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 December 31, 2008
  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 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.
 
 Class
                Outstanding
      at February 12, 2009Common
      Stock,  $.01 Par Value
                12,957,638
  
 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
                11Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                21Item
      4T.
                Controls
      and Procedures
                22PART
      II.Item
      1.
                Legal
      Proceedings
                23Item
      1A.
                Risk
      Factors
                23Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                23Item
      3.
                Defaults
      Upon Senior Securities
                24Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                24Item
      5.
                Other
      Information
                24Item
      6.
                Exhibits
                24Signature
      Page
                25
  
  PART
I
 
 ITEM
1. FINANCIAL
STATEMENTS
 
 BROOKLYN
FEDERAL BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
 (In
thousands, except share amounts)
 (Unaudited)
 
 Assets
                
                December
      31, 2008
                
                
                September
      30, 2008Cash
      and due from banks (including interest-earning balances of $4,520 and
      $3,134, respectively)
                
                $
                6,269
                
                
                $
                5,053Certificates
      of deposit
                
                
                1,197
                
                
                
                1,397Securities
      available-for-sale
                
                
                3,080
                
                
                
                3,665Securities
      held-to-maturity (estimated fair value of $65,060 and $70,996,
      respectively)
                
                
                80,709
                
                
                
                78,086Loans
      held-for-sale
                
                
                145,630
                
                
                
                134,171Loans
      receivable
                
                
                255,502
                
                
                
                241,354Less:
      Allowance for loan losses
                
                
                2,952
                
                
                
                2,205Loans
      receivable, net
                
                
                252,550
                
                
                
                239,149Federal
      Home Loan Bank of New York (“FHLB”) stock, at cost
                
                
                3,345
                
                
                
                2,802Accrued
      interest receivable
                
                
                2,663
                
                
                
                2,477Premises
      and equipment, net
                
                
                2,220
                
                
                
                2,285Bank
      owned life insurance
                
                
                9,241
                
                
                
                9,131Prepaid
      expenses and other assets
                
                
                8,265
                
                
                
                5,627Total
      assets
                
                $
                515,169
                
                
                $
                483,833Liabilities
      and Stockholders’ EquityLiabilities:Deposits:Non-interest-bearing
      deposits
                
                $
                18,805
                
                
                $
                18,773Interest-bearing
      deposits
                
                
                114,041
                
                
                
                113,303Certificates
      of deposit
                
                
                219,670
                
                
                
                210,399Total
      deposits
                
                
                352,516
                
                
                
                342,475Borrowings
                
                
                56,339
                
                
                
                44,239Advance
      payments by borrowers for taxes and insurance
                
                
                1,506
                
                
                
                2,389Accrued
      expenses and other liabilities
                
                
                17,930
                
                
                
                8,407Total
      liabilities
                
                
                428,291
                
                
                
                397,510Stockholders’
      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 12,987,018 and 13,000,081 outstanding, respectively
                
                
                135
                
                
                
                135Additional
      paid-in capital
                
                
                42,987
                
                
                
                42,939Retained
      earnings - substantially restricted
                
                
                53,442
                
                
                
                52,839Treasury
      shares - at cost, 497,192 shares and 484,129 shares,
      respectively
                
                
                (6,622
                )
                
                
                (6,443
                )Unallocated
      common stock held by employee stock ownership plan
(“ESOP”)
                
                
                (2,513
                )
                
                
                (2,552
                )Unallocated
      shares of the stock-based incentive plan
                
                
                (551
                )
                
                
                (595
                )Accumulated
      other comprehensive loss:Net
      unrealized income (loss) on securities available-for-sale, net of income
      tax
                
                
                —
                
                
                
                —Total
      stockholders’ equity
                
                
                86,878
                
                
                
                86,323Total
      liabilities and stockholders’ equity
                
                $
                515,169
                
                
                $
                483,833
  
  See
accompanying notes to consolidated financial statements.
 1
 BROOKLYN
FEDERAL BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF INCOME
 (In
thousands, except share and per share amounts)
 (Unaudited)
 
 For
      the Three Months Ended
                    December
      31,2008
                
                
                2007Interest
      income:First
      mortgage and other loans
                
                $
                7,172
                
                
                $
                5,726Mortgage-backed
      securities
                
                
                925
                
                
                
                803Other
      securities and interest-earning assets
                
                
                78
                
                
                
                171Total
      interest income
                
                
                8,175
                
                
                
                6,700Interest
      expense:Deposits
                
                
                2,500
                
                
                
                2,523Borrowings
                
                
                122
                
                
                
                117Total
      interest expense
                
                
                2,622
                
                
                
                2,640Net
      interest income before provision for loan losses
                
                
                5,553
                
                
                
                4,060Provision
      for loan losses
                
                
                747
                
                
                
                68Net
      interest income after provision for loan losses
                
                
                4,806
                
                
                
                3,992Non-interest
      income (loss):Banking
      fees and service charges
                
                
                369
                
                
                
                470Loss
      on impairment of securities available-for-sale
                
                
                (576
                )
                
                
                —Net
      gain on sale of loans held-for-sale
                
                
                17
                
                
                
                52Other
                
                
                156
                
                
                
                160Total
      non-interest income (loss)
                
                
                (34
                )
                
                
                682Non-interest
      expense:Compensation
      and fringe benefits
                
                
                2,111
                
                
                
                1,886Occupancy
      and equipment
                
                
                411
                
                
                
                335Professional
      fees
                
                
                122
                
                
                
                139Data
      processing fees
                
                
                214
                
                
                
                147Other
                
                
                368
                
                
                
                305Total
      non-interest expense
                
                
                3,226
                
                
                
                2,812Income
      before income tax expense
                
                
                1,546
                
                
                
                1,862Income
      tax expense
                
                
                571
                
                
                
                689Net
      income
                
                $
                975
                
                
                $
                1,173Earnings
      per common share:Basic
                
                $
                0.08
                
                
                $
                0.09Diluted
                
                $
                0.08
                
                
                $
                0.09Average
      common shares outstanding:Basic
                
                
                12,685,436
                
                
                
                12,953,525Diluted
                
                
                12,705,963
                
                
                
                13,007,469
 
 See
accompanying notes to consolidated financial statements.
 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 Loss
                
                
                TotalBalance
      September 30, 2007
                
                $
                135
                
                
                $
                42,758
                
                
                $
                48,379
                
                
                $
                (2,468
                )
                
                $
                (2,711
                )
                
                $
                (774
                )
                
                $
                (60
                )
                
                $
                85,259Comprehensive
      income:Net
      income
                
                
                —
                
                
                
                —
                
                
                
                1,173
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,173Net
      unrealized loss on securities available-for-sale, net of income tax
      benefit of $8
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (11
                )
                
                
                (11
                )Comprehensive
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,162Treasury
      stock purchased (43,425 shares)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (594
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (594
                )Allocation
      of ESOP stock
                
                
                —
                
                
                
                13
                
                
                
                —
                
                
                
                —
                
                
                
                39
                
                
                
                —
                
                
                
                —
                
                
                
                52Stock-based
      incentive plan expense
                
                
                —
                
                
                
                33
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                45
                
                
                
                —
                
                
                
                78Dividends
      paid on common stock, $0.05 per share
                
                
                —
                
                
                
                —
                
                
                
                (201
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (201
                )Balance
      December 31, 2007
                
                $
                135
                
                
                $
                42,804
                
                
                $
                49,351
                
                
                $
                (3,062
                )
                
                $
                (2,672
                )
                
                $
                (729
                )
                
                $
                (71
                )
                
                $
                85,756Balance
      September 30, 2008
                
                $
                135
                
                
                $
                42,939
                
                
                $
                52,839
                
                
                $
                (6,443
                )
                
                $
                (2,552
                )
                
                $
                (595
                )
                
                $
                —
                
                
                $
                86,323Comprehensive
      income:Net
      income
                
                
                —
                
                
                
                —
                
                
                
                975
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                975Net
      unrealized loss on securities available-for-sale, net of income tax
      benefit of $238
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (338
                )
                
                
                (338
                )Loss
      on impairment of securities available-for- sale, net of income tax benefit
      of $238
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                338
                
                
                
                338Comprehensive
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                975Treasury
      stock purchased (13,063 shares)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (179
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (179
                )Allocation
      of ESOP stock
                
                
                —
                
                
                
                15
                
                
                
                —
                
                
                
                —
                
                
                
                39
                
                
                
                —
                
                
                
                —
                
                
                
                54Stock-based
      incentive plan expense
                
                
                —
                
                
                
                33
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                44
                
                
                
                —
                
                
                
                77Dividends
      paid on common stock,
                  $0.10
      per share
                
                
                —
                
                
                
                —
                
                
                
                (372
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (372
                )Balance
      December 31, 2008
                
                $
                135
                
                
                $
                42,987
                
                
                $
                53,442
                
                
                $
                (6,622
                )
                
                $
                (2,513
                )
                
                $
                (551
                )
                
                $
                —
                
                
                $
                86,878
 
  See
accompanying notes to consolidated financial statements.
 3
  BROOKLYN
FEDERAL BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (In
thousands)
 (Unaudited)
  For
      the Three Months Ended
                  December
      31,2008
              
              
              2007Cash
      flows from operating activities:Net
      income
              
              $
              975
              
              
              $
              1,173Adjustments
      to reconcile net income to net cash provided by operating
      activities:ESOP
      expense
              
              
              54
              
              
              
              52Stock-based
      incentive plan expense
              
              
              77
              
              
              
              78Depreciation
      and amortization
              
              
              112
              
              
              
              65Provision
      for loan losses
              
              
              747
              
              
              
              68Income
      from bank-owned life insurance
              
              
              (95
              )
              
              
              (90
              )Loss
      on impairment of securities available-for-sale
              
              
              576
              
              
              
              —Amortization
      of servicing rights
              
              
              65
              
              
              
              —Amortization
      of deferred loan fees, net
              
              
              (101
              )
              
              
              (80
              )(Accretion
      of discounts), net of amortization of premiums
              
              
              (21
              )
              
              
              1Originations
      of loans held-for-sale
              
              
              (33,267
              )
              
              
              (28,486
              )Purchase
      of loans held-for-sale
              
              
              —
              
              
              
              (1,495
              )Proceeds
      from sales of loans held-for-sale
              
              
              1,358
              
              
              
              23,836Principal
      repayments on loans held-for-sale
              
              
              988
              
              
              
              936Net
      gain on sales of loans held-for-sale
              
              
              (17
              )
              
              
              (52
              )Increase
      in accrued interest receivable
              
              
              (186
              )
              
              
              (149
              )Deferred
      income tax benefit
              
              
              (786
              )
              
              
              (136
              )(Increase)
      decrease in prepaid expenses and other assets
              
              
              (1,905
              )
              
              
              1,116Increase
      (decrease) in accrued expenses and other liabilities
              
              
              9,523
              
              
              
              (69
              )Net
      cash used in operating activities
              
              
              (21,903
              )
              
              
              (3,232
              )Cash
      flows from investing activities:Repayments
      in excess of loan originations
              
              
              5,421
              
              
              
              703Purchase
      of loans receivable
              
              
              —
              
              
              
              (478
              )Principal
      repayments on mortgage-backed securities held-to-maturity
              
              
              2,690
              
              
              
              3,500Purchases
      of mortgage-backed securities held-to-maturity
              
              
              (5,292
              )
              
              
              (5,021
              )Purchases
      of securities available-for-sale
              
              
              —
              
              
              
              (62
              )Maturities
      of certificates of deposit
              
              
              200
              
              
              
              397(Purchases)
      redemptions of FHLB stock
              
              
              (543
              )
              
              
              33Purchases
      of bank-owned life insurance
              
              
              (15
              )
              
              
              (14
              )Purchases
      of premises and equipment
              
              
              (47
              )
              
              
              (174
              )Net
      cash provided by (used in) investing activities
              
              
              2,414
              
              
              
              (1,116
              )Cash
      flows from financing activities:Increase
      in deposits
              
              
              10,041
              
              
              
              12,450Net
      increase (decrease) in short term borrowings
              
              
              12,100
              
              
              
              (1,800
              )Repayments
      of long term borrowings
              
              
              —
              
              
              
              (300
              )Decrease
      in advance payments by borrowers for taxes and insurance
              
              
              (883
              )
              
              
              (754
              )Purchase
      of treasury stock
              
              
              (179
              )
              
              
              (594
              )Payment
      of cash dividend
              
              
              (374
              )
              
              
              (201
              )Net
      cash provided by financing activities
              
              
              20,705
              
              
              
              8,801Net
      increase in cash and cash equivalents
              
              
              1,216
              
              
              
              4,453Cash
      and cash equivalents at beginning of year
              
              
              5,053
              
              
              
              5,398Cash
      and cash equivalents at end of period
              
              $
              6,269
              
              
              $
              9,851Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Interest
              
              $
              2,614
              
              
              $
              2,649Taxes
              
              
              433
              
              
              
              —Other:Mortgage
      loans held-to-maturity transferred to held-for-sale
              
              $
              —
              
              
              $
              611Mortgage
      loans held-for-sale transferred to held-to-maturity
              
              
              19,468
              
              
              
              4,428
   See
accompanying notes to consolidated financial statements.
 4
  BROOKLYN
FEDERAL BANCORP, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 (Unaudited)
 
 Note
1 - Basis of Presentation
  The unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with instructions for Form 10-Q.  Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States of America 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-month period ended December 31, 2008 are not necessarily
indicative of the results that may be expected for the year ending
September 30, 2009.  The Company’s consolidated financial
statements, as presented in the Company’s Form 10-K for the year ended September
30, 2008, should be read in conjunction with these statements.
  Note
2 - Use of Estimates
  The
preparation of consolidated financial statements, in conformity with accounting
principles generally accepted in the United States of America, 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
and the fair values of securities are particularly susceptible to material
change in the near term.
  Note
3 – Fair Value Measurement
  In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements, which
defines fair value, establishes a framework for measuring fair value under GAAP,
and expands disclosures about fair value measurements.  SFAS No. 157
applies to other accounting pronouncements that require or permit fair value
measurements.  The new standard is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and for interim
periods within those fiscal years.  The Company adopted SFAS No. 157
effective for its fiscal year beginning October 1, 2008.
 
 In
December 2007, the FASB issued FASB Staff Position (“FSP”) 157-2, “Effective
Date of FASB Statement No. 157”.  FSP 157-2 delays the effective date
of SFAS No. 157 for all non-financial assets and liabilities, except those that
are recognized or disclosed at fair value on a recurring basis (at least
annually) to fiscal years beginning after November 15, 2008 and interim periods
within those fiscal years.  In October 2008, the FASB issued
FSP 157-3, “Determining the Fair Value of a Financial Asset When The Market
for That Asset Is Not Active” to clarify the application of the provisions of
SFAS No. 157 in an inactive market and how an entity would determine fair
value in an inactive market.  FSP 157-3 is effective immediately
and applies to our December 31, 2008 consolidated financial statements. The
adoption of SFAS No. 157, FSP 157-2 and FSP 157-3 had no impact on the amounts
reported in the consolidated financial statements.
  5
  The
primary effect of SFAS No. 157 on the Company was to expand the required
disclosures pertaining to the methods used to determine fair
values.
 
 SFAS No.
157 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 SFAS No. 157 are as follows:
  Level
1:
              Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or liabilities.Level
2:
              Quoted
      prices in markets that are not active, or inputs that are observable
      either directly or indirectly, for substantially the full term of the
      asset or liability.Level
3:
              Prices
      or valuation techniques that require inputs that are both significant to
      the fair value measurement and unobservable (i.e. supported with little or
      no market activity).
  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 used at December 31, 2008
are as follows:
  Description
              
              December
      31,
                2008
              
              
              (Level
      1)
                Quoted
      Prices
                in
      Active
                Markets
      for
                Identical
                Assets
              
              
              (Level
      2)
                Significant
                Other
                Observable
                Inputs
              
              
              (Level
      3)
                Significant
                Unobservable
                Inputs(In
      thousands)Securities
      available-for-sale
              
              $
              3,080
              
              
              $
              3,080
              
              
              $
              0
              
              
              $
              0
  6
  For
financial assets measured at fair value on a nonrecurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2008
are as follows:
  Description
              
              December
      31,
                2008
              
              
              (Level
      1)
                Quoted
      Prices
                in
      Active
                Markets
      for
                Identical
                Assets
              
              
              (Level
      2)
                Significant
                Other
                Observable
                Inputs
              
              
              (Level
      3)
                Significant
                Unobservable
                Inputs(In
      thousands)Impaired
      loans
              
              $
              1,463
              
              
              $
              0
              
              
              $
              0
              
              
              $
              1,463
 
  The
following valuation techniques were used to measure fair value of assets in the
tables above:
  Available-for-sale
      securities – The fair value of the securities was obtained through a
      primary broker/dealer from readily available price quotes as of December
      31, 2008.Impaired
      loans – Impaired loans are those that are accounted for under FASB
      Statement No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS
      114”), in which the Company has measured impairment generally based on the
      fair value of the loan’s collateral.  Fair value is generally
      determined based upon independent third party appraisals of the
      properties, or 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 of
      $1,883 less their specific valuation allowances of $420, as determined
      under SFAS 114.
  Note
4 - Impact of Certain Accounting Pronouncements
  In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. SFAS No. 159
is effective for our Company October 1, 2008. The adoption of SFAS
No. 159 did not have a material effect on our consolidated financial
statements.
 
 FASB SFAS
No. 141 (R) “Business Combinations” was issued in December of 2007. This
Statement establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. The Statement also provides guidance for recognizing and measuring
the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The guidance will
become effective as of the beginning of a company’s fiscal year beginning after
December 15, 2008.  This pronouncement will impact the Company’s
accounting for business combinations completed after the effective
date.
  7
  FASB SFAS
No. 160 “Non-controlling Interests in Consolidated Financial Statements—an
amendment of ARB No. 51” was issued in December of 2007. This Statement
establishes accounting and reporting standards for the non-controlling interest
in a subsidiary and for the deconsolidation of a subsidiary. The guidance will
become effective as of the beginning of a company’s fiscal year beginning after
December 15, 2008. The Company believes that this new pronouncement will not
have a material impact on the Company’s consolidated financial
statements.
 
 In
February 2008, the FASB issued FSP FAS 140-3, “Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions.” This FSP addresses the
issue of whether or not these transactions should be viewed as two separate
transactions or as one "linked" transaction. The FSP includes a "rebuttable
presumption" that presumes linkage of the two transactions unless the
presumption can be overcome by meeting certain criteria. The FSP will be
effective for fiscal years beginning after November 15, 2008 and will apply only
to original transfers made after that date; early adoption will not be allowed.
The Company is currently evaluating the potential impact, if any, the new
pronouncement will have on its consolidated financial statements.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities—an amendment of FASB Statement No. 133”.  SFAS
No. 161 requires entities that utilize derivative instruments to provide
qualitative disclosures about their objectives and strategies for using such
instruments, as well as any details of credit-risk-related contingent features
contained within derivatives.  SFAS No. 161 also requires entities to
disclose additional information about the amounts and location of derivatives
located within the financial statements, how the provisions of SFAS No. 133 has
been applied, and the impact that hedges have on an entity’s financial position,
financial performance, and cash flows.  SFAS No. 161 is effective for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged.  The impact to the Company will be to require
the Company to expand its disclosure regarding its derivative
instruments.
 
 In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets.”  This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill
and Other Intangible Assets”.  The intent of this FSP is to improve
the consistency between the useful life of a recognized intangible asset under
SFAS No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141R, and other GAAP.  This FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited.  The Company is currently evaluating the
potential impact, if any, the new pronouncement will have on its consolidated
financial statements.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.”  SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements.  SFAS No. 162 is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles.”  The Company is
currently evaluating the potential impact, if any, the new pronouncement will
have on its consolidated financial statements.
  8
  In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating
Securities.”  This FSP clarifies that all outstanding unvested
share-based payment awards that contain rights to non-forfeitable dividends
participate in undistributed earnings with common
shareholders.  Awards of this nature are considered participating
securities and the two-class method of computing basic and diluted earnings per
share must be applied.  This FSP is effective for fiscal years
beginning after December 15, 2008.  The Company is currently
evaluating the potential impact, if any, the new pronouncement will have on its
consolidated financial statements.
 
 In June
2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-5,
“Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an
Entity’s Own Stock” (“EITF 07-5”).  EITF 07-5 provides that an entity
should use a two step approach to evaluate whether an equity-linked financial
instrument (or embedded feature) is indexed to its own stock, including
evaluating the instrument’s contingent exercise and settlement
provisions.  It also clarifies the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation.  EITF 07-5 is effective for fiscal
years beginning after December 15, 2008.  The Company is currently
evaluating the potential impact, if any, the new pronouncement will have on its
consolidated financial statements.
 
 In June
2008, the FASB ratified EITF Issue No. 08-3, “Accounting for Lessees for
Maintenance Deposits Under Lease Arrangements” (“EITF 08-3”). EITF 08-3 provides
guidance for accounting for nonrefundable maintenance deposits.  It
also provides revenue recognition accounting guidance for the
lessor.  EITF 08-3 is effective for fiscal years beginning after
December 15, 2008.  The Company is currently evaluating the potential
impact, if any, the new pronouncement will have on its consolidated financial
statements.
 
 In
September 2008, the FASB issued FSP 133-1 and FASB Interpretation (“FIN”) 45-4,
“Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of
FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161.” FSP 133-1 and FIN 45-4 amends and
enhances disclosure requirements for sellers of credit derivatives and financial
guarantees.  It also clarifies that the disclosure requirements of
SFAS No. 161 are effective for quarterly periods beginning after November 15,
2008, and fiscal years that include those periods.  FSP 133-1 and FIN
45-4 is effective for reporting periods (annual or interim) ending after
November 15, 2008.  The implementation of this standard did not have a
material impact on our consolidated financial statements.
 
 In
September 2008, the FASB ratified EITF Issue No. 08-5, “Issuer’s Accounting for
Liabilities Measured at Fair Value With a Third-Party Credit Enhancement” (“EITF
08-5”).  EITF 08-5 provides guidance for measuring liabilities issued
with an attached third-party credit enhancement (such as a
guarantee).  It clarifies that the issuer of a liability with a
third-party credit enhancement should not include the effect of the credit
enhancement in the fair value measurement of the liability.  EITF 08-5
is effective for the first reporting period beginning after December 15,
2008.  The implementation of this pronouncement did not have a
material impact on our consolidated financial statements.
  9
  In
November 2008, the SEC released a proposed roadmap regarding the potential use
by U.S. issuers of financial statements prepared in accordance with
International Financial Reporting Standards (IFRS). IFRS is a comprehensive
series of accounting standards published by the International Accounting
Standards Board (“IASB”). Under the proposed roadmap, the Company may be
required to prepare financial statements in accordance with IFRS as early as
2014. The SEC will make a determination in 2011 regarding the mandatory adoption
of IFRS. The Company is currently assessing the impact that this potential
change would have on its consolidated financial statements, and it will continue
to monitor the development of the potential implementation of IFRS.
 
 In
November 2008, the FASB ratified EITF Issue No. 08-6,“Equity Method
Investment Accounting Considerations” (“EITF 08-6”). EITF 08-6 clarifies
the accounting for certain transactions and impairment considerations involving
equity method investments. EITF 08-6 is effective for fiscal years
beginning after December 15, 2008, with early adoption prohibited. The
Company is currently reviewing the effect this new pronouncement will have on
its consolidated financial statements.
  In
December 2008, the FASB issued FSP SFAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities.”  FSP SFAS 140-4 and FIN 46(R)-8 amends
FASB SFAS 140 “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities”, to require public entities to provide
additional disclosures about transfers of financial assets. It also amends FIN
46(R), “Consolidation of Variable Interest Entities”, to require public
enterprises, including sponsors that have a variable interest in a variable
interest entity, to provide additional disclosures about their involvement with
variable interest entities. Additionally, this FSP requires certain disclosures
to be provided by a public enterprise that is (a) a sponsor of a qualifying
special purpose entity (SPE) that holds a variable interest in the qualifying
SPE but was not the transferor of financial assets to the qualifying SPE and (b)
a servicer of a qualifying SPE that holds a significant variable interest in the
qualifying SPE but was not the transferor of financial assets to the qualifying
SPE. The disclosures required by FSP SFAS 140-4 and FIN 46(R)-8 are intended to
provide greater transparency to financial statement users about a transferor’s
continuing involvement with transferred financial assets and an enterprise’s
involvement with variable interest entities and qualifying SPEs. FSP SFAS 140-4
and FIN 46(R) is effective for reporting periods (annual or interim) ending
after December 15, 2008. The implementation of this pronouncement did not have a
material impact on our consolidated financial statements.
  In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment of
Guidance of EITF Issue No. 99-20”.  FSP EITF 99-20-1 amends the
impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets”, to achieve
more consistent determination of whether an other-than-temporary impairment has
occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure
requirements in SFAS No. 115, “Accounting for Certain Investments in Debt and
Equity Securities”, and other related guidance. FSP EITF 99-20-1 is effective
for interim and annual reporting periods ending after December 15, 2008, and
shall be applied prospectively. Retrospective application to a prior interim or
annual reporting period is not permitted. The implementation of this
pronouncement did not have a material impact on our consolidated financial
statements.
  10
  ITEM
      2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 Forward-Looking
Statements
  When used
in this quarterly report and in future filings by the Company with the
Securities and Exchange Commission, in the Company’s press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases, “anticipate,”
“would be,” “will allow,” “intends to,” “will likely result,” “are expected to,”
will continue,” “is anticipated,” “estimated,” “projected,” or similar
expressions are intended to identify “forward looking
statements.”  Such statements are subject to risks and uncertainties,
including but not limited to changes in economic conditions in the Company’s
market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in the Company’s market area, changes in the
position of banking regulators on the adequacy of the Company’s allowance for
loan losses, and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected.
  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.
  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, 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.
  11
  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, which is charged
against income.  In determining the allowance for loan losses,
management makes significant estimates.  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
such 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.
  12
  Other-than-Temporary
Impairment of Securities.We have evaluated, and continue to
evaluate, on a quarterly basis whether any securities are other-than-temporarily
impaired.  This evaluation has been conducted in the past as
necessary.  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 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
Bank’s investment in a mutual fund that invests primarily in agency and private
label mortgage backed securities has been steadily losing value, 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 $3.1 million
investment in this asset.
 
 As of
December 31, 2008, we concluded that this available-for-sale investment did
incur an other-than-temporary impairment and the Bank charged current earnings
for the impairment.  As to the securities held-to-maturity we
concluded 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.  Additionally, we have the intent and ability to hold
these investments for 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.
  Federal
Home Loan Bank Stock, which represents a required investmentin the common stock
ofthe Federal Home
Loan Bank of New York (“FHLB”), is carried at cost as of December 31, 2008 and
September 30, 2008.
  Management evaluates the FHLB stock for
impairment in accordance with Statement of Position (SOP) 01-6, “Accounting by
Certain Entities (Including Entities With Trade Receivables) That Lend to or
Finance the Activities of Others.”  Management’s determination of
whether these investments are impaired is based on their assessment of the
ultimate recoverability of their cost rather than by recognizing temporary
declines in value.  The determination of whether a decline affects the
ultimate recoverability of their cost is influenced by criteria such as (1) the
significance of the decline in net assets of the FHLB as compared to the capital
stock amount for the FHLB and the length of time this situation has persisted,
(2) commitments by the FHLB tomake payments required by
law or regulation and the level of such payments inrelation to the operating performance
of the FHLB, and (3) the impact of legislative and regulatory changes on
institutions and, accordingly, on the customer base of the
FHLB.
  Management
believes no impairment charge is necessary related to the FHLB stock as of
December 31, 2008.
  13
  We
continue to evaluate all our investments and in the event the market value of
such investments declines further and remains depressed for a substantial period
of time, we will evaluate the investments for other-than-temporary impairment at
that time.
 
 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.
 
 Business
Strategy
  Our
business strategy is to operate as a well-capitalized and profitable community
bank dedicated to providing quality customer service.  Our business
strategy historically has been to emphasize one- to four-family residential
mortgage lending.  While we will continue to engage in this type of
lending, management has determined to broaden the range of our products and
services to enhance profitability, consistent with safety and
soundness.  In recent years, we have significantly expanded our
multi-family, commercial real estate and construction lending. We have also
introduced additional products and services, such as debit cards and internet
banking.  We cannot assure you that we will successfully implement our
business strategy.
  Highlights of our business strategy are
as follows:
  ●
              Remaining a Community Oriented
      Institution.  We were established in Brooklyn, New York
      in 1887, and we have been operating continuously since that
      time.  We have been, and continue to be, committed to meeting
      the financial needs of the communities in which we operate, and we are
      dedicated to providing quality personal service to our
      customers.  Although historically our principal business
      activity has been accepting deposits from the public and using those funds
      to originate one- to four-family mortgage loans, in recent years we have
      been originating more commercial real estate loan products and a wider
      variety of residential real estate loan products to meet the needs of our
      customers.  If such loans do not satisfy our criteria for
      retention in our loan portfolio, they generally can be sold in the
      secondary market.●
              Continuing to Increase Our
      Multi-Family, Commercial Real Estate and Construction
      Lending.  Historically, we have emphasized one- to
      four-family residential lending within our market area.  While
      one- to four-family loan originations remain an important form of loans
      because of our expertise with this type of lending, in the past five years
      we have emphasized the origination of loans secured by multi-family
      properties and commercial real estate and construction loans as a means of
      increasing our interest and fee income.  Multi-family,
      commercial real estate and construction lending generally expose a lender
      to greater credit risk than loans secured by one- to four-family real
      estate.  The repayment of multi-family, commercial real estate
      and construction loans depends upon the business and financial condition
      of the borrower and, in the case of construction loans, on the economic
      viability of projects financed.  Consequently, we, like other
      financial institutions, generally charge higher rates of interest for
      these types of loans compared to one- to four-family residential
      loans.  We have invested in a new loan servicing system and
      additional personnel to allow us to service these types of loans more
      efficiently.
  14
  ●
              Managing Our Interest Rate
      Risk.  With long-term interest rates at low levels, we
      have managed our interest rate risk by maintaining a portion of our assets
      in short-term liquid assets, such as cash and due from banks, short-term
      investment securities and mortgage-related securities that provide
      significant cash flows.  This strategy positioned us to reinvest
      our short-term liquid assets in higher yielding loans and investments once
      interest rates begin to rise.  During the recent period of lower
      short-term interest rates, we have been able to maintain a market level of
      interest income on our short-term liquid assets, while still utilizing a
      portion of our liquidity to purchase security investments and redeploying
      the excess repayments of those investments to loan
      originations.  Continuing to maintain our current level of
      short-term liquid assets, however, generates less interest income than
      would have been generated if we had invested in longer-term loans and
      investments.  At December 31, 2008, $6.3 million, or 1.2% of our
      assets, was invested in cash or cash equivalents, and $1.2 million, or
      0.2% of our assets, was invested in certificates of deposit and securities
      that mature within three years.●
              Facilitate Growth Through De
      Novo Branching.  We have established financial,
      geographic and other criteria to evaluate potential new branch offices in
      our market area.  While we continue to review potential branch
      sites, there can be no assurance as to whether or when we will open such
      offices.●
              Maintaining High Asset
      Quality.  We have focused on improving and maintaining
      strong asset quality by following conservative underwriting criteria, and
      primarily originating loans secured by real
  estate.
  Comparison
of Financial Condition at December 31, 2008 and September 30, 2008
  Total
Assets.  Total assets increased $31.4 million, or 6.5%, to
$515.2 million at December 31, 2008, from $483.8 million at September 30,
2008.  This increase was primarily due to increases in cash and due
from banks, securities held-to-maturity, loans held-for-sale, loans receivable,
net, and other assets, offset in part by decreases in certificate of deposit
investments and securities available-for-sale.
  15
  Cash and Due from
Banks.Cash and due from banks increased $1.2 million, or
24.1%, to $6.3 million at December 31, 2008, from $5.1 million at September 30,
2008.
  Investment in
Certificates of Deposit.  Certificates of deposit decreased
$200,000, or 14.3%, to $1.2 million at December 31, 2008, from $1.4 million at
September 30, 2008.  This decrease was due to maturities of some
certificates.
  Securities.Security
investments, which represent securities available-for-sale and securities
held-to-maturity, increased $2.1 million, or 2.5%, to $83.8 million at
December 31, 2008, from $81.7 million at September 30, 2008.  This
increase was primarily due to purchases of mortgage-backed securities of $5.3
million, offset by repayments in mortgage-backed securities of approximately
$2.7 million and the recording of an other-than-temporary impairment of
approximately $576,000.  Our holdings of mortgage-backed securities
and securities available-for-sale totaled $80.7 million and $3.1 million,
respectively, at December 31, 2008.
  Net
Loans.  Net loans before allowance for loan losses, which
includes loans held-for-sale, increased $25.6 million, or 6.8%, to
$401.1 million at December 31, 2008, from $375.5 million at September 30,
2008, primarily due to increases in multi-family loans of $13.2 million,
construction loans of $10.3 million and land loans of $5.7 million, offset by
decreases of $3.0 million in commercial real estate loans, $270,000 in one-to
four-family loans and $81,000 in consumer and other loans.  Net
deferred fees and costs increased approximately $282,000.
  At
December 31, 2008, the Bank has one participation loan, of which our portion is
approximately $1.9 million, that is non-performing and in non-accrual
status.  This non-performing and non-accruing loan is secured by a
vacant multi-family apartment building located in New York City.  The
Bank has established a specific loan loss allowance of $420,200 for this
loan.  As mentioned in our Form 10-K filed with the SEC on December
29, 2008, this loan was classified as special mention at September 30, 2008, due
to being past maturity.  Subsequently, in November 2008, we classified
this loan as substandard and placed this loan in non-accrual status and the
foreclosure process was commenced.  In December 2008 the borrower
procured an appraisal valuing the property for $14.6 million, with our portion
of the appraisal totaling approximately $1.5 million.
  There
were two non-performing loans at September 30, 2008 totaling approximately $2.0
million, each of which was still accruing at September 30, 2008.  One
loan was the vacant multi-family property described above.  The other
non-performing loan was a commercial real estate loan for
$130,000.  This loan was classified as special mention but was
subsequently paid off in November 2008.
  On the
basis of management’s review of classified assets at December 31, 2008, we
classified $3.4 million of our assets as special mention representing one
construction loan, two commercial real estate loans and one consumer
loan.  The construction loan of $1.9 million, which represents 76.0%
of the total loan has an appraised value of $5.3 million and is current with
their payment.  One commercial real estate loan of $1.2 million has an
appraised value of $2.0 million and is still making payments after their
contractual due date and the other commercial real estate loan of $258,000,
which represents 10.0% of the total loan has an appraised value of approximately
$4.0 million and is current with their payment.  The consumer loan of
$1,200 is still making payments after their contractual due date.
  16
  On the
basis of management’s review of classified assets at December 31, 2008, we
classified two loans as substandard totaling $8.6 million.  One loan
is the vacant multi-family apartment building described above. The other loan is
a commercial real estate loan for $6.7 million with an appraised value of $13.2
million.  This loan was classified as special mention at March 31,
2008 and reclassified as substandard in June 2008 due to the borrower’s history
of making late contractual payments.  This loan remains classified
substandard at December 31, 2008.  At December 31, 2008, none of our
assets were classified as loss.
 
 Federal Home Loan
Bank of New York Stock.FHLB of New York stock increased
$543,000, or 19.4%, to $3.3 million at December 31, 2008.  At
September 30, 2008 our FHLB stock investment balance was $2.8
million.  This increase was primarily due to an increased balance in
FHLB borrowings, which triggered purchases of FHLB stock.
  Bank Owned Life
Insurance.Bank-owned life insurance increased $110,000, or
1.2%, to $9.2 million at December 31, 2008, from $9.1 million at September 30,
2008. This increase was mainly due to increases in cash surrender value from
earnings of $95,000 and additional insurance purchase of $15,000.
  Prepaid
Expenses and Other Assets.Prepaid expenses and other assets,
premises and equipment, net and accrued interest receivable increased $2.7
million, or 26.6%, to $13.1 million at December 31, 2008, from $10.4 million at
September 30, 2008. This increase was mainly due to increases in miscellaneous
other assets of approximately $2.6 million, which include increases in
unprocessed branch and department operations work of approximately $1.9 million
and approximately $788,000 in deferred tax assets. Accrued interest receivable
increased approximately $186,000.  Premises and equipment, net,
decreased approximately $65,000.
  Deposits.  Deposits
increased by $10.0 million, or 2.9%, to $352.5 million at December 31, 2008,
from $342.5 million at September 30, 2008.  The increase was primarily
due to the Bank’s marketing and promotional efforts in its market area,
including efforts to remain competitive in all of its deposit
offerings.
  Borrowed
Funds.  Total funds borrowed from the FHLB of New York,
increased $12.1 million, or 27.4%, to $56.3 million at December 31, 2008, from
$44.2 million at September 30, 2008. The primary reason for the increase was
additional funding for the origination of mortgage loans.
  Advance payments
by borrowers for taxes and insurance (“Escrow”). Escrow deposits
decreased $883,000, or 37.0%, to $1.5 million at December 31, 2008, from $2.4
million at September 30, 2008.
  Accrued Expenses
and Other Liabilities.  Accrued expenses and other liabilities
increased $9.5 million, or 113.3%, to $17.9 million at December 31, 2008, from
$8.4 million at September 30, 2008.  This increase was primarily due
to an increase in miscellaneous payables of approximately $8.1 million, which
represents outstanding official checks not yet cleared.  The Company
also had increases in taxes payable of $865,000, loan payables of $386,000,
accrued expenses of $437,000, and Supplemental Executive Retirement Plan
(“SERP”) accruals of $25,000, offset by a decrease in unprocessed banking
liabilities of $329,000.
  17
  Stockholders’
Equity.Stockholders’ equity increased by $555,000, or
0.6%, to $86.9 million at December 31, 2008, from $86.3 million at
September 30, 2008.  The primary reason for the increase is the result
of net income for the period, offset in part by the payment of dividends of
approximately $374,000 and purchases of treasury stock of approximately $179,000
pursuant to the Company’s stock repurchase plan.
  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 portion of the Company’s liquidity
consists of cash and due from banks, which are a product of its operating,
investing and financing activities.  At December 31, 2008,
$6.3 million, or 1.2%, of the Company’s assets were invested in cash and
due from banks.  The Company’s primary recurring 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, the Company sells a portion
of the longer-term mortgage loans, and the Company syndicates and sells
participation interests in portions of its multi-family, commercial real estate,
construction and land loans.  Such activity is expected to continue so
long as it meets the Company’s operational and financial needs.  In
addition, the Company invests excess funds in short-term interest-earning assets
and other assets, which provide liquidity to meet the Company’s lending
requirements.  At December 31, 2008 investments in certificates of
deposit and short-term investment securities (maturing in less than three years)
totaled $1.2 million, or 0.2%, of the Company’s assets.  As of
December 31, 2008, the Company had $56.3 million in borrowings outstanding from
the FHLB of New York and access to additional FHLB of New York
advances.
 
 At December 31, 2008, the Company had
approximately $166.2 million in commitments to originate loans and unused lines
of credit outstanding, which included $98.5 million in undisbursed construction
loans, $1.3 million in one- to four-family loans, $1.9 million in unused home
equity lines of credit, $9.4 million in commercial real estate lines of credit
and $55.1 million to originate multi-family and nonresidential mortgage
loans.  The Bank had a stand by letter of credit commitment of
approximately $2.1 million.  The Bank had no commitments to sell
loans.  Certificates of deposit due within one year of December 31,
2008 totaled $174.3 million, or 79.4% of certificates of deposit.  If
these maturing deposits do not remain with the Company, the Company will be
required to seek other sources of funds, including other certificates of deposit
and borrowings.  Depending on market conditions, the Company may be
required to pay higher rates on such deposits or other borrowings than the
Company currently pays on the certificates of deposit due on or before December
31, 2009.  Management believes, however, based on past experience that
a significant portion of its certificates of deposit will remain with the
Company.  The Company has the ability to attract and retain deposits
by adjusting the interest rates offered.
  18
  The following table sets forth the
Bank’s capital position at December 31, 2008, as compared to the minimum
regulatory capital requirements:
 
 Actual
              
              
              Minimal
      Capital
                Requirements
              
              
              To
      be well Capitalized
                Under
      Prompt
                Corrective
      Actions
                ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio(Dollars
      in thousands)Total
      risk-based capital(To
      risk-weighted assets)
              
              $
              79,428
              
              
              
              19.7
              %
              
              $
              32,196
              
              
              
              8.0
              %
              
              $
              40,245
              
              
              
              10.0
              %Tier
      1 risk-based capital(To
      risk-weighted assets)
              
              
              76,125
              
              
              
              18.9
              
              
              
              16,098
              
              
              
              4.0
              
              
              
              24,147
              
              
              
              6.0Tangible
      capital(To
      tangible assets)
              
              
              76,125
              
              
              
              14.8
              
              
              
              7,712
              
              
              
              1.5
              
              
              
              N/A
              
              
              
              N/ATier
      1 leverage (core) capital(To
      adjusted tangible assets)
              
              
              76,125
              
              
              
              14.8
              
              
              
              15,425
              
              
              
              3.0
              
              
              
              25,708
              
              
              
              5.0
 
 Off-Balance
Sheet Arrangements
 
 The following tables set forth the
Bank’s contractual obligations and commercial commitments at December 31,
2008:
 
 Commitment
      Expiration by PeriodOff-Balance Sheet
    Arrangements
              
              Total
              
              
              One
      Year
                or
      less
              
              
              More
      than One Year Through Three Years
              
              
              More
      Than
                Three
      Years through Five Years
              
              
              More
      Than
                Five
      Years(In
      thousands)To
      originate loans
              
              $
              56,417
              
              
              $
              56,417
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —Stand
      by letter of credit
              
              
              2,140
              
              
              
              2,140
              
              
              
              —
              
              
              
              —
              
              
              
              —Unused
      lines of credit
              
              
              109,776
              
              
              
              109,776
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
              
              $
              168,333
              
              
              $
              168,333
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
  Comparison
of Operating Results for the Three Months Ended December 31, 2008 and
2007
  Net
Income.  Net income decreased by $198,000, or 16.9%, to
$975,000 for the three months ended December 31, 2008, from net income of $1.2
million for the three months ended December 31, 2007.  The primary
reasons for the decrease were a decrease in non-interest income of $716,000,
increases in loan loss provision of $679,000 and non-interest expense of
$414,000, offset in part by an increase in interest income of $1.5 million and
decreases in interest expense of $18,000 and provision for income tax of
$118,000.
  19
  Net Interest
Income Before Provision for Loan Losses.Net interest income
before provision for loan losses increased by $1.5 million, or 36.8%, to
$5.6 million for the three months ended December 31, 2008, from
$4.1 million for the three months ended December 31, 2007.  The
increase in net interest income resulted primarily from an increase in the
average balance of interest-earning assets of $93.0 million and a 75 basis point
increase in the Bank’s net interest rate spread to 4.13% for the three months
ended December 31, 2008, from 3.38% for the three months ended December 31,
2007.  The Bank’s net interest margin increased 42 basis points to
4.70% for the three months ended December 31, 2008 compared to 4.28% for the
three months ended December 31, 2007.
  Interest
Income.Interest income increased $1.5 million, or 22.0%, to
$8.2 million for the three months ended December 31, 2008, from
$6.7 million for the three months ended December 31,
2007.  Interest income on loans increased by $1.5 million, or 25.3%,
to $7.2 million for the three months ended December 31, 2008, from
$5.7 million for the three months ended December 31, 2007.  The
primary reasons for the increase in interest income on loans were a $1.2 million
increase in multi-family and commercial real estate loan income, a $241,000
increase in construction loan income and a $54,000 increase in one- to
four-family income, offset in part by a decrease in other loan income of
$2,000.  The average balance of the loan portfolio increased by $90.0
million, or 30.6%, to $383.6 million for the three months ended December 31,
2008, from $293.6 million for the three months ended December 31, 2007. The
average yield on loans decreased 32 basis points to 7.48% for the three months
ended December 31, 2008, from 7.80% for the three months ended December 31,
2007. Interest income on security investments and other interest-earning assets
increased by $29,000, or 3.0%, to $1.0 million for the three months ended
December 31, 2008, from $974,000 for the three months ended December 31,
2007.  The increase in interest income on security investments and
other interest-earning assets was primarily due to an increase in the average
balance of $3.1 million, or 3.6%, to $89.2 million at December 31, 2008 from
$86.1 million at December 31, 2007, offset by a decrease of 3 basis points in
the average yield to 4.50% for the quarter ended December 31, 2008, compared to
the average yield of 4.53% for the quarter ended December 31, 2007.
  Interest
Expense.  Interest expense decreased $18,000, or 0.7%, to $2.6
million for the three months ended December 31, 2008 and December 31, 2007,
respectively.  Interest expense on deposits decreased $23,000, or
0.9%, to $2.5 million at December 31, 2008 and December 31, 2007,
respectively.  Interest expense on FHLB of New York borrowings
increased $5,000, or 4.3%, to $122,000 at December 31, 2008, from $117,000 at
December 31, 2007.  The decrease in total interest expense was
primarily the result of decreases in the average cost of interest-bearing
deposits of 62 basis points to 3.02% at December 31, 2008, compared to 3.64% at
December 31, 2007, and in the average cost of FHLB of New York borrowings of 377
basis points, to 1.07% for the quarter ended December 31, 2008, compared to the
average cost of 4.84% for the quarter ended December 31, 2007, offset in part by
increased average balances of interest-bearing deposits of $53.7 million to
$330.8 million at December 31, 2008, from $277.1 million at December 31, 2007
and FHLB of New York borrowings of $36.0 million, to $45.7 million at December
31, 2008, from $9.7 million at December 31, 2007.  The average cost of
total interest-bearing liabilities decreased 89 basis points to 2.79% for the
three months ended December 31, 2008, from 3.68% for the three months ended
December 31, 2007.
  20
  Provision for
Loan Losses.The Bank’s provision for loan losses increased by
$679,000, or 998.5%, to $747,000 for the quarter ended December 31, 2008
compared to $68,000 for the quarter ended December 31, 2007.  The
primary reasons for this increase were a specific allowance of $420,000
established for a non-accruing, vacant multi-family loan property and increases
in higher risk loan originations, including commercial mortgage loans,
construction mortgage loans and land loans.  The Bank continues to
transfer loans from its held-for-sale loan portfolio to its mortgage loan
receivable portfolio after the Bank reached its internal limit in participating
out interests in certain loans to other financial institutions.  The
allowance for loan losses as of December 31, 2008 represented 0.74% of total
loans, compared to 0.64% of total loans as of December 31, 2007.
  Non-interest
Income. Non-interest income decreased by $716,000, or 105.0%, to
$(34,000) for the quarter ended December 31, 2008 from $682,000 for the quarter
December 31, 2007.  The decrease was primarily due to an impairment
charge of $576,000 taken on the Bank’s investment in a mutual fund that invests
primarily in agency and private label mortgage backed securities.  The
market values of the fund’s holdings have been steadily decreasing, which has
caused a corresponding decrease in the fund’s net asset value.  In
addition, the fund has implemented a temporary prohibition on cash redemptions,
lessening the ability of the Bank to dispose of its remaining $3.1 million
investment in this asset.  Based on these factors, the loss was
considered to be other than temporary.  The Company continues to
evaluate this investment to determine if additional write-downs will be
necessary.  The decrease was also due to decreased loan fees of
$90,000, depositor related fees of $11,000, net gain on sale of loans
held-for-sale of $35,000 and other income of approximately $4,000.
  Non-interest
Expense.  Non-interest expense increased by $414,000, or 14.7%,
to $3.2 million for the three months ended December 31, 2008, from $2.8
million for the three months ended December 31, 2007.  The increase
resulted from increases of $225,000 in compensation and fringe benefits, which
include increases in employee salaries, health care costs and director
compensation.  The Company also experienced increased costs in
occupancy and equipment of $76,000, data processing fees of $67,000 and other
expenses of $63,000, which include advertising, office supplies, printing, and
insurance; offset in part by decreased professional fee expense of
$17,000.
  Income Taxes.Income tax expense decreased $118,000, or 17.1%, to $571,000 for the
three months ended December 31, 2008, from $689,000 for the three months ended
December 31, 2007.  The primary reason for this decrease is decreased
income before provision for income taxes.  The effective income tax
rate of the Company for the three months ended December 31, 2008 was 36.9%,
compared to the effective income tax rate of 37.0% for the three months ended
December 31, 2007.
  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 audit
committee of the board of directors meets as needed to review the Company’s
asset/liability policies and interest rate risk position.
  21
  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 decreasing interest rate
environment, 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 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, 2008.
 
 ITEM
      4T.
              CONTROLS
      AND PROCEDURES
  An
evaluation was performed under the supervision and with the participation of the
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Rule 13a-15(e) or
15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as
of December 31, 2008.  Based on such evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer have concluded that the Company’s
disclosure controls and procedures are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and regulations
and are operating in an effective manner.
  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.
  22
  PART
II - OTHER INFORMATION
  ITEM
      1.
              LEGAL
      PROCEEDINGS
  There is
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, 2008, as filed with the SEC on
December 29, 2008.
  ITEM
      2.
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
  (c)The Company
repurchased Common Stock in the quarter ending December 31, 2008. Through
December 31, 2008 the Board of Directors of the Company has 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 plan was authorized in March 2008 and completed in
October 2008, purchasing $3.0 million or 238,483 shares at an average cost of
$12.58 per share.  In November 2008 the Board of Directors approved
the fourth repurchase plan, and through December 31, 2008 the Company has
repurchased 9,000 shares at an average cost of $13.60 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. As of December 31, 2008, 497,192
shares have been repurchased, with repurchases completed during the quarter
described in the following table:
  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
      programsOctober
      1, 2008 through October 31, 2008
              
              
              4,063
              
              
              $
              14.12
              
              
              
              488,192
              
              
              
              N/ANovember
      1, 2008 through November 30, 2008
              
              
              6,400
              
              
              $
              13.61
              
              
              
              494,592
              
              
              $
              1,912,915December
      1, 2008 through December 31, 2008
              
              
              2,600
              
              
              $
              13.59
              
              
              
              497,192
              
              
              $
              1,877,572Total
              
              
              13,063
              
              
              $
              13.76
              
              
              
              497,192
              
              
              $
              1,877,572
 
 23
  ITEM
      3.
              DEFAULTS
      UPON SENIOR SECURITIESNone.ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERSNone.ITEM
      5.
              OTHER
      INFORMATIONNone.ITEM
      6.
              EXHIBITS3.1
              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 From S-1, and any amendments thereto, with the SEC
(Registration Statement No. 333-121580).
  24
 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:  February
      17, 2009
              /s/ Richard A.
      KieltyPresident
      and Chief Executive OfficerDate:  February
      17, 2009
              /s/ Ralph
      WaltherRalph
      WaltherVice
      President andChief
      Financial Officer








25