
Net Deferred Tax Assets	$	—		$	—

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

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

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

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