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Exhibit 10.1
 
SUPERVISORY AGREEMENT
 
          This Supervisory Agreement (Agreement) is made this 28th day of
September, by and through the Board of Directors (Board) of Brooklyn Federal
Savings Bank, Brooklyn, New York, OTS Docket No. 03198 (Association) and the
Office of Thrift Supervision (OTS), acting by and through its Regional Director
for the Northeast Region (Regional Director);
 
          WHEREAS, the OTS, pursuant to 12 U.S.C. § 1818, has the statutory
authority to enter into and enforce supervisory agreements to ensure the
establishment and maintenance of appropriate safeguards in the operation of the
entities it regulates; and
 
          WHEREAS, the Association is subject to examination, regulation and
supervision by the OTS; and
 
          WHEREAS, based on its examination of the Association, the OTS finds
that the Association has engaged in unsafe or unsound practices; and
 
          WHEREAS, in furtherance of their common goal to ensure that the
Association addresses the unsafe or unsound practices identified by the OTS in
the October 13, 2009 Report of Examination (2009 ROE), the Association and the
OTS have mutually agreed to enter into this Agreement; and
 
          WHEREAS, on September 21, 2010, the Association’s Board, at a duly
constituted meeting, adopted a resolution (Board Resolution) that authorizes the
Association to enter into this Agreement and directs compliance by the
Association and its directors, officers, employees, and other
institution-affiliated parties with each and every provision of tills Agreement.
 
          NOW THEREFORE, in consideration of the above premises, it is agreed as
follows:
 
Brooklyn Federal Savings Bank
Supervisory Agreement
Page 1 of 18
 
 

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Business Plan.
 
1.       Within seventy (70) days, the Association shall submit an updated
comprehensive business plan for the period of October 1, 2010 to September 30,
2013 (Business Plan) that addresses all corrective actions in the 2009 ROE
relating to the Association’s Business Plan. At a minimum, the Business Plan
shall conform to applicable laws, regulations and regulatory guidance and
include:
 

 
(a)          plans to improve the Association’s core earnings, reduce expenses,
maintain appropriate levels of liquidity, and achieve profitability on a
consistent basis throughout the term of the Business Plan;
     
(b)          strategies for ensuring that the Association has the financial and
personnel resources necessary to implement and adhere to the Business Plan,
adequately support the Association’s risk profile, maintain compliance with
applicable regulatory capital requirements, and comply with this Agreement;
     
(c)          quarterly pro forma financial projections (balance sheet,
regulatory capital ratios, and income statement) for each quarter covered by the
Business Plan that are presented in a format consistent with the Thrift
Financial Report (TFR); and
     
(d)          identification of all relevant assumptions made in formulating the
Business Plan and a requirement that documentation supporting such assumptions
be retained by the Association.

 
2.       Upon receipt of written notification from the Regional Director that
the Business Plan is acceptable, the Association shall implement and adhere to
the Business Plan. A copy of the Board meeting minutes reflecting the Board’s
adoption thereof shall be provided to the Regional Director within fifteen (15)
days after the Board meeting.
 
Brooklyn Federal Savings Bank
Supervisory Agreement
Page 2 of 18
 
 

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3.       Any material modificationsl to the Business Plan must receive the prior
written non-objection of the Regional Director. The Association shall submit
proposed material modifications to the Regional Director at least forty-five
(45) days prior to implementation.
 
4.       Within sixty (60) days after the end of each quarter, after
implementation of the Business Plan, the Board shall review quarterly variance
reports on the Association’s compliance with the Business Plan (Business Plan
Variance Reports). The Business Plan Variance Reports shall:

     
(a)          identify variances in the Association’s actual performance during
the preceding quarter as compared to the projections set forth in the Business
Plan;
     
(b)          contain an analysis and explanation of identified variances; and
     
(c)          discuss the specific measures taken or to be taken to address
identified variances.

 
5.      A copy of the Business Plan Variance Reports and Board meeting minutes
shall be provided to the Regional Director within fifteen (15) days after the
Board meeting.
 
Concentrations of Credit.
 
6.      Within sixty (60), the Association shall develop a written program for
identifying, monitoring, and controlling risks associated with concentrations of
credit (Credit Concentration Program) that addresses all corrective actions set
forth in the 2009 ROE relating to concentrations of credit. The Credit
Concentration Program shall comply with all applicable laws, regulations and
regulatory guidance and shall:
 

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1A modification shall be considered material under this Section of the Order if
the Association plans to: (a) engage in any activity that is inconsistent with
the Business Plan; or (b) exceed the level of any activity contemplated in the
Business Plan or fail to meet target amounts established in the Business Plan by
more than ten percent (10%), unless the activity involves assets risk-weighted
fifty percent (50%) or less, in which case a variance of more than twenty-five
percent (25%) shall be deemed to be a material modification.
 
Brooklyn Federal Savings Bank
Supervisory Agreement
Page 3 of 18
 
 

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(a)          establish comprehensive concentration limits expressed as a
percentage of Tier 1 (Core) Capital plus allowance for loan and lease losses
(ALLL), and document the appropriateness of such limits based on the
Association’s risk profile;
     
(b)          establish stratification categories of the Association’s
concentrations of credit, such as land loans, construction loans, income
property loans, nonresidential real estate loans, commercial loans and establish
enhanced risk analysis, monitoring, and management for each stratification
category;
     
(c)          contain specific review procedures and reporting requirements,
including written reports to the Board, designed to identify, monitor, and
control the risks associated with concentrations of credit and periodic market
analysis for the various property types and geographic markets represented in
its portfolio; and
     
(d)          contain a written action plan, including specific time frames, for
bringing the Association into compliance with its concentration of credit
limits.

 
7.       Within seventy-five (75) days, the Association shall submit its Credit
Concentration Program to the Regional Director for review and comment. Upon
receipt of written notification from the Regional Director that the Credit
Concentration Program is acceptable, the Association shall implement and adhere
to the Credit Concentration Program. The Board’s review of the Credit
Concentration Program shall be documented in the Board meeting minutes.
 
8.       Within sixty (60) days after the end of each quarter, beginning with
the quarter ending December 31, 2010, the Board shall review the appropriateness
of the Association’s concentration limits given current conditions and the
Association’s compliance with its Credit Concentration Program including the
written action plan to revise the current level of concentrations. The Board’s
review of the Association’s Credit Concentration Program shall be documented in
the Board meeting minutes.
 
Brooklyn Federal Savings Bank
Supervisory Agreement
Page 4 of 18
 
 

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Credit Administration.
 
9.       Within thirty (30) days, the Association shall revise its credit
administration policies, procedures, practices, and controls (Credit
Administration Policy) to address all corrective actions in the 2009 ROE
relating to credit administration. The Credit Administration Policy shall comply
with all applicable laws, regulations and regulatory guidance and:

     
(a)          include restrictions on loan renewals granted without principal
reductions (other than those secured by owner-occupied single-family dwellings
and consumer loans);
     
(b)          include restrictions on additional advances to borrowers who have
an existing loan with the Association that is adversely classified;
     
(c)          include polices, procedures, and systems to obtain and analyze, on
an annual basis, updated borrower financial information on all loans and/or loan
relationships (other than those secured by owner-occupied single-family
dwellings and consumer loans) with an outstanding or committed balance greater
than $500,000;
     
(d)          include guidelines requiring that collateral properties be
re-appraised prior to loans being modified, extended, or refinanced;
     
(e)          include guidelines requiring that current financial statements from
the borrower be provided to the Association prior to loans being modified,
extended or refinanced and that such financial statements be reviewed to
determine whether the borrower has the ability to repay at the modified loan
terms;
     
(f)          include an effective system for the retention, review, renewal, and
updating by the Association of all required records, filings, and other credit
related documents;

 
Brooklyn Federal Savings Bank
Supervisory Agreement
Page 5 of 18
 
 

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(g)          include funding controls over costs on construction projects to
prevent disbursements of loan funds in excess of completed construction costs;
     
(h)          include restrictions on the capitalization of interest, loan fees,
late fees, loan costs, and collection costs of problem loans;
     
(i)           include polices, procedures, and systems for escrowing and
monitoring of real estate taxes for commercial real estate loans;
     
(j)           include polices and procedures for obtaining feasibility studies
prior to approving loans for large land acquisition and construction projects;
     
(k)          include policies and procedures for the implementation of a formal
comprehensive appraisal review function; and
     
(1)          establish monthly monitoring and reporting to the Board of all
outstanding loan commitments, including the origin and expiration date of each
commitment.

 
10.     Within forty-five (45) days, the Association shall submit its Credit
Administration Policy to the Regional Director for review and comment. Upon
receipt of written notification from the Regional Director that the Credit
Administration Policy is acceptable, the Association shall implement and adhere
to the Credit Administration Policy. The Board’s review of the Credit
Administration Policy shall be documented in the Board meeting minutes. A copy
of the Credit Administration Policy shall be provided to the Regional Director
within thirty (30) days of adoption by the Board.
 
Department Resource Enhancement.
 
11.     Within thirty (30) days, the Association shall retain an independent
consultant with expertise in loan underwriting and credit administration
(Independent Consultant) to conduct a review and provide an evaluation of
whether the staffing resources devoted by the Association are adequate to
support the loan underwriting and credit administration functions at the
Association.
 
Brooklyn Federal Savings Bank
Supervisory Agreement
Page 6 of 18
 
 

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12.     Within sixty (60) days, the Independent Consultant shall prepare and
submit a report to the Board of Directors. The report shall be documented in the
Board minutes and shall describe both the evaluation process and the conclusions
and recommendations of the Independent Consultant. At a minimum, the report
shall: (a) evaluate whether the officers and employees associated with the loan
underwriting and credit administration functions have the necessary training and
expertise and resources to adequately support these functions at the
Association; (b) determine whether the staffing resources applied to the loan
underwriting and credit administration programs are adequate given the size,
complexity, growth and composition of the non-homogeneous loan portfolio at the
Association; and (c) assess whether the staffing resources are sufficient to
ensure ongoing compliance with this Agreement.
 
13.     Within seventy-five (75) days, the Board shall develop and implement a
plan for enhancement of staffing resources based on the conclusions and
recommendations of the Independent Consultant (Plan). A copy of the Plan and the
Board Resolution approving the Plan shall be provided to the Regional Director
within fifteen (15) days of adoption by the Board.
 
Internal Asset Review and Classification.
 
14.     Within thirty (30) days, the Association shall develop a written
internal asset review and classification program (IAR Program) that addresses
all corrective actions set forth in the 2009 ROE relating to internal asset
review and classification and that complies with all applicable laws,
regulations and regulatory guidance. At a minimum, the IAR Program shall:
 

 
(a)          ensure the accurate and timely identification, classification, and
reporting of the Association’s assets, including the designation of loans as
special mention or placement of loans on a watch list where a borrower’s credit
standing has deteriorated;

 
Brooklyn Federal Savings Bank
Supervisory Agreement
Page 7 of 18
 
 

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(b)          detail the Association’s loan grading system and specify parameters
for the identification of problem loans for each type of loan offered by the
Association;
     
(c)          require internal asset reviews and updates for all non-homogeneous
loans to be conducted not less than every three (3) months; and
     
(d)          require quarterly reports be submitted to the Board detailing the
Association’s adversely classified, special mention and delinquency ratios.

 
15.     Within forty-five (45) days, the Association shall submit its IAR
Program to the Regional Director for review and comment. Upon receipt of written
notification from the Regional Director that the IAR Program is acceptable, the
Association shall implement and adhere to the IAR Program. The Board’s review of
the IAR Program shall be documented in the Board meeting minutes.
 
Allowance for Loan and Lease Losses.
 
16.     Within thirty (30) days, the Association shall revise its policies,
procedures, and methodology relating to the timely establishment and maintenance
of an adequate allowance for loan and lease losses (ALLL) level (ALLL Policy) to
address all corrective actions set forth in the 2009 ROE relating to ALLL. The
ALLL Policy shall comply with applicable laws, regulations, and regulatory
guidance and shall include the appropriate use of FASB 114 impairment analysis.
 
17.     The Association shall submit a copy of the Board meeting minutes
reflecting the Board’s discussion and adoption of the ALLL Policy to the
Regional Director within thirty (30) days after the Board meeting.
 
Brooklyn Federal Savings Bank
Supervisory Agreement
Page 8 of 18
 
 

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18.     Within thirty (30) days after the end of each quarter, beginning with
the quarter ending December 31, 2010, the Association shall analyze the adequacy
of the ALLL consistent with its ALLL Policy (Quarterly ALLL Report). The Board’s
review of the Quarterly ALLL Report, including, but not limited to, all
qualitative factors considered in determining the adequacy of the Association’s
ALLL, shall be fully documented in the Board meeting minutes. Any deficiency in
the ALLL shall be remedied by the Association in the quarter in which it is
discovered and before the Association files its Thrift Financial Report (TFR)
with the OTS. A copy of the Quarterly ALLL Report and the Board meeting minutes
detailing the Board’s review shall be provided to the Regional Director within
fifteen (15) days after the Board meeting.
 
Problem Assets.
 
19.     Within seventy (70) days, the Association shall develop a detailed,
written plan with specific strategies, targets and timeframes to reduce3 the
Association’s level of problem assets4 (Problem Asset Reduction Plan). The
Problem Asset Reduction Plan, at a minimum, shall include:

     
(a)          quarterly targets for the level of problem assets as a percentage
of Tier 1 (Core) capital plus ALLL;
     
(b)          a description of the methods for reducing the Association’s level
of problem assets to the established targets; and
     
(c)          all relevant assumptions and projections based on a best-case
scenario, a worst-case scenario, and a most probable case scenario, and
documentation supporting such assumptions and projections.

 

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3 For purposes of this Paragraph, “reduce” means to collect, sell, charge off,
or improve the quality of an asset sufficient to warrant its removal from
adverse criticism.
4 The term “problem assets” shall include all classified assets, assets
designated special mention, and all nonperforming assets.
 
Brooklyn Federal Savings Bank
Supervisory Agreement
Page 9 of 18
 
 

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22.     Within sixty (60) days after the end of each quarter, a copy of the
Quarterly Asset Report shall be provided to the Regional Director.
 
Loan Workout Plan.
 
23.     Within thirty (30) days, the Association shall engage a qualified,
independent, third party (Consultant), acceptable to the Regional Director, to
conduct a review and analysis of the non-homogeneous loan portfolio and prepare
a written report that, at a minimum, sets forth a recommended, detailed,
written, work-out plan and strategy for each loan and/or loan relationship
greater than $500,000 (Loan Workout Plan).
 
24.     Within seventy (70) days, the Board shall approve, and the Association
shall implement, the Loan Workout Plan. A copy of the Loan Workout Plan and the
Board Resolution approving the Loan Workout Plan shall be provided to the
Regional Director within fifteen (15) days of its adoption by the Board.
 
25.     Within sixty (60) days, the Association shall retain a qualified
full-time workout officer, acceptable to the Regional Director, whose sole
responsibility shall be to implement and supervise compliance with the Loan
Workout Plan (Loan Workout Officer). The Loan Workout Officer shall be
independent of the Lending Department of the Association.
 
26.     Within thirty (30) days after the end of each quarter, beginning with
the quarter ending December 31, 2010, the Association shall submit a quarterly
written loan workout status report (Quarterly Loan Workout Report) to the Board.
The Board’s review of the Quarterly Loan Workout Report shall be documented in
the Board meeting minutes.
 
Restrictions on Lending.
 
27.     Effective immediately, the Association shall not make, invest in, or
purchase any new commercial real estate loans.
 
Brooklyn Federal Savings Bank
Supervisory Agreement
Page 11 of 18
 
 

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28.     Effective immediately, the Association shall not, except with the prior
written non-objection of the Regional Director, refinance, extend, or otherwise
modify, any loans to borrowers whose existing loans or lines are classified or
listed as special mention, unless the Association has: (i) developed and
implemented a workout plan for that borrower, and (ii) strengthened its position
through a reduction in the outstanding loan balance and/or obtained additional
collateral.
 
Management and Directorate Oversight.
 
29.     Within fifteen (15) days, the Association shall retain an independent
third-party, acceptable to the Regional Director, to conduct a review of current
Management and Board supervision (Management Study). The Management Study shall
be completed within forty-five (45) days after the consultant is retained, and,
at a minimum, include an evaluation of the performance of the Association’s
current Senior Executive Officers and members of the Board of directors,
including an assessment of whether compensation is commensurate with job duties
and responsibilities in compliance with 12 C.F.R. § 563 .161 (b).
 
30.     Within seventy-five (75) days, a copy of the Management Study shall be
forwarded to the Board and the Regional Director. The Board’s review of the
Management Study shall be documented in the Board meeting minutes.
 
Growth.
 
31.     Effective immediately, the Association shall not increase its total
average assets during any quarter in excess of an amount equal to net interest
credited on deposit liabilities during the prior quarter without the prior
written notice of non-objection of the Regional Director.
 
Brooklyn Federal Savings Bank
Supervisory Agreement
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Brokered Deposits.
 
32.     Effective immediately, the Association shall comply with the
requirements of 12 C.F.R. § 337.6(b).
 
Directorate and Management Changes.
 
33.     Effective immediately, the Association shall comply with the prior
notification requirements for changes in directors and Senior Executive
Officers5 set forth in 12 C.F.R. Part 563, Subpart H.
 
Golden Parachute and Indemnification Payments.
 
34.     Effective immediately, the Association shall not make any golden
parachute payment6 or prohibited indemnification payment7 unless, with respect
to each such payment, the Association has complied with the requirements of 12
C.F.R. Part 359 and, as to indemnification payments, 12 C.F.R. § 545.121.
 
Employment Contracts and Compensation Arrangements.
 
35.     Effective immediately, the Association shall not enter into, renew,
extend or revise any contractual arrangement relating to compensation or
benefits for any Senior Executive Officer or director of the Association, unless
it first provides the Regional Director with not less than sixty (60) days prior
written notice of the proposed transaction. The notice to the Regional Director
shall include a copy of the proposed employment contract or compensation
arrangement or a detailed, written description of the compensation arrangement
to be offered to such officer or director, including all benefits and
perquisites. The Board shall ensure that any contract, agreement or arrangement
submitted to the Regional Director fully complies with the requirements of 12
C.F.R. Part 359, 12 C.F.R. §§ 563.39 and 563.161(b), and 12 C.F.R. Part 570 –
Appendix A.
 

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5 The term “Senior Executive Officer” is defined at 12 C.F.R. § 563.555.
 
6 The term “golden parachute payment” is defined at 12 C.F.R. § 359.1(f).
7 The term “prohibited indemnification payment” is defined at 12 C.F.R. § 359.1
(I).
 
Brooklyn Federal Savings Bank
Supervisory Agreement
Page 13 of 18
 
 

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Dividends and Other Capital Distributions.
 
36.     Effective immediately, the Association shall not declare or pay
dividends or make any other capital distributions, as that term is defined in 12
C.F.R. § 563.141, without receiving the prior written approval of the Regional
Director in accordance with applicable regulations and regulatory guidance. The
Association’s written request for approval shall be submitted to the Regional
Director at least thirty (30) days prior to the anticipated date of the proposed
declaration, dividend payment or distribution of capital.
 
Transactions with Affiliates.
 
37.     Effective immediately, the Association shall not engage in any
transaction with an affiliate unless, with respect to each such transaction, the
Association has complied with the notice requirements set forth in 12 C.F.R. §
563.41(c)(4), which shall include the information set forth in 12 C.F.R. §
563.41(c)(3). The Board shall ensure that any transaction with an affiliate for
which notice is submitted pursuant to this Paragraph, complies with the
requirements of 12 C.F.R. § 563.41 and Regulation W, 12 C.F.R. Part 223.
 
Effective Date.
 
38.     This Agreement is effective on the Effective Date as shown on the first
page.
 
Duration.
 
39.     This Agreement shall remain in effect until terminated, modified or
suspended, by written notice of such action by the OTS, acting by and through
its authorized representatives.
 
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Supervisory Agreement
Page 14 of 18
 
 

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Time Calculations.
 
40.     Calculation of time limitations for compliance with the terms of this
Agreement run from the Effective Date and shall be based on calendar days,
unless otherwise noted.
 
Submissions and Notices.
 
41.     All submissions to the OTS that are required by or contemplated by the
Agreement shall be submitted within the specified timeframes.
 
42.     Except as otherwise provided herein, all submissions, requests,
communications, consents or other documents relating to this Agreement shall be
in writing and sent by first class U.S. mail (or by reputable overnight carrier,
electronic facsimile transmission or hand delivery by messenger) addressed as
follows:
 

 
(a)
To:
OTS
     
Michael E. Finn, Regional Director
     
Office of Thrift Supervision
     
Harborside Financial Center Plaza Five
     
Suite 1600
     
Jersey City, New Jersey 07311
                 
(b)
To:
Brooklyn Federal Savings Bank
     
Richard A. Kielty, President and Chief Executive Officer
     
81 Court Street
     
Brooklyn, New York 11201

 
No Violations Authorized.
 
43.     Nothing in this Agreement shall be construed as allowing the
Association, its Board, officers or employees to violate any law, rule, or
regulation.
 
OTS Authority Not Affected.
 
44.     Nothing in this Agreement shall inhibit, estop, bar or otherwise prevent
the OTS from taking any other action affecting the Association if at any time
the OTS deems it appropriate to do so to fulfill the responsibilities placed
upon the OTS by law.
 
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Supervisory Agreement
Page 15 of 18
 
 

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Other Governmental Actions Not Affected.
 
45.     The Association acknowledges and agrees that its execution of the
Agreement is solely for the purpose of resolving the matters addressed herein,
consistent with Paragraph 44 above, and does not otherwise release, discharge,
compromise, settle, dismiss, resolve, or in any way affect any actions, charges
against, or liability of the Association that arise pursuant to this action or
otherwise, and that may be or have been brought by any governmental entity other
than the OTS.
 
Miscellaneous.
 
46.     The laws of the United States of America shall govern the construction
and validity of this Agreement.
 
47.     If any provision of this Agreement is ruled to be invalid, illegal, or
unenforceable by the decision of any Court of competent jurisdiction, the
validity, legality, and enforceability of the remaining provisions hereof shall
not in any way be affected or impaired thereby, unless the Regional Director in
his or her sole discretion determines otherwise.
 
48.     All references to the OTS in this Agreement shall also mean any of the
OTS’s predecessors, successors, and assigns.
 
49.     The section and paragraph headings in this Agreement are for convenience
only and shall not affect the interpretation of this Agreement.
 
50.     The terms of this Agreement represent the final agreement of the parties
with respect to the subject matters thereof, and constitute the sole agreement
of the parties with respect to such subject matters.
 
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Supervisory Agreement
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Enforceability of Agreement.
 
51.     This Agreement is a “written agreement” entered into with an agency
within the meaning and for the purposes of 12 U.S.C. § 1818.
 
Signature of Directors/Board Resolution.
 
52.     Each Director signing this Agreement attests that he or she voted in
favor of a Board Resolution authorizing the consent of the Association to the
issuance and execution of the Agreement. This Agreement may be executed in
counterparts by the directors after approval of execution of the Agreement at a
duly called board meeting. A copy of the Board Resolution authorizing execution
of this Agreement shall be delivered to the OTS, along with the executed
original(s) of this Agreement.
 
[Remainder of Page Intentionally Left Blank]
 
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Supervisory Agreement
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          WHEREFORE, the OTS, acting by and through its Regional Director, and
the Board of the Association, hereby execute this Agreement.
 
BROOKLYN FEDERAL SAVINGS BANK
  OFFICE OF THRIFT SUPERVISION
Brooklyn, New York
               
By: 
/s/ Angelo J. Di Lorenzo
 
By: 
/s/ Michael E. Finn
 
Angelo J. Di Lorenzo, Director
   
Michael E. Finn
       
Regional Director, Northeast Region
         
By:
/s/ Richard A. Kielty
       
Richard A. Kielty, Director
               
By:
/s/ John C. Gallin
       
John C. Gallin, Director
               
By:
/s/ John A. Loconsolo
       
John A. Loconsolo, Director
               
By:
/s/ Daniel O. Reich
       
Daniel O. Reich, Director
               
By:
/s/ Arthur R. Williams
       
Arthur R. Williams, Director
     

 
Brooklyn Federal Savings Bank
Supervisory Agreement
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