CARVER BANCORP INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K

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, 2004

OR

|_| 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 (I.R.S. Employer Identification No.)
Incorporation or Organization)

75 WEST 125TH STREET, NEW YORK, NEW YORK 10027

(Address of Principal Executive Offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 876-4747

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 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 |_| 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 an accelerated filer (as
defined in Rule 12b-2 of the Act). |_| Yes |X| No

As of May 31, 2004, there were 2,286,380 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 $21.00 per
share of the registrant's common stock on May 28, 2004) was approximately $48.0
million.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of registrant's proxy statement for the Annual Meeting of stockholders
for the fiscal year ended March 31, 2004 are incorporated by reference into Part
III of this Form 10-K.

CARVER BANCORP, INC.
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

Part I Page
------ ----

Item 1. Business........................................................................ 2
Item 2. Properties...................................................................... 27
Item 3. Legal Proceedings............................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders............................. 28

Part II
-------

Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities................. 29
Item 6. Selected Financial Data......................................................... 30
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................... 31
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................... 44
Item 8. Financial Statements and Supplementary Data..................................... 45
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................................... 76
Item 9A. Controls and Procedures......................................................... 76

Part III
--------

Item 10. Directors and Executive Officers of Carver Bancorp, Inc......................... 76
Item 11. Executive Compensation.......................................................... 76
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters................................ 77
Item 13. Certain Relationships and Related Transactions.................................. 77
Item 14. Principal Accountant Fees and Services.......................................... 77

PART IV
-------

Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K...................................................................... 77

SIGNATURES ................................................................................ 78

EXHIBIT INDEX............................................................................... E-1

FORWARD-LOOKING STATEMENTS

Statements contained in this Annual Report on Form 10-K, including
information incorporated by reference, which are not historical facts are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition,
senior management may make forward looking statements orally to analysts,
investors, the media and others. These forward-looking statements may be
identified by the use of such words as "believe," "expect," "anticipate,"
"intend," "should," "will," "would," "could," "may," "planned," "estimated,"
"potential," "outlook," "predict," "project" and similar terms and phrases,
including references to assumptions.

Forward-looking statements are based on various assumptions and
analyses made by the Company (as defined below) in light of the management's
experience and its perception of historical trends, current conditions and
expected future developments, as well as other factors believed to be
appropriate under the circumstances. These statements are not guarantees of
future performance and are subject to risks, uncertainties and other factors,
many of which are beyond the Company's control, that could cause actual results
to differ materially from future results expressed or implied by such
forward-looking statements. Factors which could result in material variations
include, without limitation, the following:

o the Company's success in implementing its initiatives, including
expanding its product line, adding new branches and ATM centers,
successfully re-branding its image and achieving greater operating
efficiencies;

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

o legislative or regulatory changes which may adversely affect the
Company's business;

o technological changes which may be more difficult or expensive
than we anticipate;

o changes in interest rates which may reduce net interest margins
and net interest income;

o changes in deposit flows, loan demand or real estate values which
may adversely affect the Company's business;

o changes in accounting principles, policies or guidelines which may
cause the Company's condition to be perceived differently;

o 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;

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

o the ability of the Company to realize cost efficiencies;

o the Company's costs or difficulties in completing its planned
acquisition of Independence Federal Savings Bank; and

o 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.

The forward-looking statements contained herein are made as of the date
of this report, and the Company assumes no obligation to update these
forward-looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting such forward-looking statements or to update
the reasons why actual results could differ from those projected in the
forward-looking statements. You should consider these risks and uncertainties in
evaluating forward-looking statements and you should not place undue reliance on
these statements.

PART I

ITEM 1. BUSINESS

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"

2

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
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 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. 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 (212) 876-4747.

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 (the "FHLB") of New
York. Carver Federal converted to a federal savings bank in 1986 and changed its
name at that time to Carver Federal Savings Bank. 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.

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 six branch offices and investing those
funds in mortgage loans and other investments permitted to federal savings
banks. Based on asset size as of March 31, 2004, 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, 2004, this subsidiary had $220,000 in total
capital and a net operating loss of approximately $1,300. At March 31, 2004
there was no real estate owned pending disposition. Carver Federal also owns
CFSB Credit Corp., currently an inactive subsidiary originally formed to
undertake the Bank's credit card issuance. 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. Upon its formation, Carver Federal transferred
approximately $119 million of mortgage loans to Carver Asset Corporation.

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 in its primary market area; (2)
investing funds not utilized for loan originations or purchases in the purchase
of United States Government Agency securities and mortgage-backed securities;
(3) expanding its branch network by opening de novo branches and stand-alone ATM
centers; (4) generating fee income by attracting and retaining high transaction
core deposit accounts; and (5) continuing to lower its expense ratio by
efficiently utilizing personnel, branch facilities and alternative delivery
channels (telephone banking, online banking, and ATMs) to service its customers.
Carver Federal plans to generate additional fee income by utilizing third party
providers to sell non-deposit investment products and to offer a Carver Federal
credit card. 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
served by its six branches. Carver Federal considers its primary lending market
to include Bronx, Kings, New York, Queens and Richmond counties, together
comprising New York City, and lower Westchester County, New York. See "Item
2--Properties."

Although Carver Federal's branches 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

3

concessions combined with competitors' larger presence in the New York market
add to the challenges Carver Federal faces in expanding its current market
share. The Bank believes that it can compete with these institutions by offering
a competitive range of products and services as well as through personalized
attention and community involvement.

As of March 31, 2004, Carver Federal had 132 full-time equivalent
employees, of whom 45 are officers and 87 are non-officers, 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, on or before September 21, 2004, the date of our annual
meeting of stockholders, we will post on our website 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. 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 by mail, or by e-mail at
linda.dunn@carverbank.com.

PENDING MERGER WITH INDEPENDENCE FEDERAL SAVINGS BANK

On March 15, 2004, the Company entered into a definitive merger
agreement to acquire Independence Federal Savings Bank ("Independence").
Independence is a federally chartered savings bank with approximately $201
million in assets as of March 31, 2004 and five branches located in greater
Washington, D.C. At the time of announcement, the cash transaction was valued at
approximately $33 million. The transaction is currently expected to close before
the end of 2004. It remains subject to both regulatory and shareholder
approvals. See "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a more detailed discussion of the
pending merger. Except as specifically noted otherwise, the information
contained or incorporated by reference in this Form 10-K does not give effect to
the proposed transaction.

LENDING ACTIVITIES

GENERAL. Carver Federal's principal lending activity is the origination
or purchase of 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. Carver
Federal also provides permanent and end loan financing upon completion of
construction. To a lesser extent, Carver Federal originates secured consumer and
business loans. Carver Federal continued to engage in first-mortgage loan
purchases during the fiscal year ended March 31, 2004 ("fiscal 2004"), which
accounted for 54.6% of net loan additions. Loan purchases are used to supplement
originations.

LOAN PORTFOLIO COMPOSITION. Gross loans receivable increased by $58.5
million, or 19.7%, to $354.9 million at March 31, 2004 compared to $296.4
million at March 31, 2003. Carver Federal's net loan portfolio as a percentage
of total assets increased to 65.3% at March 31, 2004 compared to 57.4% at March
31, 2003. One- to four-family mortgage loans totaled $98.6 million, or 27.8% of
Carver Federal's total gross loan portfolio, multifamily loans totaled $120.3
million, or 33.9% of total gross loans, non-residential real estate loans, which
includes commercial and church loans, totaled $102.6 million, or 28.9% of total
gross loans, and construction loans, net of loans in process, totaled $27.4
million, or 7.7% of total gross loans. Consumer (credit card loans, personal
loans, home equity loans and home improvement loans) and business loans totaled
$6.0 million, or 1.7% 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. Premium on loans
increased by $397,000, or 45.8%, to $1.3 million at March 31, 2004 compared to
$867,000 at March 31, 2003. The increase was attributable to additional premiums
recorded on new loans purchased.

4

Allowance for loan losses was substantially unchanged at $4.1 million
at March 31, 2004 compared to March 31, 2003, reflecting $33,000 in net
charge-offs during fiscal 2004; there were no provisions for loan losses made
during fiscal 2004. 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,
---------------------------------------------------------------------------------------
2004 2003 2002 2001
----------------- ------------------ ----------------- ---------------------
Amount Percent AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ---------------------
(DOLLARS IN THOUSANDS)

REAL ESTATE LOANS:
One- to four-family $ 98,645 27.80% $ 71,735 24.20% $ 122,814 41.84% $ 157,767 54.94%
Multifamily 120,252 33.88% 131,749 44.45% 118,589 40.39% 83,620 29.13%
Non-residential 102,641 28.92% 79,244 26.74% 40,101 13.66% 36,113 12.58%
Construction 27,376 7.71% 11,539 3.89% 9,742 3.32% 5,821 2.03%
Consumer and business (1) 6,010 1.69% 2,125 0.72% 2,328 0.79% 3,781 1.32%
-------- ------ -------- ------ --------- ------ ----------- ---------
Total gross loans 354,924 100.00% 296,392 100.00% 293,574 100.00% 287,102 100.00%
====== ====== ====== =========
ADD:
Premium on loans 1,264 867 906 705
LESS:

Deferred fees and loan discounts (163) (363) (642) (819)
Allowance for loan Losses (4,125) (4,158) (4,128) (3,551)
--------- --------- --------- -----------
Net loan portfolio $ 351,900 $ 292,738 $ 289,710 $ 283,437
========= ========= ========= ===========

AT MARCH 31,
--------------------
2000
--------------------
AMOUNT PERCENT
--------------------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One- to four-family $ 152,458 55.76%
Multifamily 86,184 31.52%
Non-residential 22,721 8.31%
Construction 5,331 1.95%
Consumer and business (1) 6,725 2.46%
---------- ---------
Total gross loans 273,419 100.00%
=========
ADD:
Premium on loans 582
LESS:

Deferred fees and loan discounts (918)
Allowance for loan Losses (2,935)
----------
Net loan portfolio $ 270,148
==========

(1) Includes automobile, personal, credit card, home equity, home improvement
and business loans.

ONE- TO FOUR-FAMILY RESIDENTIAL LENDING. Traditionally, Carver
Federal's lending activity had 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 82% of
Carver Federal's one- to four-family residential mortgage loans at March 31,
2004 had adjustable rates and approximately 18% had fixed rates.

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 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 guidelines and requirements
for sale to the Federal National Mortgage Association ("Fannie Mae") or the
State of New York Mortgage Agency ("SONYMA") in the secondary market. From time
to time the Bank has sold such loans to Fannie Mae and to SONYMA. The Bank also
originates, to a limited extent, loans underwritten according to Federal Home
Loan Mortgage Corporation ("FHLMC") standards. Loans are sold with limited
recourse on a servicing retained basis to Fannie Mae and on a servicing released
basis to SONYMA. Carver Federal uses several sub-servicing firms to service
mortgage loans, whether held in portfolio or sold with the servicing retained.
At March 31, 2004, the Bank, through its sub-servicers, serviced $11.7 million
in loans for Fannie Mae.

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 retained in Carver Federal's portfolio and are not 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 of 275 basis points. 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.

5

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 offers competitive
rates 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,
2004, multifamily loans totaled $120.3 million, or 33.9% of Carver Federal's
gross loan portfolio. The Bank intends to continue its emphasis on multifamily
mortgage lending, which has enabled the Bank to benefit from these higher
yielding loans compared to lower yielding one- to four- family loans while still
serving the community.

Carver Federal's multifamily product guidelines generally require that
the maximum LTV not exceed 75% based on the appraised value of the mortgaged
property. The Bank generally requires a debt service coverage ratio ("DSCR") of
at least 1.3 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, the
predominance of which are adjustable rate loans that generally amortize on the
basis of a 15-, 20-, 25- or 30-year period that 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 with balances over $250,000 are risk rated by an independent consulting
firm. Separate reviews of the multifamily real estate loan portfolio are
performed annually, resulting in written management summary reports.

NON-RESIDENTIAL REAL ESTATE LENDING. Carver Federal's non-residential
real estate lending activity consists predominantly of 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 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 1.3 on non-residential real estate loans. The Bank
requires the assignment of rents of all tenants' leases in the mortgaged
property which serves as additional security for the mortgage loan. At March 31,
2004, non-residential real estate mortgage loans (including loans to churches)
totaled $102.6 million, or 28.9% of the gross loan portfolio. Carver Federal
originates non-residential real estate first mortgage loans in its market area.

All non-residential real estate loans with balances over $250,000 are
risk rated internally. Independent third party reviews of the non-residential
loan portfolio are performed at least annually, resulting in written management
summary reports.

Historically, Carver Federal has been a New York City metropolitan area
leader in the origination of loans to churches. At March 31, 2004, loans to
churches totaled $13.9 million, or 3.9% 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 24 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 usually 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

6

quality in the church loan category has been exceptional 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 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 residences
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. 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
review on all construction budgets in excess of $500,000 and 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, 2004, the Bank had $27.4 million (net of $6.3 million of
committed but undisbursed funds) in construction loans outstanding, comprising
7.7% of the Bank's total gross loan portfolio.

CONSUMER AND BUSINESS LOANS. At March 31, 2004, the Bank had
approximately $6.0 million in consumer and business loans, or 1.7% of the Bank's
gross loan portfolio. At March 31, 2004, $4.5 million, or 75.0% of the Bank's
consumer and business loans, was secured (primarily by letters of credit) and
$1.5 million, or 25.0%, was unsecured. The Bank discontinued the origination of
unsecured commercial business loans during the fourth quarter of the fiscal year
ended March 31, 1999. During fiscal 2004, the Bank originated four secured
business loans, each for $1.0 million.

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 applications are forwarded to the
Bank's Lending Department located in the Bank's main office. The Bank has
established underwriting standards for all loan products.

The underwriting and loan processing for residential loans is
outsourced to a third party provider. A commercial non-residential 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,

7

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 Bank's Asset Liability and Interest Rate Risk Committee, a
committee of the Board. 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
Fannie Mae 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.

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, 2004, the maximum
loan under this test would be $8.6 million. At March 31, 2004 there were no
relationships that exceeded the $8.6 million 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 guidelines of either Fannie Mae or SONYMA to provide opportunity
for subsequent sale in the secondary market as desired to manage interest rate
risk exposure.

LOAN PURCHASES AND ORIGINATIONS. During fiscal 2004 Carver Federal
purchased a total of $93.7 million of mortgage loans, consisting of performing
multifamily, construction and adjustable-rate one- to four-family mortgage loans
to supplement its origination efforts. This represented 54.6% of Carver
Federal's net addition to its loan production during fiscal 2004. 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 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 2004 increased $51.4 million, or 121.7%, from loan purchases of $42.3
million during the fiscal 2003.

Loan originations were $87.1 million in fiscal 2004 compared to $59.6
million in fiscal 2003 and $65.9 million in the fiscal year ended March 31, 2002
("fiscal 2002"). The increase in loan originations in fiscal 2004 can be
attributed to the Bank's commitment to invest in its market area which was
brought about by successfully staffing its Lending Department. In addition, the
market experienced increased mortgage refinance activity resulting from a lower
interest rate environment which increased loan demand.

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,
----------------------------------------------------------------------------------------
2004 2003 2002
---------------------------- --------------------------- ---------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)

Loans Originated:
One- to four-family $14,284 8.33 % $5,985 6.02 % $4,144 3.78 %
Multifamily 5,771 3.37 19,979 20.10 27,225 24.80
Non-residential 50,373 29.38 24,524 24.67 25,583 23.31
Construction 12,050 7.02 9,006 9.06 8,910 8.12
Consumer and business (1) 4,662 2.72 101 0.10 53 0.05
------------- ------------- ------------- ------------- ------------- -------------
Total loans originated 87,140 50.82 59,595 59.95 65,915 60.06
Loans purchased (2) 93,694 54.64 42,260 42.51 45,203 41.18
Loans sold (3) (9,358) (5.46) (2,453) (2.46) (1,361) (1.24)
------------- ------------- ------------- ------------- ------------- -------------
Net additions to loan portfolio $171,476 100.00 % $99,402 100.00 % $109,757 100.00 %
============= ============= ============= ============= ============= =============

(1) Comprised of automobile, 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 fixed rate one- to four-family loans and automobile
loans.

8

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 2004, the properties securing purchased loans were
concentrated in New York, New Jersey, Connecticut and California. 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, with its existing personnel and
through the use of a quality control/loan review firm, 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 Fannie Mae
and SONYMA. Mortgage loan rates reflect factors such as prevailing market
interest rate levels, the supply of money available to the savings 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.

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 contractual life of the loan using the
interest method. If a loan is prepaid, refinanced 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, 2004 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
MARCH 31, DUE THREE
----------------------------------- TO FIVE DUE FIVE TO DUE TEN TO DUE AFTER
2005 2006 2007 YEARS TEN YEARS 20 YEARS 20 YEARS TOTAL
----------- ---------- ----------- ------------ ------------ ----------- ------------ ------------
(DOLLARS IN THOUSANDS)

Real Estate Loans:
One- to four-family $4,843 $4,305 $3,037 $5,073 $1,285 $6,186 $73,916 $98,645
Multifamily 4,581 4,181 10,300 39,334 11,983 11,795 38,078 120,252
Non-residential 5,632 8,157 10,117 40,279 17,660 7,860 12,936 102,641
Construction 26,534 500 342 - - - - 27,376
Consumer and business loans 4,575 1,037 44 206 42 92 14 6,010
----------- ---------- ----------- ------------ ------------ ----------- ------------ ------------
Total $46,165 $18,180 $23,840 $84,892 $30,970 $25,933 $124,944 $354,924
=========== ========== =========== ============ ============ =========== ============ ============

The following table sets forth as of March 31, 2004 amounts in each
loan category that are contractually due after March 31, 2005 and whether such
loans have fixed rates or adjustable interest rates. Scheduled contractual
principal repayments of loans do not

9

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, 2005
------------------------------------
FIXED ADJUSTABLE TOTAL
---------- ------------ ----------
(IN THOUSANDS)
Real Estate Loans
One- to four-family $ 17,514 $ 76,288 $ 93,802
Multifamily 38,929 76,742 115,671
Non-residential 47,386 49,623 97,009
Construction - 842 842
Consumer and business loans 1,412 23 1,435
---------- ------------ ----------
Total $105,241 $203,518 $308,759
========== ============ ==========

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, borrower workout
arrangements and marketing of foreclosed properties, 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 financial condition. Such strategies, as well
as the Bank's concentration on one- to four-family and commercial mortgage
lending (which includes multifamily and non-residential real estate loans), 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's 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.

10

The following table sets forth information with respect to Carver
Federal's non-performing assets at the dates indicated.

AT MARCH 31,
----------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)

Loans accounted for on a non-accrual basis (1):
Real estate:
One- to four-family $ 558 $ 1,113 $ 756 $ 947 $ 966
Multifamily 1,532 - 253 978 870
Non-residential - 639 1,754 565 -
Construction 23 23 23 23 122
Consumer and business 10 27 37 6 168
----------- ----------- ----------- ----------- -----------
Total non-accrual loans 2,123 1,802 2,823 2,519 2,126
----------- ----------- ----------- ----------- -----------

Accruing loans contractually past due 90 days or more - - - - -
----------- ----------- ----------- ----------- -----------

Total of non-accrual and accruing 90-day past due loans $ 2,123 $ 1,802 $ 2,823 $ 2,519 $ 2,126
----------- ----------- ----------- ----------- -----------

Other non-performing assets (2):
Real estate:
One- to four-family - - - - 127
Multifamily - - - 27 27
Non-residential - - - 449 768
Consumer and business - - - - 16
----------- ----------- ----------- ----------- -----------
Total other non-performing assets - - - 476 938
----------- ----------- ----------- ----------- -----------
Total non-performing assets (3) $ 2,123 $ 1,802 $ 2,823 $ 2,995 $ 3,064
=========== =========== =========== =========== ===========

Non-performing loans to total loans 0.60% 0.61% 0.96% 1.04% 1.12%
Non-performing assets to total assets 0.39% 0.36% 0.63% 0.71% 0.73%

(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 year ended March 31, 2004, gross interest income of $185,000
would have been recorded on non-accrual loans had they been current
throughout the year

(2) Other non-performing assets represent property acquired by the Bank in
settlement of loans (i.e., through foreclosure or repossession or as an
in-substance foreclosure). These assets are recorded at the lower of their
fair value or the unpaid principal balance plus unpaid accrued interest of
the related loans.

(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, 2004, total non-performing assets increased by $321,000,
or 17.8%, to $2.1 million compared to $1.8 million at March 31, 2003. All
non-performing assets at March 31, 2004 and 2003 relate to loans accounted for
on a non-accrual basis. The increase primarily reflects an increase in
non-accruing multifamily real estate loans partially offset by a decrease in
non-accruing one- to four-family real estate loans and non-residential loans.

There were no accruing loans contractually past due 90 days or more at
March 31, 2004 and March 31, 2003, 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.

11

At March 31, 2004, Carver Federal had $2.7 million of loans classified
as substandard which represented 0.5% of the Bank's total assets and 4.8% of the
Bank's tangible regulatory capital at March 31, 2004. There were no loans
classified as doubtful or loss at March 31, 2004.

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 quarterly reviews of the Bank's loans 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.

Carver Federal's Internal Asset Review Committee reviews its 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 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 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, the
property is periodically evaluated by management 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, 2004, the Bank had no real estate acquired in settlement
of loans. See Note 1 of Notes to Consolidated Financial Statements.

12

The following table sets forth an analysis of Carver Federal's
allowance for loan losses for the periods indicated.

YEAR ENDED MARCH 31,
-------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------- ------------ -------------- ------------ ------------
(DOLLARS IN THOUSANDS)

Balance at beginning of period $ 4,158 $ 4,128 $ 3,551 $ 2,935 $ 4,020
Loans charged-off:
Real Estate:
One- to four-family 6 2 - 252 138
Non-residential 55 - - 194 171
Consumer and business 264 226 500 931 2,260
------------- ------------ -------------- ------------ ------------
Total Charge-offs 325 228 500 1,377 2,569
------------- ------------ -------------- ------------ ------------

Recoveries:
One- to four-family 107 - 3 - 31
Multifamily - - - - 40
Non-residential 10 - - - 22
Consumer and business 175 258 174 200 292
------------- ------------ -------------- ------------ ------------
Total Recoveries 292 258 177 200 385
------------- ------------ -------------- ------------ ------------

------------- ------------ -------------- ------------ ------------
Net loans charged-off (recovered) 33 (30) 323 1,177 2,184
------------- ------------ -------------- ------------ ------------
Provision for losses - - 900 1,793 1,099
------------- ------------ -------------- ------------ ------------
Balance at end of period $ 4,125 $ 4,158 $ 4,128 $ 3,551 $ 2,935
============= ============ ============== ============ ============

Ratio of net charge-offs to loans outstanding 0.01% -0.01% 0.11% 0.42% 0.84%
Ratio of allowance to total loans 1.16% 1.40% 1.41% 1.24% 1.07%
Ratio of allowance to non-performing assets (1) 194.30% 230.74% 146.23% 118.56% 95.79%

(1) Non-performing assets consist of non-accrual loans, accruing loans 90 days
or more past due and property acquired in settlement of loans.

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,
---------------------------------------------------------------------
2004 2003 2002
---------------------- ---------------------- ----------------------
% OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
AMOUNT GROSS LOANS AMOUNT GROSS LOANS AMOUNT GROSS LOANS
--------- ------------ --------- ------------ --------- ------------

Loans:
Real Estate
One- to four-family $ 355 27.80% $ 298 24.20% $ 429 41.84%
Multifamily 1,240 33.88% 656 44.45% 1,468 40.39%
Non-residential 853 28.92% 1,967 26.74% 729 13.66%
Construction 158 7.71% 170 3.89% 76 3.32%
Consumer and business 487 1.69% 344 0.72% 377 0.79%
Unallocated 1,032 N/A 723 N/A 1,049 N/A
--------- ------------ --------- ------------ --------- ------------
Total Allowance for loan losses $ 4,125 100.00% $ 4,158 100.00% $ 4,128 100.00%
========= ============ ========= ============ ========= ============

AT MARCH 31,
---------------------------------------------
2001 2000
---------------------- ----------------------
% OF LOANS % OF LOANS
IN EACH IN EACH
CATEGORY CATEGORY
TO TOTAL TO TOTAL
AMOUNT GROSS LOANS AMOUNT GROSS LOANS
--------- ------------ --------- ------------
Loans:
Real Estate
One- to four-family $ 1,198 54.94% $ 1,050 55.76%
Multifamily 748 29.13% 764 31.52%
Non-residential 353 12.58% 202 8.31%
Construction 290 2.03% 272 1.95%
Consumer and business 962 1.32% 647 2.46%
Unallocated - N/A - N/A
--------- ------------ --------- ------------
Total Allowance for loan losses $ 3,551 100.00% $ 2,935 100.00%
========= ============ ========= ============

13

INVESTMENT ACTIVITIES

GENERAL. The Bank utilizes mortgage-backed and other investment
securities in virtually all aspects of 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, liquidity
needs and performance objectives. 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, 2004, the Bank had no securities classified
as trading. At March 31, 2004, $96.4 million, or 68.9% of the Bank's
mortgage-backed and other investment securities, was classified as
available-for-sale. The remaining $43.5 million, or 31.1%, 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. 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, 2004, mortgage-backed securities constituted 22.0% of
total assets, as compared to 24.9% of total assets at March 31, 2003. Carver
Federal maintains a significant portfolio of mortgage-backed securities in the
form of Government National Mortgage Association ("GNMA") pass-through
certificates, Fannie Mae and FHLMC participation certificates and at times
collateralized mortgage obligations ("CMOs"). 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 Fannie Mae 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. CMOs are
securities issued by special purpose entities generally collateralized by pools
of mortgage-backed securities. The 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, 2004 constituted
$113.2 million, or 95.8% 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 a 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.

14

The following table sets forth the carrying value of Carver Federal's
mortgage-backed securities at the dates indicated. In November 2002 the Bank
transferred $22.8 million of mortgage-backed securities from available-for-sale
to held-to-maturity.

AT MARCH 31,
------------------------------------------------------
2004 2003 2002
----------------- ---------------- ---------------
(IN THOUSANDS)

Available-for-Sale:
GNMA $ 55,512 $ 47,120 $ 10,584
Fannie Mae 12,626 23,470 11,451
FHLMC 6,712 19,693 28,249
CMO - - 136
----------------- ---------------- ---------------
Total available-for-sale 74,850 90,283 50,420
----------------- ---------------- ---------------
HELD-TO-MATURITY:
GNMA $ 1,465 $ 2,473 $ 3,448
Fannie Mae 20,386 6,203 5,607
FHLMC 21,305 27,482 6,149
SBA 318 372 439
----------------- ---------------- ---------------
Total held-to-maturity 43,474 36,530 15,643
----------------- ---------------- ---------------
Total mortgage-backed securities $ 118,324 $ 126,813 $ 66,063
================= ================ ===============

The following table sets forth the scheduled final maturities, carrying
values and fair values for Carver Federal's mortgage-backed securities at March
31, 2004. 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.

CARRYING FAIR
VALUE VALUE
-------- --------
(IN THOUSANDS)
AVAILABLE-FOR-SALE:
Less than one year $ 9 $ 9
One through five years 902 957
Five through ten years - -
After ten years 74,202 73,884
-------- --------
$ 75,113 $ 74,850
======== ========
HELD-TO-MATURITY:
Less than one year 12 12
One through five years 174 183
Five through ten years - -
After ten years 43,288 43,599
-------- --------
$ 43,474 $ 43,794
======== ========

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 FHLB, certificates
of deposit in federally insured institutions, certain bankers' acceptances and
federal funds. The Bank may also invest, subject to certain limitations, in
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.

15

The following table sets forth the carrying value of Carver Federal's
other securities available-for-sale and held-to-maturity at the date indicated.

AT MARCH 31,
------------------------------------------
2004 2003 2002
------------- ------------ ------------
(IN THOUSANDS)

U.S. Government and Equity securities:
Available-for-sale $ 21,553 $ 38,772 $ 39,401
Held-to-maturity - - -
------------- ------------ ------------
Total other securities $ 21,553 $ 38,772 $ 39,401
============= ============ ============

The following table sets forth the scheduled maturities, carrying
values and fair values for Carver Federal's other investments at March 31, 2004.

CARRYING FAIR
VALUE VALUE
------------- ------------
(IN THOUSANDS)
Available-for-sale:
One year or less $ 6,443 $ 6,452
One through five years 14,805 15,101
------------- ------------
$ 21,248 $ 21,553
============= ============

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,
---------------------------------
2004 2003 2002
------- ------- -------
(IN THOUSANDS)

FHLB stock $ 4,576 $ 5,440 $ 3,763
Federal funds sold 8,200 5,500 21,100

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, interest payments and maturing
investments. 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 and
money market conditions. Borrowed money may be used to supplement the Bank's
available funds, and from time to time the Bank has borrowed funds from the FHLB
and 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 through the Bank's branch network rather than from outside the Bank's
market area. Carver Federal also holds deposits from various governmental
agencies or authorities and corporations. At March 31, 2004 the Bank did not
hold any brokered 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, the Bank's
growth goals and applicable regulatory restrictions and requirements.

16

The following table sets forth the change in dollar amount of deposits
in the various types of accounts offered by Carver Federal between the dates
indicated. During fiscal 2004 the Bank opened two stand-alone ATM centers in
Harlem and a new branch in Jamaica, Queens. During fiscal 2002, the Bank sold
its branch located in East New York. As a result of this sale, the Bank
transferred approximately $16.4 million of deposits to the purchaser.
Additionally, during fiscal 2002, the Bank opened a new Branch in Harlem. Both
of the new branches operate in New York State designated Banking Development
Districts ("BDD"), which allow Carver Federal to participate in BDD-related
activities, including receipt of low cost New York City and New York State
deposits. As of March 31, 2004, Carver Federal held $50.0 million in BDD
deposits.

YEAR ENDED MARCH 31,
-----------------------------------------
2004 2003 2002
-----------------------------------------
(DOLLARS IN THOUSANDS)

Deposits at beginning of period $347,164 $324,954 $279,424
Net increase before interest credited 21,852 16,450 37,403
Interest credited 4,649 5,760 8,127
------------ ------------ ------------
Deposits at end of period $373,665 $347,164 $324,954
============ ============ ============
Net increase during the year:
Amount $26,501 $22,210 $45,530
============ ============ ============
Percent 7.6% 6.8% 16.3%
============ ============ ============

The following table sets forth the distribution of the Bank's deposit
accounts and the related weighted average interest rates paid at the dates
indicated.

AT MARCH 31,
------------------------------------------------------------------------
2004 2003
--------------------------------- ----------------------------------
PERCENT OF WEIGHTED PERCENT OF WEIGHTED
TOTAL AVERAGE TOTAL AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
---------- ---------- ---------- ---------- ---------- -----------

Non-interest-bearing demand $ 20,966 5.6 % - % $ 16,539 4.8 % - %
NOW demand 22,671 6.0 0.30 18,190 5.2 0.53
Savings and clubs 131,120 35.1 0.60 128,935 37.1 1.06
Money Market savings 30,842 8.3 0.74 20,735 6.0 0.92
Certificates of deposit 168,066 45.0 1.97 162,765 46.9 2.20
---------- ---------- ---------- ----------
Total $373,665 100.0 % 1.18 % $ 347,164 100.0 % 1.51 %
========== ========== ========== ==========

AT MARCH 31,
------------------------------------
2002
------------------------------------
PERCENT OF WEIGHTED
TOTAL AVERAGE
AMOUNT DEPOSITS RATE
---------- --------- -------------
Non-interest-bearing demand $ 13,463 4.1 % - %
NOW demand 18,095 5.6 1.24
Savings and clubs 126,779 39.0 1.71
Money Market savings 15,232 4.7 1.78
Certificates of deposit 151,385 46.6 2.73
---------- ---------
Total $324,954 100.0 % 2.09 %
========== =========

17

The following table sets forth the amount and maturities of
certificates of deposit in specified weighted average interest rate categories
at March 31, 2004.

PERIOD TO MATURITY MARCH 31,
----------------------------------------------------------------------------- ---------------------------
LESS THAN AFTER PERCENT
Rate ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL OF TOTAL 2003 2002
- --------------- ------------- ------------- ----------- ----------- ------------- ---------- ---------------------------
(DOLLARS IN THOUSANDS)

0% - 0.99% $ 29,641 $ 33 $ 3 $ 171 $ 29,848 17.76 % $ - $ -
1% - 1.99% 65,023 4,045 161 205 69,434 41.31 87,811 22,138
2% - 3.99% 29,453 8,352 5,538 9,951 53,294 31.71 40,926 95,523
4% and over 3,622 3,387 871 7,610 15,490 9.22 34,028 33,724
------------- ------------- ----------- ----------- ------------- ---------- ------------- -------------
Total $ 127,739 $ 15,817 $ 6,573 $17,937 $ 168,066 100.00 % $ 162,765 $ 151,385
============= ============= =========== =========== ============= ========== ============= =============

Carver Federal's certificates of deposit of $100,000 or more were
$104.3 million as of March 31, 2004 compared to $100.1 million at March 31,
2003.

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 agreement 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 blanket 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. 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, 2004, Carver Federal had outstanding $104.3 million
in total borrowed money.

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,
--------------------------------
2004 2003
------------- -------------
(DOLLARS IN THOUSANDS)

Amounts outstanding at the end of period:
FHLB advances $ 91,516 $ 108,789
Guaranteed preferred beneficial interest in junior subordinated debentures 12,741 -
Loan for employee stock ownership plan 25 207

Weighted average rate paid at period end:
FHLB advances 3.92% 3.59%
Guaranteed preferred beneficial interest in junior subordinated debentures 4.20% -
Loan for employee stock ownership plan 4.00% 4.00%

Maximum amount of borrowing outstanding at any month end:
FHLB advances $ 112,030 $ 108,789
Guaranteed preferred beneficial interest in junior subordinated debentures 12,742 -
Loan for employee stock ownership plan 207 389

Approximate average amounts outstanding for period:
FHLB advances $ 99,359 $ 80,541
Guaranteed preferred beneficial interest in junior subordinated debentures 6,854 -
Loan for employee stock ownership plan 137 320

Approximate weighted average rate paid during period (1):
FHLB advances 3.74% 3.99%
Guaranteed preferred beneficial interest in junior subordinated debentures 4.78% -
Loan for employee stock ownership plan 4.07% 4.24%

(1) The approximate weighted average rate paid during the period was computed
by dividing the average amounts outstanding into the related interest
expense for the period.

On September 17, 2003, the Trust issued 13,000 shares, liquidation
amount $1,000 per share, of floating rate capital securities. Gross proceeds
from the sale of these trust preferred 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 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 securities are
cumulative and payable at a floating rate per annum (reset quarterly) equal to
3.05% over 3-month LIBOR, with a current rate of 4.16%. The subordinated debt
securities amounted to $12.7 million at March 31, 2004 and are included in other
borrowed money on the consolidated statement of financial condition.

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

19

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.

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 surplus, which does not include accumulated other comprehensive
income. The Bank may lend additional amounts up to 10% of its unimpaired capital
and 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, 2004, the Bank's limit on loans to one
borrower based on its unimpaired capital and surplus was $8.6 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" 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 to a bank charter. At March 31, 2004, the Bank
maintained approximately 70.9% 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 2% 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 and certain purchased credit
card relationships. 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

20

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, 2004,
the Bank exceeded each of its capital requirements with a tangible capital ratio
of 10.6%, leverage capital ratio of 10.6% and total risk-based capital ratio of
17.7%.

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 account interest rate risk, concentration 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 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.

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 an
application or a notice with the OTS at least 30 days before making a capital
distribution. 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. In other cases,
the Bank will have to file a notice as a savings bank subsidiary of a savings
and loan holding company.

The OTS may disapprove of a notice or application 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.

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 branches, ATMs and other offices.

The CRA also requires all institutions to make public disclosure of
their CRA ratings. The Bank received a "Satisfactory" CRA rating in its most
recent examination conducted in 2001.

21

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" is limited by OTS regulations and by Sections
23A and 23B 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.

The FRB rescinded its interpretations of Sections 23A and 23B of the
FRA and replaced these interpretations with Regulation W. The OTS has also
conformed its regulations to coincide with Regulation W. Regulation W makes
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 issued a final rule, effective as of October 6, 2003, which
conforms the OTS's regulations on transactions with affiliates to Regulation W.
In addition, the rule implements 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 final rule also includes 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 final OTS rule. We do
not expect that the changes made by Regulation W and the final OTS rule will
have a 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.

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.

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.

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

22

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, 2003, the
Bank was considered well-capitalized by the OTS.

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. 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 .0212% 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.

FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of New
York ("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,
2004 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.

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
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 $6.6 million and $45.4
million (subject to adjustment by the FRB), and (b) a reserve of 10% (subject to
adjustment by the FRB between 8% and 14%) must be maintained against that
portion of total transaction accounts in excess of $45.4 million. The first $6.6
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

23

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.

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 Federal Reserve Board.

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;

(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.

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 a new Section 6-1 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

24

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:

o Establishment of anti-money laundering programs.

o 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.

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

o Prohibition on correspondent accounts for foreign
shell banks and compliance with recordkeeping
obligations with respect to correspondent accounts of
foreign banks.

The OTS adopted interim final rules implementing the USA PATRIOT Act in 2002 and
adopted final rules implementing the customer identification requirements on May
9, 2003. The final rule became effective June 9, 2003, however, financial
institutions had until October 1, 2003 to come into compliance with such final
rule. Compliance with the regulations adopted under the USA PATRIOT Act did not
have a material adverse impact on our financial condition or results of
operations.

FEDERAL AND STATE TAXATION

FEDERAL TAXATION

GENERAL. The Holding Company and the Bank currently file consolidated
federal income tax returns, report their income for 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. The Bank, as a "small bank" (one with assets having
an adjusted tax basis of $500 million or less) in fiscal 2003 and fiscal 2002,
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 2004 the Bank was no longer considered a small bank as 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 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

25

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 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 rates for fiscal years
2004 and 2003 are 9.03% and 9.53%, respectively, (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.

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 recently enacted
regarding the use and treatment of tax bad debt reserves that is substantially
similar to the New York State legislation described above.

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.

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 May 31, 2004. 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 46, has served as President and Chief Executive
Officer and a Director of the Holding Company and Carver Federal since June 1,
1999. 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.

CATHERINE A. PAPAYIANNIS, age 44, has served as Executive Vice
President and Chief Operating Officer since June 2002. Ms. Papayiannis was
previously Senior Vice President/Director of Community Banking at Atlantic Bank
of New York, where she oversaw the regional retail distribution network, the
offsite ATM network, wealth and cash management services, residential and
consumer lending and small business banking.

JAMES H. BASON, age 49, 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 35, has served as Senior Vice President and 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.

LINDA J. DUNN, age 48, has served as Senior Vice President, General
Counsel and Corporate Secretary since June 2001. Ms. Dunn had been a corporate
associate at the law firm Paul, Weiss, Rifkind, Wharton & Garrison since 1994.

WILLIAM GRAY, age 49, 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.

BRIAN J. MAHER, age 62, has served as Senior Vice President and Chief
Credit Officer with over 30 years of experience in financial services. Mr. Maher
joined Carver in September 2002 and was appointed to the newly created Chief
Credit Officer position in January 2003.

26

MARGARET D. PETERSON, age 53, 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.

DEVON W. WOOLCOCK, age 38, has served as Senior Vice President and
Chief of Retail Banking since 2000. He joined Carver from Citibank where he was
a Division Executive Vice President and where, most recently, he had managed six
branches in Brooklyn and Queens.

ITEM 2. PROPERTIES.

The Bank currently conducts its business through one administrative
office and six branch offices (including the main office) and two stand-alone
ATM centers. Carver does not share its 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, 2004. The Bank
believes that such facilities are suitable and adequate for its operational
needs.

LEASE
YEAR OWNED OR EXPIRATION NET BOOK
OPENED LEASED DATE VALUE
---------------------------------------------------
(In thousands)

Main Office & BRANCH
--------------------
75 West 125th Street 1996 Owned $ 5,548
New York, NY

Branch Offices
--------------
1281 Fulton Street
Brooklyn, NY 1989 Owned 1,453
(Bedford-Stuyvesant Office)

1009-1015 Nostrand Avenue
Brooklyn, NY 1975 Owned 333
(Crown Heights Office)

115-02 Merrick Boulevard
Jamaica, NY 1996 Leased 2/28/2011 278
(St Albans Office)

130 Malcolm X Boulevard
New York, NY 2001 Leased 5/31/2006 579
(Malcolm X Blvd. Office)

158-45 Archer Avenue
Jamaica, New York 2003 Leased 7/31/2018 677
(Jamaica Center Office)

ATM CENTERS
503 West 125th Street
New York, NY 2003 Leased 3/1/2013 156

601 West 137th Street
New York, NY 2003 Leased 10/31/2003 146
-----------
Total $ 9,170
===========

The net book value of Carver Federal's investment in premises and
equipment totaled approximately $11.8 million at March 31, 2004.

ITEM 3. LEGAL PROCEEDINGS.

From time to time, Carver Federal is a party to various legal
proceedings incident to its business. Certain claims, suits, complaints and
investigations involving Carver Federal, arising in the ordinary course of
business, have been filed or are pending. The Company is of the opinion, after
discussion with legal counsel representing Carver Federal in these proceedings,
that the

27

aggregate liability or loss, if any, arising from the ultimate disposition of
these matters would not have a material adverse effect on the Company's
consolidated financial position or results of operations. At March 31, 2004,
except as set forth below, there were no material legal proceedings to which the
Company or its subsidiaries was a party or to which any of their property was
subject.

On or about April 29, 1999, plaintiff Reginald St. Rose ("St.
Rose"), a former Carver Federal employee, filed suit against Carver Federal in
the Supreme Court of the State of New York, County of New York (the "St. Rose
Action"). On or about January 12, 1999, Carver Federal and St. Rose entered into
an agreement (the "Agreement") providing that St. Rose would resign from Carver
Federal on the terms and conditions set forth in the Agreement. In the St. Rose
Action, St. Rose alleged breach of contract, promissory estoppel, and fraudulent
misrepresentation related to the Agreement and St. Rose's separation from Carver
Federal. St. Rose sought damages in an amount not less than $50,000 with respect
to the breach of contract cause of action and sought undisclosed damages with
respect to the promissory estoppel claim. Carver Federal had unasserted
counterclaims against St. Rose for, among other claims, payment of certain
financial obligations to Carver Federal. The parties reached a final settlement
during the fourth quarter of fiscal 2004, which settlement will not have a
material impact on the Bank's financial condition or results of operations.

Carver Federal was a defendant in two actions brought by Ralph
Williams ( "Williams Action I" and "Williams Action II") and an action brought
by Janice Pressley (the "Pressley Action") both of which arose out of events
concerning the Northeastern Conference Federal Credit Union ("Northeastern").
Plaintiff Williams is a former member of the Board of Directors of Northeastern
and plaintiff Pressley is former treasurer of Northeastern. Northeastern was a
federal credit union, and it maintained accounts with Carver Federal and other
banks in the New York metropolitan area (collectively, the "Bank Defendants").
Plaintiffs alleged that the National Credit Union Administration ("NCUA") acted
improperly when it placed Northeastern into conservatorship and subsequent
liquidation. In or about July 1998, Williams commenced Williams Action I in the
United States District Court, District of Columbia, seeking to restrain the NCUA
from executing on the conservatorship order and an order directing the Bank
Defendants to "restore [their] accounts to their original status." The Bank
Defendants were not served with the pleadings in Williams Action I, and the
court entered judgment against them on default. After the Bank Defendants
learned of this case, they made a motion in September 2001 to vacate the default
judgment. In January 2004, Williams Action I was dismissed without prejudice.

On or about November 22, 2000, Williams filed Williams Action
II in the United States District Court, District of Columbia, against the NCUA
and the Bank Defendants seeking damages in the amount of $1 million plus certain
additional unspecified amounts for the allegedly "unauthorized" or "invalid"
actions of the NCUA Board of Directors in taking control of Northeastern as well
as damages for discrimination and civil rights violations. Plaintiff Pressley
filed the Pressley Action in the same court against the same defendants seeking
unspecified compensatory and punitive damages based on identical allegations as
Williams, except that she also alleged certain claims of employment
discrimination. The Bank Defendants filed a joint motion to dismiss Williams
Action II, which motion was granted by the District Court and appealed by
Williams. The Bank Defendants collectively filed a motion for summary affirmance
of the District Court's decision on October 9, 2003, which motion was granted on
April 1, 2004, resolving Williams Action I and Williams Action II in the Bank
Defendants' favor. The Bank Defendants also made a joint motion to dismiss the
Pressley Action. After grant of the motion and appeal by Pressley, the Court of
Appeals dismissed the appeal in August 2003 and, in October 2003 with the
consent of Pressley's counsel, the District Court ordered the dismissal of
Pressley's case against the Bank Defendants, resolving the Pressley Action in
its entirety.

In or about January 2004, Michael Lee & Company, former accountants for
Hale House Center, Inc. ("Michael Lee"), filed an action against Carver Federal
in New York County Supreme Court, asserting a single claim for contribution
against Carver Federal. The complaint alleges that Carver Federal should be
liable to Michael Lee in the event that Michael Lee is found liable to
non-parties Hale House Center, Inc. and its affiliated corporations ("Hale House
plaintiffs") in a separate action that the Hale House plaintiffs have filed
against Michael Lee. The Hale House plaintiffs have asserted claims of
professional malpractice and breach of contract against Michael Lee for
providing deficient accounting services to Hale House. The basis of Michael
Lee's contribution claim against Carver Federal is that Carver Federal allegedly
breached a legal duty it owed Hale House by improperly opening and maintaining a
checking account on behalf of one of the Hale House affiliates. Michael Lee
seeks contribution from Carver Federal in the amount of at least $8.5 million or
the amount of any money judgment entered against Michael Lee in favor of the
Hale House plaintiffs. On February 4, 2004 Carver Federal filed a motion to
dismiss the complaint in its entirety and, on February 11, 2004, Michael Lee
served a cross-motion for summary judgment against Carver Federal. In May 2004,
the court ruled in favor of Carver Federal and judgment was entered in Carver
Federal's favor on June 14, 2004. Michael Lee's time to appeal will run until
July 20, 2004.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

During the quarter ended March 31, 2004, no matter was submitted to a
vote of our security holders through the solicitation of proxies or otherwise.

28

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.

The Holding Company's common stock is listed on the American Stock
Exchange under the symbol "CNY." As of May 31, 2004, there were 2,286,380 shares
of the common stock outstanding, held by approximately 1,135 stockholders of
record. The following table shows the high and low per share sales prices of the
common stock and the dividends declared for the quarters indicated.

HIGH LOW DIVIDEND HIGH LOW DIVIDEND
---- --- -------- ---- --- --------

FISCAL YEAR 2004 FISCAL YEAR 2003
June 30, 2003 $16.59 $13.70 $0.05 June 30, 2002 $13.10 $11.31 $ -
September 30, 2003 $18.15 $16.25 $0.05 September 30, 2002 $12.15 $ 9.83 $ -
December 31, 2003 $26.50 $17.60 $0.05 December 31, 2002 $11.27 $ 9.08 $0.05
March 31, 2004 $25.99 $23.02 $0.05 March 31, 2002 $14.54 $11.13 $0.05

On January 9, 2003, the Holding Company's Board of Directors announced
the establishment of a quarterly cash dividend in an amount to be determined
each quarter dependent upon its earnings, financial condition and other factors.
In each of the four fiscal years prior to fiscal 2003, the Company paid an
annual $0.05 per common share cash dividend.

The Bank will not be permitted to pay dividends to the Holding Company
on its capital stock if its regulatory capital would be reduced below applicable
regulatory capital requirements or if its stockholders' equity would be reduced
below the amount required to be maintained for the liquidation account, which
was established in connection with the Bank's conversion to stock form. The OTS
capital distribution regulations applicable to savings institutions (such as the
Bank) that meet their regulatory capital requirements permit, after not less
than 30 days prior notice to the OTS, capital distributions during a calendar
year that do not exceed the Bank's net income for that year plus its retained
net income for the prior two years. For information concerning the Bank's
liquidation account, see Note 11 of the Notes to the Consolidated Financial
Statements.

Unlike the Bank, the Holding Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent, in part, upon capital distributions
from the Bank. The Holding Company is subject to the requirements of Delaware
law, which generally limit dividends to an amount equal to the excess of the net
assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital, or if there is no such excess, to its
net profits for the current and/or immediately preceding fiscal year.

On August 6, 2002 the Holding Company announced a stock repurchase
program. To date, 29,100 shares of its common stock have been repurchased in
open market transactions at an average price of $13.84 per share as part of this
program. The Holding Company intends to use repurchased shares to fund its
stock-based benefit and compensation plans and for any other purpose the Board
deems advisable in compliance with applicable law. The Holding Company did not
make any purchases of its equity securities during the fourth quarter of fiscal
2004.

29

ITEM 6. SELECTED FINANCIAL DATA

AT OR FOR THE FISCAL YEAR ENDED MARCH 31,
-------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Selected Financial Condition Data:
Assets $ 538,830 $ 509,845 $ 450,306 $424,500 $ 420,119
Loans, net 351,900 292,738 289,710 283,437 270,148
Securities 139,877 165,585 105,464 87,788 104,177
Cash and cash equivalents 22,774 23,160 34,851 31,758 22,202
Deposits 373,665 347,164 324,954 279,424 281,941
Borrowed funds 104,282 108,996 75,651 105,600 98,578
Stockholders' equity $ 44,645 $ 41,073 $ 36,742 $ 32,096 $ 32,641
Number of deposit accounts 38,578 41,220 41,200 44,751 54,597
Number of offices 6 5 5 5 7

OPERATING DATA:
Interest income $ 26,234 $ 27,390 $ 28,395 $ 28,336 $ 27,371
Interest expense 8,700 8,983 12,047 14,278 14,009
------------ ------------ ------------ ----------- ------------
Net interest income 17,534 18,407 16,348 14,058 13,362
Provision for loan losses - - 900 1,793 1,099
------------ ------------ ------------ ----------- ------------
Net interest income after provision for loan losses 17,534 18,407 15,448 12,265 12,263
Non-interest income 5,278 3,161 4,485 2,934 2,539
Non-interest expenses 15,480 14,704 14,339 15,490 15,827
------------ ------------ ------------ ----------- ------------
Income (loss) before income taxes 7,332 6,864 5,594 (291) (1,025)
Income tax 2,493 3,033 881 98 110
------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ----------- ------------
Net income (loss) $ 4,839 $ 3,831 $ 4,713 $ (389) $ (1,135)
============ ============ ============ =========== ============
============ ============ ============ =========== ============
Diluted earnings (loss) per common share $ 1.87 $ 1.52 $ 1.89 $ (0.26) $ (0.53)
============ ============ ============ =========== ============

SELECTED STATISTICAL DATA:
Return on average assets (1) 0.93 % 0.83 % 1.11 % (0.07)% (0.27)
Return on average equity (2) 11.40 9.77 13.78 (0.89) (3.29)
Net interest margin (3) 3.56 4.26 4.09 3.61 3.47
Average interest rate spread (4) 3.40 4.08 3.89 3.48 3.38
Efficiency ratio (5) 67.86 68.18 77.89 96.93 104.31
Operating expense to average assets (6) 2.97 3.18 3.37 3.72 3.82
Equity to total assets at end of period 8.29 8.06 8.16 7.56 7.77
Average equity to average assets 8.13 8.48 8.03 7.85 8.33
Dividend payout ratio (7) 9.86 3.19 2.55 (17.24) (5.17)

ASSET QUALITY RATIOS:
Non-performing assets to total assets (8) 0.39 % 0.36 % 0.63 % 0.71 % 0.73
Non-performing assets to total loans receivable (8) 0.60 0.61 0.96 1.04 1.12
Allowance for loan losses to total loans receivable 1.16 1.40 1.41 1.24 1.07

(1) Net income divided by average total assets
(2) Net income divided by average total equity
(3) Net interest income divided by average interest-earning assets.
(4) The difference between the weighted average yield on interest-earning assets
and the weighted average cost of interest-bearing liabilities.
(5) Non-interest expense (other than real estate owned expenses) divided by the
sum of net interest income and non-interest income (other than net security
gains and losses and other non-recurring income).
(6) Non-interest expense less real estate owned expenses, divided by average
total assets.
(7) Dividends paid to common stockholders as a percentage of net income (loss)
available to common stockholders.
(8) Non performing assets consist of non-accrual loans, loans accruing 90 days
or more past due, and property acquired in settlement of loans.

30

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

EXECUTIVE SUMMARY

The Company's results of operations are significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government policies, changes in accounting standards and actions
of regulatory agencies.

Success in Carver the Company's Federal's fiscal 2004 performance
reflects multiple factors:

o A strong net interest margin
o Strong credit quality
o Continued loan and deposit growth
o Prudent investment portfolio management
o Active capital management

During fiscal 2004, net interest margin was strong. However, net
interest margin compression impacted earnings growth due to the historically low
interest rate environment. Net interest margin declined to 3.56% for fiscal 2004
from 4.26% for fiscal 2003. Prepayments continued at an accelerated rate over
the last two fiscal years due to the sustained low interest rate environment.
Prepayments on mortgage-backed securities and mortgage loans contributed to net
interest margin compression as these cash flows were reinvested at lower market
yields. Partially offsetting the decline in net interest margin was the increase
in average interest-earning assets of $61.2 million to $493.0 million for fiscal
2004 from $431.8 million for fiscal 2003.

Structurally, the Bank's balance sheet exhibits an asset sensitive bias
over the long term. As a result, the Bank's greatest exposure is to a sustained
lower rate environment as asset yields would be expected to decline further
while deposit costs would be expected to stabilize. Should rates begin to rise,
additional margin compression would be expected in the near term; however,
management anticipates that the Bank's balance sheet would benefit over time
from a prolonged rising rate environment. In the fiscal year ending March 31,
2005 ("fiscal 2005"), it is anticipated that the Bank will be operating with a
lower net interest margin relative to fiscal 2004.

Asset quality of the Bank's loan portfolio remained strong. To
accomplish this objective the Company seeks to follow its loan policies and
underwriting practices, which include (1) granting loans on a sound and
collectible basis; (2) understanding the needs of borrowers and the economic
conditions in the Company's target market, while maintaining a balance between
yield and risk; (3) ensuring that primary, secondary and tertiary sources of
repayment are adequate in relation to the amount of the loan; (4) developing and
maintaining adequate diversification of the Bank's loan portfolio as a whole and
within loan categories; (5) ensuring that each loan is properly documented; and
(6) developing and applying adequate collection procedures.

The Bank experienced strong growth in its core business with increases
in net loans receivable and deposits of 20.2% and 7.6%, respectively, compared
to March 31, 2003. While the average balance of interest earning assets
increased, the higher volume was more than offset by a decrease in yields.
Management is mindful of growth levels and the long-term effects of adding
assets to the balance sheet in this low interest rate environment. Management
believes that its loans are priced sensibly, and as the rate environment shifts
management is cognizant of potentially repositioning assets. Management
continues its strategy not to take undue risks by extending asset maturities or
to compromise credit quality to record higher yielding assets. Lowering the
Bank's efficiency ratio remains a priority while continuing to expand Carver's
franchise value, through delivery channel expansion and new product offerings.
Financial results were achieved while maintaining an efficiency ratio of 67.86%
for fiscal 2004.

For fiscal 2004, net gains from sales of securities available-for-sale
totaled $31,000. The Bank sold investment securities that were susceptible to
increased prepayment risk in a continued low interest rate environment.
Additional securities were sold as part of ongoing investment portfolio
strategies. Mortgage-backed securities are sometimes sold when they pay down to
a certain level to mitigate increased price risk. Government securities are
sometimes sold to take advantage of changes in the yield curve. Cash flows from
the investment and loan portfolios, as well as deposit growth, were deployed
into loans and investment securities.

Earnings growth outpaced asset growth for the fiscal year, adding to
the importance of active capital management. During fiscal 2003, the Company
approved a stock repurchase plan, allowing the repurchase of up to 10% of its
then current outstanding common shares. Since inception of the stock repurchase
program, the Company has purchased 29,100 shares of its common stock in open
market transactions at an average price of $13.84 per share, representing 1.3%
of its outstanding shares. In addition, in fiscal 2003 the Company established a
regular quarterly dividend. Despite the change from an annual to a quarterly
dividend, Carver's capital levels remain high and at a level that should be
sufficient to support our intended acquisition of Independence and our planned
branch expansion and organic growth. In April 2004, the Bank successfully opened
a full service state-of-the-art branch in Jamaica, Queens and has plans to open
an additional branch in fiscal 2005 in Fort Greene, Brooklyn. Additionally, in
the last 12 months the Bank opened two 24/7 ATM banking centers in Harlem.

Each of these elements is discussed in the analysis of our financial
results and the accompanying financial statements and

31

footnotes.

PENDING MERGER WITH INDEPENDENCE FEDERAL SAVINGS BANK

On March 15, 2004, the Company entered into a definitive merger
agreement to acquire Independence in a cash transaction valued at approximately
$33 million. Under the terms of the merger agreement, Independence's
stockholders will receive $21.00 in cash for each share of their common stock.
The merger agreement has been approved by the directors of Independence, the
Company and the Bank. The transaction, which is expected to close before the end
of 2004, is subject to customary closing conditions, including regulatory
approvals and the approval of Independence's shareholders. The merger agreement
requires Independence to pay the Company a termination fee of $1.6 million if
the merger agreement is terminated under certain circumstances following
Independence's receipt of a superior acquisition proposal or $325,000 if the
merger is not approved by Independence's shareholders.

The Holding Company has made an Amended Share Voting Stipulation and
Undertaking in favor of the OTS and entered into a Trust Agreement with American
Stock Transfer & Trust Company pursuant to which it has placed 72,400 of the
common shares of Independence owned by the Holding Company, representing
approximately 4.7% of the outstanding common shares of Independence, in a
non-voting trust. The shares held in the trust are shares of Independence owned
by the Holding Company in excess of the 5% limit set forth in Section
10(e)(1)(A)(iii) of HOLA prior to the OTS approving the Holding Company's H-(e)3
Application to acquire Independence. Section 10(e)(1)(A)(iii) provides that a
savings and loan holding company may not acquire or retain more than 5% of the
outstanding voting shares of a savings association that is not a subsidiary
without the prior approval of the OTS. The Trust Agreement will terminate, and
the Independence common shares held in the trust will be transferred back to the
Holding Company, upon the receipt by the Holding Company of the approval of the
OTS to retain more than 5% of Independence's outstanding voting stock.

GENERAL

Carver Federal's net income is dependent primarily on its net interest
income, which is the difference between interest income earned on its loan,
investment and mortgage-backed securities portfolios and the interest paid on
its interest-bearing liabilities, such as deposits and borrowings. In addition,
net income is affected by the level of provision for loan losses, as well as
non-interest income and operating expenses.

Lending activities are influenced by the demand for and supply of
housing, competition among lenders, the level of interest rates and the
availability of funds. Deposit flow and costs of funds are influenced by
prevailing market interest rates, primarily on competing investments, account
maturities, and the levels of personal income and savings.

CRITICAL ACCOUNTING POLICIES

Various elements of our accounting policies, by their nature, are
inherently subject to estimation techniques, valuation assumptions and other
subjective assessments. Our policy with respect to the methodologies used to
determine the allowance for loan losses is our most critical accounting policy.
This policy is important to the presentation of our financial condition and
results of operations, and it involves a higher degree of complexity and
requires management to make difficult and subjective judgments, which often
require assumptions or estimates about highly uncertain matters. The use of
different judgments, assumptions and estimates could result in material
differences in our results of operations or financial condition.

See Note 1 of Notes to Consolidated Financial Statements for a
description of our critical accounting policy related to allowance for loan
losses and an explanation of the methods and assumptions underlying its
application.

ASSET/LIABILITY MANAGEMENT

Net interest income, the primary component of Carver Federal's net
income, is determined by the difference or "spread" between the yield earned on
interest-earning assets and the rates paid on its interest-bearing liabilities
and the relative amounts of such assets and liabilities. Because Carver
Federal's interest-bearing liabilities consist primarily of shorter term deposit
accounts, Carver Federal's interest rate spread can be adversely affected by
changes in general interest rates if its interest-earning assets are not
sufficiently sensitive to changes in interest rates. The Bank has sought to
reduce its exposure to changes in interest rates by more closely matching the
effective maturities and repricing periods of its interest-earning assets and
interest-bearing liabilities through a variety of strategies, including the
origination and purchase of adjustable-rate mortgage loans for its portfolio,
investment in adjustable-rate mortgage-backed securities and shorter-term
investment securities and the sale of all long-term fixed-rate mortgage loans
originated into the secondary market.

DISCUSSION OF MARKET RISK--INTEREST RATE SENSITIVITY ANALYSIS

As a financial institution, the Bank's primary component of market risk
is interest rate volatility. Fluctuations in interest

32

rates will ultimately impact both the level of income and expense recorded on a
large portion of the Bank's assets and liabilities, and the market value of all
interest-earning assets, other than those which possess a short term to
maturity. Since all of the Company's interest-bearing liabilities and virtually
all of the Company's interest-earning assets are located at the Bank, most of
the Company's interest rate risk ("IRR") exposure lies at the Bank level. As a
result, all significant IRR management procedures are performed at the Bank
level. Based upon the Bank's nature of operations, the Bank is not subject to
foreign currency exchange or commodity price risk. The Bank does not own any
trading assets.

Carver Federal seeks to manage its IRR by monitoring and controlling
the variation in repricing intervals between its assets and liabilities. To a
lesser extent, Carver Federal also monitors its interest rate sensitivity by
analyzing the estimated changes in market value of its assets and liabilities
assuming various interest rate scenarios. As discussed more fully below, there
are a variety of factors which influence the repricing characteristics of any
given asset or liability.

The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity gap. An asset or liability
is said to be interest rate sensitive within a specific period if it will mature
or reprice within that period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific period of time and the amount of interest-bearing
liabilities repricing within that same time period. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities and is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of falling interest rates, a
negative gap could result in an increase in net interest income, while a
positive gap could adversely affect net interest income. Conversely, during a
period of rising interest rates a negative gap could adversely affect net
interest income, while a positive gap could result in an increase in net
interest income. As illustrated below, Carver Federal had a negative one-year
gap equal to 8.46% of total rate sensitive assets at March 31, 2004. As a
result, Carver Federal's net interest income could be negatively affected by
rising interest rates and positively affected by falling interest rates.

The following table sets forth information regarding the projected
maturities, prepayments and repricing of the major rate-sensitive asset and
liability categories of Carver Federal as of March 31, 2004. Maturity repricing
dates have been projected by applying estimated prepayment rates based on the
current rate environment. The information presented in the following table is
derived in part from data incorporated in "Schedule CMR: Consolidated Maturity
and Rate," which is part of the Bank's quarterly reports filed with the OTS. The
repricing and other assumptions are not necessarily representative of the Bank's
actual results. Classifications of items in the table below are different from
those presented in other tables and the financial statements and accompanying
notes included herein and do not reflect non-performing loans.

THREE OVER ONE
OR FOUR TO THROUGH OVER THREE OVER FIVE OVER
LESS TWELVE THREE THROUGH THROUGH TEN
MONTHS MONTHS YEARS FIVE YEARS TEN YEARS YEARS
------ ------ ----- ---------- --------- -----
(DOLLARS IN THOUSANDS)

RATE SENSITIVE ASSETS:
Loans and Mortgage Backed Securities $ 23,023 $ 103,025 $ 169,308 $ 112,222 $ 33,097 $ 32,574
Federal Funds Sold 8,200 - - - - -
Investment Securities 6,394 - 10,461 4,640 - 4,635
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning assets 37,617 103,025 179,769 116,862 33,097 37,209
RATE SENSITIVE LIABILITIES:
NOW demand 149 4,014 4,251 1,551 7,329 5,806
Savings and clubs 3,152 7,696 15,501 13,000 32,918 58,855
Money market savings 2,924 10,314 8,416 1,960 3,394 3,834
Certificates of Deposit 28,700 100,619 21,102 17,644 - -
Borrowings 2,025 24,000 60,974 4,300 242 -
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing liabilities $ 36,950 $ 146,643 $ 110,244 $ 38,455 $ 43,883 $ 68,495

Interest Sensitivity Gap $ 667 $(43,618) $ 69,525 $ 78,407 $(10,786) $(31,286)

Cumulative Interest Sensitivity Gap $ 667 $(42,951) $ 26,574 $ 104,981 $ 94,195 $ 62,908
Ratio of Cumulative Gap to Total Rate
Sensitive assets 0.13% -8.46% 5.24% 20.68% 18.56% 12.39%

TOTAL
-----
(DOLLARS IN THOUSANDS)
RATE SENSITIVE ASSETS:
Loans and Mortgage Backed Securities $ 473,248
Federal Funds Sold 8,200
Investment Securities 26,130
------------
Total interest-earning assets 507,578
RATE SENSITIVE LIABILITIES:
NOW demand 23,100
Savings and clubs 131,122
Money market savings 30,842
Certificates of Deposit 168,065
Borrowings 91,541
------------
Total interest-bearing liabilities $ 444,670

Interest Sensitivity Gap $ 62,908

Cumulative Interest Sensitivity Gap -
Ratio of Cumulative Gap to Total Rate
Sensitive assets

33

The table above assumes that fixed maturity deposits are not withdrawn
prior to maturity and that transaction accounts will decay as disclosed in the
table above.

Certain shortcomings are inherent in the method of analysis presented
in the table above. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in the market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, generally have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Additionally, an
increased credit risk may result as the ability of many borrowers to service
their debt may decrease in the event of an interest rate increase. Virtually all
of the adjustable-rate loans in Carver Federal's portfolio contain conditions
that restrict the periodic change in interest rate.

NET PORTFOLIO VALUE ("NPV") ANALYSIS. As part of its efforts to
maximize net interest income while managing the risks associated with changing
interest rates, management uses the NPV methodology.

Under this methodology, IRR exposure is assessed by reviewing the
estimated changes in net interest income ("NII") and NPV that would
hypothetically occur if interest rates rapidly rise or fall all along the yield
curve. Projected values of NII and NPV at both higher and lower regulatory
defined rate scenarios are compared to base case values (no change in rates) to
determine the sensitivity to changing interest rates.

Presented below, as of March 31, 2004, is an analysis of the Bank's IRR
as measured by changes in NPV and NII for instantaneous and sustained parallel
shifts of 100 basis points in market interest rates. Such limits have been
established with consideration of the impact of various rate changes and the
Bank's current capital position. The Bank's level of IRR, as measured by changes
in NPV, for fiscal 2004 is substantially unchanged from fiscal 2003. The
information set forth below relates solely to the Bank; however, because
virtually all of the Company's IRR exposure lies at the Bank level, management
believes the table below also accurately reflects an analysis of the Company's
IRR.

NET PORTFOLIO VALUE NPV AS A % OF PV OF ASSETS
-------------------------------------------- --------------------------
CHANGE IN RATE $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
-------------- -------- -------- -------- --------- ------

(DOLLARS IN THOUSANDS)
+300 bp 73,093 -14,877 -17% 13.39% -208 bp
+200 bp 79,383 -8,586 -10% 14.31% -116 bp
+100 bp 84,450 -3,519 -4% 15.02% -45 bp
0 bp 87,970 - - 15.47% -
(100)bp 90,175 2,205 3% 15.71% +24 bp

MARCH 31, 2004
--------------
RISK MEASURES: +200 BP RATE SHOCK
Pre-Shock NPV Ratio: NPV as % of PV of Assets 15.47%
Post-Shock NPV Ratio 14.31%
Sensitivity Measure; Decline in NPV Ratio 116 bp

Certain shortcomings are inherent in the methodology used in the above
IRR measurements. Modeling changes in NPV require the making of certain
assumptions, which may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV table
presented assumes that the composition of Carver Federal's interest sensitive
assets and liabilities existing at the beginning of a period remains constant
over the period being measured and also assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or repricing of specific assets and liabilities.
Accordingly, although the NPV table provides an indication of Carver Federal's
IRR exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on Carver Federal's net interest income and will differ from
actual results.

AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES

The following table sets forth certain information relating to Carver
Federal's average interest-earning assets and average interest-bearing
liabilities and reflects the average yield on assets and the average cost of
liabilities for the years indicated. Such yields and costs are derived by
dividing income or expense by the average balances of assets or liabilities,
respectively, for the periods

34

shown. Average balances are derived from average month-end balances, except for
federal funds which are derived from daily balances. The use of average monthly
balances instead of average daily balances on all other accounts should not
result in any material difference in the information presented.

The table also presents information for the years indicated with
respect to the difference between the weighted average yield earned on
interest-earning assets and the weighted average rate paid on interest-bearing
liabilities, or "interest rate spread," which savings institutions have
traditionally used as an indicator of profitability. Another indicator of an
institution's profitability is its "net interest margin," which is its net
interest income divided by the average balance of interest-earning assets. Net
interest income is affected by the interest rate spread and by the relative
amounts of interest-earning assets and interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income.

MONTH ENDED MARCH 31, 2004 YEAR ENDED MARCH 31, 2004
------------------------------ --------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/COST BALANCE INTEREST YIELD/COST
-------------- -------------- ----------- ---------- ------------
(DOLLARS IN THOUSANDS)

INTEREST-EARNING ASSETS:
Loans (1) $ 348,418 6.25% $ 314,297 $20,117 6.40%
Investment securities (2) 25,844 3.71% 29,708 1,161 3.91%
Mortgage-backed securities 120,666 3.93% 126,764 4,789 3.78%
Federal funds 6,626 0.89% 22,194 167 0.75%
-------------- -------------- ----------- ---------- ------------
Total interest-earning assets 501,554 5.49% 492,963 26,234 5.32%
Non-interest-earning assets 25,264 28,423
-------------- -----------
Total assets $ 526,818 $ 521,386
============== ===========

INTEREST-BEARING LIABILITIES:
Deposits:
NOW demand $ 22,568 0.31% $ 23,286 $ 85 0.37%
Savings and clubs 130,771 0.59% 130,509 1,001 0.77%
Money market savings 29,383 0.80% 27,662 235 0.85%
Certificates of deposit 168,223 1.95% 163,382 3,304 2.02%
-------------- -------------- ----------- ---------- ------------
Total deposits 350,945 1.24% 344,839 4,625 1.34%
Mortgagors deposits 1,753 1.34% 1,643 24 1.46%
Borrowed money 104,375 4.03% 106,350 4,051 3.81%
-------------- -------------- ----------- ---------- ------------
Total deposits and interest-bearing
liabilities 457,073 1.88% 452,832 8,700 1.92%
----------
Non-interest-bearing liabilities:
Demand 19,508 19,408
Other liabilities 6,308 6,746
-------------- -----------
Total liabilities 482,889 478,986
Stockholders' equity 43,929 42,400
-------------- -----------
Total liabilities and stockholders'
equity $ 526,818 $ 521,386
============== ===========
Net interest income $17,534
==========

Average interest rate spread 3.61% 3.40%
============== ============

Net interest margin 3.67% 3.56%
============== ============

Ratio of average interest-earning assets to
interest-bearing liabilities 109.73% 108.86%
============== ============

(1) Includes non-accrual loans.
(2) Includes FHLB stock.

35

YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------------
2003 2002
----------------------------------------- -------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
INTEREST EARNING ASSETS: BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
---------------- ---------- ------------ --------------- ------------- ------------
(DOLLARS IN THOUSANDS)

Loans (1) $ 282,439 $21,194 7.50% $ 297,130 $ 22,727 7.65%
Investment securities (2) 36,660 1,614 4.40% 38,505 2,324 6.04%
Mortgage-backed securities 93,002 4,282 4.60% 50,450 2,918 5.78%
Fed funds sold 19,744 300 1.52% 13,662 426 3.12%
---------------- ---------- ------------ --------------- ------------- ------------
Total interest earning assets 431,845 27,390 6.34% 399,747 28,395 7.10%
Non-interest earning assets 30,414 26,177
---------------- ---------------
Total assets $ 462,259 $ 425,924
================ ===============

INTEREST BEARING LIABILITIES:
Deposits
NOW demand $ 18,138 $ 130 0.72% $ 21,114 $ 237 1.12%
Savings and clubs 127,004 1,477 1.16% 126,065 2,342 1.86%
Money market savings 16,747 189 1.13% 16,181 302 1.87%
Certificates of deposit 155,187 3,964 2.55% 133,624 5,246 3.93%
---------------- ---------- ------------ --------------- ------------- ------------
Total deposits 317,076 5,760 1.82% 296,984 8,127 2.74%
Borrowed money 80,861 3,223 3.99% 78,153 3,920 5.02%
---------------- ---------- ------------ --------------- ------------- ------------
Total interest-bearing liabilities 397,937 8,983 2.26% 375,137 12,047 3.21%
---------- -------------
Non-interest-bearing liabilities:
Demand 15,234 7,781
Other liabilities 9,880 8,809
---------------- ---------------
Total liabilities 423,051 391,727
Stockholders' equity 39,208 34,197
---------------- ---------------
Total liabilities and stockholders'
equity $ 462,259 $ 425,924
================ ===============
Net interest income $18,407 $ 16,348
========== =============

Average interest rate spread 4.08% 3.89%
============ ============

Net interest margin 4.26% 4.09%
============ ============

Ratio of avg interest-earning assets to
interest-bearing liabilities 108.52% 106.56%
============ ============

(1) Includes non-accrual loans.
(2) Includes FHLB stock.

RATE/VOLUME ANALYSIS

The following table sets forth information regarding the extent to
which changes in interest rates and changes in volume of interest related assets
and liabilities have affected Carver Federal's interest income and expense
during the periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided for changes attributable to
(1) changes in volume (changes in volume multiplied by new rate), (2) changes in
rates (change in rate multiplied by old volume) and (3) changes in rate/volume.
Changes in rate/volume variance are allocated proportionately between changes in
rate and changes in volume.

36

YEAR ENDED MARCH 31,
-----------------------------------------------------------------------
2004 VS. 2003 2003 VS. 2002
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------------- -----------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)

INTEREST EARNING ASSETS:
Loans $ 2,039 $(3,116) $(1,077) $(1,124) $ (409) $(1,533)
Investment securities (273) (180) (453) (81) (629) (710)
Mortgage-backed securities 1,270 (763) 507 1,959 (595) 1,364
Fed funds 18 (151) (133) 92 (218) (126)
----------- ----------- ----------- ----------- ----------- -----------
Total interest earning assets 3,054 (4,210) (1,156) 846 (1,851) (1,005)

INTEREST BEARING LIABILITIES:
Deposits
NOW demand 19 (64) (45) (21) (85) (106)
Savings and clubs 27 (503) (476) 11 (876) (865)
Money market savings 93 (47) 46 6 (119) (113)
Certificates of deposit 165 (801) (636) 551 (1,834) (1,283)
----------- ----------- ----------- ----------- ----------- -----------
Total deposits 304 (1,415) (1,111) 547 (2,914) (2,367)
Borrowed money 1,024 (196) 828 109 (806) (697)
----------- ----------- ----------- ----------- ----------- -----------
Total deposits and interest bearing
liabilities 1,328 (1,611) (283) 656 (3,720) (3,064)

Net change in interest income $ 1,726 $(2,599) $ (873) $ 190 $ 1,869 $ 2,059
=========== =========== =========== =========== =========== ===========

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 AND 2003

At March 31, 2004, total assets increased by $29.0 million, or 5.7%, to
$538.8 million compared to $509.8 million at March 31, 2003. The increase in
total assets was primarily attributable to an increase in loans receivable,
partially offset by decreases in securities. The increase in loans receivable
and the decrease in securities reflects the decision to reinvest funds received
from the maturities and repayments of securities into higher yielding real
estate loans.

Loans receivable, net, increased by $59.2 million, or 20.2%, to $351.9
million as of March 31, 2004 compared to $292.7 million one year ago. The loan
growth during fiscal 2004 represented loan originations of $87.1 million and
loan purchases of $93.7 million, offset by principal repayments of $111.9
million and loans sold to Fannie Mae of $9.4 million. The increase in mortgage
loan principal repayments, originations and purchases in fiscal 2004 and fiscal
2003 is primarily a result of the lower interest rate environment during both
fiscal years, which has significantly increased the level of mortgage refinance
activity. One- to four-family mortgage loans increased by $26.9 million, or
37.5%, to $98.6 million at March 31, 2004 compared to $71.7 million at March 31,
2003. The increase in one- to four-family loans is primarily due to increased
loan purchases as well as $8.3 million in increased loan originations.
Multifamily real estate loans decreased by $11.4 million, or 8.7%, to $120.3
million at March 31, 2004 compared to $131.7 million at March 31, 2003.
Non-residential real estate loans (including church loans) increased by $23.4
million, or 29.5%, to $102.6 million at March 31, 2004 compared to $79.2 million
at March 31, 2003. Construction loans increased by $15.9 million, or 138.3%, to
$27.4 million at March 31, 2004 compared to $11.5 million at March 31, 2003
primarily due to purchases. The Bank continues to focus on the origination of
multifamily, non-residential and construction real estate loans in the markets
it serves and will augment these originations with loan purchases. Consumer and
business loans increased by $3.9 million, or 182.8%, to $6.0 million at March
31, 2004 compared to $2.1 million at March 31, 2003. The increase in consumer
and business loans comprises four separate secured business loans in the amount
of $1.0 million each originated during fiscal 2004.

Total securities at March 31, 2004 decreased $25.7 million to $139.9
million from $165.6 million at March 31, 2003, reflecting a $32.7 million
decrease in available-for-sale securities and a $6.9 million increase in
held-to-maturity securities. The decrease in available-for-sale securities
primarily reflects $65.1 million in principal repayments, maturities and calls,
$23.9 million in proceeds from sales of securities, and an $860,000 decrease in
the market value of the portfolio, substantially offset by purchases of $58.5
million. The increase in held-to-maturity securities reflects securities
purchases of $19.9 million offset by principal payments and maturities of $12.7
million. Available-for-sale securities represented 68.9% of the total securities
portfolio at March 31, 2004 compared to 77.9% at March 31, 2003. The Bank
invests in securities to help diversify its asset portfolios and satisfy
collateral requirements for certain deposits and borrowings.

At March 31, 2004, total liabilities increased $25.4 million, or 5.4%,
to $494.2 million compared to $468.8 million at March 31, 2003. Deposits
increased $26.5 million, or 7.6%, to $373.7 million at March 31, 2004 from
$347.2 million at March 31, 2003.

37

The increase in deposits was primarily attributable to increases of $10.1
million in money market accounts, $8.9 million in demand accounts, $5.3 million
in certificates of deposit and $2.2 million in regular savings and club
accounts. Funds from deposit growth were used to pay down higher cost advances
from the FHLB-NY, resulting in a net decrease in total borrowed money of $4.7
million, or 4.3%, to $104.3 million at March 31, 2004, from $109.0 million one
year ago. Advances from the FHLB-NY declined by $17.5 million which were
partially offset by new borrowings from the issuance of $12.7 million of trust
preferred securities.

At March 31, 2004, stockholders' equity increased $3.6 million, or
8.7%, to $44.6 million compared to $41.1 million at March 31, 2003. The increase
in stockholders' equity was primarily attributable to net income of $4.8 million
partially offset by other comprehensive losses, net of taxes, of $492,000, a net
increase in treasury stock holdings of $200,000 and dividends declared of
$659,000. The Bank's capital levels meet regulatory requirements of a well
capitalized financial institution.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2004 AND 2003

NET INCOME

The Bank reported net income for fiscal 2004 of $4.8 million compared
to $3.8 million for the prior fiscal year. Net income available to common
stockholders for fiscal 2004 was $4.6 million, or $1.87 per diluted common share
compared to $3.6 million, or $1.52 per diluted common share, for fiscal 2003.
The increase in net income was primarily due to a $2.1 million increase in
non-interest income and a $540,000 reduction in income tax expense partially
offset by an $873,000 decrease in net interest income and a $776,000 increase in
non-interest expense.

INTEREST INCOME

Interest income for fiscal 2004 was $26.2 million, a decrease of $1.2
million, or 4.2%, from the prior fiscal year. The average balance of
interest-earning assets increased to $493.0 million for fiscal 2004 from $431.8
million for the prior fiscal year. This increase was more than offset by a
decline in the average yield on interest-earning assets to 5.32% for fiscal 2004
compared to 6.34% for fiscal 2003.

Interest income on loans decreased by $1.1 million, or 5.1%, to $20.1
million for fiscal 2004 compared to $21.2 million for the prior fiscal year. The
decrease in interest income from loans reflects a 110 basis point decrease in
the average rate earned on loans to 6.40% for fiscal 2004 from 7.50% for the
prior fiscal year, the effects of which were partially offset by an increase of
$31.9 million, or 11.3%, in the average balance of loans to $314.3 million for
fiscal 2004 compared to $282.4 million for fiscal 2003. The increase in the
average balance of loans reflects originations and purchases in excess of
principal collections. The decline in the average rate earned on loans was
principally due to the downward pricing on loan products during the low interest
rate environment experienced during fiscal 2004, see "Item 7. Management
Discussion and Analysis--Liquidity and Capital Resources."

Interest income on mortgage-backed securities increased by $507,000, or
11.8%, to $4.8 million for fiscal 2004 compared to $4.3 million for the prior
fiscal year, reflecting an increase of $33.8 million in the average balance of
mortgage-backed securities to $126.8 million for fiscal 2004 compared to $93.0
million for fiscal 2003. The increase in the average balance of such securities
was due to the utilization of part of the proceeds received from increased
borrowings and deposits, coupled with the redeployment of mortgage loan
principal repayments, to purchase mortgage-backed securities. This increase was
partially offset by an 82 basis point decrease in the average rate earned on
mortgage-backed securities to 3.78% for fiscal 2004 from 4.60% for the prior
fiscal year.

Interest income on investment securities decreased by approximately
$453,000, or 28.1%, to $1.2 million for fiscal 2004 compared to $1.6 million for
the prior fiscal year. The decrease in interest income on investment securities
reflects a 49 basis point decrease in the average rate earned on investment
securities to 3.91% for fiscal 2004 from 4.40% for the prior fiscal year and a
decrease of $7.0 million in the average balance of investment securities to
$29.7 million for fiscal 2004 compared to $36.7 million for fiscal 2003.

Interest income on federal funds decreased $133,000, or 44.3%, to
$167,000 for fiscal 2004 compared to $300,000 for the prior fiscal year. The
decrease is attributable to a 77 basis point decrease in the average rate earned
on federal funds, partially offset by a $2.5 million increase in the average
balance of federal funds.

INTEREST EXPENSE

Interest expense decreased by $283,000, or 3.2%, to $8.7 million for
fiscal 2004 compared to $9.0 million for the prior fiscal year. The decrease in
interest expense reflects a decline of 34 basis points in the average cost of
interest-bearing liabilities. This decline in average rate paid was partially
offset by a $54.9 million increase in the average balance of interest-bearing
liabilities to $452.8 million in fiscal 2004 from $397.9 million in fiscal 2003.
The increase in the average balance of interest-bearing liabilities in fiscal
2004 compared to fiscal 2003 was due to increases in the average balance of
interest-bearing deposits, as well as increases in

38

the average balance of borrowed money.

Interest expense on deposits decreased $1.1 million, or 19.3%, to $4.6
million for fiscal 2004 compared to $5.8 million for the prior fiscal year. This
decrease is attributable to a 48 basis point decrease in the cost of average
deposits partially offset by a $27.7 million, or 8.8%, increase in the average
balance of interest-bearing deposits to $344.8 million for fiscal 2004 compared
to $317.1 million for fiscal 2003. The increase in the average balance of
interest-bearing deposits was primarily due to an increase in the average
balance of money market accounts of $10.9 million, or 65.2%, and an increase in
the average balance of certificates of deposit of $8.2 million, or 5.3%. The
increase in average interest-bearing deposits was achieved in part through
deposits generated by a new branch and two new ATM centers in fiscal 2004. The
decrease in the average rate paid on deposits was principally due to the
declining interest rate environment experienced in fiscal 2004.

Interest expense on borrowed money increased by $828,000, or 25.7%, to
$4.1 million for fiscal 2004 compared to $3.2 million for the prior fiscal year.
The increase in interest expense on borrowed money for fiscal 2004 reflects a
$25.5 million increase in the average balance of borrowed money, of which $6.9
million resulted from the issuance of trust preferred securities, partially
offset by a decrease of 18 basis points in the average cost of borrowed money.
The decrease in average cost of borrowings was due to the continued declining
interest rate environment experienced during fiscal 2004.

NET INTEREST INCOME

Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends primarily upon the volume of interest-earning assets and
interest-bearing liabilities and the corresponding interest rates earned and
paid. Our net interest income is significantly impacted by changes in interest
rate and market yield curves. See "--Discussion of Market Risk--Interest Rate
Sensitivity Analysis" for further discussion on the potential impact of changes
in interest rates on our results of operations.

Net interest income before the provision for loan losses decreased
$873,000, or 4.7%, to $17.5 million for fiscal 2004 compared to $18.4 million
for the prior fiscal year. The 102 basis point decrease in the return on average
interest-earning assets, coupled with a 34 basis point decrease in the cost of
interest-bearing liabilities used to fund interest-earning assets, contributed
to a 68 basis point decrease in the interest rate spread to 3.40% for fiscal
2004 compared to 4.08% for the prior fiscal year. The net interest margin
decreased to 3.56% for fiscal 2004 compared to 4.26% for fiscal 2003.

PROVISION FOR LOAN LOSSES

During fiscal 2004 no provision was recorded for loan losses. The Bank
records provisions for loan losses, which are charged to earnings, in order to
maintain the allowance for loan losses at a level that is considered appropriate
to absorb probable losses inherent in the existing loan portfolio. Factors
considered when evaluating the adequacy of the allowance for loan losses include
the volume and type of lending conducted, the Bank's previous loan loss
experience, the known and inherent risks in the loan portfolio, adverse
situations that may affect the borrowers' ability to repay, the estimated value
of any underlying collateral and trends in the local and national economy and
trends in the real estate market.

During fiscal 2004, the Bank had net charge-offs of $33,000 compared to
net recoveries of $30,000 for fiscal 2003. At March 31, 2004, non-performing
loans totaled $2.1 million, or 0.6% of total loans compared to $1.8 million, or
0.6% of total loans, at March 31, 2003. At March 31, 2004, the Bank's allowance
for loan losses was $4.1 million, substantially unchanged from that of March 31,
2003, resulting in a ratio of the allowance to non-performing loans of 194.3% at
March 31, 2004 compared to 230.7% at March 31, 2003, and a ratio of allowance
for possible loan losses to total loans of 1.16% and 1.40% at March 31, 2004 and
March 31, 2003, respectively. The Bank believes its reported allowance for loan
loss at March 31, 2004 is both appropriate in the circumstances and adequate to
provide for estimated probable losses in the loan portfolio. For further
discussion of non-performing loans and allowance for loan losses, see "Item
1--Business--General Description of Business--Asset Quality" and Note 1 of Notes
to the Consolidated Financial Statements.

NON-INTEREST INCOME

Non-interest income is comprised of loan fees and service charges,
gains or losses from the sale of securities and certain other items, fee income
for banking services and miscellaneous non-interest income. Non-interest income
increased $2.1 million, or 67.0%, to $5.3 million for fiscal 2004 compared to
$3.2 million for fiscal 2003. The increase is primarily due to a $1.3 million
increase in loan fees and service charges and a $590,000 increase in other, or
miscellaneous, non-interest income. Loan fees and service charges amounted to
$2.6 million for fiscal 2004, a 94.4% increase from the prior fiscal year,
primarily resulting from higher mortgage prepayment penalties relating to
increased refinancing activity including several loans whose prepayment
penalties were based on the yield maintenance method compared to a flat
declining rate method usually used by the Bank. The yield maintenance method is
calculated by using a stated contractual interest rate for the remaining term of
the loan multiplied by the current outstanding balance. Current loan production
does not incorporate the yield maintenance method. Additionally, a decline in
the refinance market could result in lower prepayment penalty fee income. Other
non-interest income amounted to $597,000 for fiscal 2004 compared to

39

$7,000 for the prior fiscal year. The increase in other non-interest income was
primarily a result of a recovery of $558,000 of which $411,000 was related to
the recognition of previously unrecognized mortgage loan income from one problem
loan that had been held in escrow pending the resolution of certain mechanics'
liens. The remaining recovery of $147,000 was from previously unrecognized
prepaid mortgage loan income.

NON-INTEREST EXPENSE

Non-interest expense increased by $776,000, or 5.3%, to $15.5 million
for fiscal 2004 compared to $14.7 million for the prior fiscal year. The
increase in non-interest expense was primarily attributable to increases of
$813,000 in salaries and employee benefits and $58,000 in net occupancy and
equipment expenses, slightly offset by a decrease of $95,000 in other
non-interest expense. The increase in salaries and employee benefits was
primarily attributable to annual salary increases, new hires and the increased
costs of benefit plans. Net occupancy expenses increased primarily from new and
upgraded 24/7 ATM centers and the Bank's recently opened Jamaica Center branch.

INCOME TAX EXPENSE

Income tax expense was approximately $2.5 million for fiscal 2004, a
$540,000, or 17.8%, decrease from $3.0 million for fiscal 2003 due to a
reduction in the Company's tax rate following the establishment of a REIT. The
effective tax rate in fiscal 2004 was 34.0% compared to 44.2% in fiscal 2003.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2003 AND 2002

NET INCOME

The Bank reported net income for fiscal 2003 of $3.8 million compared
to $4.7 million for the prior fiscal year. Net income available to common
stockholders for fiscal 2003 was $3.6 million, or $1.52 per diluted common share
compared to $4.5 million, or $1.89 per diluted common share, for fiscal 2002.
The decrease in net income was primarily due to a $2.2 million increase in
income tax expense, a $1.3 million decrease in non-interest income and a
$366,000 increase in non-interest expense partially offset by a $2.1 million
improvement in net interest income and a $900,000 decrease in the provision for
loan losses.

INTEREST INCOME

Interest income for fiscal 2003 was $27.4 million, a decrease of $1.0
million, or 3.5%, from the prior fiscal year. The average balance of
interest-earning assets increased to $431.8 million for fiscal 2003 from $399.7
million for the prior fiscal year. This increase was more than offset by a
decline in the average yield on interest-earning assets to 6.34% for fiscal 2003
compared to 7.10% for fiscal 2002.

Interest income on loans decreased by $1.5 million, or 6.8%, to $21.2
million for fiscal 2003 compared to $22.7 million for fiscal 2002. The decrease
in interest income from loans reflects a decrease of $14.7 million, or 4.9%, in
the average balance of loans to $282.4 million for fiscal 2003 compared to
$297.1 million for fiscal 2002, coupled with a 10 basis point decrease in the
average rate earned on loans to 7.50% for fiscal 2003 from 7.65% for the prior
fiscal year. The decrease in the average balance of loans reflects amortization
of prepayments in excess of originations and purchases. The decline in the
average rate earned on loans was principally due to the downward pricing on loan
products during the continuing declining interest rate environment of fiscal
2003.

Interest income on mortgage-backed securities increased by $1.4
million, or 46.7%, to $4.3 million for fiscal 2003 compared to $2.9 million for
the prior fiscal year, reflecting an increase of $42.6 million in the average
balance of mortgage-backed securities to $93.0 million for fiscal 2003 compared
to $50.5 million for fiscal 2002. The increase in the average balance of such
securities was due to the utilization of part of the proceeds received from
increased borrowings and deposits, coupled with the redeployment of mortgage
loan principal repayments, to purchase mortgage-backed securities. This increase
was partially offset by a 118 basis point decrease in the average rate earned on
mortgage-backed securities to 4.60% from 5.78%.

Interest income on investment securities decreased by approximately
$710,000, or 30.6%, to $1.6 million for fiscal 2003 compared to $2.3 million for
the prior fiscal year. The increase in interest income on investment securities
reflects a 164 basis point decrease in the average rate earned on investment
securities to 4.40% from 6.04% and a decrease of $1.8 million in the average
balance of investment securities to $36.7 million for fiscal 2003 compared to
$38.5 million for fiscal 2002.

Interest income on federal funds decreased $126,000, to $300,000 for
fiscal 2003 compared to $426,000 for the prior fiscal year. The decrease is
attributable to a 160 basis point decrease in the average rate earned on federal
funds, partially offset by a $6.1 million increase in the average balance of
federal funds.

40

INTEREST EXPENSE

Interest expense decreased by $3.1 million, or 25.4%, to $9.0 million
for fiscal 2003 compared to $12.0 million for the prior fiscal year. The
decrease in interest expense reflects a decline of 95 basis points in the
average cost of interest-bearing liabilities. This decline in average rate paid
was partially offset by a $22.8 million increase in the average balance of
interest-bearing liabilities to $397.9 million in fiscal 2003 from $375.1
million in fiscal 2002. The increase in the average balance of interest-bearing
liabilities in fiscal 2003 compared to fiscal 2002 was due to increases in the
average balance of interest-bearing deposits and, to a lesser extent, increases
in the average balance of borrowed money.

Interest expense on deposits decreased $2.4 million, or 29.1%, to $5.8
million for fiscal 2003 compared to $8.1 million for the prior fiscal year. This
decrease is attributable to a 92 basis point decrease in the cost of average
deposits partially offset by a $20.1 million, or 6.8%, increase in the average
balance of interest-bearing deposits to $317.1 million for fiscal 2003 compared
to $297.0 million for fiscal 2002. The increase in the average balance of
interest-bearing deposits was primarily due to an increase in the average
balance of certificates of deposit of $21.6 million, or 16.1%. The increase in
average interest-bearing deposits was achieved through increased retail
production brought about by enhanced marketing efforts. The decrease in the
average rate paid on deposits was principally due to the declining interest rate
environment experienced in fiscal 2003.

Interest expense on borrowed money decreased by $697,000, or 17.8%, to
$3.2 million for fiscal 2003 compared to $3.9 million for the prior fiscal year.
The decrease in interest expense on borrowed money for fiscal 2003 reflects a
decrease of 103 basis points in the average cost of borrowed money partially
offset by a $2.7 million increase in the average balance of borrowed money. The
decrease in average cost of borrowings was due to the continued declining
interest rate environment experienced during fiscal 2003.

NET INTEREST INCOME

Net interest income before the provision for loan losses increased $2.1
million, or 12.6%, to $18.4 million for fiscal 2003 compared to $16.3 million
for the prior fiscal year. Net interest income benefited from a general interest
rate decline, as well as an increase in deposits. This benefit was partially
offset by an increase in borrowed money, a decrease in loan originations and
average loan balances and accelerated prepayments of mortgage-backed securities.
The 95 basis point decrease in the cost of interest-bearing liabilities used to
fund interest-earning assets, coupled with a 76 basis point decrease in the
return on average interest-earning assets, contributed to a 19 basis point
increase in the interest rate spread to 4.08% for fiscal 2003 compared to 3.89%
for the prior fiscal year. The net interest margin increased to 4.26% for fiscal
2003 compared to 4.09% for fiscal 2002.

PROVISION FOR LOAN LOSSES

For fiscal 2003 there were no provisions recorded for loan losses
compared to $900,000 for fiscal 2002. Management believes that the decrease in
provisions for loan losses compared to fiscal 2002 was warranted by the
decreases in charge-offs and non-performing assets.

During fiscal 2003, the Bank had net recoveries of approximately
$30,000 compared to net charge-offs of $323,000 for fiscal 2002. At March 31,
2003, non-performing loans totaled $1.8 million, or 0.6% of total loans,
compared to $2.8 million, or 1.0% of total loans, at March 31, 2002. At March
31, 2003, the Bank's allowance for loan losses was $4.2 million, substantially
unchanged from that at March 31, 2002, resulting in a ratio of the allowance to
non-performing loans of 230.7% at March 31, 2003 compared to 146.2% at March 31,
2002, and a ratio of allowance for possible loan losses to total loans of 1.40%
and 1.41% at March 31, 2003 and March 31, 2002, respectively. Management
believes the Company's reported allowance for loan loss at March 31, 2003 is
both appropriate in the circumstances and adequate to provide for estimated
probable losses in the loan portfolio. For further discussion of non-performing
loans and allowance for loan losses, see "Item 1--Business--General Description
of Business--Asset Quality" and Note 1 of Notes to the Consolidated Financial
Statements.

NON-INTEREST INCOME

Non-interest income is composed of loan fees and service charges, gains
or losses from the sale of securities and certain other items, fee income for
banking services and miscellaneous non-interest income. Non-interest income
decreased $1.3 million, or 29.5%, to $3.2 million for fiscal 2003 compared to
$4.5 million for fiscal 2002. Despite increases in fees and charges for deposits
and loans, non-interest income decreased due to the inclusion in fiscal 2002 of
$1.4 million relating to the sale of securities, $987,000 relating to the sale
of the Bank's East New York branch and the loss of $101,000 from the sale of the
Bank's automobile loan portfolio.

Excluding the income and loss from sales of securities, loans and
deposits, total non-interest income increased by $961,000, or 43.7% compared to
fiscal 2002. Loan fees and service charges amounted to $1.3 million for fiscal
2003, a $655,000, or a 95.5%, increase from the prior fiscal year. The increase
in loan fees and service charges is primarily attributable to substantially
higher mortgage prepayment penalties, primarily resulting from multifamily
borrowers prepaying due to the lower interest rate environment, and a
restructuring of the Bank's loan fees in the second quarter of fiscal 2003.
Depository fees and charges increased $316,000, or

41

21.1%, to $1.8 million for fiscal 2003 from $1.5 million for fiscal 2002. The
increase in depository fees primarily relates to increased ATM fees and the
restructuring of the Bank's service charges in the second quarter of fiscal
2003.

NON-INTEREST EXPENSE

Non-interest expense increased by $366,000, or 2.6%, to $14.7 million
for fiscal 2003 compared to $14.3 million for the prior fiscal year. The
increase in non-interest expense was primarily attributable to increases of
$307,000 in net occupancy and equipment expenses and $269,000 in salaries and
employee benefits, partially offset by a decrease of $210,000 in other
non-interest expense. The increase in net occupancy and equipment expenses are
related to the opening of the Malcolm X Blvd. branch in September 2001 and the
renovation of an existing branch facility which resulted in increases in
maintenance contracts, building taxes and water and sewer expense. The increase
in salaries and employee benefits was primarily attributable to increased
compensation resulting from the Bank being able to successfully fill key
management positions, including the Chief Operating Officer, Chief Financial
Officer, Chief Lending Officer and Chief Credit Officer positions.

INCOME TAX EXPENSE

Income tax expense was approximately $2.5 million for fiscal 2004, a
$540,000, or 17.8%, decrease from $3.0 million for fiscal 2003, reflecting the
benefit of the Bank's REIT. The effective tax rate in fiscal 2004 was 34.0%
compared to 44.2% in fiscal 2003.

LIQUIDITY AND CAPITAL RESOURCES

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

Management believes the Bank's short-term assets have sufficient
liquidity to cover loan demand, potential fluctuations in deposit accounts and
to meet other anticipated cash requirements. In addition, as previously
discussed, the Bank has the ability to borrow funds from the FHLB-NY to further
meet any liquidity needs. The Bank monitors its liquidity utilizing guidelines
that are contained in a policy developed by management of the Bank and approved
by the Bank's Board of Directors. The Bank's several liquidity measurements are
evaluated on a frequent basis. The Bank was in compliance with this policy as of
March 31, 2004.

Congress eliminated the statutory liquidity requirement which required
federal savings banks to maintain a minimum amount of liquid assets of between
4% and 10%, as determined by the Director of the OTS, the Bank's primary federal
regulator. The Bank is required to maintain sufficient liquidity to ensure its
safe and sound operation. As a result of the elimination of the liquidity
requirement, the Bank manages its liquidity through a Board-approved liquidity
policy. The Bank's most liquid assets are cash and short-term investments. The
level of these assets is dependent on the Bank's operating, investing and
financing activities during any given period. At March 31, 2004 and 2003, assets
qualifying for short-term liquidity, including cash and short-term investments,
totaled $28.7 million and $45.3 million, respectively.

The levels of the Bank's short-term liquid assets are dependent on the
Bank's operating, financing and investing activities during any given period.
The most significant liquidity challenge the Bank currently faces is the
variability in its cash flows as a result of mortgage refinance activity, which
has resulted in a lag in redeploying lower yielding federal funds into higher
yielding mortgage loans, which has had a negative impact on the Company's net
interest margin and net interest income. As mortgage interest rates decline,
customers' refinance activities tend to accelerate, causing the cash flow from
both the mortgage loan portfolio and the mortgage-backed securities portfolio to
accelerate. In addition, as mortgage interest rates decrease, customers
generally tend to prefer fixed rate mortgage loan products over variable rate
products. Since the Bank generally sells its 15-year and 30-year fixed rate loan
production into the secondary mortgage market, the origination of such products
for sale does not significantly reduce the Bank's liquidity. During fiscal 2002,
the Federal Open Market Committee reduced the federal funds rate on eight
separate occasions by a total of 325 basis points, resulting in a lower interest
rate environment in fiscal 2002 compared to the fiscal year ended March 31,
2001. During fiscal 2003, the federal funds rate was again lowered on three
separate occasions a total of 125 basis points. During fiscal 2004 the federal
funds rate has remained unchanged. The increase in loan and securities
repayments experienced by the Bank over the past two fiscal years was primarily
the result of the increase in mortgage loan refinancing activity caused by this
lower interest rate environment.

The Consolidated Statements of Cash Flows present the change in cash
from operating, investing and financing activities. During fiscal 2004, cash and
cash equivalents decreased by $386,000. Net cash provided by operating
activities was $17.0 million, representing primarily the results of operations
adjusted for depreciation and amortization and the provision for loan losses.
Net cash

42

used in investing activities was $38.2 million, which was primarily the result
of purchases of loans and securities and originations of loans partially offset
by repayments and maturities of loans and securities. Net cash provided by
financing activities was $20.8 million, reflecting primarily net increases in
deposits and borrowed money.

CONTRACTUAL OBLIGATIONS

The following table presents the Bank's contractual obligations at
March 31, 2004.

PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------
Contractual Less than 1 - 3 3 - 5 More than
Obligations Total 1 year years years 5 years
- ------------------------------------------------ ---------------------------- ------------ ------------ ------------
(IN THOUSANDS)

Long term debt obligations:
FHLB advances $ 91,516 $ 26,000 $64,274 $ 1,000 $ 242
Guaranteed preferred beneficial interest in
junior subordinated debentures 12,741 12,741
------------- ------------- ------------ ------------ ------------
Total long term debt obligations 104,257 26,000 64,274 13,741 242

Operating lease obligations:
Lease obligations for rental properties 2,619 370 946 606 697
------------- ------------- ------------ ------------ ------------
Total contractual obligations $106,876 $ 26,370 $65,220 $ 14,347 $ 939
============= ============= ============ ============ ============

REGULATORY CAPITAL POSITION

The Bank must satisfy three minimum capital standards established by
the OTS. For a description of the OTS capital regulation, see "Item
1--Regulation and Supervision--Federal Banking Regulation--Capital
Requirements."

The Bank presently exceeds all capital requirements as currently
promulgated. At March 31, 2004, the Bank had tangible, core, and total
risk-based capital ratios of 10.6%, 10.6% and 17.7%, respectively.

The following table reconciles the Bank's stockholders' equity at March
31, 2004 under accounting principles generally accepted in the United States of
America ("GAAP") to regulatory capital requirements.

REGULATORY CAPITAL REQUIREMENTS
--------------------------------------------------------------
GAAP TANGIBLE LEVERAGE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
------------------------------ -------------- --------------
(IN THOUSANDS)

Stockholders' Equity at March 31, 2004 (1) $ 57,442 $ 57,442 $ 57,442 $ 57,442

Add:
General valuation allowances - - 4,125
Deduct:
Unrealized loss on securities available-for-sale, net (251) (251) (251)
Goodwill and qualifying intangible assets - - -
-------------- -------------- --------------
Regulatory Capital 57,191 57,191 61,316
Minimum Capital requirement 10,776 21,553 27,726
-------------- -------------- --------------
Regulatory Capital Excess $ 46,415 $ 35,638 $ 33,590
============== ============== ==============

(1) Reflects Bank only.

IMPACT OF INFLATION AND CHANGING PRICES

The financial statements and accompanying notes appearing elsewhere
herein have been prepared in accordance with GAAP, which require the measurement
of financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of Carver Federal's operations. Unlike most industrial companies, nearly
all the assets and liabilities of the Bank are monetary in nature. As a result,
interest rates have a greater impact on Carver Federal's performance than do the
effects of the general level of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.

43

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information required by this item appears under the caption "Discussion of
Market Risk--Interest Rate Sensitivity Analysis" in Item 7, incorporated herein
by reference.

44

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

LETTERHEAD OF KPMG LLP

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders
Carver Bancorp, Inc.:

We have audited the accompanying consolidated statements of financial
condition of Carver Bancorp, Inc. and subsidiaries (the "Company") as of March
31, 2004 and 2003 and the related consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended March 31, 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with standards established by the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and the significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of March 31, 2004 and 2003, and the results of its operations and its cash
flows for each of the years in the three-year period ended March 31, 2004, in
conformity with accounting principles generally accepted in the United States of
America.

KPMG LLP
New York, New York
June 24, 2004

45

MANAGEMENT'S REPORT

Management of Carver Bancorp is responsible for the preparation and
integrity and fair presentation of the consolidated financial statements and
other information presented in this annual report. The consolidated financial
statements have been prepared in conformity with GAAP and, where necessary, are
based on management's best estimates and judgment. Other financial information
contained elsewhere in this annual report is consistent with that contained in
the consolidated financial statements.

Management maintains accounting systems and internal controls to meet its
responsibilities for reliable consolidated financial statements. There are
inherent limitations in the effectiveness of internal controls, including the
possibility of circumvention of overriding of controls. Furthermore, because of
changes in conditions, the effectiveness of internal controls may vary over
time. These systems and controls are designed to provide reasonable assurance
that assets are safeguarded and transactions are properly recorded and executed
in accordance with management's authorization. An internal audit function is
maintained to continually evaluate the adequacy and effectiveness of such
internal controls, policies and procedures.

KPMG LLP, independent auditors, are engaged to audit the Company's
consolidated financial statements in accordance with auditing standards
generally accepted in the United States of America and the independent auditor's
report expresses their opinion as to the fair representation, in all material
respects, of the consolidated financial statements in conformity with GAAP. The
audit provides an objective assessment of the degree to which management meet
its responsibility for financial reporting.

The Board fulfills its oversight role for the financial statements
through the Finance and Audit Committee, which is composed entirely of outside
directors. The Finance and Audit Committee meet regularly with management, the
internal auditors, and the independent auditors, to discuss internal controls
and accounting, auditing and financial reporting matters. The Finance and Audit
Committee reviews and approves the scope of internal and external audits, as
well as recommendations made with respect to internal controls by the
independent and internal auditors and the various regulatory agencies. KPMG LLP
and the internal auditors meet with the Finance and Audit Committee with and
with and without management present.

Management assessed the Company's system of internal control over
financial reporting as of March 31, 2004 based on criteria for effective
internal control over financial reporting described in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that as of March 31, 2004, the Company's system of internal controls
over financial reporting met those criteria.

/s/ Deborah C. Wright /s/ William C. Gray
- --------------------- -------------------

Deborah C. Wright William C. Gray
President and Chief Executive Officer Senior Vice President and
Chief Financial Officer

46

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

MARCH 31,
-----------------------------
2004 2003
------------- ------------

ASSETS
Cash and cash equivalents:
Cash and due from banks $ 11,574 $ 15,160
Federal funds sold 8,200 5,500
Interest earning deposits 3,000 2,500
------------- ------------
Total cash and cash equivalents 22,774 23,160
------------- ------------
Securities:
Available-for-sale, at fair value (including pledged as collateral of
$82,325 at March 31, 2004, $124,954 at March 31, 2003) 96,403 129,055
Held-to-maturity, at amortized cost (including pledged as collateral of $42,189 at
March 31, 2004 and $35,138 at March 31, 2003; fair value of $43,794 at
March 31, 2004 and $37,543 at March 31, 2003) 43,474 36,530
------------- ------------
Total securities 139,877 165,585
------------- ------------
Loans receivable:
Real estate mortgage loans 350,015 294,771
Consumer and business loans 6,010 2,125
Allowance for loan losses (4,125) (4,158)
------------- ------------
Total loans receivable, net 351,900 292,738
------------- ------------
Premises and equipment, net 11,826 10,193
Federal Home Loan Bank of New York stock, at cost 4,576 5,440
Accrued interest receivable 2,489 3,346
Identifiable intangible asset, net -- 178
Other assets 5,388 9,205
------------- ------------
Total assets $ 538,830 $ 509,845
============= ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 373,665 $ 347,164
Advances from the Federal Home Loan Bank of New York and other borrowed money 104,282 108,996
Other liabilities 16,238 12,612
------------- ------------
Total liabilities 494,185 468,772
------------- ------------
Stockholders' equity:
Preferred stock (par value $0.01 per share; 1,000,000
shares authorized; 100,000 issued and outstanding) 1 1
Common stock (par value $0.01 per share: 5,000,000 shares authorized; 2,316,358 shares issued;
2,285,267 and 2,296,960 outstanding at March 31, 2004 and March 31, 2003, respectively) 23 23
Additional paid-in capital 23,882 23,781
Retained earnings 20,892 16,712
Unamortized awards of common stock under management recognition plan ("MRP") (21) (4)
Treasury stock, at cost (31,091 shares at March 31, 2004 and 19,398 shares at March 31, 2003) (390) (190)
Accumulated other comprehensive income 258 750
------------- ------------
Total stockholders' equity 44,645 41,073
------------- ------------
Total liabilities and stockholders' equity $ 538,830 $ 509,845
============= ============

See accompanying notes to consolidated financial statements.

47

CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)

FOR THE YEAR ENDED MARCH 31,
--------------------------------
2004 2003 2002
---------- ---------- ---------

Interest income:
Loans $ 20,117 $ 21,194 $ 22,727
Mortgage-backed securities 4,789 4,282 2,918
Investment securities 1,161 1,614 2,324
Federal funds sold 167 300 426
---------- ---------- ---------
Total interest income 26,234 27,390 28,395
---------- ---------- ---------

Interest expense:
Deposits 4,649 5,760 8,127
Advances and other borrowed money 4,051 3,223 3,920
---------- ---------- ---------
Total interest expense 8,700 8,983 12,047
---------- ---------- ---------

Net interest income 17,534 18,407 16,348

Provision for loan losses - - 900
---------- ---------- ---------
Net interest income after provision for loan losses 17,534 18,407 15,448
---------- ---------- ---------

Non-interest income:
Depository fees and charges 1,925 1,813 1,497
Loan fees and service charges 2,607 1,341 686
Gain on sale of investment securities 31 - 1,399
Income from sale of branches - - 987
Gain (loss) from sale of loans 118 - (101)
Other 597 7 17
---------- ---------- ---------
Total non-interest income 5,278 3,161 4,485
---------- ---------- ---------

Non-interest expense:
Compensation and benefits 7,587 6,774 6,505
Net occupancy expense 1,443 1,261 1,144
Equipment 1,486 1,610 1,420
Other 4,964 5,059 5,269
---------- ---------- ---------
Total non-interest expense 15,480 14,704 14,338
---------- ---------- ---------

Income before income taxes 7,332 6,864 5,595
Income taxes 2,493 3,033 881
---------- ---------- ---------
Net income $ 4,839 $ 3,831 $ 4,714
========== ========== =========

Dividends applicable to preferred stock $ 197 $ 197 $ 197

Net income available to common stockholders $ 4,642 $ 3,634 $ 4,517
========== ========== =========

Earnings per common share:
Basic $ 2.03 $ 1.59 $ 1.98
========== ========== =========
Diluted $ 1.87 $ 1.52 $ 1.89
========== ========== =========

See accompanying notes to consolidated financial statements.

48

CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(In thousands)

ADDITIONAL RETAINED
PREFERRED STOCK COMMON STOCK PAID-IN CAPITAL EARNINGS TREASURY STOCK
--------------- ------------- ---------------- ---------------- --------------

Balance - March 31, 2001 $ 1 $ 23 $ 23,769 $ 8,793 $ (61)
Comprehensive income:
Net income - - - 4,714 -
Change in net unrealized gain on
available-for-sale securities, net
of taxes - - - - -
--------------- ------------- ---------------- ---------------- --------------
Comprehensive income, net of taxes:
Dividends paid - - - (313) -
Purchase of treasury stock - - (5) - (77)
Allocation of ESOP Stock - - (8) - -
Purchase of shares for MRP - - - - -
--------------- ------------- ---------------- ---------------- --------------
BALANCE - MARCH 31, 2002 1 23 23,756 13,194 (138)
Comprehensive income :
Net income - - - 3,831 -
Change in net unrealized gain on
available-for-sale securities, net
of taxes - - - - -
--------------- ------------- ---------------- ---------------- --------------
Comprehensive income, net of taxes:
Dividends paid - - - (313) -
Treasury stock activity - - 5 - (52)
Allocation of ESOP Stock - - 20 - -
Purchase of shares for MRP - - - - -
--------------- ------------- ---------------- -------------------------------
BALANCE--MARCH 31, 2003 1 23 23,781 16,712 (190)
Comprehensive income :
Net income - - - 4,839 -
Change in net unrealized gain on
available-for-sale securities, net
of taxes - - - - -
--------------- ------------- ---------------- ---------------- --------------
Comprehensive income, net of taxes:
Dividends paid - - (659) -
Treasury stock activity - - 82 - (200)
Allocation of ESOP Stock - - - - -
Issuance (Purchase) of shares for
MRP - - 19 - -
--------------- ------------- ---------------- ---------------- --------------
BALANCE--MARCH 31, 2004 $ 1 $ 23 $ 23,882 $ 20,892 $ (390)
=============== ============= ================ ===============================

COMMON STOCK COMMON STOCK TOTAL
ACCUMULATED OTHER ACQUIRED BY ACQUIRED BY STOCKHOLDERS'
COMPREHENSIVE INCOME ESOP MRP EQUITY
--------------------- -------------- -------------- -----------------

Balance - March 31, 2001 $ - $ (334) $ (95) 32,096
Comprehensive income:
Net income - - - 4,714
Change in net unrealized gain on
available-for-sale securities, net
of taxes 116 - - 116
--------------------- -------------- -------------- -----------------
Comprehensive income, net of taxes: 4,830
Dividends paid - - - (313)
Purchase of treasury stock - - - (82)
Allocation of ESOP Stock - 182 - 174
Purchase of shares for MRP - - 37 37
--------------------- -------------- -------------- -----------------
BALANCE - MARCH 31, 2002 116 (152) (58) 36,742
Comprehensive income :
Net income - - - 3,831
Change in net unrealized gain on
available-for-sale securities, net
of taxes 634 - - 634
--------------------- -------------- -------------- -----------------
Comprehensive income, net of taxes: 4,465
Dividends paid - - - (313)
Treasury stock activity - - - (47)
Allocation of ESOP Stock - 152 - 172
Purchase of shares for MRP - - 54 54
--------------------- -------------- -------------- -----------------
BALANCE--MARCH 31, 2003 750 - (4) 41,073
Comprehensive income :
Net income - - - 4,839
Change in net unrealized gain on
available-for-sale securities, net
of taxes (492) - - (492)
--------------------- -------------- -------------- -----------------
Comprehensive income, net of taxes: 4,347
Dividends paid - - - (659)
Treasury stock activity - - - (118)
Allocation of ESOP Stock - - - -
Issuance (Purchase) of shares for
MRP - - (17) 2
--------------------- -------------- -------------- -----------------
BALANCE--MARCH 31, 2004 $ 258 $ - $ (21) $ 44,645
===================== ============== ============== =================

See accompanying notes to consolidated financial statements.

49

CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

YEAR ENDED MARCH 31,
------------------------------------------------------------
2004 2003 2002
---- ---- ----

Cash flows from operating activities:
Net income $ 4,839 $ 3,831 $ 4,713
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses - - 900
ESOP and MRP expense 33 206 206
Depreciation and amortization expense 1,146 1,224 1,155
Amortization of intangibles 178 213 213
Other amortization 1,848 481 625
Loss from sale of loans - - 101
Gain on sale of branches - - (987)
Gain on sale of foreclosed real estate - - (77)
Charge-off of branch improvements and related items, net - - (1,399)
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable 857 (542) (77)
Decrease (increase) in other assets 4,478 (6,112) (1,451)
Increase (decrease) in other liabilities 3,615 (481) 6,185
(Decrease) increase in accrued interest payable (39) 134 (606)
------------------- ------------------- -------------------
Net cash provided by (used in) operating activities 16,955 (1,046) 9,501
------------------- ------------------- -------------------
Cash flows from investing activities:
Purchases of securities:
Available-for-sale (58,477) (91,112) (134,721)
Held-to-maturity (19,859) (4,145) -
Proceeds from principal payments, maturities and calls of
securities:
Available-for-sale 65,060 28,705 79,233
Held-to-maturity 12,693 6,578 6,357
Proceeds from sales of available-for-sale securities 23,871 - 32,676
Disbursements for loan originations (87,140) (59,595) (63,190)
Loans purchased from third parties (93,694) (42,260) (45,881)
Principal collections on loans 111,937 96,432 100,306
Redemption (Purchase) of FHLB-NY stock 864 (1,677) 1,992
Proceeds from loans sold 9,358 2,453 1,260
Proceeds from sale of other real estate owned - - 553
Additions to premises and equipment (2,779) (1,166) (1,172)
------------------- ------------------- -------------------
Net cash used in investing activities (38,166) (65,787) (22,587)
------------------- ------------------- -------------------
Cash flows from financing activities:
Net increase in deposits 26,501 22,210 61,900
Repayment of securities repurchase agreements - - (4,930)
Net (repayment of) proceeds from FHLB advances and - - -
other borrowed money (17,455) 33,345 (25,019)
Issuance of trust preferred securities, net 12,741 - -
Cash paid for sale of deposits - - (15,383)
Common stock repurchased (303) (100) (77)
Dividends paid (659) (313) (312)
------------------- ------------------- -------------------
Net cash provided by financing activities 20,825 55,142 16,179
------------------- ------------------- -------------------
Net (decrease) increase in cash and cash equivalents (386) (11,691) 3,093
Cash and cash equivalents at beginning of the period 23,160 34,851 31,758
------------------- ------------------- -------------------
Cash and cash equivalents at end of the period $ 22,774 $ 23,160 $ 34,851
=================== =================== ===================

Supplemental information:
Noncash Transfers-
Securities transferred from available-for-sale to
held-to-maturity $ - $ 22,811 $ -
Securities transferred from held-to-maturity to
available-for-sale - - 45,700
Change in unrealized gain on valuation of available-for-sale
investments, net (492) 634 116

Cash paid for-
Interest 8,739 9,616 12,685
Income taxes 2,825 3,106 473

See accompanying notes to consolidated financial statements

50

CARVER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Carver Bancorp, Inc. (on a stand-alone basis, the "Holding Company" or
"Registrant"), was incorporated in May 1996 and its principal wholly owned
subsidiary is Carver Federal Savings Bank (the "Bank" or "Carver Federal").
Carver Statutory Trust I (the "Trust") is another wholly owned subsidiary of the
Holding Company. The Trust, which was formed in September 2003, exists for the
sole purpose of issuing trust preferred securities and investing the proceeds in
an equivalent amount of subordinated debentures of the Holding Company. CFSB
Realty Corp. and CFSB Credit Corp. are wholly owned subsidiaries of the Bank.
CFSB Credit Corp. is currently inactive. The Bank owns a majority interest in
Carver Asset Corporation, a real estate investment trust formed in the fourth
quarter of fiscal 2003. The Bank was chartered in 1948 and began operations in
1949 as Carver Federal Savings and Loan Association, a federally chartered
mutual savings and loan association. The Bank converted to a federal savings
bank in 1986 and changed its name at that time. On October 24, 1994, the Bank
converted from mutual to stock form and issued 2,314,275 shares of its common
stock, par value $0.01 per share. On October 17, 1996, the Bank completed its
reorganization into a holding company structure (the "Reorganization") and
became a wholly owned subsidiary of the Holding Company. In connection with the
Reorganization, each share of the Bank's outstanding common stock was exchanged
for one share of the Holding Company's common stock, par value $0.01 per share.
See Note 11 of Notes to the Consolidated Financial Statements. 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."

Carver Federal's principal business consists of attracting deposit
accounts through its branch offices and investing those funds in mortgage loans
and other investments permitted by federal savings banks. The Bank has six
branches located throughout the City of New York that primarily serve the
communities in which they operate.

BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION

The consolidated financial statements include the accounts of the
Holding Company, the Bank, the Bank's wholly owned or majority owned
subsidiaries, Carver Asset Corporation, CFSB Realty Corp. and CFSB Credit Corp.,
and Carver Statutory Trust I, a subsidiary of the Holding Company. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated statement of financial condition
and revenues and expenses for the period then ended. Estimates that are
particularly susceptible to significant changes in the near-term relate to
prepayment assumptions on mortgage-backed securities, the determination of the
allowance for loan losses and the valuation of real estate owned. Actual results
could differ significantly from those estimates.

Management believes that prepayment assumptions on mortgage-backed
securities are appropriate, the allowance for loan losses is adequate and real
estate owned is properly valued. While management uses available information to
recognize losses on loans and real estate owned, future additions to the
allowance for loan losses or future write downs of real estate owned may be
necessary based on changes in economic conditions in the areas where Carver
Federal had extended mortgages and other credit instruments.

In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Carver Federal's allowance for loan
losses and real estate owned valuations. Such agencies may require Carver
Federal to recognize additions to the allowance for loan losses or additional
write downs of real estate owned based on their judgments about information
available to them at the time of their examination.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and amounts due from depository
institutions and federal funds sold. Generally, federal funds sold are sold for
one-day periods.

SECURITIES

The Bank does not have trading securities, but does differentiate
between held-to-maturity securities and available-for-sale securities. When
purchased, securities are classified in either the securities held-to-maturity
portfolio or the securities available-for-sale portfolio. Securities can be
classified as held-to-maturity and carried at amortized cost only if the Bank
has a positive intent and

51

ability to hold those securities to maturity. If not classified as
held-to-maturity, such securities are classified as securities
available-for-sale. Available-for-sale securities are reported at fair value.
Unrealized holding gains or losses for securities available-for-sale are to be
excluded from earnings and reported net of deferred income taxes as a separate
component of accumulated other comprehensive income, a component of
Stockholders' Equity.

Securities held-to-maturity are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts using the level-yield
method over the remaining period until maturity.

Gains or losses on sales of securities of all classifications are
recognized based on the specific identification method.

LOANS RECEIVABLE

Loans receivable are carried at unpaid principal balances plus
unamortized premiums, less the allowance for loan losses and deferred loan fees
and discounts.

The Bank defers loan origination fees and certain direct loan
origination costs and accretes such amounts as an adjustment of yield over the
contractual lives of the related loans using methodologies which approximate the
interest method. Premiums and discounts on loans purchased are amortized or
accreted as an adjustment of yield over the contractual lives of the related
loans using methodologies which approximate the interest method.

Loans are generally placed on non-accrual status when they are past due
90 days or more as to contractual obligations or when other circumstances
indicate that collection is questionable. When a loan is placed on non-accrual
status, any interest accrued but not received is reversed against interest
income. Payments received on a non-accrual loan are either applied to the
outstanding principal balance or recorded as interest income, depending on an
assessment of the ability to collect the loan. A non-accrual loan is restored to
accrual status when principal and interest payments become less than 90 days
past due and its future collectibility is reasonably assured.

ALLOWANCE FOR LOAN LOSSES

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

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

o Establishment of reserve amounts for all specifically
identified criticized loans that have been designated as
requiring attention by management's internal loan review
program, bank regulatory examinations or the external
auditors.

o An average loss factor is applied to smaller balance
homogenous types of loans not subject to specific review.
These loans include residential one- to four-family,
multifamily, nonresidential and construction properties,
which also includes consumer and business loans.

o An allocation to the remaining loans giving effect to
historical loss experience over several years and linked to
cyclical trends.

Recognition is also given to the changed risk profile brought about by
business combinations, customer knowledge, the results of ongoing credit
quality monitoring processes and the cyclical nature of economic and business
conditions. An important consideration in applying these methodologies is the
concentration of real estate related loans located in the New York City
metropolitan area.

The initial allocation or specific-allowance methodology commences with
loan officers and underwriters grading the quality of their loans on an
eight-category risk classification scale. Loans identified from this process as
below investment grade are referred to the Internal Asset Review Committee for
further analysis and identification of those factors that may ultimately affect
the full recovery or collectibility of principal and/or interest. These loans
are subject to continuous review and monitoring while they remain in the
criticized category. Additionally, the Internal Asset Review Committee is
responsible for performing periodic reviews of the loan portfolio that are
independent from the identification process employed by loan officers and
underwriters. Gradings that fall into criticized categories are further
evaluated and reserve amounts are established for each loan.

The second allocation or loss factor approach to common or homogeneous
loans is made by applying the average loss factor to the outstanding balances
in each loan category.

52

The final allocation of the allowance is made by applying several years
of loss experience to categories of loans. It gives recognition to the loss
experience of acquired businesses, business cycle changes and the real estate
components of loans. Since many loans depend upon the sufficiency of
collateral, any adverse trend in the real estate markets could seriously affect
underlying values available to protect against loss.

Other evidence used to support the amount of the allowance and its
components are as follows:

o Regulatory examinations

o Amount and trend of criticized loans

o Actual losses

o Peer comparisons with other financial institutions

o Economic data associated with the real estate market in the
Company's market area

o Opportunities to dispose of marginally performing loans for cash
consideration

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

A loan is considered to be impaired, as defined by Statement of
Financial Accounting Standards ("SFAS") No. 114, "ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN" ("SFAS 114"), when it is probable that Carver Federal will
be unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement. Carver Federal tests loans covered
under SFAS 114 for impairment if they are on non-accrual status or have been
restructured. Consumer credit non-accrual loans are not tested for impairment
because they are included in large groups of smaller-balance homogeneous loans
that, by definition along with leases, are excluded from the scope of SFAS 114.
Impaired loans are required to be measured based upon the present value of
expected future cash flows, discounted at the loan's initial effective interest
rate, or at the loan's market price or fair value of the collateral if the loan
is collateral dependent. If the loan valuation is less than the recorded value
of the loan, an impairment reserve must be established for the difference. The
impairment reserve is established by either an allocation of the reserve for
credit losses or by a provision for credit losses, depending on various
circumstances. Impairment reserves are not needed when credit losses have been
recorded so that the recorded investment in an impaired loan is less than the
loan valuation.

CONCENTRATION OF RISK

The Bank's principal lending activities are concentrated in loans
secured by real estate, a substantial portion of which is located in the State
of New York. Accordingly, the ultimate collectibility of a substantial portion
of the Company's loan portfolio is susceptible to changes in New York's market
conditions.

PREMISES AND EQUIPMENT

Premises and equipment are comprised of land, at cost, and buildings,
building improvements, furnishings and equipment and leasehold improvements, at
cost, less accumulated depreciation and amortization. Depreciation and
amortization charges are computed using the straight-line method over the
following estimated useful lives:

Buildings and improvements 10 to 40 years
Furnishings and equipment 3 to 10 years
Leasehold improvements Lesser of useful life or remaining
term of lease

Significant renewals and betterments are charged to the property and
equipment account. Maintenance and repairs are charged to expense in the year
incurred.

REAL ESTATE OWNED

Real estate acquired by foreclosure or deed in lieu of foreclosure is
recorded at the fair value at the date of acquisition and thereafter carried at
the lower of cost or fair value less estimated selling costs. The fair value of
such assets is determined based primarily upon independent appraisals and other
relevant factors. The amounts ultimately recoverable from real estate owned
could differ from the net carrying value of these properties because of economic
conditions.

53

Costs incurred to improve properties or prepare them for sale are
capitalized. Revenues and expenses related to the holding and operating of
properties are recognized in operations as earned or incurred. Gains or losses
on sale of properties are recognized as incurred. The Bank had no real estate
owned as of March 31, 2004.

IDENTIFIABLE INTANGIBLE ASSETS

Carver Federal adopted Statement of Financial Accounting Standards
No.142 ("SFAS No. 142"), "GOODWILL AND OTHER INTANGIBLE ASSETS" on January 1,
2002. SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually.

Identifiable intangible assets relate primarily to core deposit
premiums, resulting from the valuation of core deposit intangibles acquired in
the purchase of two branch offices. These identifiable intangible assets are
amortized using the straight line method over periods not exceeding the
estimated average remaining life of the existing customer deposits acquired.
Amortization periods range from 5 to 15 years. Amortization periods for
intangible assets are monitored to determine if events and circumstances require
such periods to be reduced.

INCOME TAXES

Carver Federal accounts for income taxes using the asset and liability
method. Temporary differences between the basis of assets and liabilities for
financial reporting and tax purposes are measured as of the balance sheet date.
Deferred tax liabilities or recognizable deferred tax assets are calculated on
such differences, using current statutory rates, which result in future taxable
or deductible amounts. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.

IMPAIRMENT

The Company annually evaluates long-lived assets, certain identifiable
intangibles, deferred cost and goodwill for indication of impairment in value.
There has been no impairment for the past three years. When required, asset
impairment will be recorded as an expense in the current period.

EARNINGS (LOSS) PER COMMON SHARE

Basic earnings per share ("EPS") is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding. Diluted EPS includes any additional common shares as if all
potentially dilutive common shares were issued (e.g. convertible preferred
stock). For the purpose of these calculations, unreleased shares of the Carver
Federal Savings Bank Employee Stock Ownership Plan ("ESOP") are not considered
to be outstanding.

TREASURY STOCK

Treasury stock is recorded at cost and is presented as a reduction of
stockholders' equity.

PENSION PLANS

In February 1998, the FASB issued SFAS No. 132, "EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS" ("SFAS 132"). SFAS 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. Carver Federal
has made the required disclosures in the accompanying Notes to the Consolidated
Financial Statements.

STOCK-BASED COMPENSATION PLANS

Compensation expense is recognized for the Bank's ESOP equal to the
fair value of shares committed to be released for allocation to participant
accounts. Any difference between the fair value at that time and the ESOP's
original acquisition cost is charged or credited to stockholders' equity
(additional paid-in capital). The cost of unallocated ESOP shares (shares not
yet committed to be released) is reflected as a reduction of stockholders'
equity.

The Holding Company accounts for its stock option plan ("Stock Option
Plan") in accordance with Accounting Principles Board ("APB") Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly, compensation expense is
recognized only if the exercise price of the option is less than the fair value
of the underlying stock at the grant date. SFAS 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" ("SFAS 123"), encourages entities to recognize the fair value of
all stock-based awards (measured on the grant date) as compensation expense over
the vesting period. Alternatively, SFAS 123 allows entities to apply the
provisions of APB

54

Opinion No. 25 and provide pro forma disclosures of net income and earnings per
share as if the fair-value-based method defined in SFAS 123 had been applied.
The Holding Company has elected to apply the provisions of APB Opinion No. 25
and provide these pro forma disclosures.

Carver Federal applies Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related interpretations in
accounting for our stock-based Plan under which there is no charge to earnings
for stock option awards and the dilutive effect of outstanding options is
reflected as additional share dilution in the computation of earnings per share.

Alternatively, Carver Federal could have accounted for its Stock Option
Plan under SFAS 123, under which compensation cost for stock option awards would
be calculated and recognized over the service period (generally equal to the
vesting period). Had Carver Federal applied SFAS 123 for its Stock Option Plan,
net income and earnings per common share would have been to the pro forma
amounts indicated below for the years ended March 31:

2004 2003 2002
-------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income (loss) available to common shareholders:
As reported $4,642 $3,634 $4,517
Total stock-based employee compensation expense
determined under fair value based methods for
all awards, net of related tax effects (158) (88) (102)
-------------- --------------- ---------------
Pro forma $ 4,484 $ 3,546 $ 4,415
============== =============== ===============

Basic earnings (loss) per share:
As reported $2.03 $1.59 $1.98
Pro forma 1.96 1.55 1.94

Diluted earnings (loss) per share:
As reported $1.87 $1.52 $1.89
Pro forma 1.81 1.48 1.85

Weighted average number of shares outstanding 2,283,802 2,290,934 2,276,920

The fair value of the option grants was estimated on the date of the
grant using the Black-Scholes option pricing model applying the following
weighted average assumptions: risk-free interest rates of 2.50%, 2.50% and
4.50%, for the relevant fiscal years ended March 31, 2004, 2003 and 2002
("fiscal 2004", "fiscal 2003" and "fiscal 2002"), respectively; volatility of
45% for fiscal 2004 and 30% fiscal 2003 and fiscal 2002; expected dividend yield
was calculated using annual dividends of $0.20 per share for fiscal 2004 and
fiscal 2003 and $0.05 for fiscal 2002; and an expected life of five years for
employee option grants and seven years for directors option grants.

The Holding Company's management recognition and retention plan ("MRP")
is also accounted for in accordance with Accounting Principles Board Opinion No.
25. The fair value of the shares awarded, measured at the grant date, is
recognized as unearned compensation (a deduction from stockholders' equity) and
amortized to compensation expense as the shares become vested. When MRP shares
become vested, the Company records a credit to additional paid-in capital for
tax benefits attributable to any MRP deductions in excess of the grant-date fair
value charged to expense, for financial reporting purposes.

RECLASSIFICATIONS

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

55

NOTE 2. SECURITIES

The following is a summary of securities at March 31, 2004:

GROSS UNREALIZED
----------------
CARRYING ESTIMATED
VALUE GAINS LOSSES FAIR-VALUE
------------- ------------ ------------ -----------
(DOLARS IN THOUSANDS)

Available-for-Sale:
Mortgage-backed securities:
Pass-through certificates:
Government National Mortgage Association $ 55,703 $ 169 $ (360) $ 55,512
Federal Home Loan Mortgage Corporation 6,753 52 (93) 6,712
Federal National Mortgage Association 12,657 47 (78) 12,626
------------- ------------ ------------ -----------
Total mortgage-backed securities 75,113 268 (531) 74,850
Equity Securities 48 10 - 58
U.S. Government Agency Securities 21,200 296 (1) 21,495
------------- ------------ ------------ -----------
Total available-for-sale 96,361 574 (532) 96,403
------------- ------------ ------------ -----------

HELD-TO-MATURITY:
Mortgage-backed securities:
Pass-through certificates:
Government National Mortgage Association 1,465 96 - 1,561
Federal Home Loan Mortgage Corporation 21,305 362 (1) 21,666
Federal National Mortgage Association 20,386 94 (234) 20,246
Small Business Administration 318 3 - 321
------------- ------------ ------------ -----------
Total mortgage-backed securities 43,474 555 (235) 43,794
U.S. Government Agency Securities - - - -
Total held-to-maturity 43,474 555 (235) 43,794
------------- ------------ ------------ -----------
Total securities $ 139,835 $ 1,129 $ (767) $166,598
============= ============ ============ ===========

The following is a summary of securities at March 31, 2003:

GROSS UNREALIZED
----------------
CARRYING ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
------------ ----------- ------------ ------------
(DOLLARS IN THOUSANDS)

AVAILABLE-FOR-SALE:
Mortgage-backed securities:
Pass-through certificates:
Government National Mortgage Association $ 47,066 $ 184 $ (130) $ 47,120
Federal Home Loan Mortgage Corporation 19,614 90 (11) 19,693
Federal National Mortgage Association 23,286 216 (32) 23,470
------------ ----------- ------------ ------------
Total mortgage-backed securities 89,966 490 (173) 90,283
U.S. Government Agency Securities 38,187 585 - 38,772
------------ ----------- ------------ ------------
Total available-for-sale 128,153 1,075 (173) 129,055
------------ ----------- ------------ ------------

HELD-TO-MATURITY:
Mortgage-backed securities:
Pass-through certificates:
Government National Mortgage Association 2,473 157 - 2,630
Federal Home Loan Mortgage Corporation 27,482 682 - 28,164
Federal National Mortgage Association 6,203 177 - 6,380
Small Business Administration 372 - (3) 369
------------ ----------- ------------ ------------
Total mortgage-backed securities 36,530 1,016 (3) 37,543
------------ ----------- ------------ ------------
Total held-to-maturity 36,530 1,016 (3) 37,543
------------ ----------- ------------ ------------
Total securities $164,683 $ 2,091 $ (176) $166,598
============ =========== ============ ============

56

The net unrealized gain on available-for-sale securities was $42,000
($26,000 after taxes) at March 31, 2004 as compared to $902,000 ($750,000 after
taxes) at March 31, 2003. On November 30, 2002 the Bank transferred $22.8
million of mortgage-backed securities from available-for-sale to
held-to-maturity as a result of management's intention to hold these securities
in portfolio until maturity. A related unrealized gain of $468,000 was recorded
as a separate component of stockholders' equity and is being amortized over the
remaining lives of the securities as an adjustment to yield. As of March 31,
2004 the carrying value of these securities is $18.1 million and a related
unrealized gain of $232,000 (net of amortization) continues to be reported.
Changes in unrealized holding gains and losses between fiscal 2004 and fiscal
2003 resulted in an after-tax decrease in stockholders' equity of $492,000.
These gains and losses will continue to fluctuate based on changes in the
portfolio and market conditions.

Sales of available-for-sale securities resulted in gross realized
gains during fiscal 2004 and the fiscal year ended March 31, 2002 of $31,000 and
$1.4 million, respectively. There were no sales of securities in fiscal 2003.

The following is a summary of the carrying value (amortized cost) and
fair value of securities at March 31, 2004, by remaining period to contractual
maturity (ignoring earlier call dates, if any). Actual maturities may differ
from contractual maturities because certain security issuers have the right to
call or prepay their obligations.

CARRYING FAIR
VALUE VALUE
------------ ------------
(IN THOUSANDS)

AVAILABLE-FOR-SALE :
Less than one year $ 6,452 $ 6,461
One through five years 15,707 16,058
Five through ten years - -
After ten years 74,202 73,884
------------ ------------
$96,361 $96,403
============ ============
HELD-TO-MATURITY:
Less than one year 12 12
One through five years 174 183
Five through ten years - -
After ten years 43,288 43,599
------------ ------------
$43,474 $43,794
============ ============

The unrealized losses and fair value of securities that have been in
a continuous unrealized loss position for less than 12 months and 12 months or
longer were as follows:

MARCH 31, 2004
--------------------------------------------------------------
Less than 12 months 12 months or longer Total
------------------- ------------------- --------------------
Unrealized Fair Unrealized Fair Unrealized Fair
Losses Value Losses Value Losses Value
---------- --------- -------- ---------- --------- ----------
(IN THOUSANDS)

AVAILABLE-FOR-SALE:
Mortgage-backed securities $ (342) $ 32,035 $ (189) $ 15,220 $ (531) $ 47,255
U.S. Government Agency
Securities (1) 6,394 - - (1) 6,394
---------- --------- -------- ---------- --------- ----------
Total available-for-sale (343) 38,429 (189) 15,220 (532) 53,649
---------- --------- -------- ---------- --------- ----------
HELD-TO-MATURITY:
Mortgage-backed securities (226) 17,951 (9) 1,379 (235) 19,330
---------- --------- -------- ---------- --------- ----------
Total securities $ (569) $ 56,380 $ (198) $ 16,599 $ (767) $ 72,979
========== ========= ======== ========== ========= ==========

57

NOTE 3. LOANS RECEIVABLE, NET

A summary of loans receivable, net follows:

MARCH 31,
---------------------------------------------------------
2004 2003
--------------------------- --------------------------
AMOUNT PERCENT AMOUNT PERCENT
------------- ------------- --------------------------
(DOLLARS IN THOUSANDS)

REAL ESTATE LOANS:
One- to four-family $ 98,645 27.80 % $ 71,735 24.20 %
Multifamily 120,252 33.88 131,749 44.45
Nonresidential 102,641 28.92 79,244 26.74
Construction 27,376 7.71 11,539 3.89
Construction loans in process - - - -
Consumer and business 6,010 1.69 2,125 0.72
------------- ------------- --------------------------
Total gross loans 354,924 100.00 % 296,392 100.00 %
============= =============

ADD:
Premium on loans 1,264 867
LESS:
Deferred fees and loan discounts (163) (363)
Allowance for loan Losses (4,125) (4,158)
------------- -------------
Total $ 351,900 $ 292,738
============= =============

At March 31, 2004, 91.0% of the Company's real estate loans receivable
were principally secured by properties located in the State of New York.

The mortgage loan portfolios serviced for Fannie Mae are not included
in the accompanying consolidated financial statements. The unpaid principal
balances of these loans aggregated $11.7 million, $4.1 million and $2.9 million
at March 31, 2004, 2003 and 2002, respectively. Custodial escrow balances,
maintained in connection with the foregoing loan servicing, were approximately
$40,000, $16,000 and $28,000 at March 31, 2004, 2003 and 2002, respectively.
During the year ended March 31, 2004 the Bank sold $9.4 million in loans with a
gain of $118,000 recognized, as compared to $2.5 million in loans sold during
fiscal 2003 and a minimal gain recognized.

The following is an analysis of the allowance for loan losses:

YEAR ENDED MARCH 31,
--------------------------------------
2004 2003 2002
------ ------ ------
(DOLLARS IN THOUSANDS)

Balance at beginning of the year $4,158 $4,128 $3,551
Provision charged to operations - - 900
Recoveries of amounts previously charged off 292 258 177
Loans charged-off (325) (228) (500)
------ ------ ------
Balance at ending of the year $4,125 $4,158 $4,128
====== ====== ======

Non-accrual loans consist of loans for which the accrual of interest
has been discounted as a result of such loans becoming 90 days or more
delinquent as to principal and/or interest payments. Interest income on
non-accrual loans is recorded when received. Restructured loans consist of loans
where borrowers have been granted concessions in regards to the terms of their
loans due to financial or other difficulties, which rendered them unable to
repay their loans under the original contractual terms.

At March 31, 2004, 2003 and 2002 the recorded investment in impaired
loans was $2.1 million, $1.8 million and $2.8 million, respectively all of which
represented non-accrual loans. The related allowance for credit losses was
approximately $317,000 and $195,000 at March 31, 2004 and 2003, respectively.
The impaired loan portfolio is primarily collateral dependent. The average
recorded investment in impaired loans during the fiscal years ended March 31,
2004, 2003 and 2002 was approximately $2.0 million, $1.8 million and $2.3
million, respectively. For the fiscal years ended March 31, 2004, 2003 and 2002,
the Company did not recognize any interest income on these impaired loans.
Interest income of $185,000, $173,000 and $288,000, respectively, for the fiscal
years ended March 31, 2004, 2003 and 2002 would have been recorded on impaired
loans had they performed in accordance with the original contract.

At March 31, 2004 and 2003, there were no loans to officers or
directors.

58

NOTE 4. PREMISES AND EQUIPMENT, NET

The detail of premises and equipment is as follows:

MARCH 31,
------------------------------
2004 2003
-------------- -------------
(DOLLARS IN THOUSANDS)

Land $ 415 $ 415
Building and improvements 8,838 8,477
Leasehold improvements 1,976 975
Furniture and Equipment 6,799 5,383
-------------- -------------
18,028 15,250
Less accumulated depreciation and amortization 6,202 5,057
-------------- -------------
$ 11,826 $ 10,193
============== =============

Depreciation and amortization charged to operations for the fiscal
years ended March 31, 2004, 2003 and 2002 amounted to $1.1 million, $1.2 million
and $1.2 million, respectively.

NOTE 5. ACCRUED INTEREST RECEIVABLE

The detail of accrued interest receivable is as follows:

MARCH 31,
-------------------------------
2004 2003
-------------- --------------
(DOLLARS IN THOUSANDS)

Loans receivable $ 1,683 $ 1,984
Mortgage-backed securities 580 716
Investments and other interest bearing assets 226 646
-------------- --------------
Total accrued interest receivable $ 2,489 $ 3,346
============== ==============

NOTE 6. IDENTIFIABLE INTANGIBLE ASSETS

The identifiable intangible assets relate to the acquisition of the
Bedford-Stuyvesant branch office. Details follow:

MARCH 31,
------------------------------------------------------------------------
2004 2003
----------------------------------- ----------------------------------
(DOLLARS IN THOUSANDS)
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Value Amortization Value Value Amortization Value
---------- ------------ ---------- --------- ------------- ----------

Core deposit premiums $ 582 $ 582 $ - $ 582 $ 410 $ 172
Other 22 22 - 22 16 6
---------- ------------ ---------- --------- ------------- ----------
$ 604 $ 604 $ - $ 604 $ 426 $ 178
========== ============ ========== ========= ============= ==========

59

NOTE 7. DEPOSITS

Deposit balances and weighted average stated interest rates at March 31
follow:

------------------------------------------ -----------------------------------------
2004 2003
------------------------------------------ -----------------------------------------
PERCENT OF PERCENT OF
TOTAL WEIGHTED TOTAL WEIGHTED
AMOUNT DEPOSITS AVERAGE RATE AMOUNT DEPOSITS AVERAGE RATE
------------- ------------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)

Non-interest -bearing demand $ 20,966 5.6 % % $ 16,539 4.8 % % -
NOW demand 22,671 6.0 0.30 18,190 5.2 0.53
Savings and clubs 131,120 35.1 0.60 128,935 37.1 1.06
Money Market savings 30,842 8.3 0.74 20,735 6.0 0.92
Certificates of deposit 168,066 45.0 1.97 162,765 46.9 2.20
------------- ------------- ------------ ------------- ------------ ------------
Total $ 373,665 100.0 % 1.18 % $ 347,164 100.0 % 1.51 %
============= ============= ============= ============

Scheduled maturities of certificates of deposit follow:

MARCH 31,
-----------------------------
2004 2003
------------- -------------
(IN THOUSANDS)
Certificates of deposit by remaining
term to contractual maturity:
Within one year $ 127,739 $ 127,668
After one but within two years 15,817 12,492
After two but within three years 6,573 10,387
After three years 17,937 12,218
------------- -------------
Total $ 168,066 $ 162,765
============= =============

The aggregate amount of certificates of deposit with minimum
denominations of $100,000 or more was approximately $104.3 million at March 31,
2004 compared to $100.1 million at March 31, 2003.

Interest expense on deposits for the years ended March 31 follows:

2004 2003 2002
------------- ------------- -------------
(IN THOUSANDS)

NOW demand $ 85 $ 131 $ 237
Savings and clubs 1,000 1,477 2,342
Money market savings 235 189 302
Certificates of deposit 3,316 3,975 5,263
------------- ------------- -------------
4,636 5,772 8,144
Mortgagors deposits 24 - -
Penalty for early withdrawal of
certificates of deposit (11) (12) (17)
------------- ------------- -------------
Total interest expense $ 4,649 $ 5,760 $ 8,127
============= ============= =============

60

NOTE 8. BORROWED MONEY

FEDERAL HOME LOAN BANK ADVANCES ("FHLB"). FHLB advances and weighted
average interest rates at March 31 follow, by remaining period to maturity:

--------------------------- ---------------------------
2004 2003
--------------------------- ---------------------------
(DOLLARS IN THOUSANDS)
Maturing
YEAR ENDED WEIGHTED WEIGHTED
March 31, AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT
-------------- ------------- ----------- ------------- -----------

2004 - % $ - - 1.93 % $ 18,250
2005 4.05 26,000 4.05 26,000
2006 3.46 32,840 3.46 32,840
2007 4.42 28,134 4.42 28,134
2008 3.49 3,300 3.49 3,300
2009 2.86 1,000 - -
2012 3.50 242 3.50 265
------------- ----------- ------------- -----------
3.92 % $91,516 3.59 % $108,789
============= =========== ============= ===========

As a member of the FHLB, the Bank may have outstanding FHLB borrowings
in a combination of term advances and overnight funds of up to 25% of its total
assets, or approximately $134.7 million at March 31, 2004. Borrowings are
secured by the Bank's investment in FHLB stock and by a blanket security
agreement. This agreement requires the Bank to maintain as collateral certain
qualifying assets (principally residential mortgage loans and securities) not
otherwise pledged. At March 31, 2004 and 2003, advances were secured by pledges
of the Bank's investment in the capital stock of the FHLB of New York totaling
$4.6 million and $5.4 million, respectively and a blanket assignment of the
Bank's unpledged qualifying mortgage, mortgage-backed securities and investment
portfolios.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. In securities sold
under agreements to repurchase, the Bank borrows funds through the transfer of
debt securities to the FHLB, as counterparty, and concurrently agrees to
repurchase the identical securities at a fixed price on a specified date.
Repurchase agreements are collateralized by the securities sold and, in certain
cases, by additional margin securities. At March 31, 2004 and 2003 there were no
securities sold under agreements to repurchase outstanding.

SUBORDINATED DEBT SECURITIES. On September 17, 2003, Carver Statutory
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
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 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 securities are cumulative and payable at a
floating rate per annum (reset quarterly) equal to 3.05% over three-month LIBOR,
with a current rate of 4.16%.

61

The following table sets forth certain information regarding Carver
Federal's borrowings at the dates and for the periods

AT OR FOR THE YEAR ENDED
MARCH 31,
--------------------------------
2004 2003
-------------- -------------
(DOLLARS IN THOUSANDS)

Amounts outstanding at the end of period:
FHLB advances $ 91,516 $ 108,789
Guaranteed preferred beneficial interest in junior subordinated debentures 12,741 -
Loan for employee stock ownership plan 25 207

Weighted average rate paid at period end:
FHLB advances 3.92% 3.59%
Guaranteed preferred beneficial interest in junior subordinated debentures 4.20% -
Loan for employee stock ownership plan 4.00% 4.00%

Maximum amount of borrowing outstanding at any month end:
FHLB advances $112,030 $ 108,789
Guaranteed preferred beneficial interest in junior subordinated debentures 12,742 -
Loan for employee stock ownership plan 207 389

Approximate average amounts outstanding for period:
FHLB advances $ 99,359 $ 80,541
Guaranteed preferred beneficial interest in junior subordinated debentures 6,854 -
Loan for employee stock ownership plan 137 320

Approximate weighted average rate paid during period (1):
FHLB advances 3.74% 3.99%
Guaranteed preferred beneficial interest in junior subordinated debentures 4.78% -
Loan for employee stock ownership plan 4.07% 4.24%

(1) The approximate weighted average rate paid during the period was computed
by dividing the average amounts outstanding into the related interest
expense for the period.

NOTE 9. INCOME TAXES

The components of income tax expense for the years ended March 31 are
as follows:

2004 2003 2002
------------- ------------- -------------
(IN THOUSANDS)

Federal income tax expense (benefit):
Current $ 1,634 $ 4,200 $ 569
Deferred 427 (1,626) 1,792
------------- ------------- -------------
2,061 2,574 2,361
------------- ------------- -------------
State and local income tax expense (benefit):
Current 342 1,104 913
Deferred 90 (645) 46
------------- ------------- -------------
432 459 959
------------- ------------- -------------

Valuation allowance - - (2,439)

Total provision for income tax $ 2,493 $ 3,033 $ 881
============= ============= =============

62

The reconciliation of the expected federal income tax rate to the
consolidated effective tax rate for fiscal years ended March 31 follows:

2004 2003 2002
---------------------- ---------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- --------- ------------ --------- ------------- ---------
(DOLLARS IN THOUSANDS)

Statutory Federal income tax $ 2,493 34.0 % $ 2,334 34.0 % $ 1,902 34.0 %
State and local income taxes, net of Federal tax benefit 285 3.9 303 4.4 632 11.3
Change in valuation allowance - - - - (2,439) (43.6)
Other (285) (3.9) 396 5.8 786 14.0
----------- --------- ------------ --------- ------------- ---------

Total income tax expense $ 2,493 34.0 % $ 3,033 44.2 % $ 881 15.7 %
=========== ========= ============ ========= ============= =========

Carver Federal's stockholders' equity includes approximately $2.8
million at each of March 31, 2004, 2003 and 2002 which has been segregated for
federal income tax purposes as a bad debt reserve. The use of this amount for
purposes other than to absorb losses on loans may result in taxable income for
federal income taxes at the then current tax rate.

Tax effects of existing temporary differences that give rise to
significant portions of deferred tax assets and deferred tax liabilities at
March 31 of the years indicated follow:

2004 2003
----------- -----------
(IN THOUSANDS)

Deferred tax assets
Income from affiliate $ 1,943 $ 2,050
Allowance for loan losses 1,414 1,414
Deferred loan fees 52 287
Compensation and benefit plans 100 281
Reserves for losses on other assets 20 22
Non-accrual loan interest 242 194
Contributions carryforward - 1
----------- -----------

Total deferred tax assets before valuation
allowance 3,771 4,249
Valuation allowance - -
----------- -----------
Total deferred tax assets 3,771 4,249
----------- -----------

Deferred tax liabilities
Unrealized gain on available-for-sale securities 159 616
Identifiable Intangibles - 71
Depreciation 393 283
----------- -----------
Total deferred tax liabilities 552 970
----------- -----------

Net deferred tax assets $ 3,219 $ 3,279
=========== ===========

A valuation allowance against the deferred tax assets at March 31, 2004
and 2003 was not established since it is more likely than not that the results
of future operations will generate sufficient future taxable income to realize
the deferred tax asset.

63

NOTE 10. EARNINGS PER COMMON SHARE

The following table reconciles the earnings (loss) available to common
shareholders (numerator) and the weighted average common stock outstanding
(denominator) for both basic and diluted earnings per share for the periods
presented:

YEAR ENDED MARCH 31,
--------------------------------------------
2004 2003 2002
------------- ------------- -------------
(IN THOUSANDS)

Net income $ 4,839 $ 3,831 $ 4,713
Preferred stock dividends (197) (197) (197)
------------- ------------- -------------
Net income - basic 4,642 3,634 4,516
Impact of potential conversion of convertible preferred stock to common
stock 197 197 197
------------- ------------- -------------
Net income - diluted $ 4,839 $ 3,831 $ 4,713
============= ============= =============

Weighted average common shares outstanding - basic 2,284 2,291 2,277
Effect of dilutive securities convertible preferred stock and options 305 235 218
------------- ------------- -------------
Weighted average common shares outstanding - diluted 2,589 2,526 2,495
============= ============= =============

NOTE 11. STOCKHOLDERS' EQUITY

CONVERSION AND STOCK OFFERING. On October 24, 1994, the Bank issued in
an initial public offering 2,314,375 shares of common stock (par value $0.01) at
a price of $10 per share resulting in net proceeds of $21.5 million. As part of
the initial public offering, the Bank established a liquidation account at the
time of conversion, in an amount equal to the surplus and reserves of the Bank
at September 30, 1994. In the unlikely event of a complete liquidation of the
Bank (and only in such event), eligible depositors who continue to maintain
accounts shall be entitled to receive a distribution from the liquidation
account. The total amount of the liquidation account may be decreased if the
balances of eligible deposits decreased as measured on the annual determination
dates. The balance of the liquidation account was approximately $2.1 million
(unaudited), and $2.1 million (unaudited) at March 31, 2004 and 2003,
respectively, based on an assumed decrease of 15.25% of eligible deposits per
annum. On October 17, 1996, the Bank completed the Reorganization and became the
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 the Holding Company's common stock.
In connection with the Reorganization, a shareholder of the Bank exercised
appraisal rights and 100 shares of the Bank's common stock were purchased from
such shareholder in the fourth fiscal quarter of 1997. Accordingly, 2,314,275
shares of the Holding Company's common stock were outstanding. The Bank is not
permitted to pay dividends to the Holding Company on its capital stock if the
effect thereof would cause its net worth to be reduced below either: (i) the
amount required for the liquidation account, or (ii) the amount required for the
Bank to comply with applicable minimum regulatory capital requirements.

CONVERTIBLE PREFERRED STOCK. 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"). In addition, Carver
Federal entered into a Registration Rights Agreement, dated January 11, 2000,
with MSDW and Provender. The gross proceeds from the private placement were $2.5
million. On June 1, 2004, Provender sold all 60,000 of its Series B Preferred
Stock to Keefe Bruyette & Woods, Inc.

The Series A Preferred Stock and Series B Preferred Stock (collectively
the "Preferred Stock") accrue annual dividends at $1.97 per share. Dividends are
payable semi-annually on June 15 and December 15 of each year. Each share of
Preferred Stock is convertible at the option of the holder, at any time, into
2.08333 shares of Carver Federal's Common Stock, subject to certain antidilution
adjustments. The Holding Company may redeem the Preferred Stock beginning
January 15, 2004. In the event of any liquidation, dissolution or winding up of
Carver Federal, whether voluntary or involuntary, the holders of the shares of
Preferred Stock shall be entitled to receive $25 per share of Preferred Stock
plus all dividends accrued and unpaid thereon. Each share of Preferred Stock is
entitled to one vote for each share of Common Stock into which the Preferred
Stock can be converted.

At March 31, 2004 unpaid accrued dividends related to the Preferred
Stock amounted to $58,000.

REGULATORY CAPITAL. The operations and profitability of the Bank are
significantly affected by legislation and the policies of the various regulatory
agencies. The Office of Thrift Supervision ("OTS") has promulgated capital
requirements for financial institutions consisting of minimum tangible and core
capital ratios of 2.0% and 3.0%, respectively, of the institution's adjusted
total

64

assets and a minimum risk-based capital ratio of 8.0% of the institution's risk
weighted assets. Although the minimum core capital ratio is 3.0%, the Federal
Deposit Insurance Corporation Improvement Act, as amended ("FDICIA"), stipulates
that an institution with less than 4.0% core capital is deemed undercapitalized.
At March 31, 2004 and 2003, the Bank exceeded all of its regulatory capital
requirements.

The following is a summary of the Bank's actual capital amounts and
ratios as of March 31, 2004 and 2003 compared to the OTS requirements for
minimum capital adequacy and for classification as a well-capitalized
institution:

MINIMUM CAPITAL CLASSIFICATION AS
BANK ACTUAL ADEQUACY WELL CAPITALIZED
------------------ -------------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------- ----------- -------- --------- --------
(DOLLARS IN THOUSANDS)

March 31, 2004
- --------------
Tangible capital $ 57,191 10.6 % $ 10,776 2.0 % N/A N/A %
Leverage capital 57,191 10.6 21,553 4.0 26,941 5.0
Risk-based capital:
Tier 1 $ 57,191 16.5 $ 13,863 4.0 $ 20,794 6.0
Total 61,316 17.7 27,726 8.0 34,657 10.0

March 31, 2003
- --------------
Tangible capital $ 39,725 7.8 % $ 10,170 2.0 % N/A N/A %
Leverage capital 39,725 7.8 20,341 4.0 25,426 5.0
Risk-based capital:
Tier 1 $ 39,725 12.8 $ 12,422 4.0 $ 18,633 6.0
Total 43,610 14.0 24,844 8.0 31,055 10.0

The following table reconciles the Bank's stockholders' equity at March
31, 2004, in accordance with accounting principles generally accepted in the
U.S. to regulatory capital requirements:

REGULATORY CAPITAL REQUIREMENTS
--------------------------------------------------------------
GAAP TANGIBLE LEVERAGE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------------- -------------- -------------- --------------
(IN THOUSANDS)

Stockholders' Equity at March 31, 2004 (1) $ 57,442 $ 57,442 $ 57,442 $ 57,442

Add:
General valuation allowances - - 4,125
Deduct:
Unrealized loss on securities available-for-sale, net (251) (251) (251)
Goodwill and qualifying intangible assets - - -
-------------- -------------- --------------
Regulatory Capital 57,191 57,191 61,316
Minimum Capital requirement 10,776 21,553 27,726
-------------- -------------- --------------
Regulatory Capital Excess $ 46,415 $ 35,638 $ 33,590
============== ============== ==============

COMPREHENSIVE INCOME. Comprehensive income represents net income and
certain amounts reported directly in stockholders' equity, such as the net
unrealized gain or loss on securities available for sale. The Holding Company
has reported its comprehensive income for fiscal 2004 and 2003 in the
consolidated statements of changes in stockholders' equity and comprehensive
income. Carver Federal's other comprehensive income or loss (other than net
income), which is attributable to unrealized gains and losses on securities, for
the year ended March 31, 2004 and 2003 were $258,000 and $750,000, respectively.
Included in the amounts at March 31, 2004 and 2003 was $232,000 and $255,000,
respectively, relating to an unrealized gain on available-for-sale securities
that were transferred during fiscal 2003 to held-to-maturity. This unrealized
gain is an unrealized gain reported as a separate component of stockholders'
equity and is amortized over the remaining lives of the securities as an
adjustment to yield.

65

NOTE 12. EMPLOYEE BENEFIT AND STOCK COMPENSATION PLANS

PENSION PLAN. Carver Federal has a non-contributory defined benefit
pension plan covering all eligible employees. The benefits are based on each
employee's term of service. Carver Federal's policy is to fund the plan with
contributions which equal the maximum amount deductible for federal income tax
purposes. The plan was curtailed during the fiscal year ended March 31, 2001.

The following table sets forth the plan's changes in benefit
obligation, changes in plan assets and funded status and amounts recognized in
Carver Federal's consolidated financial statements at March 31:

2004 2003
------------- ---------------
(IN THOUSANDS)

Change in projected benefit obligation during the year
Projected benefit obligation at the beginning of year $ 2,752 $ 2,623
Interest cost 172 178
Actuarial loss 43 182
Benefits paid (231) (231)
------------- ---------------
Projected benefit obligation at end of year $ 2,736 $ 2,752
============= ===============

Change in fair value of plan assets during the year
Fair value of plan assets at beginning of year $ 2,907 $ 3,369
Actual return on plan assets 392 (231)
Benefits paid (231) (231)
------------- ---------------
Fair value of plan assets at end of year $ 3,068 $ 2,907
============= ===============

Funded status $ 332 $ 155
Unrecognized (gain) / loss (33) 93
------------- ---------------
Accrued pension cost $ 299 $ 248
============= ===============

Net periodic pension benefit included the following components for the
years ended March 31 are:

2004 2003 2002
------------- -------------- ------------
(IN THOUSANDS)

Interest cost $ 172 $ 178 $ 182
Expected return on plan assets (223) (260) (279)
Amortization of:
Unrecognized (gain) - (19) (56)
------------- -------------- ------------
Net periodic pension (benefit) $ (51) $ (101) $ (153)
============= ============== ============

Significant actuarial assumptions used in determining plan benefits for
the years ended March 31 are:

2004 2003 2002
------------ --------------- ------------

Annual salary increase (1) N/A N/A N/A
Expected Long-term return on assets 8.00% 8.00% 8.00%
Discount rate used in measurement of benefit obligations 6.50% 6.50% 7.00%

(1) The annual salary increase rate is not applicable as the plan is frozen.

SAVINGS INCENTIVE PLAN. Carver has a savings incentive plan, pursuant
to Section 401(k) of the Code, for all eligible employees of the Bank. Pursuant
to the plan, Carver may make an annual non-elective contribution to the 401(k)
plan on behalf of each eligible employee up to 2% of the employee's annual pay,
subject to IRS limitations. This non-elective Carver contribution may be made
regardless of whether or not the employee makes a contribution to the 401(k)
plan. To be eligible for the non-elective Carver contribution, the employee must
have completed at least one year of service and be employed as of the last day
of the plan year, December 31. In addition, Carver matches contributions to the
plan equal to 100% of pre-tax contributions made by each employee up to a
maximum of 4% of their pay, subject to IRS limitations. All such matching
contributions to the plan will be fully vested and non-forfeitable at all times
regardless of the years of service. However, the non-elective Carver
contribution, if awarded,

66

vests over a five-year period. Total savings incentive plan expenses for the
years ended March 31, 2004, 2003 and 2002 were $95,000, $127,000 and $60,000,
respectively.

DIRECTORS' RETIREMENT PLAN. Concurrent with the conversion to the stock
form of ownership, Carver Federal adopted a retirement plan for non-employee
directors. The plan was curtailed during the fiscal year ended March 31, 2001.
The benefits are payable based on the term of service as a director. The
following table sets forth the plan's changes in benefit obligation, changes in
plan assets and funded status and amounts recognized in Carver Federal's
consolidated financial statements at March 31:

2004 2003
------------ ------------
(IN THOUSANDS)

Change in projected benefit obligation during the year
Projected benefit obligation at beginning of year $ 200 $ 264
Interest cost 12 17
Actuarial (gain) - (38)
Benefits paid (43) (43)
------------ ------------
Projected benefit obligation at end of year $ 169 $ 200
============ ============
Change in fair value of plan assets during the year
Fair value of plan assets at beginning of year $ - $ -
Employer contributions 43 43
Benefits paid (43) (43)
------------ ------------
Fair value of plan assets at end of year $ - $ -
============ ============
Funded Status $ (169) $(200)
Unrecognized (gain) (17) (17)
------------ ------------
Accrued pension cost $ (186) $ (217)
============ ============

Net periodic pension cost for the years ended March 31, 2004, 2003 and
2002 included the following:

2004 2003 2002
------------- ------------ ------------
(IN THOUSANDS)

Interest cost $ 12 $ 17 $ 19
------------- ------------ ------------
Net periodic pension cost $ 12 $ 17 $ 19
============= ============ ============

The actuarial assumptions used in determining plan benefits include a
discount rate of 6.5%, 6.5% and 7.25% for the years ended March 31, 2004, 2003
and 2002, respectively.

MANAGEMENT RECOGNITION PLAN ("MRP"). The MRP provides for automatic
grants of restricted stock to certain employees as of the September 12, 1995
adoption of the MRP. In addition, the MRP provides for additional discretionary
grants of restricted stock to those employees selected by the committee
established to administer the MRP. Awards generally vest in three to five equal
annual installments commencing on the first anniversary date of the award,
provided the recipient is still an employee of the Holding Company or the Bank
on such date. Awards will become 100% vested upon termination of service due to
death or disability. When shares become vested and are distributed, the
recipients will receive an amount equal to any accrued dividends with respect
thereto. On September 23, 2003, the MRP was amended to increase the number of
shares available to 119,431. Pursuant to the MRP, the Bank recognized $128,000,
$79,000 and $119,000 as expense for the years ended March 31, 2004, 2003 and
2002, respectively.

EMPLOYEE STOCK OWNERSHIP PLAN. Effective upon conversion, an ESOP was
established for all eligible employees. The ESOP used $1,821,320 in proceeds
from a term loan obtained from a third-party institution to purchase 182,132
shares of Bank common stock in the initial public offering. The term loan
principal is payable over forty equal quarterly installments through September
2004. Interest on the term loan is payable quarterly, initially at a rate of
3.00% over the average federal funds rate. On May 20, 2002, the term loan was
modified to provide for interest at a fixed rate of 4% per annum. Each year, the
Bank intends to make discretionary contributions to the ESOP, which will be
equal to principal and interest payments required on the term loan less any
dividends received by the ESOP on unallocated shares.

Shares purchased with the loan proceeds were initially pledged as collateral for
the term loan and are held in a suspense account for future allocation among the
participants on the basis of compensation, as described by the Plan, in the year
of allocation. Accordingly, the ESOP shares pledged as collateral are reported
as unearned ESOP shares in the consolidated statements of financial

67

condition. As shares are committed to be released from collateral, the Bank
reports compensation expense equal to the current market price of the shares,
and the shares become outstanding for net income per common share computations.
ESOP compensation expense was $0, $172,000 and $174,000 for the years ended
March 31, 2004, 2003 and 2002, respectively.

The ESOP shares at March 31 follow:

2004 2003
------------ ------------
(IN THOUSANDS)
Allocated shares 177 163
Unreleased shares 5 19
------------ ------------
Total ESOP shares 182 182
============ ============

Fair value of unreleased shares $ 117 $ 261
============ ============

STOCK OPTION PLAN. During 1995, the Holding Company adopted the 1995
Stock Option Plan (the "Plan") to advance the interests of the Bank through
providing stock options to select key employees and directors of the Bank and
its affiliates. The number of shares reserved for issuance under the plan is
338,862. At March 31, 2004, there were 229,636 options outstanding and 108,925
were exercisable. Options are granted at the fair market value of Carver Federal
common stock at the time of the grant for a period not to exceed ten years.
Under the Plan, as amended, option grants generally vest on an annual basis
ratably over either three or five years, commencing after one year of service.
In some instances, portions of option grants vest at the time of the grant. All
options are exercisable immediately upon a participant's disability, death or a
change in control, as defined in the Plan.

Information regarding stock options as of and for the years ended March
31 follows:

2004 2003 2004
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- ------- ---------

Outstanding, beginning of year 192,176 $ 10.07 134,767 $ 9.10 112,963 $ 9.17
Granted 43,638 16.35 65,142 12.05 59,767 9.86
Exercised (77) 12.06 (333) 9.93 (2,500) 6.75
Forfeited (6,101) 10.39 (7,400) 10.14 (35,463) 10.61
------- ------- -------
Outstanding, end of year 229,636 11.25 192,176 10.07 134,767 9.10
======= ======= =======
Exercisable at year end 108,636 - 106,020 - 65,600 -

Information regarding stock options at March 31, 2004 follows:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
Range of REMAINING EXERCISE EXERCISE
Exercise Prices SHARES LIFE PRICE SHARES PRICE
- ---------------------- ------------- ------------- ----------- ------------- ------------

$ 8.00 $ 8.99 68,000 6 years $ 8.24 50,000 $ 8.26
9.00 9.99 46,560 7 years 9.86 32,369 9.83
10.00 10.99 7,000 7 years 10.53 4,600 10.54
11.00 11.99 2,500 9 years 11.28 833 11.28
12.00 12.99 61,176 8 years 12.08 20,123 12.08
13.00 13.99 1,000 4 years 13.81 1,000 13.81
15.00 15.99 10,000 9 years 15.96 - -
16.00 16.99 33,019 9 years 16.41 - -
21.00 21.99 381 10 years 21.76 - -
------------- -------------
Total 229,636 108,925
============= =============

68

NOTE 13. COMMITMENTS AND CONTINGENCIES

The Bank is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers.

These financial instruments primarily include commitments to extend
credit and to sell loans. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the statements of financial condition. The contract amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.

The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies making commitments as it does for on-balance-sheet
instruments.

The Bank has outstanding various commitments as follows:

MARCH 31,
-------------------------------
2004 2003
--------------- -------------
(IN THOUSANDS)

Commitments to originate mortgage loans $ 71,114 $ 10,643
Commitments to originate consumer loans 2,844 2,464
Letters of Credit 1,908 1,908
--------------- -------------
Total $ 75,866 $ 15,015
=============== =============

At March 31, 2004, of the $71.1 million in outstanding commitments to
originate mortgage loans, $58.8 million represented commitments to originate
non-residential mortgage loans at variable rates within a range of 5.45% to
7.25%, $5.9 million represented the balance of all other real estate loans at
fixed rates between 4.50% to 6.50% and $6.4 million represented construction
loans at an average rate of 4.79%.

At March 31, 2004, undisbursed funds from approved consumer lines of
credit, primarily credit cards, totaled $2.4 million. Such lines consist of
unsecured and secured lines of credit of $2.1 million and $281,000 respectively.
All such lines carry adjustable rates. At March 31, 2004, undisbursed funds from
approved unsecured commercial lines of credit totaled $45,000. At March 31,
2004, the Bank maintains one letter of credit in the amount of $1.9 million.

Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the counter-party.

Collateral held consists primarily of residential real estate, but may
include income-producing commercial properties.

Rentals, including real estate taxes, under long-term operating leases
for certain branch offices aggregated approximately $245,000, $186,000, and
$142,000 for the years ended March 31, 2004, 2003 and 2002, respectively. As of
March 31, 2004, minimum rental commitments under all noncancellable leases with
initial or remaining terms of more than one year and expiring through 2012
follow:

YEAR ENDING MINIMUM
March 31, RENTAL
--------- ------
(In Thousands)
2005 $ 370
2006 374
2007 291
2008 281
2009 299
Thereafter 1,004
-------------
$ 2,619
=============

69

The Bank also has, in the normal course of business, commitments for
services and supplies. Management does not anticipate losses on any of these
transactions.

LEGAL PROCEEDINGS. From time to time, Carver Federal is a party to
various legal proceedings incident to its business. Certain claims, suits,
complaints and investigations involving Carver Federal, arising in the ordinary
course of business, have been filed or are pending. The Company is of the
opinion, after discussion with legal counsel representing Carver Federal in
these proceedings, that the aggregate liability or loss, if any, arising from
the ultimate disposition of these matters would not have a material adverse
effect on the Company's consolidated financial position or results of
operations. At March 31, 2004, except as set forth below, there were no material
legal proceedings to which the Company or its subsidiaries was a party or to
which any of their property was subject.

On or about April 29, 1999, plaintiff Reginald St. Rose ("St. Rose"), a
former Carver Federal employee, filed suit against Carver Federal in the Supreme
Court of the State of New York, County of New York (the "St. Rose Action"). On
or about January 12, 1999, Carver Federal and St. Rose entered into an agreement
(the "Agreement") providing that St. Rose would resign from Carver Federal on
the terms and conditions set forth in the Agreement. In the St. Rose Action, St.
Rose alleged breach of contract, promissory estoppel, and fraudulent
misrepresentation related to the Agreement and St. Rose's separation from Carver
Federal. St. Rose sought damages in an amount not less than $50,000 with respect
to the breach of contract cause of action and sought undisclosed damages with
respect to the promissory estoppel claim. Carver Federal had unasserted
counterclaims against St. Rose for, among other claims, payment of certain
financial obligations to Carver Federal. The parties reached a final settlement
during the fourth quarter of fiscal 2004, which settlement will not have a
material impact on the Bank's financial condition or results of operations.

Carver Federal was a defendant in two actions brought by Ralph Williams
("Williams Action I" and "Williams Action II") and an action brought by Janice
Pressley (the "Pressley Action") both of which arose out of events concerning
the Northeastern Conference Federal Credit Union ("Northeastern"). Plaintiff
Williams is a former member of the Board of Directors of Northeastern and
plaintiff Pressley is former treasurer of Northeastern. Northeastern was a
federal credit union, and it maintained accounts with Carver Federal and other
banks in the New York metropolitan area (collectively, the "Bank Defendants").
Plaintiffs alleged that the National Credit Union Administration ("NCUA") acted
improperly when it placed Northeastern into conservatorship and subsequent
liquidation. In or about July 1998, Williams commenced Williams Action I in the
United States District Court, District of Columbia, seeking to restrain the NCUA
from executing on the conservatorship order and an order directing the Bank
Defendants to "restore [their] accounts to their original status." The Bank
Defendants were not served with the pleadings in Williams Action I, and the
court entered judgment against them on default. After the Bank Defendants
learned of this case, they made a motion in September 2001 to vacate the default
judgment. In January 2004, Williams Action I was dismissed without prejudice.

On or about November 22, 2000, Williams filed Williams Action II in the
United States District Court, District of Columbia, against the NCUA and the
Bank Defendants seeking damages in the amount of $1 million plus certain
additional unspecified amounts for the allegedly "unauthorized" or "invalid"
actions of the NCUA Board of Directors in taking control of Northeastern as well
as damages for discrimination and civil rights violations. Plaintiff Pressley
filed the Pressley Action in the same court against the same defendants seeking
unspecified compensatory and punitive damages based on identical allegations as
Williams, except that she also alleged certain claims of employment
discrimination. The Bank Defendants filed a joint motion to dismiss Williams
Action II, which motion was granted by the District Court and appealed by
Williams. The Bank Defendants collectively filed a motion for summary affirmance
of the District Court's decision on October 9, 2003, which motion was granted on
April 1, 2004, resolving Williams Action I and Williams Action II in the Bank
Defendants' favor. The Bank Defendants also made a joint motion to dismiss the
Pressley Action. After grant of the motion and appeal by Pressley, the Court of
Appeals dismissed the appeal in August 2003 and, in October 2003 with the
consent of Pressley's counsel, the District Court ordered the dismissal of
Pressley's case against the Bank Defendants, resolving the Pressley Action in
its entirety.

In or about January 2004, Michael Lee & Company, former accountants for
Hale House Center, Inc. ("Michael Lee"), filed an action against Carver Federal
in New York County Supreme Court, asserting a single claim for contribution
against Carver Federal. The complaint alleges that Carver Federal should be
liable to Michael Lee in the event that Michael Lee is found liable to
non-parties Hale House Center, Inc. and its affiliated corporations ("Hale House
plaintiffs") in a separate action that the Hale House plaintiffs have filed
against Michael Lee. The Hale House plaintiffs have asserted claims of
professional malpractice and breach of contract against Michael Lee for
providing deficient accounting services to Hale House. The basis of Michael
Lee's contribution claim against Carver Federal is that Carver Federal allegedly
breached a legal duty it owed Hale House by improperly opening and maintaining a
checking account on behalf of one of the Hale House affiliates. Michael Lee
seeks contribution from Carver Federal in the amount of at least $8.5 million or
the amount of any money judgment entered against Michael Lee in favor of the
Hale House plaintiffs. On February 4, 2004 Carver Federal filed a motion to
dismiss the complaint in its entirety and, on February 11, 2004, Michael Lee
served a cross-motion for summary judgment against Carver Federal. In May 2004,
the court ruled in favor of Carver Federal and judgment was entered in Carver
Federal's favor on June 14, 2004. Michael Lee's time to appeal will run until
July 20, 2004.

70

NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is defined as the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than a forced or liquidation sale. Significant estimations were
used by the Bank for the purpose of this disclosure. Estimated fair values have
been determined by the Bank using the best available data and estimation
methodology suitable for each category of financial instrument. For those loans
and deposits with floating interest rates, it is presumed that estimated fair
values generally approximate their recorded book balances. The estimation
methodologies used and the estimated fair values and carrying values of the
Bank's financial instruments are set forth below:

CASH AND CASH EQUIVALENTS AND ACCRUED INTEREST RECEIVABLE

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

SECURITIES

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

LOANS RECEIVABLE

The fair value of loans receivable is estimated by discounting future
cash flows, using current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities of
such loans.

DEPOSITS

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

BORROWINGS

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

COMMITMENTS

The fair market value of unearned fees associated with financial
instruments with off-balance sheet risk at March 31, 2004 approximates the fees
received. The fair value is not considered material.

The carrying amounts and estimated fair values of the Bank's financial
instruments at March 31, 2004 and 2003 follow:

------------------------------------------------------
2004 2003
-------------------------- --------------------------
Carrying Estimated CARRYING ESTIMATED
Amount Fair Value AMOUNT FAIR VALUE
------------- ------------ ------------ ------------
(IN THOUSANDS)

Financial Assets:
Cash and cash equivalents $ 22,774 $ 22,774 $ 23,160 $ 23,160
Investment securities available-for-sale 21,248 21,553 38,187 38,772
Mortgage backed securities held-to-maturity 43,474 43,794 36,530 37,543
Mortgage backed securities available-for-sale 75,113 74,850 89,966 90,283
Loans receivable 351,900 362,684 292,738 316,073
Accrued interest receivable 2,489 2,489 3,346 3,346
Financial Liabilities:
Deposits $ 373,665 $ 375,294 $ 347,164 $ 349,317
Advances from FHLB of New York 91,516 94,469 108,789 112,443
Other borrowed money 12,766 13,027 207 215

71

LIMITATIONS

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

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

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

NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of unaudited quarterly financial data for
fiscal years ended March 31, 2004 and 2003:

THREE MONTHS ENDED
-----------------------------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

FISCAL 2004
Interest income $6,516 $6,602 $6,483 $6,633
Interest expense (2,230) (2,109) (2,217) (2,144)
-------------- -------------- -------------- --------------
Net interest income 4,286 4,493 4,266 4,489
Provision for loan losses - - - -
Non-interest income 1,140 1,574 1,577 984
Non-interest expense (3,780) (3,890) (3,971) (3,836)
Income tax expense (559) (751) (636) (547)
-------------- -------------- -------------- --------------
Net income $1,087 $1,426 $1,236 $1,090
============== ============== ============== ==============
Earnings per common share
Basic $0.45 $0.60 $0.52 $0.46
Diluted $0.42 $0.55 $0.47 $0.42

FISCAL 2003
Interest income $6,768 $6,759 $6,761 $7,101
Interest expense (2,338) (2,210) (2,218) (2,216)
-------------- -------------- -------------- --------------
Net interest income 4,430 4,549 4,543 4,885
Provision for loan losses - - - -
Non-interest income 953 716 750 741
Non-interest expense (3,795) (3,533) (3,539) (3,837)
Income taxes (expense) benefit (714) (797) (807) (715)
-------------- -------------- -------------- --------------
Net income (loss) $874 $935 $947 $1,074
============== ============== ============== ==============
Earnings (loss) per common share
Basic $0.36 $0.39 $0.39 $0.45
Diluted $0.35 $0.37 $0.38 $0.42

72

NOTE 16. CARVER BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL STATEMENTS

CONDENSED STATEMENTS OF FINANCIAL CONDITION

AS OF MARCH 31,
---------------------------
2004 2003
------------- ------------
(IN THOUSANDS)

ASSETS
Cash on deposit with the Bank $ 93 $ 87
Investment Securities 59 -
Investment in the Subsidiaries 57,846 41,055
Other Assets 12 -
------------- ------------
Total assets $58,010 $ 41,142
============= ============

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Borrowings $13,144 $ -
Accounts payable to Subsidiaries 22 1
Other liabilities 199 68
------------- ------------
Total liabilities $13,365 $ 69
============= ============

Stockholders' equity 44,645 41,073
------------- ------------
Total liabilities and stockholders' equity $58,010 $ 41,142
============= ============

CONDENSED STATEMENTS OF INCOME

YEAR ENDED MARCH 31,
----------------------------------------------
2004 2003 2002
------------- ------------ ------------
(IN THOUSANDS)

INCOME
Equity in net income from Subsidiaries $ 8,328 $ 7,320 $ 6,247
Interest income from deposit with the Bank 9 6 33
Other income 9 - -
------------- ------------ ------------
Total income 8,346 7,326 6,280

EXPENSES
Interest Expense on Borrowings 337 - -
Salaries and employee benefits 169 52 82
Legal expense - 102 236
Shareholder expense 458 248 296
Other 50 60 72
------------- ------------ ------------
Total expense 1,014 462 686

Income before income taxes 7,332 6,864 5,594
Income tax expense 2,493 3,033 881
------------- ------------ ------------
Net income $ 4,839 $ 3,831 $ 4,713
============= ============ ============

73

CONDENSED STATEMENTS OF CASH FLOWS

YEAR ENDED MARCH 31,
----------------------------------------------
2004 2003 2002
------------ ------------ ------------
(DOLLARS IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,839 $ 3,831 $ 4,713
Adjustments to reconcile net loss to net cash
provided by operating activities:
Equity in net income of Subsidiaries (8,328) (7,320) (6,247)
Income Taxes from the Bank 2,493 3,033 -
Increase (decrease) in accounts payable to Bank 21 (13) (104)
Increase (decrease) in other liabilities 131 (1,182) 976
Allocation of ESOP Stock - - 206
Other, net 1,772 1,664 (844)
------------ ------------ ------------
Net cash provided by (used in) operating activities 928 13 (1,300)
------------ ------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES
Additional Investment in Bank (13,153) - -
Purchase of Investment Securities (59) - -
------------ ------------ ------------
Net cash (used in) provided by investing activities (13,212) - -

CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Sub Debt 13,144 - -
Purchase of treasury stock, net (200) (52) (77)
Dividends paid (654) (313) (312)
------------ ------------ ------------
Net cash (used in) provided by financing activities 12,290 (365) (389)
------------ ------------ ------------
Net increase in cash 6 (352) (1,689)

Cash and cash equivalents - beginning 87 439 2,128
------------ ------------ ------------
Cash and cash equivalents - ending $ 93 $ 87 $ 439
============ ============ ============

NOTE 17. RECENT ACCOUNTING PRONOUNCEMENTS

ACCOUNTING AND DISCLOSURE REQUIREMENT RELATED TO THE MEDICARE PRESCRIPTION DRUG,
IMPROVEMENT AND MODERNIZATION ACT OF 2003

In January 2004, the Financial Accounting Standards Board ("FASB")
issued Staff position No. 106-1 "ACCOUNTING AND DISCLOSURE REQUIREMENTS RELATED
TO MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003"
("Medicare Act") for annual financial statements of fiscal years ending after
December 7, 2003. The Medicare Act introduced both a Medicare prescription-drug
benefit and federal subsidy to sponsors of retiree health-care plans that
provide a benefit at least "actuarially equivalent" to the Medicare benefit.
Carver Federal is not affected by the Medicare Act since it does not provide
retiree health-care benefits.

EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFIT

In December 2003, the FASB issued a revised SFAS No. 132, "EMPLOYERS'
DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS - AN AMENDMENT OF
FASB STATEMENTS NOS. 87, 88 AND 106" (SFAS No. 132(R)). SFAS No. 132 (R)
requires additional disclosures to those in the original statement about the
assets, obligations, cash flows and net periodic benefit cost of defined benefit
pension plans and other defined postretirement plans. SFAS No. 132 (R) also
amends Accounting Principles Board ("APB") Opinion No. 28, "INTERIM FINANCIAL
REPORTING," to require interim disclosure of the components of net periodic
benefit cost and, if significantly different from previously disclosed amounts,
the amounts of contributions and projected contributions to fund pension plans
and other postretirement benefit plans. SFAS No. 132 (R) is effective for
financial statements for fiscal years ending after December 15, 2003, except for
disclosure of estimated future benefit payments, which is effective for fiscal
years ending after June 15, 2004. As the provisions of SFAS No. 132 (R) are
disclosure related, the adoption of SFAS No. 132 (R) had no impact on Carver
Federal's financial condition or results of operations.

74

CONSOLIDATION OF VARIABLE INTEREST ENTITIES

In December 2003, the FASB issued Interpretation No. 46 (revised),
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51,"
("FIN 46R"). Fin 46R addresses how a business enterprise should evaluate whether
it has a controlling financial interest in an entity through means other than
voting rights and, accordingly, should consolidate the variable interest entity
("VIE"). FIN 46R replaces FIN46 that was issued in January 2003. All public
companies, such as Carver Federal, are required to fully implement FIN 46R no
later than the end of the first reporting period ending after March 15, 2004.
The adoption of FIN 46R resulted in the deconsolidation of the Trust, which did
not have a material impact on Carver Federal's financial condition or results of
operations.

ACCOUNTING FOR CERTAIN LOANS OR DEBT SECURITIES ACQUIRED IN A TRANSFER

In December 2003, the American Institute of Certified Public
Accountants issued Statement of Position No. 03-3, "ACCOUNTING FOR CERTAIN LOANS
OR DEBT SECURITIES ACQUIRED IN A TRANSFER" (SOP No. 03-3). SOP No. 03-3
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in loans or
debt securities acquired in a transfer if those differences are attributable, at
least in part, to credit quality. SOP No. 03-3 prohibits "carry over" or
creation of valuation allowances in the initial accounting of all loans acquired
in transfers within the scope of SOP No. 03-3, which includes loans acquired in
a business combination. SOP No. 03-3 is effective for loans acquired in fiscal
years beginning after December 15, 2004. The adoption of SOP No. 03-3 is not
expected to have an impact on Carver Federal's financial condition or results of
operations.

ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY

In May 2003, the FASB issued Statement No. 150, "ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY"("SFAS
No. 150"). The SFAS No. 150 requires issuers to classify as liabilities (or
assets in some circumstances) three classes of freestanding financial
instruments that embody obligations for the issuer. Generally, the statement is
effective for financial instruments entered into or modified after May 31, 2003
and is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a
material impact on the Company's earnings or financial position.

AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133
ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," which amends and clarifies
financial accounting and reporting of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES." SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003, and should generally be applied prospectively. The provisions of
SFAS No. 149 that relate to SFAS No. 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003, should continue
to be applied in accordance with their respective effective dates. In addition,
the provisions of SFAS No. 149 which relate to forward purchases or sales of
when-issued securities or other securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The adoption of SFAS No. 149 did not have a material impact on Carver
Federal's financial condition or results of operations.

GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS

In November 2002, FASB issued Interpretation No. 45, "GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS" ("FIN 45"), which addresses the disclosure
to be made by a guarantor in its interim and annual financial statements about
its obligations under guarantees. FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees.

FIN 45 requires the guarantor to recognize a liability for the
non-contingent component of the guarantee; this is the obligation to stand ready
to perform in the event that specified triggering events or conditions occur.
The initial measurement of this liability is the fair value of the guarantee at
inception. The recognition of the liability is required even if it is not
probable that payments will be required under the guarantee or if the guarantee
was issued with a premium payment or as part of a transaction with multiple
elements.

The Company will adopt the disclosure requirements of FIN 45 and will
apply the recognition and measurement provisions for all guarantees entered into
or modified after March 31, 2004. As of March 31, 2004 the Company maintains one
letter of credit in the amount of $1.9 million and therefore management does not
anticipate that the adoption of this interpretation will have a significant
effect on the Company's earnings or financial position.

75

NOTE 18. PENDING ACQUISITION

On March 15, 2004, the Company entered into a definitive merger
agreement to acquire Independence in a cash transaction valued at approximately
$33 million. Under the terms of the merger agreement, Independence's
stockholders will receive $21.00 in cash for each share of their common stock.
The merger agreement has been approved by the directors of Independence, the
Company and the Bank. The transaction, which is expected to close before the end
of 2004, is subject to customary closing conditions, including regulatory
approvals and the approval of Independence's shareholders. The merger agreement
requires Independence to pay the Company a termination fee of $1.6 million if
the merger agreement is terminated under certain circumstances following
Independence's receipt of a superior acquisition proposal or $325,000 if the
merger is not approved by Independence's shareholders.

The Holding Company has made an Amended Share Voting Stipulation and
Undertaking in favor of the OTS and entered into a Trust Agreement with American
Stock Transfer & Trust Company pursuant to which it has placed 72,400 of the
common shares of Independence owned by the Holding Company, representing
approximately 4.7% of the outstanding common shares of Independence, in a
non-voting trust. The shares held in the trust are shares of Independence owned
by the Holding Company in excess of the 5% limit set forth in Section
10(e)(1)(A)(iii) of HOLA prior to the OTS approving the Holding Company's H-(e)3
Application to acquire Independence. Section 10(e)(1)(A)(iii) provides that a
savings and loan holding company may not acquire or retain more than 5% of the
outstanding voting shares of a savings association that is not a subsidiary
without the prior approval of the OTS. The Trust Agreement will terminate, and
the Independence common shares held in the trust will be transferred back to the
Holding Company, upon the receipt by the Holding Company of the approval of the
OTS to retain more than 5% of Independence's outstanding voting stock.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission (the "SEC"). As of March 31, 2004, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective and timely in alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.

There were no changes in our internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting and we did not identify any significant deficiencies or
material weaknesses requiring corrective action with respect to those controls.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information concerning Executive Officers of the Company which responds
to this Item is incorporated by reference from the section entitled "Executive
Officers and Key Managers of Carver and Carver Federal" in the Holding Company's
definitive proxy statement for the Annual Meeting of Stockholders for the fiscal
year ended March 31, 2004 (the "Proxy Statement"). The information that responds
to this Item with respect to Directors is incorporated by reference from the
section entitled "Election of Directors" in the Proxy Statement. Information
with respect to compliance by the Company's Directors and Executive Officers
with Section 16(a) of the Exchange Act is incorporated by reference from the
subsection entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Proxy Statement.

AUDIT COMMITTEE FINANCIAL EXPERT

Information regarding the audit committee of the Company's Board of
Directors, including information regarding audit committee financial experts
serving on the audit committee, is presented under the heading "Corporate
Governance" in the Company's Proxy Statement and is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information required in response to this Item is incorporated by
reference from the section entitled "Compensation of Directors and Executive
Officers" in the Proxy Statement.

76

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

The information required in response to this Item is incorporated by
reference from the section entitled "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required in response to this Item is incorporated by
reference from the section entitled "Transactions with Certain Related Persons"
in the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required in response to this Item is incorporated by
reference from the section entitled "Auditor Fee Information" in the Proxy
Statement.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) List of Documents Filed as Part of this Report

(1) Financial Statement Schedules. All financial statement schedules
have been omitted, as the required information is either
inapplicable or included under Item 8, "Financial Statement and
Supplementary Data".

(b) Reports on Form 8-K Filed during the Last Quarter of the Registrant's Fiscal
Year Ended March 31, 2004.

(1) Report on Form 8-K, dated January 30, 2004, which includes
information being filed pursuant to Item 12 but was not filed
under Item 9, an announcement of our financial results for the
third quarter ended December 31, 2003.

(2) Report on Form 8-K, dated March 16, 2004, an announcement of the
execution of an Agreement and Plan of Merger between Carver
Bancorp, Inc., Carver Federal Savings Bank and Independence
Federal Savings Bank.

(c) Exhibits required by Item 601 of Regulation S-K:

See Index of Exhibits on page E-1.

77

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

CARVER BANCORP, INC.

June 22, 2004 By /s/ Deborah C. Wright
----------------------------------------
Deborah C. Wright
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below on June 22, 2003 by the following persons on
behalf of the Registrant and in the capacities indicated.

/s/ Deborah C. Wright President, Chief Executive Officer and Director
- --------------------------- (Principal Executive Officer)
Deborah C. Wright

/s/ William Gray Senior Vice President and Chief Financial Officer
- --------------------------- (Principal Financial and Accounting Officer)
William Gray

/s/ Frederick O. Terrell
- ---------------------------
Frederick O. Terrell Chairman

/s/ Carol Baldwin Moody
- ---------------------------
Carol Baldwin Moody Director

/s/ David L. Hinds
- ---------------------------
David L. Hinds Director

/s/ Robert Holland, Jr.
- ---------------------------
Robert Holland, Jr. Director

/s/ Pazel G. Jackson
- ---------------------------
Pazel G. Jackson, Jr. Director

/s/ Edward B. Ruggiero
- ---------------------------
Edward B. Ruggiero Director

- ---------------------------
Strauss Zelnick Director

78

EXHIBIT INDEX

Exhibit Number Description
- -------------- -----------

2.1 Agreement and Plan of Merger dated as of March 15,
2004 by and between Carver Bancorp, Inc., Carver
Federal Savings Bank and Independence Federal Savings
Bank (10)

3.1 Certificate of Incorporation of Carver Bancorp, Inc.
(1)

3.2 Amended and Restated Bylaws of Carver Bancorp, Inc.
(9)

4.1 Stock Certificate of Carver Bancorp, Inc. (1)

4.2 Federal Stock Charter of Carver Federal Savings Bank
(1)

4.3 Bylaws of Carver Federal Savings Bank (1)

4.4 Amendments to Bylaws of Carver Federal Savings Bank
(2)

4.5 Certificate of Designations, Preferences and Rights
of Series A Convertible Preferred Stock (4)

4.6 Certificate of Designations, Preferences and Rights
of Series B Convertible Preferred Stock (4)

10.1 Carver Bancorp, Inc. 1995 Stock Option Plan,
effective as of September 12, 1995 (1)

10.2 Carver Federal Savings Bank Retirement Income Plan,
as amended and restated effective as of January 1,
1997 and as further amended through January 1, 2001
(9)

10.3 Carver Federal Savings Bank 401(k) Savings Plan in
RSI Retirement Trust, as amended and restated
effective as of January 1, 1997 and including
provisions effective through January 1, 2002 (9)

10.4 Carver Bancorp, Inc. Employee Stock Ownership Plan,
effective as of January 1, 1994, incorporating
Amendment No. 1, incorporating Second Amendment,
incorporating Amendment No. 2, incorporating
Amendment No. 2A, incorporating Amendment No. 3 and
incorporating Amendment No. 4 (9)

10.5 Carver Federal Savings Bank Deferred Compensation
Plan, effective as of August 10, 1993 (1)

10.6 Carver Federal Savings Bank Retirement Plan for
Nonemployee Directors, effective as of October 24,
1994 (1)

10.7 Carver Bancorp, Inc. Management Recognition Plan,
effective as of September 12, 1995 (1)

10.8 Carver Bancorp, Inc. Incentive Compensative Plan,
effective as of September 12, 1995 (1)

10.9 Employment Agreement by and between Carver Federal
Savings Bank and Deborah C. Wright, entered into as
of June 1, 1999 (3)

10.10 Employment Agreement by and between Carver Bancorp,
Inc. and Deborah C. Wright, entered into as of June
1, 1999 (3)

E-1

Exhibit Number Description
- -------------- -----------

10.11 Securities Purchase Agreement by and among Carver
Bancorp, Inc., Morgan Stanley & Co. Incorporated and
Provender Opportunities Fund L.P. (5)

10.12 Registration Rights Agreement by and among Carver
Bancorp, Inc., Morgan Stanley & Co. Incorporated and
Provender Opportunities Fund L.P. (5)

10.13 Settlement Agreement and Mutual Release by and among
BBC Capital Market, Inc., The Boston Bank of
Commerce, Kevin Cohee and Teri Williams; Carver
Bancorp, Inc., Deborah C. Wright, David N. Dinkins,
Linda H. Dunham, Robert J. Franz, Pazel G. Jackson,
Jr., Herman Johnson and David R. Jones; Morgan
Stanley & Co., Incorporated; and Provender
Opportunities Fund, L.P. and Frederick O. Terrell (5)

10.14 Amendment to the Carver Bancorp, Inc. 1995 Stock
Option Plan (6)

10.15 Amended and Restated Employment Agreement by and
between Carver Federal Savings Bank and Deborah C.
Wright, entered into as of June 1, 1999 (7)

10.16 Amended and Restated Employment Agreement by and
between Carver Bancorp, Inc. and Deborah C. Wright,
entered into as of June 1, 1999 (7)

10.17 Form of Letter Employment Agreement between Executive
Officers and Carver Bancorp, Inc. (7)

10.18 Employment Agreement by and between Carver Federal
Savings Bank and Catherine A. Papayiannis, entered
into as of April 22, 2002 (7)

10.19 Carver Bancorp, Inc. Compensation Plan for
Non-Employee Directors (9)

10.20 Amendment Number One to Carver Federal Savings Bank
Retirement Income Plan, as amended and restated
effective as of January 1, 1997 and as further
amended through January 1, 2001 (9)

10.21 First Amendment to the Restatement of the Carver
Federal Savings Bank 401(k) Savings Plan (9)

10.22 Second Amendment to the Restatement of the Carver
Federal Savings Bank 401(k) Savings Plan for EGTRRA
(9)

10.23 Guarantee Agreement by and between Carver Bancorp,
Inc. and U.S. Bank National Association, dated as of
September 17, 2003 (8)

10.24 Amended and Restated Declaration of Trust by and
among, U.S. Bank National Association, as
Institutional Trustee, Carver Bancorp, Inc., as
Sponsor, and Linda Dunn, William Gray and Deborah
Wright, as Administrators, dated as of September 17,
2003 (8)

10.25 Indenture, dated as of September 17, 2003, between
Carver Bancorp, Inc., as Issuer, and U.S. Bank
National Association, as Trustee (8)

10.26 Second Amendment to the Carver Bancorp, Inc.
Management Recognition Plan, effective as of
September 23, 2003 (*)

10.27 Amended Share Voting Stipulation and Undertaking made
by Carver Bancorp, Inc. in favor of the OTS, made as
of April 22, 2004 (*)

10.28 Trust Agreement between Carver Bancorp, Inc. and
American Stock & Transfer Trust Company, dated May 3,
2004 (*)

10.29 First Amendment to Employment Agreement by and
between Carver Federal Savings Bank and Catherine A.
Papayiannis, entered into as of May 27, 2004 (*)

21.1 Subsidiaries of the Registrant (*)

E-2

Exhibit Number Description
- -------------- -----------

23.2 Consent of KPMG LLP (*)

31.1 Certifications of Chief Executive Officer (*)

31.2 Certifications of Chief Financial Officer (*)

32.1 Written Statement of Chief Executive Officer
furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
(*)

32.2 Written Statement of Chief Financial Officer
furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350(*)

(*) Filed herewith. Copies of these exhibits are available at no charge
through the SEC website at http://www.sec.gov.

(1) Incorporated herein by reference to Registration Statement No. 333-5559
on Form S-4 of the Registrant filed with the Securities and Exchange
Commission on June 7, 1996.

(2) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1998.

(3) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1999.

(4) Incorporated herein by reference to the Exhibits to the Registrant's
Report on Form 8-K, dated January 14, 2000.

(5) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2000.

(6) Incorporated herein by reference to the Registrant's Proxy Statement
dated January 25, 2001.

(7) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2002.

(8) Incorporated herein by reference to the Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the three months ended September 30,
2003.

(9) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2003

(10) Incorporated herein by reference to the Exhibits to the Registrant's
Report on Form 8-K, dated March 16, 2004.

E-3