UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549




FORM 10-Q




x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934




For the quarterly period ended June 30, 2010




OR




o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934




Commission File Number 000-51208




BROOKLYN FEDERAL BANCORP, INC.(Exact name of registrant as specified in its charter)




Federal



20-2659598(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification Number)
  81 Court Street, Brooklyn, New York


11201(Address of principal executive offices)
(Zip Code)




Registrant’s telephone number, including area code (718) 855-8500.




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.




YES     x          NO     o




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).




YES     o          NO     o




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer
o
Accelerated Filer
oNon-accelerated Filer
o
Smaller Reporting Company
x




Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).




YES     o          NO     x




Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.




Common Stock, $.01 Par Value

12,889,344Class

Outstanding at August 16, 2010










BROOKLYN FEDERAL BANCORP, INC.




Form 10-Q Quarterly Report




Table of Contents




PART I.





Page NumberItem 1.
Financial Statements

1Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

21Item 3.
Quantitative and Qualitative Disclosures About Market Risk

37Item 4.
Controls and Procedures

37PART II.Item 1.
Legal Proceedings

38Item 1A.
Risk Factors

38Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

39Item 3.
Defaults Upon Senior Securities

39Item 4.
(Reserved)

39Item 5.
Other Information

40Item 6.
Exhibits

40Signature Page

41










PART I




ITEM 1.                      FINANCIAL STATEMENTS




BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


(In thousands, except share amounts)


(Unaudited)




June 30,


September 30,Assets

2010


2009Cash and due from banks (including interest-earning balances of $5,553 and$2,102, respectively)

$
8,950


$
3,472Securities:Available-for-sale


74,597



3,305Held-to-maturity (estimated fair value of $59,334 at September 30, 2009)


-



66,201Total securities


74,597



69,506Loans receivable


422,847



430,435Less: Allowance for loan losses


21,767



10,750Loans receivable, net


401,080



419,685Federal Home Loan Bank of New York (“FHLB”) stock, at cost


1,970



2,382Bank owned life insurance


9,790



9,511Accrued interest receivable


2,187



2,799Premises and equipment, net


1,853



2,030Deferred tax asset


20,092



10,330Prepaid expenses and other assets


3,839



1,730Total assets

$
524,358


$
521,445Liabilities and Stockholders’ EquityLiabilities:Deposits:Non-interest-bearing deposits

$
16,861


$
16,595Interest-bearing deposits


155,844



134,664Certificates of deposit


255,428



250,811Total deposits


428,133



402,070Borrowings


15,200



27,300Advance payments by borrowers for taxes and insurance


1,595



2,142Accrued expenses and other liabilities


6,257



8,059Total liabilities


451,185



439,571Stockholders’ equity:Preferred stock, $0.01 par value, 1,000,000 shares authorized; none issued


--



--Common stock, $0.01 par value, 20,000,000 shares authorized; 13,484,210 issued and 12,889,344 and 12,890,754 outstanding, respectively


135



135Additional paid-in capital


43,135



43,112Retained earnings - substantially restricted


40,656



52,671Treasury shares - at cost, 594,866 shares and 593,456 shares, respectively


(7,720
)


(7,707
)Unallocated common stock held by employee stock ownership plan (“ESOP”)


(2,275
)


(2,394
)Unallocated shares of the stock-based incentive plan


(297
)


(417
)Accumulated other comprehensive loss:Net unrealized loss on securities, net of income tax


(461
)


(3,526
)Total stockholders’ equity


73,173



81,874Total liabilities and stockholders’ equity

$
524,358


$
521,445




See accompanying notes to consolidated financial statements.




1


BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except share and per share amounts)


(Unaudited)


For the Three Months Ended


For the Nine Months EndedJune 30,


June 30,


June 30,


June 30,2010


2009


2010


2009Interest income:Loans

$
6,292


$
7,800


$
20,387


$
22,380Mortgage-backed securities


822



924



2,594



2,796Other securities and interest-earning assets


55



96



229



246Total interest income


7,169



8,820



23,210



25,422Interest expense:Deposits


1,757



2,313



5,772



7,273Borrowings


68



64



173



281Total interest expense


1,825



2,377



5,945



7,554Net interest income before provision for loan losses


5,344



6,443



17,265



17,868Provision for loan losses


8,790



376



16,747



1,216Net interest (loss) income after provision for loan losses


(3,446
)


6,067



518



16,652Non-interest income:Loss on other than temporary impairment (“OTTI”) of securities


(10,305
)


(2,300
)


(11,546
)


(3,166
)Less: Non-credit portion of OTTI recorded in other comprehensive income (before taxes)


-



2,078



-



2,078Net loss on OTTI recognized in earnings


(10,305
)


(222
)


(11,546
)


(1,088
)Banking fees and service charges


178



427



662



1,053Net gain on sale of loans held-for-sale


91



92



185



222Other


155



161



445



459Total non-interest (loss) income


(9,881
)


458



(10,254
)


646Non-interest expense:Compensation and employee benefits


1,937



2,052



5,996



6,727Occupancy and equipment


444



444



1,340



1,293FDIC Insurance


263



486



565



546Professional fees


259



83



853



336Data processing fees


165



177



495



553Other


418



318



1,161



1,040Total non-interest expense


3,486



3,560



10,410



10,495(Loss) income before income tax expense


(16,813
)


2,965



(20,146
)


6,803Income tax (benefit) expense


(7,469
)


1,226



(9,148
)


2,640Net (loss) income

$
(9,344
)

$
1,739


$
(10,998
)

$
4,163(Loss) earnings per common share:Basic

$
(0.74
)

$
0.14


$
(0.87
)

$
0.33Diluted

$
(0.74
)

$
0.14


$
(0.87
)

$
0.33Average common shares outstanding:Basic


12,631,821



12,608,619



12,623,577



12,648,701Diluted


12,631,821



12,610,748



12,623,577



12,653,142








2


BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


(In thousands, except for per share amounts)


(Unaudited)


Common Stock


Additional Paid-in Capital


Retained Earnings-Substantially Restricted


Treasury Stock


Unallocated Common Stock Held by ESOP


Unallocated Shares of the Stock-based Incentive Plan


Accumulated Other Comprehensive Income (Loss)


TotalBalance at September 30, 2009

$
135


$
43,112


$
52,671


$
(7,707
)

$
(2,394
)

$
(417
)

$
(3,526
)

$
81,874Comprehensive loss:Net loss


--



--



(10,998
)


--



--



--



--



(10,998
)Net unrealized loss on securities available-for-sale,net of income tax benefit of $2,668


--



--



--



--



--



--



(3,396
)


(3,396
)Loss on impairment of securities available-for-sale,net of income tax benefit of $5,085


--



--



--



--



--



--



6,461



6,461Total comprehensive loss






























(7,933
)Treasury stock purchased  (1,336 shares)


--



--



--



(13
)


--



--



--



(13
)Allocation of ESOP stock


--



(15
)


--



--



119



--



--



104Stock-based incentive plan expense


--



38



--



--



--



120



--



158Dividends paid on common stock, $0.11 per share


--



--



(1,017
)


--



--



--



--



(1,017
)Balance at June 30, 2010

$
135


$
43,135


$
40,656


$
(7,720
)

$
(2,275
)

$
(297
)

$
(461
)

$
73,173


See accompanying notes to consolidated financial statements.
  3




BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 
 For the Nine Months EndedJune 30,2010


2009Cash flows from operating activities:Net (loss) income

$
(10,998
)

$
4,163Adjustments to reconcile net income to net cash used in operating activities:ESOP expense


104



147Stock-based incentive plan expense


158



235Depreciation and amortization


340



339Provision for loan losses


16,747



1,216Income from bank-owned life insurance


(264
)


(277
)Gross loss on OTTI recognized in earnings


11,546



1,088Amortization of servicing rights


38



147Accretion of deferred loan fees, net


(505
)


(299
)Accretion of discounts, net of amortization of premiums


(274
)


(100
)Originations of loans held-for-sale


(5,337
)


(76,942
)Proceeds from sales of loans held-for-sale


5,426



12,497Principal repayments on loans held-for-sale


2



8,501Net gain on sales of loans held-for-sale


(185
)


(222
)Decrease (increase) in accrued interest receivable


612



(413
)Deferred income tax benefit


(11,918
)


(1,437
)(Increase) decrease in prepaid expenses and other assets


(2,021
)


783(Decrease) increase in accrued expenses and other liabilities


(1,805
)


2,285Net cash provided by (used in) operating activities


1,666



(48,289
)Cash flows from investing activities:Repayments in excess of loan originations


2,358



9,379Principal repayments on mortgage-backed securities held-to-maturity


15,507



12,339Principal repayments on mortgage-backed securities available-for-sale


94



--Purchases of mortgage-backed securities held-to-maturity


(15,699
)


(10,770
)Purchases of securities available-for-sale


(11,068
)


(500
)Maturities of certificates of deposit


--



1,397Net redemptions of FHLB stock


412



219Purchases of bank-owned life insurance


(15
)


(15
)Purchases of premises and equipment


(163
)


(114
)Net cash (used in) provided by investing activities


(8,574
)


11,935Cash flows from financing activities:Increase in deposits


26,063



51,933Net decrease in short term borrowings


(17,100
)


(13,800
)Proceeds from long term borrowings


5,000



2,000Repayments of long term borrowings


--



(439
)Decrease in advance payments by borrowers for taxes and insurance


(547
)


(1,005
)Purchases of treasury stock


(13
)


(1,255
)Payment of cash dividend


(1,017
)


(1,108
)Net cash provided by financing activities


12,386



36,326Net increase (decrease) in cash and cash equivalents


5,478



(28
)Cash and cash equivalents at beginning of year


3,472



5,053Cash and cash equivalents at end of period

$
8,950


$
5,025
 
 4
 
 BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 
 For the Nine Months EndedJune 30,2010


2009Supplemental disclosure of cash flow information:Cash paid during the period for:Interest

$
5,941


$
7,570Taxes


4,440



3,188Other:Mortgage loans held-for-sale transferred to held-to-maturity


--



62,820Securities held-to-maturity transferred to available-for-sale


71,017



--
 
 See accompanying notes to consolidated financial statements.
 5
 
 BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2010
 (Unaudited)
 
 Note 1 - Business
 
 BFS Bancorp, MHC
 
 BFS Bancorp, MHC is the federally chartered mutual holding company parent of Brooklyn Federal Bancorp, Inc.  The only business that BFS Bancorp, MHC has engaged in is the majority ownership of Brooklyn Federal Bancorp, Inc.  BFS Bancorp, MHC was formed upon completion of Brooklyn Federal Savings Bank’s reorganization into the mutual holding company structure.  So long as BFS Bancorp, MHC exists, it will own a majority of the voting stock of Brooklyn Federal Bancorp, Inc.
 
 Brooklyn Federal Bancorp, Inc.
 
 Brooklyn Federal Bancorp, Inc. (the “Company”) was formed to serve as the stock holding company for Brooklyn Federal Savings Bank (the “Bank”) as part of the Bank’s reorganization into the mutual holding company structure.  The Company completed its initial public offering on April 5, 2005.
 
 The Company issued 9,257,500 shares to BFS Bancorp, MHC, and 3,967,500 shares to depositors resulting in a total of 13,225,000 shares issued and outstanding after completion of the reorganization.  At June 30, 2010, there were 12,889,344 total shares outstanding 71.8% of which were owned by BFS Bancorp, MHC.
 
 Brooklyn Federal Savings Bank
 
 The Bank is a federally chartered savings bank headquartered in Brooklyn, NY.  The Bank was originally founded in 1887.  We conduct our business from our main office and four branch offices.  All of our offices are located in New York State.  The telephone number at our main office is (718) 855-8500.
 
 At June 30, 2010, the Bank had total assets of $523.4 million, total deposits of $431.3 million and stockholders’ equity of $66.8 million.  Our net loss for the three months and nine months ended June 30, 2010 was $9.3 million and $11.0 million, respectively.  Our principal business activity is originating mortgage loans secured by one-to-four-family residential real estate, multi-family real estate and commercial real estate, construction loans, land loans and, to a limited extent, a variety of consumer loans and home equity loans. We offer a variety of deposit accounts, including checking, savings and certificates of deposit, and emphasize personal and efficient service for our customers.
 
 Note 2 - Basis of Presentation, Reclassifications, and Subsequent Events
 
 A) Basis of Presentation
 
 The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with instructions for Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included and all significant inter-company balances and transactions have been eliminated in consolidation.  Operating results for the three and nine month periods ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending September 30, 2010.  The Company’s consolidated financial statements, as presented in the Company’s Form 10-K for the year ended September 30, 2009, should be read in conjunction with these statements.
 
 6
 
 B) Reclassifications
 
 Certain amounts in the consolidated financial statements presented for the prior year period have been reclassified to conform to the current year presentation.  On the Consolidated Statements of Financial Condition, the net deferred tax asset has been reclassified from prepaid expenses and other assets.  On the Consolidated Statements of Operations, FDIC Insurance has been reclassified from Non-interest expense - Other.
 
 C) Subsequent Events
 
 The Company has evaluated events and transactions occurring subsequent to the Consolidated Statements of Condition date of June 30, 2010 for items that should potentially be recognized or disclosed in these financial statements.  Based upon our evaluation, no events were identified which would be recorded in the interim financial statements,  except as noted in Note 5 – Securities and Note 8 – Subsequent Events.
 
 Note 3 - Use of Estimates
 
 The preparation of consolidated financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from current estimates. Estimates associated with the allowance for loan losses, fair values of securities and deferred taxes are particularly susceptible to material change in the near term.
 
 Note 4 - Impact of Certain Accounting Pronouncements
 
 In January 2010, the Financial Accounting Standards Board (the“FASB”)issued Accounting Standards Update (“ASU”) 2010-06, Fair Value Measurements and Disclosures(“Topic 820”): Improving Disclosures about Fair Value Measurements(“ASU 10-06”). ASU 10-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. These new disclosure requirements were adopted by the Company during the current period, with the exception of the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010.  With respect to the portions of this ASU that were adopted during the current period, the adoption of this standard did not have a material impact on the Company’s financial position, results of operations, cash flows, or disclosures.  Management does not believe that the adoption of the remaining portion of this ASU will have a material impact on the Company’s financial position, results of operation, cash flows, or disclosures.
 
 In February 2010, the FASB issued ASU 2010-09, Subsequent Events (“Topic 855”): Amendments to Certain Recognition and Disclosure Requirements. The amendments remove the requirement for a Securities and Exchange Commission  (“SEC”) registrant to disclose the date through which subsequent events were evaluated as this requirement would have potentially conflicted with SEC reporting requirements. Removal of the disclosure requirement is not expected to affect the nature or timing of subsequent events evaluations performed by the Company. This ASU became effective upon issuance.
 
 7
 
 In July 2010, the FASB issued ASU No. 2010-20 which amends the authoritative accounting guidance under Topic 310, Receivables.  The guidance amends existing disclosures to provide financial statement users with greater transparency about an entity’s allowance for loan and lease losses and the credit quality of its loan and lease portfolio.  Under the new guidelines, the allowance for loan and lease losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired loans and leases and non-accrual status are to be presented by class of loans and leases.  Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required.  The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the loan and lease portfolio’s risk and performance.  This guidance is effective for interim and annual reporting periods ending on or after December 15, 2010.  Adoption of this guidance is not expected to have a material effect on the Company’s results of operations or financial condition.
 
 Note 5 - Securities
 
 Investments in securities at June 30, 2010 and September 30, 2009 are summarized as follows:
 
 June 30, 2010

Amortized
cost


Gross
unrealized
gains


Gross
unrealized
losses


Estimated
fair value(In thousands)Securities available-for-sale:Mortgage-backed securities:Government agency

$
9,254


$
10


$
(10
)

$
9,254Government-sponsored enterprises


28,782



427



(90
)


29,119Private issuers


34,222



633



(1,808
)


33,047Mutual funds


3,159



18



-



3,177Total securities available-for-sale

$
75,417


$
1,088


$
(1,908
)

$
74,597
 
 September 30, 2009

Amortized
cost


Gross
unrealized
gains


Gross
unrealized
losses


Estimated
fair value(In thousands)Securities available-for-sale:Mutual funds

$
3,289


$
16


$
-


$
3,305Amortized
cost


Carrying cost


Gross
unrealized
gains


Gross
unrealized
losses


Estimated
fair value(In thousands)Securities held-to-maturity:Mortgage-backed securities:Government agency

$
125


$
125


$
3


$
(5
)

$
123Government-sponsored enterprises


20,474



20,474



391



(2
)


20,863Private issuers


51,630



45,602



259



(7,513
)


38,348Total securities held-to-maturity

$
72,229


$
66,201


$
653


$
(7,520
)

$
59,334
 
 8
 
 The Company acquired all of its mortgage-backed securities (none resulted from retained interests in loans sold or securitized by the Company). At June 30, 2010, mortgage-backed securities issued by government-sponsored enterprises consisted of (i) Federal Home Loan Mortgage Corporation (“Freddie Mac”) securities with an amortized cost of $13.3 million (compared to $12.2 million at September 30, 2009) and an estimated fair value of $13.5 million (compared to $12.5 million at September 30, 2009) and (ii) Federal National Mortgage Association (“Fannie Mae”) securities with an amortized cost of $15.5 million (compared to $8.2 million at September 30, 2009) and an estimated fair value of $15.6 million (compared to $8.3 million at September 30, 2009).  These are the only securities of individual issuers held by the Company with an aggregate book value exceeding 10% of the Company’s equity at June 30, 2010. Government agency mortgage-backed securities represent securities issued by Government National Mortgage Association (“Ginnie Mae”).
 
 During the three months ended June 30, 2010, the Company changed its intention regarding its mortgage-backed securities that were previously classified as held-to-maturity, due to the increased capital required to be held against these securities.  Based upon the change in intent, all of the Company’s held-to-maturity securities were transferred to available-for-sale.  The held-to-maturity securities transferred to available-for-sale were carried at an amortized cost of approximately $61.3 million (after previously recognized other-than-temporary-impairment  charges) and a fair value of $60.4 million on the date of transfer, with the net unrealized loss recorded in accumulated other comprehensive loss.  Subsequent to June 30, 2010 the Company sold 14 of these securities with no material additional loss or gain.  For the securities that were sold subsequent to June 30, 2010, the Company recorded other-than-temporary-impairment (“OTTI”) charges during the three and nine months ended June 30, 2010 totaling $9.6 million which was the difference between the book and market value at June 30, 2010.  The remaining OTTI charges of $0.7 million and $1.9 million during the three and nine months ended June 30, 2010, respectively, were for the securities referenced above prior to the reclassification of said securities from held-to-maturity to available-for-sale.
 
 The Company recognized other-than-temporary impairment charges of $10.3 million and $11.5 million on securities for the three and nine month periods ended June 30, 2010, compared to $0.2 million and $1.1 million for the three and nine month periods ended June 30, 2009.  During the nine months ended June 30, 2009, in addition to the OTTI charges discussed above, the Company recognized OTTI charges primarily related to the private issuer mortgage-backed securities. The Company recognized an OTTI charge of $45,000 and $130,000 on its securities  investment in a mutual fund for the three and nine month periods ended June 30, 2010, compared to zero and $0.9 million for the three and nine month periods ended June 30, 2009.  The Bank’s investment in this mutual fund has been steadily losing value.  In addition, the fund implemented a temporary prohibition on cash redemptions, thereby lessening the ability of the Bank to dispose of its remaining $2.7 million investment in this asset.
 
 At June 30, 2010, the Bank pledged securities having an amortized cost of $33.8 million, with an estimated fair value of $33.6 million, as collateral for advances from the Federal Home Loan Bank of New York.
 
 The following table summarizes debt securities available-for-sale at estimated fair value by contractual final maturity as of June 30, 2010.  Actual maturities will differ from contractual final maturity due to scheduled monthly payments and due to borrowers having the right to prepay obligations with or without a prepayment penalty.
 
 Amortized


Estimatedcost


Fair Value(In thousands)Mortgage-backed securities:One year or less

$
-


$
-Over one year through five years


172



177Over five years through ten years


47,398



46,417More than ten years


24,688



24,826Total debt securities available-for-sale

$
72,258


$
71,420
 
 9
 The following table summarizes securities at June 30, 2010 and September 30, 2009 with gross unrealized losses, segregated by the length of time the securities had been in a continuous loss position:
 
 June 30, 2010

Less than 12 months


12 months or more


TotalEstimated


Gross unrealized

Estimated


Gross unrealized

Estimated


Gross unrealizedfair value


losses


fair value


losses


fair value


losses(In thousands)Government agency

$
3,027


$
(8
)

$
78


$
(2
)

$
3,105


$
(10
)Government-sponsored enterprises


10,735



(90
)


-



-



10,735



(90
)Private issuers


2,673



(223
)


13,276



(1,585
)


15,949



(1,808
)Total temporarily impaired securities

$
16,435


$
(321
)

$
13,354


$
(1,587
)

$
29,789


$
(1,908
)
 September 30, 2009

Less than 12 months


12 months or more


TotalEstimated


Gross unrealized

Estimated


Gross unrealized

Estimated


Gross unrealizedfair value


losses


fair value


losses


fair value


losses(In thousands)Government agency

$
-


$
-


$
104


$
(5
)

$
104


$
(5
)Government-sponsored enterprises


450



(1
)


39



(1
)


489



(2
)Private issuers


7,493



(152
)


22,418



(7,361
)


29,911



(7,513
)Total temporarily impaired securities

$
7,943


$
(153
)

$
22,561


$
(7,367
)

$
30,504


$
(7,520
)
 
 10
 In April 2009, the FASB amended the OTTI model for debt securities.  The impairment model for equity securities was not affected.  Under the updated guidance, an OTTI loss must be fully recognized in earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis.  However, even if an investor does not expect to sell a debt security, it must evaluate the expected cash flows to be received and determine if a credit loss has occurred.  In the event of OTTI, only the amount of impairment associated with the credit loss is recognized in earnings.  Amounts relating to factors other than credit losses are recorded in accumulated other comprehensive loss (“AOCL”). The guidance also requires additional disclosures regarding the calculation of credit losses as well as factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired.
 
 Securities in unrealized loss positions are analyzed as part of the Company’s ongoing assessment of OTTI.  When the Company intends to sell or is required to sell securities, the Company recognizes an impairment loss equal to the full difference between the amortized cost basis and fair value of those securities.  When the Company does not intend to sell or is not required to sell equity or debt securities in an unrealized loss position, potential OTTI is considered based on a variety of factors, including the length of time and extent to which the fair value has been less than cost; adverse conditions specifically related to the industry, the geographic area or financial condition of the issuer or the underlying collateral of a security; the payment structure of the security; changes to the rating of the security by a rating agency; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet date.  For mortgage-backed securities, the Company estimates cash flows over the remaining lives of the underlying collateral to assess whether credit losses exist and determines if any adverse changes in cash flows have occurred.  The Company’s cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting period.  As of June 30, 2010, the Company does not intend to sell the securities with an unrealized loss position in AOCL, except for the 14 private issuer securities referenced above, and it is likely that the Company will not be required to sell these securities before recovery of their amortized cost basis.  The Company believes that the securities with an unrealized loss in AOCL are not other-than-temporarily impaired as of June 30, 2010.
 
 U.S. Government Agency and Government Sponsored Enterprise Mortgage-backed Securities
 
 The carrying value of the Company’s U.S. Government agency and Government sponsored mortgage-backed securities totaled $38.4 million at June 30, 2010 and comprised 51.4% of total investments and 7.3% of total assets as of that date.  At June 30, 2010, there were twelve securities of this type in an unrealized loss position for less than 12 months and two securities of this type in an unrealized loss position for 12 months or longer.  This category of securities generally includes mortgage pass-through securities and collateralized mortgage obligations issued by U.S. government agencies, such as Ginnie Mae, which guarantees the contractual cash flows associated with those securities and U.S. government-sponsored entities such as Fannie Mae and Freddie Mac, each of which carried the implicit guarantee of the U.S. government to guarantee the contractual cash flows associated with those securities. Those guarantees were strengthened during the 2008-2009 financial crisis during which time Fannie Mae and Freddie Mac each were placed into receivership by the federal government. Through those actions, the U.S. government effectively reinforced the guarantees of those agencies, thereby assuring the creditworthiness of the mortgage-backed securities issued by those agencies.
 
 With credit risk being reduced to negligible levels due to the U.S. government’s support of these agencies, the unrealized losses on the Company’s investment in U.S. Government agency and Government sponsored mortgage-backed securities are due largely to the combined effects of several market-related factors. First, movements in market interest rates significantly impact the average lives of mortgage-backed securities by influencing the rate of principal prepayment attributable to refinancing activity. Changes in the expected average lives of these securities significantly impact their fair values due to the extension or contraction of the cash flows that an investor expects to receive over the life of the security.
 
 Historically, lower market interest rates generally prompt greater refinancing activity, thereby shortening the average lives of mortgage-backed securities and vice-versa. However, prepayment rates are also influenced by fluctuating real estate values and the overall availability of credit in the marketplace, which significantly impacts the ability of borrowers to refinance. The deteriorating real estate market values and reduced availability of credit that has characterized the residential real estate marketplace over the past four years has significantly slowed both real estate purchase and refinancing activities. Consequently, prepayment rates on mortgage-backed securities have generally slowed thereby extending their average lives.
 
 11
 
 The market price of mortgage-backed securities, being the key measure of the fair value to an investor in those securities, is also influenced by the overall supply and demand for those securities in the marketplace. Absent other factors, an increase in the demand for, or a decrease in the supply of a security increases its price. Conversely, a decrease in the demand for, or an increase in the supply of a security decreases its price.
 
 In sum, the factors influencing the fair value of the Company’s U.S. Government agency and Government sponsored mortgage-backed securities, as described above, generally result from movements in market interest rates and changing real estate and financial market conditions, which affect the supply and demand for those securities. Inasmuch as market conditions fluctuate over time, the impairments of value arising from these changing market conditions are both “noncredit-related” and “temporary” in nature.
 
 Finally, the Company purchased these securities at either discounts or nominal premiums relative to their par amounts. Accordingly, the Company expects that the securities will not be settled for a price less than their amortized cost.
 
 In light of the factors noted above, the Company does not consider its U.S. Government agency and Government sponsored mortgage-backed securities with unrealized losses at June 30, 2010 to be “other-than-temporarily” impaired as of that date.
 
 Private Issuer Mortgage-backed Securities
 
 The carrying value of the Company’s private issuer mortgage-backed securities totaled $33.0 million at June 30, 2010 and comprised 44.3% of total investments and 6.3% of total assets as of that date.  At June 30, 2010, there was one security of this type in an unrealized loss position for less than 12 months and 10 securities of this type in an unrealized loss position for 12 months or longer.
 
 In addition, the Company has subsequently sold 14 of its private issuer mortgage-backed securities with a carrying value of $6.7 million.  These securities were marked to market at June 30, 2010 through an OTTI charge as the Company’s intention regarding these securities changed.
 
 Unlike agency and government sponsored mortgage-backed securities, private issuer collateralized mortgage obligations are not explicitly guaranteed by a U.S. government sponsored entity. Rather, these securities generally utilize the structure of the larger investment vehicle to reallocate credit risk among the individual tranches comprised within that vehicle. Through this process, investors in different tranches are subject to varying degrees of risk that the cash flows of their tranche will be adversely impacted by borrowers defaulting on the underlying mortgage loans. The creditworthiness of certain tranches may also be further enhanced by additional credit insurance protection embedded within the terms of the total investment vehicle.
 
 The Company monitors the general level of credit risk for each of its private issuer mortgage-backed securities based upon the ratings assigned to its specific tranches by one or more credit rating agencies. The level of these ratings, and changes thereto, is one of several factors considered by the Company in identifying those securities that may be other-than-temporarily impaired. For example, all impaired private issuer mortgage-backed securities that are rated below investment grade are reviewed individually to determine if the impairment is other-than- temporary.
 
 Additional factors considered by the Company in identifying its other-than-temporarily impaired securities include, but are not limited to, the severity and duration of the impairment, the payment performance of the underlying mortgage loans and trends relating thereto, the original terms of the underlying loans regarding credit quality (e.g.,Prime, Alt-A), the geographic distribution of the real estate collateral supporting those loans and any current or anticipated declines in associated collateral values, as well as the degree of protection against credit losses afforded to the Company’s security through the structural characteristics of the larger investment vehicle as noted above. Based upon these additional factors, the impairment of certain investment grade securities may also be reviewed for other-than-temporary impairment.
 
 12
 
 Securities determined to be potentially other-than-temporarily impaired are individually analyzed to determine the “credit-related” and “noncredit-related” portions of the impairment. As noted earlier, a credit-related impairment generally represents the amount by which the present value of the cash flows that are expected to be collected on an other-than-temporarily impaired security fall below its amortized cost. Projected cash flows for the Company’s private issuer mortgage-backed securities are modeled using an automated securities analytics system that is commonly used by institutional investors and the broker/dealer community. The system generates an individual tranche’s projected cash flows based upon several input assumptions regarding the payment performance of the mortgage loans underlying the larger investment vehicle of which the Company’s tranche is a part. These assumptions include, but may not be limited to, loan prepayment rates, loan default rates, and the severity of actual losses on defaulting loans. The Company generally bases the input values for these assumptions on historical data reported by the analytics system. The Company then calculates the present value of those cash flows based upon the appropriate discount rate required by the applicable accounting guidance.
 
 The impairments of those securities whose cash flows, when present valued, fall below the Company’s carrying value due to expected principal losses are identified as other-than-temporary. The amount by which the present value of the expected cash flows falls below the Company’s carrying value of the security is identified as the credit-related portion of the other-than-temporary impairment. The remaining portion, where applicable, is identified as noncredit-related, other-than-temporary impairment.
 
 The impairments of those individually analyzed securities whose cash flows, when present valued, exceed the Company’s carrying value or otherwise reflect no expected principal losses, are generally identified as temporary. Similarly, the impairments associated with those securities that have generally retained their investment-grade credit rating and whose additional factors, as noted above, are not characterized by potentially adverse attributes, are also generally identified as temporary. In these cases, the Company attributes the unrealized losses to the same fluctuating market-related factors as those affecting agency mortgage-backed securities, noting, in particular, the comparatively greater temporary adverse effect on fair value arising from the general illiquidity of private issuer, investment grade mortgage-backed securities in the marketplace compared to agency-guaranteed mortgage-backed securities. In light of these factors, the related impairments are defined as “temporary.”
 
 The classification of impairment as “temporary” is further reinforced by the Company’s stated intent and recognition that we will not be required to sell any of our private issuer mortgage-backed securities which allows for an adequate timeframe during which the fair values of the impaired securities are expected to recover to their amortized cost. More specifically, as of June 30, 2010, the Company has no intention to sell the securities, with the exception of the 14 private issuer mortgage-backed securities referenced above. Additionally, the Company has concluded that the possibility of being required to sell the securities prior to their anticipated recovery is unlikely based upon its strong liquidity and capital position as of that date.
 
 The following table presents a roll-forward of the credit loss component of OTTI on private issuer mortgage-backed securities for which a non-credit component of OTTI was recognized in other comprehensive loss for the three and nine months ended June 30, 2010.  OTTI recognized in earnings for credit-impaired debt securities is presented as additions in two components, based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment) or is not the first time a debt security was credit impaired (subsequent credit impairment).  Changes in the credit loss component of credit-impaired debt securities were as follows:
 
 13
 
 For the Three Months ended June 30, 2010

Total Other-
Than-
Temporary
Impairment
Loss


Other-Than-
Temporary
Impairment 
Credit Losses
Recorded in
Earnings


Other-Than-
Temporary 
Impairment
Credit Losses
Recorded in
Other
Comprehensive
Income(in thousands)Beginning balance as of April 1, 2010

$
10,017


$
3,180


$
6,837Add: Initial other-than-temporary credit losses


4,001



4,001



-Additional other-than-temporary credit losses


(578
)


6,259



(6,837
)Ending balance as of June 30, 2010

$
13,440


$
13,440


$
-
 
 For the Three Months ended June 30, 2009

Total Other-
Than-
Temporary
Impairment
Loss


Other-Than-
Temporary
Impairment
Credit Losses
Recorded in 
Earnings


Other-Than-
Temporary 
Impairment
Credit Losses
Recorded in
Other
Comprehensive
Income(in thousands)Beginning balance as of April 1, 2009

$
-


$
-


$
-Add: Initial other-than-temporary credit losses


2,300



222



2,078Additional other-than-temporary credit losses


-



-



-Ending balance as of June 30, 2009

$
2,300


$
222


$
2,078
 
 For the Nine Months ended June 30, 2010

Total Other-
Than-
Temporary
Impairment
Loss


Other-Than-
Temporary 
Impairment
Credit Losses 
Recorded in
Earnings


Other-Than-
Temporary
Impairment
Credit Losses
Recorded in
Other
Comprehensive
Income(in thousands)Beginning balance as of September 30, 2009

$
8,085


$
2,024


$
6,061Add: Initial other-than-temporary credit losses


4,955



4,179



776Additional other-than-temporary credit losses


400



7,237



(6,837
)Ending balance as of June 30, 2010

$
13,440


$
13,440


$
-
 
 14
 
 For the Nine Months ended June 30, 2009

Total Other-
Than-
Temporary
Impairment
Loss


Other-Than-
Temporary
Impairment
Credit Losses
Recorded in
Earnings


Other-Than-
Temporary
Impairment 
Credit Losses
Recorded in
Other
Comprehensive
Income(in thousands)Beginning balance as of September 30, 2008

$
-


$
-


$
-Add: Initial other-than-temporary credit losses


2,300



222



2,078Additional other-than-temporary credit losses


-



-



-Ending balance as of June 30, 2009

$
2,300


$
222


$
2,078
 
 Note 6 – Allowance for Loan Losses
 
 The following table summarizes the activity in allowance for loan losses for the nine month period ended June 30, 2010 and fiscal year ended September 30, 2009 (dollars in thousands):
 
 June


September2010


2009Balance at beginning of period

$
10,750


$
2,205Charge-offs:One-to-four-family


171



-Multi-family


1,218



-Commercial real estate


2,929



-Construction


254



-Land


1,130



-Consumer and other


35



-Recoveries


(7
)


-Net charge-offs


5,730



-Provision for loan losses


16,747



8,545Balance at end of period

$
21,767


$
10,750Ratios:Annualized net charge-offs to averageloans outstanding


1.77
%


0.00
%Allowance for loan losses to total loansat end of period


5.15
%


2.50
%
 
 Non-performing loans are defined as either in non-accrual status and/or past contractual maturity date.  At June 30, 2010, $99.4 million of our loans net of specific allowances, or 23.5% of our total loans, compared to $22.1 million, or 5.13% at September 30, 2009, were non-accrual and/or past maturity and therefore non-performing.  These loans consist of multi-family, commercial real estate, construction and land loans.  We are actively pursuing all applicable methods and resources to reduce the number and amount of non-performing loans.
 
 15
 
 The table below sets forth the amounts and categories of our non-performing assets, net of specific allowances at the dates indicated.  We may from time to time agree to modify the contractual terms of a borrower’s loan.  In cases where these modifications represent a concession (for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates) to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”).  At June 30, 2010, loans modified in a troubled debt restructuring totaled $38.0 million.  One loan for $0.4 million is performing in accordance with its new terms and, therefore, is not included in the table below.  The remaining total of $37.6 million is in non-accrual status, and included in the table below.  However, of the $37.6 million, $32.8 million are performing in accordance with their modified terms.     The sharp and prolonged downturn in the real estate market has resulted in a deterioration of the Company’s loans receivable portfolio, which in turn has caused increases in non-performing loans, particularly in our multi-family, commercial real estate and construction loan portfolios.
 
 The following table sets forth information with respect to the Company’s non-performing assets (dollars in thousands):
 
 June 30,


September 30,2010


2009Non-accrual loans:One- to four-family

$
-


$
-Multi-family


31,456



902Commercial real estate


47,170



15,623Construction


4,588



832Land


5,449



4,722Total non-accrual loans


88,663



22,079Loans past maturity and still accruing


10,775



-Total non-performing assets

$
99,438


$
22,079Ratios:Total non-performing loans to total loans


23.52
%


5.13
%Total non-performing loans to total assets


18.96
%


4.23
%Total non-performing assets to total assets


18.96
%


4.23
%
 
 For the three and nine months ended June 30, 2010, there was $1.3 million and $4.4 million of interest income that would have been recorded had our non-accruing loans been current and in accordance with their original terms.
 
 Note 7 - Financial Instrument Fair Value Disclosures
 
 FASB issued guidance regarding Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under U.S. GAAP, and expands disclosures about fair value measurements.  This guidance applies to other accounting pronouncements that require or permit fair value measurements.
 
 The FASB-issued guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under this guidance are as follows:
 
 Level 1: Quoted prices in active markets for identical assets or liabilities.
 
 16




Level 2: Observable inputs other than Level 1 prices, such as quoted for similar assets or liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
 
 An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
 
 For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy as reported on the consolidated statements of financial condition at June 30, 2010 and September 30, 2009 are as follows (in thousands):
 (Level 1)Quoted Prices


(Level 2)in Active


Significant


(Level 3)Markets for


Other


SignificantIdentical


Observable


UnobservableDescription

June 30, 2010


Assets


Inputs


InputsSecurities available-for-sale

$
74,597


$
3,177


$
71,420


$
-(Level 1)Quoted Prices


(Level 2)in Active


Significant


(Level 3)Markets for


Other


SignificantIdentical


Observable


UnobservableDescription

September 30, 2009


Assets


Inputs


InputsSecurities available-for-sale

$
3,305


$
3,305


$
-


$
-
 
 For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy as reported on the consolidated statement of financial condition at June 30, 2010 and September 30, 2009 is as follows (in thousands):
 
 (Level 1)Quoted Prices


(Level 2)in Active


Significant


(Level 3)Markets for


Other


SignificantIdentical


Observable


UnobservableDescription

June 30, 2010


Assets


Inputs


InputsImpaired loans

$
106,071


$
-


$
-


$
106,071Impaired securities


6,687



-



6,687



-
 
 17
 
 (Level 1)Quoted Prices


(Level 2)in Active


Significant


(Level 3)Markets for


Other


SignificantIdentical


Observable


UnobservableDescription

September 30, 2009


Assets


Inputs


InputsImpaired loans

$
17,880


$
-


$
-


$
17,880Impaired securities


724



-



724



-
 
 A description of the methods and significant assumptions utilized in estimating the fair value of impaired assets follows:
 
 Impaired loans – The Company has measured impairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon current independent third party appraisals of the properties for collateral dependent loans, or if recent appraisals are not available on discounted cash flows based upon the expected proceeds.  These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.  The fair value consists of the loan balances less their specific valuation allowances.
 
 Impaired securities – The Company has measured impairment generally based on the fair values of securities that are primarily determined by obtaining matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
 
 Fair value disclosures are required for financial instruments for which it is practicable to estimate fair value. The definition of a financial instrument includes many of the assets and liabilities recognized in the Bank’s consolidated statements of financial condition, as well as certain off-balance sheet items. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date.
 
 Quoted market prices are used to estimate fair values when those prices are available. However, active markets do not exist for many types of financial instruments. Consequently, fair values for these instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. Estimates developed using these methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs.
 
 18
 
 The following table summarizes the carrying value and estimated fair value of the Company’s financial instruments at June 30, 2010 and September 30, 2009:
 
 June 30, 2010


September 30, 2009Carrying


Estimated


Carrying


Estimatedvalue


fair value


value


fair value(In thousands)Financial assets:Cash and due from banks

$
8,950


$
8,950


$
3,472


$
3,472Securities available-for-sale


74,597



74,597



3,305



3,305Securities held-to-maturity


-



-



66,201



59,334Loans receivable, net


401,080



402,357



419,685



421,085FHLB stock


1,970



1,970



2,382



2,382Financial liabilities:Deposits


428,133



432,685



402,070



405,548Borrowings


15,200



15,521



27,300



27,390
 
 The following methods and assumptions were utilized by the Company in estimating the fair values of its financial instruments at June 30, 2010 and September 30, 2009:
 
 (a)
Cash and Due from Banks
 
 The estimated fair values of cash and due from banks are assumed to equal the carrying values, as these balances are due on demand.
 
 (b)
Securities Available-for-Sale and Held-to-Maturity
 
 The estimated fair values for mutual fund securities available-for-sale were based principally on quoted market prices (Level 1 inputs).  The fair values of all other securities available-for-sale and all held-to-maturity (carried at amortized cost) securities were primarily determined by obtaining matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
 
 (c)
Loans Receivable, Net
 
 The loan portfolio was segregated into various components for valuation purposes in order to group loans based on their significant financial characteristics, such as loan type, interest rate, interest rate type (adjustable or fixed) and payment status (performing or non-performing).
 
 Fair values were estimated for each component as described below.
 
 The fair values of performing mortgage loans and consumer loans were estimated by discounting the anticipated cash flows from the respective portfolios. The discount rates reflected current market rates for loans with similar terms to borrowers of similar credit quality.
 
 The fair values of non-performing mortgage loans and consumer loans were based on recent collateral appraisals for collateral dependent loans, or if recent appraisals are not available, on management’s analysis of estimated cash flows based upon expected proceeds discounted at rates commensurate with the credit risk involved.
 
 19
 
 (d)
Federal Home Loan Bank Stock
 
 The estimated fair value of the Bank’s investment in Federal Home Loan Bank stock is deemed to equal its carrying value, which represents the price at which it may be redeemed.
 
 (e)
Deposits
 
 The estimated fair values of deposits with no stated maturity, which include NOW, money market, and passbook savings accounts are deemed to be equal to the amount payable on demand at the valuation date. The estimated fair values of certificates of deposit represent contractual cash flows discounted using interest rates currently offered on deposits with similar characteristics and remaining maturities.
 
 (f)
Borrowings
 
 The fair values of borrowings were estimated using a discounted cash flow analysis based on the current incremental borrowing rates for similar types of borrowing arrangements.
 
 (g)
Commitments
 
 Fair values of commitments outstanding are estimated based on the fees that would be charged for similar agreements, considering the remaining term of the agreement, the rate offered and the creditworthiness of the parties. The estimated fair values of commitments outstanding as of June 30, 2010 and September 30, 2009 were not considered significant and are not included in the above table.
 
 Note 8 – Subsequent Events
 
 As previously disclosed, in connection with its most recent examination of the Bank, the Office of Thrift Supervision (the “OTS”) issued a supervisory directive that the Bank cease originating new construction loans or commercial real estate loans, except for any legally binding commitments outstanding at December 3, 2009.  In addition, the OTS designated  the Bank as being in “troubled condition”, for purposes of imposing certain regulatory restrictions including, without limitation,  that the Bank:
 
 (1) Limit its asset growth in any quarter to an amount not to exceed net interest credited on deposit liabilities;
 
 (2) Obtain prior OTS approval before declaring or paying dividends or making any other capital distributions;
 
 (3) Obtain the nonobjection of the OTS before increasing brokered deposits in excess of interest credited above the amount as of February 28, 2010;
 
 (4) Notify the OTS prior to adding any new directors or senior executive officers; and
 
 (5) Receive nonobjection from the OTS before entering into, renewing, extending or revising any contractual arrangement related to compensation or benefits with any officer or director of the Bank.
 
 The Bank is in compliance with these limitations.
 
 The Company received a proposed supervisory agreement from the OTS dated August 9, 2010, which we expect to enter into once it is reviewed and finalized.  In addition to the restrictions listed above, the supervisory agreement will require the Company and BFS Bancorp, MHC to submit a written financial plan to address its present and future capital needs and the Bank to submit an updated comprehensive business plan, develop a plan to lessen its credit concentration, strengthen its credit administration and loan loss policies, procedures and practices and develop a plan to reduce its level of problem assets, among other requirements.  The proposed supervisory agreement states that the Company shall not declare or pay dividends or make any other capital distributions without receiving the prior written approval of the Regional Director in accordance with applicable regulations and regulatory guidance. We cannot anticipate what, if any, additional requirements that the OTS may impose.
 
 20
 
 The Company has completed the sale of 14 private issuer mortgage-backed securities as referenced in Note 5- Securities.
 
 
 ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
 
 Forward-Looking Statements
 
 
 Certain statements contained herein are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity.
 
 The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investing activities, and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.
 
 The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by law.
 
 General
 
 The Company’s results of operations depend mainly on its net interest income, which is the difference between the interest income earned on its loan and investment portfolios and interest expense paid on its deposits and borrowed funds.  Results of operations are also affected by fee income from banking operations, provisions for loan losses, other-than-temporary impairments, gains (losses) on sales of loans and securities available-for-sale and other miscellaneous income.  The Company’s non-interest expenses consist primarily of compensation and employee benefits, office occupancy, technology, FDIC insurance, marketing, general administrative expenses and income tax expense.
 
 The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect the Company’s financial condition and results of operations.
 
 Our website address is www.brooklynbank.com.  Information on our website should not be considered a part of this document.
 
 21
 
 Critical Accounting Policies
 
 We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies.  We consider the following to be our critical accounting policies:
 
 Allowance for Loan Losses.The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date.  The allowance is established through the provision for loan losses that is charged against income.  In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of the most critical for the Bank.  The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
 
 As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans.  Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties.  Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined.  The assumptions supporting appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.
 
 Management performs a quarterly evaluation of the adequacy of the allowance for loan losses.  Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal and external loan reviews and other relevant factors.  This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions.
 
 The analysis of the allowance for loan losses has two components: specific and general allocations.  Specific allocations are made for loans that are determined to be impaired.  Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses.  The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history.  We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations.  This analysis establishes factors that are applied to the loan groups to determine the amount of the general allocations.  Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results.
 
 Other-than-Temporary Impairment of Securities.We evaluate on a quarterly basis whether any securities are other-than-temporarily impaired. In making this determination, we consider the extent and duration of the impairment, the nature and financial health of the issuer and our ability and intent to hold the securities for a period sufficient to allow for any anticipated recovery in market value.  Other considerations include, without limitation, a review of the credit quality of the issuer and the existence of a guarantee or insurance, if applicable to the security.  If a security is determined to be other-than-temporarily impaired, we record an impairment loss as a charge to income for the period in which the impairment loss is determined to exist, resulting in a reduction to our earnings for that period.
 
 The fair value of the Bank’s investment in a mutual fund that invests primarily in agency and private label mortgage-backed securities has been steadily decreasing, which has caused a corresponding decrease in the fund’s net asset value.  In addition, the fund implemented a temporary prohibition on cash redemptions, lessening the ability of the Bank to dispose of its remaining $2.7 million investment in this asset. During the nine month period ended June 30, 2010, we concluded that this available-for-sale investment did incur an other-than-temporary impairment totaling $0.1 million and the Bank charged current earnings for the impairment.
 
 22
 
 Regarding the debt securities available-for-sale and held-to-maturity, which are composed completely of mortgage-backed securities, an other-than-temporary impairment loss must be fully recognized in earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis.  However, even if an investor does not expect to sell a debt security, it must evaluate the expected cash flows to be received and determine if a credit loss has occurred.  In the event of an other-than-temporary impairment loss, only the amount of impairment associated with the credit loss is recognized in earnings.  An other-than-temporary impairment loss relating to factors other than credit losses is recorded in accumulated other comprehensive loss.  For the debt securities held-to-maturity at September 30, 2009, we concluded that  the unrealized loss was temporary in nature due to marketability and market interest rates and not the underlying credit quality of the issuers of the securities and did not incur an other-than-temporary impairment.  For the debt securities available-for-sale at both June 30, 2010 and September 30, 2009, we concluded that a portion of the unrealized loss was temporary in nature due to marketability and market interest rates and not the underlying credit quality of the issuers of the securities and did not incur an other-than-temporary impairment. The Bank charged current earnings for the impairment related to credit losses for the debt securities available for sale totaling $10.3 million and $11.4 million for the three and nine month periods ended June 30, 2010, respectively. No accumulated other comprehensive loss is recorded since these debt securities have been designated to be sold and the unrealized losses have therefore been recognized through an OTTI impairment charge.
 
 We have the intent to hold the remaining debt securities and it is unlikely that we will be required to sell these investments prior to the time necessary to recover the amortized costs.  Future events that would materially change this conclusion and require a charge to operations for an impairment loss include a change in the credit quality of the issuers.
 
 Deferred Income Taxes.  We use the asset and liability method of accounting for income taxes.  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established.  We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income.  These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.  A valuation allowance for deferred tax assets may be required if the amount of taxes recoverable through loss carry-back declines, or if we project lower levels of future taxable income.  Such a valuation allowance would be established through a charge to income tax expense which would adversely affect our operating results.
 
 Comparison of Financial Condition at June 30, 2010 and September 30, 2009
 
 Overview.  Total assets increased $3.0 million, or 0.6%, to $524.4 million at June 30, 2010 from $521.4 million at September 30, 2009.  This increase was primarily due to increases in cash and due from banks as a result of growth in deposits, securities, deferred tax asset and prepaid expenses and other assets, offset by decreases to loans receivable, FHLB stock and accrued interest receivable.  In addition, the growth in the deposit base was used to pay down $12.1 million in borrowings.
 
 Cash and Due From Banks.Cash and due from banks increased $5.5 million, or 157.8%, to $9.0 million at June 30, 2010 from $3.5 million at September 30, 2009.
 
 Securities.Investment securities increased $5.1 million, or 7.3%, to $74.6 million at June 30, 2010 from $69.5 million at September 30, 2009.  This increase was primarily due to purchases of $26.8 million, partially offset by repayments of mortgage-backed securities of approximately $15.6 million and the recording of an other-than-temporary impairment of approximately $11.5 million.  During the nine months ended June 30, 2010, the Company’s intent in relation to the private-issuer mortgage-backed securities changed as noted in Note 5 - Securities.
 
 23
 
 Net Loans.  Loans before allowance for loan losses decreased $7.6 million, or 1.8%, to $422.8 million at June 30, 2010 from $430.4 million at September 30, 2009, primarily due to decreases in multi-family loans of $12.9 million, commercial real estate loans of $8.0 million, one-to-four family loans of $4.7 million and land loans of $3.5 million offset in part by an increase in construction loans of $19.8 million. We expect nominal loan growth for the foreseeable future since, under the directive we received from the OTS, other than contractual commitments outstanding as of December 3, 2009, the Bank will not originate any multi-family, commercial real estate, construction or landloans without the prior approval of the OTS.
 
 On the basis of management’s review of assets, at June 30, 2010 we classified $56.3 million of our assets as special mention or potential problem loans compared to $56.4 million at September 30, 2009.   Loans classified as special mention are not considered “classified” under the OTS regulations but do warrant extra attention.
 
 At June 30, 2010 we classified $106.1 million of loans as substandard compared to $54.4 million at September 30, 2009.  Substandard loans include $99.4 million of non-performing loans, of which $88.7 million are non-accrual loans and $10.7 million are loans contractually past maturity date for which we continue to accrue interest. Of the $88.7 million in non-accrual loans, $32.8 million are TDR’s and are performing in accordance with their modified terms. We have evaluated each substandard loan for potential impairment under ASC 310 “Receivables.” Based upon our analysis $70.3 million of such substandard loans did not require an allowance as of June 30, 2010 due to the fact that the collateral value of the real estate, net of estimated selling costs, exceeded the carrying value of the loan.  The Company believes that as of June 30, 2010 the allowance for loan losses is adequate to absorb known and inherent losses within the loan portfolio. There can be no assurances that additional provision for loan losses will not be required in future periods.
 
 Net charge-offs totaled $5.7 million for the nine months ended June 30, 2010 compared to none for the nine months ended June 30, 2009.  Annualized net charge-offs represented 1.77% of average loans for the nine months ended June 30, 2010.
 
 Allowance for Loan Losses and Asset Quality
 
 The Company maintains an allowance for loan losses that management believes is sufficient to absorb known and inherent losses in its loan portfolio. The adequacy of the allowance for loan and lease losses (“ALLL”) is determined by management’s continuing review of the Company’s loan portfolio, which includes identification and review of individual factors that may affect a borrower’s ability to repay. Management reviews overall portfolio quality through an analysis of delinquency and non-performing loan data, estimates of the value of underlying collateral and current charge-offs. A review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and composition of the loan portfolio are also taken into consideration. The ALLL reflects management’s evaluation of the loans presenting identified loss as well as the risk inherent in various components of the portfolio. As such, an increase in the size of the portfolio or any of its components could necessitate an increase in the ALLL even though there may not be a decline in credit quality or an increase in potential problem loans.
 
 For additional information regarding the Company’s ALLL policy, please refer to Note 2(h) of Notes to Consolidated Financial Statements, “Nature of Business and Summary of Significant Accounting Policies” included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009.
  24
 
 The following table summarizes the activity in allowance for loan losses for the nine month period ended June 30, 2010 and fiscal year ended September 30, 2009 (dollars in thousands):
 June


September2010


2009Balance at beginning of period

$
10,750


$
2,205Charge-offs:One-to-four-family


171



-Multi-family


1,218



-Commercial real estate


2,929



-Construction


254



-Land


1,130



-Consumer and other


35



-Recoveries


(7
)


-Net charge-offs


5,730



-Provision for loan losses


16,747



8,545Balance at end of period

$
21,767


$
10,750Ratios:Annualized net charge-offs to averageloans outstanding


1.77
%


0.00
%Allowance for loan losses to total loans at end of period


5.15
%


2.50
%
 
 The Company provided $16.7 million in loan loss provision for the nine months ended June 30, 2010, an increase of $15.5 million, compared to a $1.2 million provision in the same prior year period. The $16.7 million recognized in the provision for the nine month period ended June 30, 2010 reflects $3.1 million in allocated loss allowance for criticized assets and $13.6 million in a general loss allowance.  The increase in the general allowance for loan losses is due to the increasing trend in substandard loans caused by the economic downturn in our real estate market as evidenced by the increase in non-performing loans from $22.1 million at September 30, 2009 to $99.4 million at June 30, 2010.  The Company’s future level of non-performing loans will be influenced by economic conditions, including the impact of those conditions on the Bank’s customers, interest rates and other factors existing at the time.  Based on management’s evaluation of residential and commercial real estate markets and the overall economy, coupled with the composition of our delinquencies, non-performing loans, net loan charge-offs and overall loan portfolio, we determined that a $16.7 million provision for loan losses was warranted for the nine months ended June 30, 2010.
 
 At June 30, 2010 and September 30, 2009, the Bank’s allowance for loan losses was $21.8 million and $10.8 million, respectively. The ratio of the allowance for loan losses to non-performing loans was 21.89% at June 30, 2010, compared to 48.69% at September 30, 2009.
 
 Non-Performing Loans and Potential Problem Assets
 
 After a one-to-four-family residential loan becomes 15 days late, the Bank delivers a computer-generated late charge notice to the borrower.  Approximately one week later, we deliver a reminder notice.  When a loan becomes 30 days delinquent, the loan servicing department manager determines whether to send an acceleration letter to the borrower and attempts to make personal contact.  After 60 days, we will generally refer the matter to legal counsel who is authorized to commence foreclosure proceedings.  Management is authorized to begin foreclosure proceedings on any loan after 60 days, after determining that it is prudent to do so and the proper acceleration letter has been sent.
 
 25
 
 After a multi-family, commercial real estate or construction loan becomes ten days delinquent, the Bank delivers a computer-generated late charge notice to the borrower and attempts to make personal contact with theborrower.  If there is no successful resolution of the delinquency at that time, we may accelerate the payment terms of the loan and issue a letter notifying the borrower of this acceleration.  After such loan is 15 days delinquent, we may refer the matter to legal counsel who is authorized to commence foreclosure proceedings.  Management is authorized to begin foreclosure proceedings on any delinquent loan after determining that it is prudent to do so.
 
 Loans are reviewed on a regular basis by management’s Asset Classification Committee and are placed on non-accrual status when they become 90 days or more delinquent and collection is doubtful or when, regardless of how many days delinquent the loan is, other factors indicate that the collection of these amounts is doubtful.  When loans are placed on non-accrual status, unpaid accrued interest is reversed, and further income is recognized only to the extent received.
 
 Non-Performing Loans.Non-performing loans are defined as either in non-accrual status and/or past contractual maturity date.  At June 30, 2010, $99.4 million of our loans net of specific allowances, or 23.52%, of our total loans, compared to $22.1 million, or 5.13%, at September 30, 2009, were non-accrual and/or past maturity and therefore non-performing.  These loans consist of multi-family, commercial real estate, construction and land loans.  We are actively pursuing all applicable methods and resources to reduce the number and amount of non-performing loans.
 
 Non-Performing Assets.The table below sets forth the amounts and categories of our non-performing assets, net of specific allowances at the dates indicated.  We may from time to time agree to modify the contractual terms of a borrower’s loan.  In cases where these modifications represent a concession (for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates) to a borrower experiencing financial difficulty, the modification is considered a TDR, or troubled debt restructuring.  If a TDR, at the time of its modification, is current, or performing, it will remain in accrual status, so long as the borrower continues to perform in accordance with the modified terms.  If a TDR, at the time of its modification, is not performing, the loan will remain in non-accrual status until such time that the borrower has demonstrated the ability to perform in accordance with the modified terms, usually six months. At June 30, 2010, loans modified in a troubled debt restructuring totaled $38.0 million.  One loan for $0.4 million is performing in accordance with its new terms and, therefore, is not included in the table below.  The remaining total of  $37.6 million is in non-accrual status, and included in the table below.  However, of the $37.6 million, $32.8 million are performing in accordance with their modified terms.   The sharp downturn in the real estate market has resulted in a deterioration of the Company’s loans receivable portfolio, which in turn has caused increases in non-performing loans, particularly in our multi-family, commercial real estate and construction loan portfolios.
 
 26
 
 The following table sets forth information with respect to the Company’s non-performing assets (dollars in thousands):
  June 30,


September 30,2010


2009Non-accrual loans:Multi-family

$
31,456


$
902Commercial real estate


47,170



15,623Construction


4,588



832Land


5,449



4,722Total non-accrual loans


88,663



22,079Loans past maturity and still accruing


10,775



-Total non-performing assets

$
99,438


$
22,079Ratios:Total non-performing loans to total loans


23.52
%


5.13
%Total non-performing loans to total assets


18.96
%


4.23
%Total non-performing assets to total assets


18.96
%


4.23
%
 
 For the three and nine months ended June 30, 2010, there was $1.3 million and $4.4 million of interest income that would have been recorded had our non-accruing loans been current and in accordance with their original terms.
 
 Federal Home Loan Bank of New York Stock.  FHLB stock decreased $0.4 million, or 17.3%, to $2.0 million at June 30, 2010 from $2.4 million at September 30, 2009.  This decrease was primarily due to the decrease in FHLB borrowings, which triggered redemptions of FHLB stock. We have evaluated the FHLB stock for impairment as of June 30, 2010, concluding there was no impairment.
 
 Deferred Tax Asset.  Deferred tax asset increased $9.8 million, or 94.8%, to $20.1 million at June 30, 2010 from $10.3 million at September 30, 2009.  The elevated levels of the Company’s allowance for loan losses and OTTI have been the contributing factors to this marked increase.
 
 Prepaid Expenses and Other Assets.Prepaid expenses and other assets increased $2.1 million, or 121.9%, to $3.8 million at June 30, 2010 from $1.7 million at September 30, 2009.  The increase was due primarily to an increase of $1.7 million in prepaid FDIC insurance assessments.  The FDIC prepaid insurance assessment covers the estimated premiums to be paid by the Bank through December 31, 2012.
 
 Deposits.  Total deposits increased $26.0 million, or 6.5%, to $428.1 million at June 30, 2010 from $402.1 million at September 30, 2009.  The increase in interest-bearing deposits was primarily due to the Bank’s efforts to remain competitive with all of its deposit offerings.  Money market deposit balances increased $15.3 million, certificates of deposit increased $4.6 million, savings account balances increased $3.9 million and NOW account balances increased $1.9 million compared to September 30, 2009. Non-interest bearing deposits increased $0.3 million at June 30, 2010, compared to September 30, 2009.
 
 Borrowed Funds.  Total funds borrowed from the FHLB of New York decreased $12.1 million, or 44.3%, to $15.2 million at June 30, 2010 from $27.3 million at September 30, 2009.  Excess liquidity due to deposit growth was redeployed into reducing outstanding borrowings.
 
 Accrued Expenses and Other Liabilities.  Accrued expenses and other liabilities decreased $1.8 million, or 22.4%, to $6.3 million at June 30, 2010 from $8.1 million at September 30, 2009.  This decrease was primarily due to a reduction in income tax payable of approximately $1.3 million due to a decrease in current taxable income.
 
 27




Liquidity and Capital Resources.The Company maintains liquid assets at levels it considers adequate to meet its liquidity needs.  The Company adjusts its liquidity levels to fund deposit outflows, pay real estate taxes on mortgage loans, repay its borrowings and to fund loan commitments.  The Company also adjusts its liquidity levels as appropriate to meet asset and liability management objectives.
 
 The Company’s primary sources of liquidity are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations, as well as access to FHLB of New York advances.  While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by the Company’s competition.  The Company sets the interest rates on its deposits to maintain a desired level of total deposits.  In addition, the Company invests excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.
 
 A significant portion of our liquidity consists of cash and cash equivalents and securities available for sale, which are a product of our operating, investing and financing activities.  At June 30, 2010, $9.0 million of our assets were invested in cash and due from banks and $74.6 million were invested in securities available for sale.  Our primary sources of cash are principal repayments on loans, proceeds from the calls and maturities of investment securities, principal repayments of mortgage-backed securities and increases in deposit accounts.  Currently, we sell longer-term fixed rate mortgage loans, and we syndicate and sell participation interests in portions of our multi-family, commercial real estate and construction loans.  Pursuant to the directive we received from the OTS, except for commitments outstanding as of December 3, 2009, we will not originate any multi-family, commercial real estate, construction or land loans without the prior approval of the OTS.  In addition, we invest excess funds in short-term interest-earning assets and other assets, which provide liquidity to meet our lending requirements.  There were no certificates of deposit and short-term investment securities (maturing in less than three years) at June 30, 2010.  As of June 30, 2010 we had $15.2 million in borrowings outstanding from the Federal Home Loan Bank of New York and we have access to additional Federal Home Loan Bank advances of up to $47.4 million.  In addition, we have access to a secured line of credit with the Federal Reserve Bank of New York.
 
 At June 30, 2010 we had $66.0 million in loan commitments outstanding, which included $48.4 million in undisbursed construction loans, $11.6 million in commercial real estate lines of credit, $4.5 million in unused home equity lines of credit and $1.5 million in one-to-four-family loans. Pursuant to the directive we received from the OTS, other than contractual commitments outstanding as of December 3, 2009, the Bank will not originate any multi-family, commercial real estate, construction, or land loans without prior OTS approval.  Certificates of deposit due within one year of June 30, 2010 totaled $162.0 million, or 63.4%, of total certificates of deposit.  The large percentage of certificates of deposit that mature within one year reflects our customers’ hesitancy to invest their funds for long periods in the current low interest rate environment.  If these maturing deposits do not remain with us we will be required to seek other sources of funds, including other certificates of deposit and borrowings.  Depending on market conditions, we may be required to pay higher rates on these deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2011.  We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us.  We have the ability to attract and retain deposits by adjusting the interest rates offered.
 
 28
 
 The following table sets forth the Bank’s capital position at June 30, 2010 and September 30, 2009, as compared to the minimum regulatory capital requirements:
 
 Actual


For capital adequacy

purposes


To be well capitalized

under prompt corrective

action provisionsAmount


Ratio


Amount


Ratio


Amount


RatioAt June 30, 2010:

(Dollars in thousands)Total risk-based capital (to risk weighted assets)

$
73,763



13.6
%

$
43,244



8.0
%

$
54,056



10.0
%Tier I risk-based capital (to risk weighted assets)


65,792



12.2



21,622



4.0



32,433



6.0Tangible capital (to tangible assets)


65,792



12.6



7,835



1.5



N/A



N/ATier I leverage (core) capital (to adjusted tangible assets)


65,792



12.6



15,671



3.0



26,118



5.0At September 30, 2009:Total risk-based capital (to risk weighted assets)

$
79,779



14.5
%

$
43,938



8.0
%

$
54,922



10.0
%Tier I risk-based capital (to risk weighted assets)


71,192



13.0



21,969



4.0



32,953



6.0Tangible capital (to tangible assets)


71,192



13.8



7,760



1.5



N/A



N/ATier I leverage (core) capital (to adjusted tangible assets)


71,192



13.8



15,521



3.0



25,868



5.0
 
 Off-Balance Sheet Arrangements
 
 The following table sets forth the Bank’s contractual obligations and commercial commitments at June 30, 2010:
 
 Commitment Expiration by Period
 More than


More ThanOne Year


Three YearsOne Year


Through


Through


More ThanOff-Balance Sheet Arrangements

Total


or Less


Three Years


Five Years


Five YearsTo originate loans

$
1,494


$
1,494


$
-


$
-


$
-Unused lines of credit, including undisbursed construction loans


64,539



44,835



3,755



8,179



7,770Total

$
66,033


$
46,329


$
3,755


$
8,179


$
7,770
 
 29
 
 Analysis of Earnings
 
 The Company’s profitability is primarily dependent upon net interest income and further affected by provisions for loan losses, non-interest income, non-interest expense and income taxes.  The earnings of the Company, which are principally earnings of the Bank, are significantly affected by general economic and competitive conditions, particularly changes in market interest rates, and to a lesser extent by government policies and actions of regulatory authorities.
 
 The following tables set forth, for the periods indicated, certain information relating to the Company’s average interest-earning assets, average interest-bearing liabilities, net interest income, interest rate spread and interest rate margin.  It reflects the average yield on assets and the average cost of liabilities.  Such yields and costs are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods shown.  Average balances are derived from daily or month-end balances as available.  Management does not believe that using average monthly balances instead of average daily balances represents a material difference in information presented.  The average balance of loans includes loans on which the Company has discontinued accruing interest.  The average yield and cost include fees, which are considered adjustments to yields (dollars in thousands).
 
 30
 BROOKLYN FEDERAL  BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED AVERAGE BALANCES
 Three months ended June 30,2010


2009Average

Balance


Interest


Average

Yield/Cost


Average

Balance


Interest


Average

Yield/CostInterest-earning assets:Loans (1)

$
427,144


$
6,292



5.89
%

$
417,442


$
7,800



7.47
%Mortgage-backed securities (2)


74,291



822



4.43



75,927



924



4.87Investment securities and other interest-earning assets (2)


15,169



55



1.45



8,904



96



4.31Total interest-earning assets


516,604



7,169



5.55



502,273



8,820



7.02Non interest-earning assets


11,941











18,611Total assets

$
528,545










$
520,884Interest-bearing liabilities:Savings accounts

$
64,571



68



0.42


$
62,313



150



0.96Money market/NOW accounts


92,498



180



0.78



64,107



244



1.52Certificates of deposit


260,078



1,509



2.33



238,109



1,919



3.22Total interest-bearing deposits


417,147



1,757



1.69



364,529



2,313



2.54Borrowings


9,796



68



2.78



37,100



64



0.69Total interest-bearing liabilities


426,943



1,825



1.71



401,629



2,377



2.37Non interest-bearing liabilities:


24,283











31,428Total liabilities


451,226











433,057Stockholders’ equity


77,319











87,827Total liabilities & stockholders’ equity

$
528,545










$
520,884Net interest income





$
5,344










$
6,443Average interest rate spread










3.84
%










4.65
%Net interest-earning assets

$
89,661










$
100,644Net interest margin










4.14
%










5.13
%Ratio of average interest-earning assets to interest-bearing liabilities










121.00
%










125.06
%
 
 (1) Non-accrual loans are included in the appropriate average loan category but interest on non-accrual loans has not been included for purposes of determining interest income.
 (2)  These amounts represent net amounts after OTTI charges.
 
 31
 BROOKLYN FEDERAL  BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED AVERAGE BALANCES
 Nine months ended June 30,2010


2009Average

Balance


Interest


Average

Yield/Cost


Average

Balance


Interest


Average

Yield/CostInterest-earning assets:Loans (1)

$
432,682


$
20,387



6.28
%

$
402,673


$
22,380



7.41
%Mortgage-backed securities (2)


71,873



2,594



4.81



77,989



2,796



4.78Investment securities and other interest-earning assets (2)


11,102



229



2.76



9,503



246



3.45Total interest-earning assets


515,657



23,210



6.00



490,165



25,422



6.92Non interest-earning assets


12,876











18,557Total assets

$
528,533










$
508,722Interest-bearing liabilities:Savings accounts

$
62,758



261



0.56


$
59,362



451



1.01Money market/NOW accounts


85,698



692



1.08



59,395



780



1.75Certificates of deposit


259,257



4,819



2.49



226,954



6,042



3.55Total interest-bearing deposits


407,713



5,772



1.89



345,711



7,273



2.81Borrowings


12,294



173



1.88



45,220



281



0.83Total interest-bearing liabilities


420,007



5,945



1.89



390,931



7,554



2.58Non interest-bearing liabilities


26,818











30,652Total liabilities


446,825











421,583Stockholders’ equity


81,708











87,139Total liabilities & stockholders’ equity

$
528,533










$
508,722Net interest income





$
17,265










$
17,868Average interest rate spread










4.11
%










4.34
%Net interest-earning assets

$
95,650










$
99,234Net interest margin










4.46
%










4.86
%Ratio of average interest-earning assets to interest-bearing liabilities










122.77
%










125.38
%
 
 (1) Non-accrual loans are included in the appropriate average loan category but interest on non-accrual loans has not been included for purposes of determining interest income.
 (2)  These amounts represent net amounts after OTTI charges.
 
 32
 
 Comparison of Operating Results for the Three Months Ended June 30, 2010 and 2009
 
 Net Income.  Net income decreased $11.1 million to a net loss of $9.4 million for the three months ended June 30, 2010 from net income of $1.7 million for the three months ended June 30, 2009.  The primary reasons for the decrease were the increase in the provision for loan losses of $8.4 million, to $8.8 million for the three months ended June 30, 2010 from $0.4 million for the three months ended June 30, 2009 and an increase in other-than-temporary impairment of securities of $10.1 million, to $10.3 million for the three months ended June 30, 2010 from $0.2 million for the three months ended June 30, 2009, which was partially offset by a reduction in  income tax expense of $8.7 million due to an income tax benefit of $7.5 million for the three months ended June 30, 2010, compared to an income tax expense of $1.2 million for the three months ended June 30, 2009.
 
 Net Interest Income Before Provision for Loan Losses.Net interest income before provision for loan losses decreased $1.1 million, or 17.1%, for the three months ended June 30, 2010, compared to the three months ended June 30, 2009,.  The Bank’s net interest rate spread decreased 81 basis points to 3.84% for the three months ended June 30, 2010, compared to 4.65% for the three months ended June 30, 2009.  The Bank’s net interest margin decreased 99 basis points to 4.14% for the three months ended June 30, 2010, compared to 5.13% for the three months ended June 30, 2009. The primary reason for the decreases in the net interest rate spread and net interest margin for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009, is the average yield on loans, which decreased 158 basis points.  The Company’s level of non-accrual loans have increased, thereby reducing loan income which would otherwise have been recognized, and interest rates have trended downward since the three months ended June 30, 2009.  Somewhat mitigating the decreases in the net interest rate spread and net interest margin is the lower cost of interest-bearing liabilities, from 2.37% for the three months ended June 30, 2009 to 1.71% for the three months ended June 30, 2010. This is also reflective of the low interest rate environment coupled with the Bank’s decision to conservatively set our interest rates on deposits.
 
 Interest Income.Interest income decreased $1.6 million, or 18.7%, to $7.2 million for the three months ended  June 30, 2010 from $8.8 million for the three months ended June 30, 2009. Interest income on loans decreased $1.5 million, or 19.3%, to $6.3 million for the three months ended June 30, 2010 from $7.8 million for the three months ended June 30, 2009. Interest on multi-family and commercial real estate loans decreased $2.1 million and interest on one-to-four family loans decreased $0.1 million. These decreases were partially offset by an increase in interest on construction loans of $0.7 million.  The average yield on loans decreased 158 basis points to 5.89% for the three months ended June 30, 2010, from 7.47% for the three months ended June 30, 2009. The average balance of the loan portfolio increased $9.7 million, or 2.3%, to $427.1 million for the three months ended June 30, 2010 from $417.4 million for the three months ended June 30, 2009. The average yield on loans for the three months ended June 30, 2010 would have been 7.12% had interest income been recorded on our non-accruing loans.  Interest income on mortgage-backed securities decreased $0.1 million for the three months ended June 30, 2010, compared to the three months ended June 30, 2009. The average yield on mortgage-backed securities decreased 44 basis points to 4.43% for the three months ended June 30, 2010, compared to 4.87% for the quarter ended June 30, 2009.  The average balance of the mortgage-backed securities portfolio decreased $1.6 million, or 2.2%, to $74.3 million at June 30, 2010 from $75.9 million at June 30, 2009.  Interest income on investment securities and other interest-earning assets decreased by $41 thousand for the three months ended June 30, 2010 compared to the three months ended June 30, 2009.  The average yield on investment securities and other interest-earning assets decreased 286 basis points to 1.45% for the three months ended June 30, 2010, compared to 4.31% for the three months ended June 30, 2009. The average balance of investment securities and other interest-earning assets increased $6.3 million, or 70.4%, to $15.2 million for the three months ended June 30, 2010 from $8.9 million for the three months ended June 30, 2009.
 
 Interest Expense.  Interest expense decreased $0.6 million, or 23.2%, to $1.8 million for the three months ended June 30, 2010, compared to $2.4 million for the three months ended June 30, 2009.  Interest expense on deposits decreased $0.5 million, or 24.0%, to $1.8 million for the three months ended June 30, 2010, compared to $2.3 million for the three months ended June 30, 2009.  Interest expense on FHLB borrowings remained flat at $0.1 million for the three months ended June 30, 2010 and 2009.  The decrease in total interest expense was primarily the result of an 85 basis point decrease in the average cost of interest-bearing deposits, to 1.69% for the three months ended June 30, 2010, compared to 2.54% for the three months ended June 30, 2009.   The decrease in total interest expense was partially offset by a $52.6 million increase in the average balance of interest-bearing deposits, to $417.1 million for the three months ended June 30, 2010, from $364.5 million for the three months ended June 30, 2009, and to a far lesser extent,  a 209 basis point increase in the average cost of FHLB borrowings, to 2.78% for the three months ended June 30, 2010, compared to 0.69% for the three months ended June 30, 2009.  The average cost of total interest-bearing liabilities decreased 66 basis points to 1.71% for the three months ended June 30, 2010, from 2.37% for the three months ended June 30, 2009.
 
 33
 
 Provision for Loan Losses.The Company provided $8.8 million in loan loss provision for the third quarter of fiscal 2010, an increase of $8.4 million compared to a $0.4 million loan loss provision in the prior year period. The $8.8 million provision for the three month period ended June 30, 2010 reflects $3.1 million in allocated loss allowances for criticized assets and $5.7 million in the general loss allowance. The Company’s future level of non-performing loans will be influenced by economic conditions, including the impact of those conditions on the Bank’s customers, interest rates, real estate values and other factors existing at the time.  Based on management’s evaluation of residential and commercial real estate markets and the overall economy, coupled with the composition of our delinquencies, non-performing loans, net loan charge-offs and overall loan portfolio, we determined that an $8.8 million provision for loan losses was warranted for the three months ended June 30, 2010. Please refer to the “Allowance for Loan Losses and Asset Quality” section of Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.
 
 Non-interest Income. Non-interest income decreased $10.3 million to a loss of $9.9 million for the three months ended June 30, 2010 from a gain of $0.4 million for the three months ended June 30, 2009.  The decrease was primarily due to an increase in the impairment charge of $10.1 million to $10.3 million for the three months ended June 30, 2010, from $0.2 million for the three months ended June 30, 2009.
 
 Non-interest Expense.  Non-interest expense decreased $0.1 million, or 2.1%, to $3.5 million for the three months ended June 30, 2010, from $3.6 million for the three months ended June 30, 2009.  The decrease resulted primarily from decreases in FDIC insurance of $0.2 million and compensation and employee benefits of $0.1 million, offset by an increase in professional fees of $0.2 million.
 
 Income Taxes.Income tax expense decreased $8.7 million to a benefit of  $7.5 million for the three months ended June 30, 2010, compared to an expense of $1.2 million for the three months ended June 30, 2009.  The reason for this decrease was the loss before provision for income taxes.
 
 Comparison of Operating Results for the Nine Months Ended June 30, 2010 and 2009
 
 Net Income.  Net income decreased $15.2 million to a net loss of $11.0 million for the nine months ended June 30, 2010 from net income of $4.2 million for the nine months ended June 30, 2009.  The primary reasons for the decrease were the increases in the provision for loan losses of $15.5 million and the loss on impairment of investment securities of $10.4 million offset by an increase in the income tax benefit of $11.8 million for the nine months ended June 30, 2010 compared to the same period last year.
 
 Net Interest Income Before Provision for Loan Losses.Net interest income before provision for loan losses decreased $0.6 million, or 3.4%, to $17.3 million for the nine months ended June 30, 2010 from $17.9 million for the nine months ended June 30, 2009.  The decrease in net interest income resulted primarily from a decrease in the average yield of interest-earning assets from 6.92% for the nine months ended June 30, 2009 to 6.00% for the nine months ended June 30, 2010. The average balance of interest-bearing deposits increased by 17.9%, from $345.7 million for the nine months ended June 30, 2009 to $407.7 million for the nine months ended June 30, 2010. The average cost of interest-bearing liabilities decreased 69 basis points, from 2.58% for the nine months ended June 30, 2009 to 1.89% for the nine months ended June 30, 2010.  The Bank’s net interest rate spread decreased 23 basis points to 4.11% for the nine months ended June 30, 2010, compared to 4.34% for the nine months ended June 30, 2009.  The Bank’s net interest margin decreased 40 basis points to 4.46% from 4.86% for the comparative period. The primary reason for the decreases in the net interest rate spread and net interest margin for the nine months ended June 30, 2010, as compared to the nine months ended June 30, 2009, is the average yield on loans, which decreased 113 basis points.  The Company’s level of non-accrual loans have increased, thereby reducing loan income which would otherwise have been recognized, and interest rates have trended downward since the nine months ended June 30, 2009.  Somewhat mitigating the decreases in the net interest rate spread and net interest margin is the lower cost of interest-bearing liabilities, from 2.58% for the nine months ended June 30, 2009 to 1.89% for the nine months ended June 30, 2010. This is also reflective of the low interest rate environment coupled with the Bank’s decision to conservatively set our interest rates on deposits.
 
 34
 
 Interest Income.Interest income decreased $2.2 million, or 8.7%, to $23.2 million for the nine months ended June 30, 2010 from $25.4 million for the nine months ended June 30, 2009.  Interest income on loans decreased $2.0 million, or 8.9%, to $20.4 million for the nine months ended June 30, 2010 from $22.4 million for the nine months ended June 30, 2009.  Interest on multi-family and commercial real estate loans, and on one-to-four family loans decreased $3.8 million and $0.4 million, respectively, partially offset by an increase in interest on construction loans of $2.2 million. The average balance of the loan portfolio increased $30.0 million, or 7.5%, to $432.7 million for the nine months ended June 30, 2010 from $402.7 million for the nine months ended June 30, 2009. The average yield on loans decreased 113 basis points to 6.28% for the nine months ended June 30, 2010, from 7.41% for the nine months ended June 30, 2009. The average yield on loans for the nine months ended June 30, 2010 would have been 7.65% had interest income been recorded on our non-accruing loans.  Interest income on mortgage-backed securities decreased $0.2 million, or 7.2%, for the nine months ended June 30, 2010, compared to the same period last year. The average balance of mortgage-backed securities decreased $6.1 million, and the average yield was virtually unchanged, increasing three basis points.  Interest income on investment securities and other interest-earning assets was flat for the nine months ended June 30, 2010, compared to the same period last year. The average balance on investment securities and other interest-earning assets increased $1.6 million, or 16.8%, to $11.1 million for the nine months ended June 30, 2010 from $9.5 million for the nine months ended June 30, 2009. The average yield on investment securities and other interest-earning assets decreased 69 basis points to 2.76% for the nine months ended June 30, 2010, compared to 3.45% for the nine months ended June 30, 2009.
 
 Interest Expense.  Interest expense decreased $1.6 million, or 21.3%, to $5.9 million for the nine months ended June 30, 2010, compared to $7.5 million for the nine months ended June 30, 2009.  Interest expense on deposits decreased $1.5 million, or 20.6%, to $5.8 million for the nine months ended June 30, 2010, compared to $7.3 million for the nine months ended June 30, 2009.  Interest expense on FHLB borrowings decreased to $0.2 million for the nine months ended June 30, 2010 from $0.3 million for the nine months ended June 30, 2009.  The decrease in total interest expense was primarily the result of a 92 basis point decrease in the average cost of interest-bearing deposits, from 2.81% for the nine months ended June 30, 2009 to 1.89% for the nine months ended June 30, 2010. The average balance of interest-bearing deposits increased $62.0 million, or 17.9%, from $345.7 million for the nine months ended June 30, 2009 to $407.7 million for the nine months ended June 30, 2010.  The average cost of FHLB borrowings increased 105 basis points, however the average balance decreased $32.9 million, or 72.8%, for the nine months ended June 30, 2010, compared to the nine months ended June 30, 2009.  The average cost of total interest-bearing liabilities decreased 69 basis points to 1.89% for the nine months ended June 30, 2010, from 2.58% for the nine months ended June 30, 2009.
 
 Provision for Loan Losses.The Company provided $16.7 million in loan loss provision for the nine months ended June 30, 2010, an increase of $15.5 million compared to a $1.2 million loan loss provision in the prior year period for the same reasons noted in the “Provision for Loan Losses” discussion for the three months ended June 30, 2010.  Based upon the Company’s evaluation, the $16.7 million recognized in the loan loss provision for the nine month period ended June 30, 2010, reflecting a $4.8 million  specific loss allowance for criticized assets and an $11.9 million general loss allowance was warranted.  Please refer to the “Allowance for Loan Losses and Asset Quality” section of Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.
 
 Non-interest Income. Non-interest income decreased $10.9 million to a loss of $10.3 million for the nine months ended June 30, 2010 from a gain of $0.6 million for the nine months ended June 30, 2009.  The decrease was primarily due to an increase in the impairment charge of $10.4 million to $11.5 million for the nine months ended June 30, 2010, from $1.1 million for the nine months ended June 30, 2009. Banking fees and service charges decreased $0.5 million, or 37.1%, from $1.1 million for the nine months ended June 30, 2009 to $0.6 million for the nine months ended June 30, 2010.
 
 35
 
 Non-interest Expense.  Non-interest expense decreased $0.1 million, or 0.8%, for the nine months ended June 30, 2010 compared to the same period last year.  Compensation and employee benefits decreased $0.7 million, or 10.9%, offset by an increase in professional fees of $0.5 million and other expenses of $0.1 million.
 
 Income Taxes.Income tax expense decreased $11.8 million to a benefit of $9.2 million for the nine months ended June 30, 2010, from an expense of $2.6 million for the nine months ended June 30, 2009.  The reason for this decrease was the loss before provision for income taxes.
 
 36
  ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 The majority of the Company’s assets and liabilities are monetary in nature.  Consequently, the Company’s most significant form of market risk is interest rate risk.  The Company’s assets, consisting primarily of mortgage loans, have longer maturities than the Company’s liabilities, consisting primarily of deposits.  As a result, a principal part of the Company’s business strategy is to manage interest rate risk and reduce the exposure of its net interest income to changes in market interest rates.  Accordingly, the Company’s board of directors has approved guidelines for managing the interest rate risk inherent in its assets and liabilities, given the Company’s business strategy, operating environment, capital, liquidity and performance objectives.  Senior management monitors the level of interest rate risk on a regular basis and the finance committee of the board of directors meets as needed to review the Company’s asset/liability policies and interest rate risk position.
 
 The Company seeks to manage its interest rate risk in order to minimize the exposure of its earnings and capital to changes in interest rates.  During the low interest rate environment that has existed in recent years, the Company has implemented the following strategies to manage its interest rate risk: (i) maintaining a high level of short-term liquid assets invested in cash and cash equivalents, short-term securities and mortgage-related securities that provide significant cash flows; (ii) generally selling longer-term mortgage loans; and (iii) lengthening the average term of the Bank’s certificates of deposit.  By investing in short-term, liquid instruments, the Company believes it is better positioned to react to increases in market interest rates.  However, investments in shorter-term securities and cash and cash equivalents generally bear lower yields than longer-term investments.  Thus, during the recent environment of decreased interest rates, the Bank’s strategy of investing in liquid instruments has resulted in lower levels of interest income than would have resulted from investing in longer-term loans and investments.  Management intends to lengthen the maturity of the Company’s interest-earning assets as interest rates increase, which in turn should result in a higher yielding portfolio of interest-earning assets.  There have been no material changes in the Company’s interest rate risk since September 30, 2009.
 ITEM 4.
CONTROLS AND PROCEDURES
 We are required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information  is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.  In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
 In accordance with SEC rules, an evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness, as of June 30, 2010,  of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act).  Based upon that evaluation, we concluded that our disclosure controls and procedures were effective as of June 30, 2010 at a reasonable assurance level.  Our conclusion was predicated on the fact that we believe that we have corrected the material weakness related to our methodologies used to assess the adequacy of the allowance for loan losses as noted in the March 31, 2010 Form 10-Q.  The Company has taken corrective action to enhance its methodologies by expanding and improving our analysis, updating our policies and procedures and obtaining third party corroboration of such methodologies. The Company believes that the allowance for loan losses is adequate at June 30, 2010.
 
 No change in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting, except for the corrective action noted above.
 
 37
 
 PART II - OTHER INFORMATION
 
 ITEM 1.
LEGAL PROCEEDINGS
 There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.
 
 ITEM 1A.
RISK FACTORS
 There are no material changes to the risk factors as previously disclosed in the Company’s Form 10-K for the year ended September 30, 2009, as filed with the SEC on January 6, 2010 except as follows:
 
 Financial reform legislation recently enacted will, among other things, eliminate the Office of Thrift Supervision, create a new Consumer Financial Protection Bureau, tighten capital standards and result in new laws and regulations that are expected to increase our costs of operations.
 
 On July 21, 2010 the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impacts of the Dodd-Frank Act may not be known for many months or years. The new law provides that the Office of Thrift Supervision will cease to exist one year from the date of the new law’s enactment. The Office of the Comptroller of the Currency, which is currently the primary federal regulator for national banks, will become the primary federal regulator for federal thrifts. The Board of Governors of the Federal Reserve System will supervise and regulate all savings and loan holding companies, including mutual holding companies that were formerly regulated by the Office of Thrift Supervision.
 
 The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Banks with $10 billion or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.
 
 The Dodd-Frank Act requires minimum leverage (Tier 1) and risk based capital requirements for bank and savings and loan holding companies that are no less stringent than those applicable to banks, which will exclude certain instruments that previously have been eligible for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities. Bank holding companies with assets of less than $500 million are exempt from these capital requirements.
 
 Effective one year after the date of enactment the Dodd-Frank Act eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.
 
 The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation deposit insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution, rather than deposits. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012.  The legislation also increases the required minimum reserve ratio for the Deposit Insurance Fund, from 1.15% to 1.35% of insured deposits, and directs the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets.
 
 38
 
 The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizes the Securities and Exchange Commission to promulgate rules that allow stockholders to nominate their own candidates using a company’s proxy materials. It also provides that the listing standards of the national securities exchanges shall require listed companies to implement and disclose “clawback” policies mandating the recovery of incentive compensation paid to executive officers in connection with accounting restatements. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives.
 
 The Dodd-Frank Act permanently eliminated the requirements of complying with Section 404(b) of the Sarbanes-Oxley Act of 2002 for registrants with less than $75 million of market capitalization.
 
 It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.
  The recently enacted financial reform legislation may have an adverse effect on our ability to pay dividends, which would adversely affect the value of our common stock.
  The
   The Company received a proposed supervisory agreement from the OTS.
  ’
  ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 The Company repurchased 74 shares of Common Stock in the quarter ending June 30, 2010.  Through September 30, 2009, the Board of Directors of the Company approved four common stock repurchase plans.  The first repurchase plan was completed in August 2007, purchasing $1.5 million or 102,370 shares at an average cost of $14.65 per share.  The second repurchase plan was completed in March 2008, purchasing $2.0 million or 147,339 shares at an average cost of $13.57 per share.  The third repurchase plan was completed in October 2008, purchasing $3.0 million or 238,483 shares at an average cost of $12.58 per share.  The fourth plan was authorized in November 2008 and through June 30, 2010, the Company has repurchased 106,674 shares at an average cost of $11.44 per share.  Stock repurchases will be made from time to time and may be effected through open market purchases, block trades and in privately negotiated transactions. Repurchased stock will be held as treasury stock and will be available for general corporate purposes.
 
 Company Purchases of Common StockPeriod

Total

number of

shares

purchased


Average

price

paid per

share


Total

number of

shares

purchased

as part of

publicly

announced

plans or

programs


Approximate

dollar value

of shares that

may yet be

purchased

under the

plans or

programsApril 1, 2010 through April 30, 2010


-


$
-



-


$
-May 1, 2010 through May 31, 2010


-



-



-



-June 1, 2010 through June 30, 2010


74



4.54



594,866



780,223Total


74


$
4.54



594,866


$
780,223
 
 ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 None.
 
 ITEM 4.
(RESERVED)
 
 39
 ITEM 5.
OTHER INFORMATION
 
 None.
 
 ITEM 6.
EXHIBITS
 3.1
Certificate of Incorporation of Brooklyn Federal Bancorp, Inc. 13.2
Bylaws of Brooklyn Federal Bancorp, Inc.14
Form of Common Stock of Brooklyn Federal Bancorp, Inc. 111
Computation of Earnings Per Share31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 1    Filed as exhibits to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the SEC (Registration Statement No. 333-121580).
 
 40
  SIGNATURES
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 BROOKLYN FEDERAL BANCORP, INC.(Registrant)Date:  August 16, 2010
/s/ Richard A. KieltyPresident and Chief Executive OfficerDate:  August 16, 2010
/s/ Michael A. TrinidadVice President andChief Financial Officer