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, 2009





OR





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


OF THE SECURITIES EXCHANGE ACT OF 1934





Commission File Number 000-51208




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

20-2659598(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification Number)81 Court Street, Brooklyn, New York

11201(Address of principal executive offices)

(Zip Code)


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





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.


YES     x          NO     o





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


YES     o          NO     o





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





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


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


YES     o          NO     x





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





Common Stock, $.01 Par Value

12,889,418Class

Outstanding at February 10, 2010











BROOKLYN FEDERAL BANCORP, INC.





Form 10-Q Quarterly Report





Table of Contents








PART I.





Page NumberItem 1.
Financial Statements
1Item 2.
Management’s Discussion and Analysis of Financial Conditionand Results of Operations
17Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28Item 4T.
Controls and Procedures
28PART II.Item 1.
Legal Proceedings
28Item 1A.
Risk Factors
28Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
29Item 3.
Defaults Upon Senior Securities
29Item 4.
Submission of Matters to a Vote of Security Holders
29Item 5.
Other Information
29Item 6.
Exhibits
29Signature Page
30









PART I





ITEM 1.
FINANCIAL STATEMENTS





BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


(In thousands, except share amounts)


(Unaudited)




December 31,


September 30,Assets

2009


2009Cash and due from banks (including interest-earning balances of $3,079 and $2,102, respectively)

$
4,995


$
3,472Securities:Available-for-sale


3,213



3,305Held-to-maturity (estimated fair value of $57,674 and $59,334, respectively)


63,770



66,201Total securities


66,983



69,506Loans held-for-sale


299



--Loans receivable


440,362



430,435Less: Allowance for loan losses


11,798



10,750Loans receivable, net


428,564



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


1,723



2,382Bank owned life insurance


9,613



9,511Accrued interest receivable


2,717



2,799Premises and equipment, net


1,937



2,030Net deferred tax asset


11,862



10,300Prepaid expenses and other assets


3,672



1,760Total assets

$
532,365


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

$
17,310


$
16,595Interest-bearing deposits


146,100



134,664Certificates of deposit


262,943



250,811Total deposits


426,353



402,070Borrowings


12,100



27,300Advance payments by borrowers for taxes and insurance


1,581



2,142Accrued expenses and other liabilities


9,848



8,059Total liabilities


449,882



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


--



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


135



135Additional paid-in capital


43,151



43,112Retained earnings - substantially restricted


53,386



52,671Treasury shares - at cost, 593,456 shares


(7,707
)


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


(2,354
)


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


(372
)


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


(3,756
)


(3,526
)Total stockholders’ equity


82,483



81,874Total liabilities and stockholders’ equity

$
532,365


$
521,445









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 EndedDecember 31,2009


2008Interest income:First mortgage and other loans

$
7,188


$
7,172Mortgage-backed securities


910



925Other securities and interest-earning assets


92



78Total interest income


8,190



8,175Interest expense:Deposits


2,065



2,500Borrowings


54



122Total interest expense


2,119



2,622Net interest income before provision for loan losses


6,071



5,553Provision for loan losses


1,083



747Net interest income after provision for loan losses


4,988



4,806Non-interest income:Total OTTI loss on securities


(1,088
)


(576
)Less:Non-credit portion of OTTI recorded in other comprehensive income (before taxes)


776



--Net OTTI loss recognized in earnings


(312
)


(576
)Banking fees and service charges


285



369Net gain on sale of loans held-for-sale


60



17Other


142



156Total non-interest income


175



(34
)Non-interest expense:Compensation and employee benefits


2,032



2,111Occupancy and equipment


428



411FDIC Insurance


148



16Professional fees


171



122Data processing fees


162



214Other


358



352Total non-interest expense


3,299



3,226Income before income tax expense


1,864



1,546Income tax expense


750



571Net income

$
1,114


$
975Earnings per common share:Basic

$
0.09


$
0.08Diluted

$
0.09


$
0.08Dividends paid

$
0.11


$
0.10Average common shares outstanding:Basic


12,613,083



12,685,436Diluted


12,621,486



12,705,963






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 Income (Loss)


TotalBalance at September 30, 2009

$
135


$
43,112


$
52,671


$
(7,707
)

$
(2,394
)

$
(417
)

$
(3,526
)

$
81,874Comprehensive income:Net income


--



--



1,114



--



--



--



--



1,114Net unrealized loss on securities available-for-sale, net of income tax benefit of $40


--



--



--



--



--



--



(52
)


(52
)Loss on impairment of securities available-for-sale, net of income tax benefit of $35


--



--



--



--



--



--



45



45Non-credit impairment losses on securities held-to-maturity, net of income tax benefit of $278


--



--



--



--



--



--



(353
)


(353
)Transfer of Credit losses on securities held-to-maturity, net of income tax benefit of $102


--



--



--



--



--



--



130



130Total comprehensive income






























884Allocation of ESOP stock


--



6



--



--



40



--



--



46Stock-based incentive plan expense


--



33



--



--



--



45



--



78Dividends paid on common stock, $0.11 per share


--



--



(399
)


--



--



--



--



(399
)Balance at December 31, 2009

$
135


$
43,151


$
53,386


$
(7,707
)

$
(2,354
)

$
(372
)

$
(3,756
)

$
82,483See 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 EndedDecember 31,2009


2008Cash flows from operating activities:Net income

$
1,114


$
975Adjustments to reconcile net income to net cash used in operating activities:ESOP expense


46



54Stock-based incentive plan expense


78



77Depreciation and amortization


113



112Provision for loan losses


1,083



747Income from bank-owned life insurance


(88
)


(95
)Net OTTI loss recognized in earnings


312



576Amortization of servicing rights


26



65Accretion of deferred loan fees, net


(125
)


(101
)Accretion of discounts, net of amortization of premiums


(87
)


(21
)Originations of loans held-for-sale


(2,130
)


(33,267
)Proceeds from sales of loans held-for-sale


1,853



1,358Principal repayments on loans held-for-sale


2



988Net gain on sales of loans held-for-sale


(60
)


(17
)Decrease (increase) in accrued interest receivable


82



(186
)Deferred income tax benefit


(1,092
)


(786
)Increase in prepaid expenses and other assets


(1,936
)


(1,905
)Increase in accrued expenses and other liabilities


1,789



9,523Net cash provided by (used in) operating activities


980



(21,903
)Cash flows from investing activities:(Loan originations in excess of repayments) Repayments in excess of loan originations


(9,804
)


5,421Principal repayments on mortgage-backed securities held-to-maturity


4,995



2,690Purchases of mortgage-backed securities held-to-maturity


(3,395
)


(5,292
)Maturities of certificates of deposit


--



200Redemption (purchases) of FHLB stock


659



(543
)Purchases of bank-owned life insurance


(15
)


(15
)Purchases of premises and equipment


(20
)


(47
)Net cash (used in) provided by investing activities


(7,580
)


2,414Cash flows from financing activities:Increase in deposits


24,283



10,041Net (decrease) increase in short term borrowings


(17,200
)


12,100Proceeds from long term borrowings


2,000



--Decrease in advance payments by borrowers for taxes and insurance


(561
)


(883
)Purchase of treasury stock


--



(179
)Payment of cash dividend


(399
)


(374
)Net cash provided by financing activities


8,123



20,705Net decrease in cash and cash equivalents


1,523



1,216Cash and cash equivalents at beginning of year


3,472



5,053Cash and cash equivalents at end of period

$
4,995


$
6,269








4


BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


(Unaudited)





For the Three Months EndedDecember 31,2009


2008Supplemental disclosure of cash flow information:Cash paid during the period for:Interest

$
2,118


$
2,614Taxes


581



433Non-cash operating activities:Mortgage loans held-for-sale transferred to held-to-maturity


--



19,468







See accompanying notes to consolidated financial statements.





5


BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009





(Unaudited)





Note 1 - Business





BFS Bancorp, MHC




BFS Bancorp, MHC is the federally chartered mutual holding company parent of Brooklyn Federal Bancorp, Inc.  The only business that BFS Bancorp, MHC has engaged in is the majority ownership of Brooklyn Federal Bancorp, Inc.  BFS Bancorp, MHC was formed upon completion of Brooklyn Federal Savings Bank’s reorganization
into the mutual holding company structure.  So long as BFS Bancorp, MHC exists, it will own a majority of the voting stock of Brooklyn Federal Bancorp, Inc.





Brooklyn Federal Bancorp, Inc.





Brooklyn Federal Bancorp, Inc. (the “Company”) was formed to serve as the stock holding company for Brooklyn Federal Savings Bank (the “Bank”) as part of the Bank’s reorganization into the mutual holding company structure.  The Company completed its initial public offering on April 5, 2005.





The Company issued 9,257,500 shares to BFS Bancorp, MHC, and 3,967,500 shares to depositors resulting in a total of 13,225,000 shares issued and outstanding after completion of the reorganization.  At December 31, 2009, there were 12,890,754 total shares outstanding resulting in a 71.8% ownership by BFS Bancorp, MHC.





Brooklyn Federal Savings Bank





The Bank is a federally chartered savings bank headquartered in Brooklyn, New York.  The Bank was originally founded in 1887.  We conduct our business from our main office and four branch offices.  All of our offices are located in New York State.  The telephone number at our main office is (718)
855-8500.





At December 31, 2009, we had total assets of $532.4 million, total deposits of $426.4 million and stockholders’ equity of $82.5 million.  Our net income for the three months ended December 31, 2009 was $1.1 million.  Our principal business activity is the origination of mortgage loans secured by one- to four-family
residential real estate, multi-family real estate, commercial real estate, construction loans, land loans and, to a limited extent, a variety of consumer loans and home equity loans.  The Bank offers a variety of deposit accounts, including checking, savings and certificates of deposit, and it emphasizes personal and efficient service for its customers.





Our website address is www.brooklynbank.com.  Information on our website should not be considered a part of this document.





Note 2 - Basis of Presentation, Reclassifications, and Subsequent Events




A) Basis of Presentation




The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with instructions for Form 10-Q.  Accordingly, they do not
include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included and all significant inter-company balances and transactions have been eliminated in consolidation.  Operating results for the three-month period ended December 31, 2009 are not necessarily indicative of the results that may be expected
for the year ending September 30, 2010.  The Company’s consolidated financial statements, as presented in the Company’s Form 10-K for the year ended September 30, 2009, should be read in conjunction with these statements.




6


B) Reclassifications





Certain amounts in the consolidated financial statements presented for the prior year period have been reclassified to conform to the current year presentation.  On the Consolidated Statements of Financial Condition, Net deferred tax asset has been reclassified from Prepaid expenses and other assets.  On the Consolidated
Statements of Income, FDIC Insurance has be reclassified from Non-interest expense-Other.





C) Subsequent Events





The Company has evaluated events and transactions occurring subsequent to the Consolidated Statements of Condition date of December 31, 2009, for items that should potentially be recognized or disclosed in these financial statements.  The evaluation was conducted through February 10, 2010, the date these financial statements were
issued.




Note 3 - Use of Estimates




The preparation of consolidated financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ from current estimates. Estimates associated with the allowance for loan losses and the fair values of securities are particularly susceptible to material change in the near term.




Note 4 - Impact of Certain Accounting Pronouncements




In June 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to accounting for transfers of financial assets.  This guidance eliminates the concept of a qualifying special-purpose entity; changes the requirements for derecognizing financial assets; and requires additional
disclosures.  This guidance enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets.  This guidance is effective as of the beginning of a reporting entity’s first annual reporting period that begins after November 15, 2009.  We are currently evaluating the impact this guidance will have on our financial condition and results
of operations.





Note 5 - Securities





Investments in securities available-for-sale and held-to-maturity at December 31, 2009 are summarized as follows:




December 31, 2009Amortized
cost


Carrying
cost


Gross
unrealized
gains


Gross
unrealized
losses


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

$
3,209


$
3,209


$
4


$
--


$
3,213Securities held-to-maturity:Mortgage-backed securities:Government-sponsored enterprises

$
18,720


$
18,720


$
362


$
(66
)


19,016Government agency


121



121



3



(5
)


119Private issuers


51,644



44,929



308



(6,698
)


38,539Total securities held-to-maturity

$
70,485


$
63,770


$
673


$
(6,769
)

$
57,674





7


All of the Company’s mortgage-backed securities were acquired by purchase (none resulted from retained interests in loans sold or securitized by the Company). Mortgage-backed securities issued by government-sponsored enterprises at December 31, 2009 consist of (i) Freddie Mac securities with an amortized cost of $11.0 million (compared
to $12.2 million at September 30, 2009) and an estimated fair value of $11.2 million (compared to $12.5 million at September 30, 2009) and (ii) Fannie Mae securities with an amortized cost of $7.7 million (compared to $8.2 million at September 30, 2009) and an estimated fair value of $7.8 million (compared to $8.3 million at September 30, 2009).  These are the only securities of individual issuers held by the Company with an aggregate book value exceeding 10% of the Company’s equity at December
31, 2009. Government agency mortgage-backed securities represent securities issued by Ginnie Mae.





The Company recognized an other-than-temporary impairment (“OTTI”) charge of $0.1 million on securities available-for-sale for the three months ended December 31, 2009, compared to $0.6 million for the three months ended December 31, 2008.  The impairment charge relates to our investment in a mutual fund with a carrying
value of $2.7 million that invests primarily in agency and private label mortgage-backed securities.  The Bank’s investment in this mutual fund has been steadily losing value, caused by a corresponding decrease in the fund’s net asset value.  In addition, the fund implemented a temporary prohibition on cash redemptions, lessening the ability of the Bank to dispose of its remaining $2.7 million investment in this asset.





The Company recognized an OTTI charge in earnings of $0.2 million on securities held-to-maturity for the three months ended December 31, 2009, compared to none for the three months ended December 31, 2008.  This charge related to credit loss and was attributable to private issued mortgage-backed securities and was determined
through a present-value analysis of expected cash flows on the securities.





Total pre-tax OTTI for the three months ended December 31, 2009 was $0.3 million and the net OTTI that was recognized in earnings was $0.2 million.  OTTI is a non-cash charge and not necessarily an indicator of a permanent decline in value.





There were no sales of securities during the three months ended December 31, 2009.





At December 31, 2009, the Bank pledged securities of $39.1 million in amortized cost, with an estimated fair value of $39.6 million, as collateral for advances from the Federal Home Loan Bank.





The following table summarizes securities held-to-maturity at amortized cost and estimated fair value by contractual final maturity as of December 31, 2009.  Actual maturities will differ from contractual final maturity due to scheduled monthly payments and due to borrowers having the right to prepay obligations with or without
prepayment penalty.





Amortized


Carrying


Estimatedcost


cost


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

$
--


$
--


$
--Over one year through five years


244



244



250Over five years through ten years


23,564



23,564



23,306More than ten years


46,677



39,962



34,118Total securities held-to-maturity

$
70,485


$
63,770


$
57,674




8


The following table summarizes those securities held-to-maturity at December 31, 2009 with gross unrealized losses, segregated by the length of time the securities had been in a continuous loss position:




As of December 31, 2009Less than 12 months

12 months or more

TotalEstimated


Gross unrealized

Estimated


Gross unrealized

Estimated


Gross unrealizedfair value


losses


fair value


losses


fair value


losses(In thousands)Securities held-to-maturity:Mortgage-backed securities:Government agency

$
--


$
--


$
101


$
(5
)

$
101


$
(5
)Government-sponsored enterprises


--



--



693



(66
)


693



(66
)Private issuers


8,941



(606
)


20,577



(6,092
)


29,518



(6,698
)Total temporarily impaired securities held-to-maturity

$
8,941


$
(606
)

$
21,371


$
(6,163
)

$
30,312


$
(6,769
)


In April 2009, the FASB amended the OTTI model for debt securities.  The impairment model for equity securities was not affected.  Under the new guidance, an OTTI loss must be fully recognized in earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor
will be required to sell the debt security before recovery of its amortized cost basis.  However, even if an investor does not expect to sell a debt security, it must evaluate the expected cash flows to be received and determine if a credit loss has occurred.  In the event of OTTI, only the amount of impairment associated with the credit loss is recognized in earnings.  Amounts relating to factors other than credit losses are recorded in accumulated other comprehensive loss (“AOCL”).
The guidance also requires additional disclosures regarding the calculation of credit losses as well as factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired.  The Company adopted the new guidance effective April 1, 2009.





Securities in unrealized loss positions are analyzed as part of the Company’s ongoing assessment of OTTI.  When the Company intends to sell or is required to sell securities, the Company recognizes an impairment loss equal to the full difference between the amortized cost basis and fair value of those securities.  When
the Company does not intend to sell or is not required to sell equity or debt securities in an unrealized loss position, potential OTTI is considered based on a variety of factors, including the length of time and extent to which the fair value has been less than cost; adverse conditions specifically related to the industry, the geographic area or financial condition of the issuer or the underlying collateral of a security; the payment structure of the security; changes to the rating of the security by a rating
agency; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet date.  For debt securities, the Company estimates cash flows over the remaining lives of the underlying collateral to assess whether credit losses exist and determine if any adverse changes in cash flows have occurred.  The Company’s cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting period.  As
of December 31, 2009, the Company does not intend to sell the securities with an unrealized loss position in AOCL, and it is not more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost basis.  The Company believes that the securities with an unrealized loss in AOCL are not other-than-temporarily impaired as of December 31, 2009.  We will not be required to sell our securities due to the strong liquidity position
and our ability to borrow $57.2 million from the Federal Home Loan Bank of New York, if necessary.





U.S. Government Agency and Government Sponsored Enterprise Mortgage-backed Securities





The carrying value of the Company’s U.S. Government Agency and Government Sponsored mortgage-backed securities totaled $18.8 million at December 31, 2009 and comprised 29.5% of total held-to-maturity investments and 3.5% of total assets as of that date.  At December 31, 2009, there was no securities of this type in an unrealized
loss position for less than 12 months and nine securities of this type in an unrealized loss position for 12 months or longer.  This category of securities generally includes mortgage pass-through securities and collateralized mortgage obligations issued by U.S. government agencies, such as Ginnie Mae which guarantees the contractual cash flows associated with those securities and U.S. government-sponsored entities such as Fannie Mae and Freddie Mac, each of which carried the implicit guarantee of the
U.S. government to guarantee the contractual cash flows associated with those securities. Those guarantees were strengthened during the 2008-2009 financial crisis during which time Fannie Mae and Freddie Mac each were placed into receivership by the federal government. Through those actions, the U.S. government effectively reinforced the guarantees of those agencies, thereby assuring the creditworthiness of the mortgage-backed securities issued by those agencies.





9


With credit risk being reduced to negligible levels due to the U.S. government’s support of these agencies, the unrealized losses on the Company’s investment in U.S. Government Agency and Government Sponsored mortgage-backed securities are due largely to the combined effects of several market-related factors. First, movements
in market interest rates significantly impact the average lives of mortgage-backed securities by influencing the rate of principal prepayment attributable to refinancing activity. Changes in the expected average lives of these securities significantly impact their fair values due to the extension or contraction of the cash flows that an investor expects to receive over the life of the security.





Historically, lower market interest rates generally prompt greater refinancing activity thereby shortening the average lives of mortgage-backed securities and vice-versa. However, prepayment rates are also influenced by fluctuating real estate values and the overall availability of credit in the marketplace, which significantly impacts
the ability of borrowers to refinance. The deteriorating real estate market values and reduced availability of credit that has characterized the residential real estate marketplace over the past four years has significantly slowed both real estate purchase and refinancing activities. Consequently, prepayment rates on mortgage-backed securities have generally slowed thereby extending their average lives.





The market price of mortgage-backed securities, being the key measure of the fair value to an investor in those securities, is also influenced by the overall supply and demand for those securities in the marketplace. Absent other factors, an increase in the demand for, or a decrease in the supply of a security increases its price. Conversely,
a decrease in the demand for, or an increase in the supply of a security decreases its price. The recent volatility and uncertainty in the marketplace has reduced the overall level of demand for mortgage-backed securities which has generally had an adverse impact on their prices in the open market. This has been further exacerbated by many larger institutions shedding mortgage-related assets to shrink their balance sheets for capital adequacy purposes thereby increasing the supply of those securities.





In sum, the factors influencing the fair value of the Company’s U.S. Government Agency and Government Sponsored mortgage-backed securities, as described above, generally result from movements in market interest rates and changing real estate and financial market conditions, which affect the supply and demand for those securities.
Inasmuch as market conditions fluctuate over time, the impairments of value arising from these changing market conditions are both “noncredit-related” and “temporary” in nature.





The Company has the stated ability and intent to “hold-to-maturity” those securities so designated.  More specifically, as of December 31, 2009, the Company has decided not to sell the securities. Additionally, the Company has concluded that the possibility of being required to sell the securities prior to their anticipated
recovery is unlikely based upon its strong liquidity, asset quality and capital position as of that date.





Finally, the Company purchased these securities at either discounts or nominal premiums relative to their par amounts. Accordingly, the Company expects that the securities will not be settled for a price less than their amortized cost.





In light of the factors noted above, the Company does not consider its U.S. Government Agency and Government Sponsored mortgage-backed securities with unrealized losses at December 31, 2009 to be “other-than-temporarily” impaired as of that date.




10


Private Issuer Mortgage-backed Securities





The carrying value of the Company’s private issuer mortgage-backed securities totaled $44.9 million at December 31, 2009 and 70.5% of total held-to-maturity investments and 8.4% of total assets as of that date.  At December 31, 2009, there were four securities of this type in an unrealized loss position for less than 12
months and 21 securities of this type in an unrealized loss position for 12 months or longer.





Unlike agency and government sponsored mortgage-backed securities, private issuer collateralized mortgage obligations are not explicitly guaranteed by a U.S. government sponsored entity. Rather, these securities generally utilize the structure of the larger investment vehicle to reallocate credit risk among the individual tranches comprised
within that vehicle. Through this process, investors in different tranches are subject to varying degrees of risk that the cash flows of their tranche will be adversely impacted by borrowers defaulting on the underlying mortgage loans. The creditworthiness of certain tranches may also be further enhanced by additional credit insurance protection embedded within the terms of the total investment vehicle.





The Company monitors the general level of credit risk for each of its private issuer mortgage-backed securities based upon the ratings assigned to its specific tranches by one or more credit rating agencies. The level of these ratings, and changes thereto, is one of several factors considered by the Company in identifying those securities
that may be other-than-temporarily impaired. For example, all impaired private issuer mortgage-backed securities that are rated below investment grade are reviewed individually to determine if the impairment is other-than temporary.





Additional factors considered by the Company in identifying its other-than-temporarily impaired securities include, but are not limited to, the severity and duration of the impairment, the payment performance of the underlying mortgage loans and trends relating thereto, the original terms of the underlying loans regarding credit quality
(e.g.,Prime, Alt-A), the geographic distribution of the real estate collateral supporting those loans and any current or anticipated declines in associated collateral values, as well as the degree of protection against credit losses afforded to the Company’s security through the structural characteristics of the larger investment vehicle as noted above. Based upon these additional factors, the impairment of
certain investment grade securities may also be reviewed for other-than-temporary impairment.





Securities determined to be potentially other-than-temporarily impaired are individually analyzed to determine the “credit-related” and “noncredit-related” portions of the impairment. As noted earlier, a credit-related impairment generally represents the amount by which the present value of the cash flows that are
expected to be collected on an other-than-temporarily impaired security fall below its amortized cost. Projected cash flows for the Company’s private issuer mortgage-backed securities are modeled using an automated securities analytics system that is commonly used by institutional investors and the broker/dealer community. The system generates an individual tranche’s projected cash flows based upon several input assumptions regarding the payment performance of the mortgage loans underlying the larger
investment vehicle of which the Company’s tranche is a part. These assumptions include, but may not be limited to, loan prepayment rates, loan default rates, and the severity of actual losses on defaulting loans. The Company generally bases the input values for these assumptions on historical data reported by the analytics system. The Company then calculates the present value of those cash flows based upon the appropriate discount rate required by the applicable accounting guidance.





The impairments of those securities whose cash flows, when present valued, fall below the Company’s carrying value due to expected principal losses are identified as other-than-temporary. The amount by which the present value of the expected cash flows falls below the Company’s carrying value of the security is identified as
the credit-related portion of the other-than-temporary impairment. The remaining portion, where applicable, is identified as noncredit-related, other-than-temporary impairment.





The impairments of those individually analyzed securities whose cash flows, when present valued, exceed the Company’s carrying value or otherwise reflect no expected principal losses, are generally identified as temporary. Similarly, the impairments associated with those securities that have generally retained their investment-grade
credit rating and whose additional factors, as noted above, are not characterized by potentially adverse attributes, are also generally identified as temporary. In these cases, the Company attributes the unrealized losses to the same fluctuating market-related factors as those affecting agency mortgage-backed securities, noting, in particular, the comparatively greater temporary adverse effect on fair value arising from the general illiquidity of private issuer, investment grade mortgage-backed securities in
the marketplace compared to agency-guaranteed mortgage-backed securities. In light of these factors, the related impairments are defined as “temporary.”





11


The classification of impairment as “temporary” is further reinforced by the Company’s stated intent and recognition that we will not be required to sell any of our private issuer mortgage-backed securities which allows for an adequate timeframe during which the fair values of the impaired securities are expected to recover
to their amortized cost. More specifically, as of December 31, 2009, the Company has decided not to sell the securities. Additionally, the Company has concluded that the possibility of being required to sell the securities prior to their anticipated recovery is unlikely based upon its strong liquidity, asset quality and capital position as of that date.





In light of the factors noted above, the Company concluded that nine of its 34 private issuer mortgage-backed securities with amortized costs, excluding impairments, totaling approximately $10.4 million were “other-than-temporarily” impaired by approximately $9.2 million, cumulatively as of December 31, 2009 comprising $2.3
million and $6.8 million of credit-related and non-credit related impairments, respectively. The Company does not consider the 21 private issuer mortgage-backed securities in an unrealized loss position with amortized costs of approximately $32.8 million to be “other-than-temporarily” impaired as of that date.





The following table presents a roll-forward of the credit loss component of OTTI on private issuer mortgage-backed securities for which a non-credit component of OTTI was recognized in other comprehensive loss for the three months ended December 31, 2009.  OTTI recognized in earnings for credit-impaired debt securities is presented
as additions in two components, based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment) or is not the first time a debt security was credit impaired (subsequent credit impairment).  Changes in the credit loss component of credit-impaired debt securities were as follows:





For the three months ended December 31, 2009

Total Other-Than-Temporary Impairment
Loss


Other-Than-Temporary Impairment
Credit Losses recorded in
Earnings


Other-Than-Temporary Impairment Non -Credit Losses recorded in Other Comprehensive
Loss(In thousands)Beginning balance as of September 30, 2009

$
8,085


$
2,024


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


954



178



776Additional other-than-temporary credit losses


54



54



--Ending balance as of December 31, 2009

$
9,093


$
2,256


$
6,837




Note 6 - Financial Instrument Fair Value Disclosures





FASB issued guidance regarding Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements.  This guidance applies to other accounting pronouncements that require or permit fair value measurements.  The Company
adopted the guidance effective for its fiscal year beginning October 1, 2008.  The primary effect of the FASB-issued guidance on the Company was to expand the required disclosures pertaining to the methods used to determine fair values.





The FASB-issued guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs
(Level 3 measurements).  The three levels of the fair value hierarchy under this guidance are as follows:





12


Level 1: Quoted prices in active markets for identical assets or liabilities.





Level 2: Observable inputs other than Level 1 prices, such as quoted for similar assets or liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.





Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted
cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.





An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.





For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy as reported on the consolidated statement of financial condition at December 31, 2009 and September 30, 2009 are as follows (in thousands):





(Level 1)Quoted Prices


(Level 2)in Active


Significant


(Level 3)Markets for


Other


SignificantIdentical


Observable


UnobservableDescription

December 31, 2009


Assets


Inputs


InputsSecurities available-for-sale

$
3,213


$
3,213


$
--


$
--(Level 1)Quoted Prices


(Level 2)in Active


Significant


(Level 3)Markets for


Other


SignificantIdentical


Observable


UnobservableDescription

September 30, 2009


Assets


Inputs


InputsSecurities available-for-sale

$
3,305


$
3,305


$
--


$
--




13


For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy as reported on the consolidated statements of financial condition at December 31, 2009 is as follows (in thousands):





(Level 1)Quoted Prices


(Level 2)in Active


Significant


(Level 3)Markets for


Other


SignificantIdentical


Observable


UnobservableDescription

December 31, 2009


Assets


Inputs


InputsImpaired loans

$
16,850


$
--


$
--


$
16,850Impaired securities


4,885



--



4,885



--




The following valuation techniques were used to measure fair value of assets in the tables above:





Securities available-for-sale – The fair value of the securities was obtained through a primary broker/dealer from readily available price quotes as of December 31, 2009.





Impaired loans – The Company has measured impairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon 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 less their specific valuation allowances.   Impaired loans only include loans in which we have recorded specific valuation allowances.





Impaired securities – The Company has measured impairment generally based on the fair values of securities (impaired) that are primarily determined by obtaining matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities
but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).





Fair value disclosures are required for financial instruments for which it is practicable to estimate fair value. The definition of a financial instrument includes many of the assets and liabilities recognized in the Bank’s consolidated statements of financial condition, as well as certain off-balance sheet items. Fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date.





Quoted market prices are used to estimate fair values when those prices are available. However, active markets do not exist for many types of financial instruments. Consequently, fair values for these instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments.
Estimates developed using these methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed do not reflect any premium or discount
that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs.




14


The following table summarizes the carrying value and estimated fair value of the Company’s financial instruments at December 31, 2009 and September 30, 2009:





December 31, 2009


September 30, 2009Carrying


Estimated


Carrying


Estimatedvalue


fair value


value


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

$
4,995


$
4,995


$
3,472


$
3,472Securities available-for-sale


3,213



3,213



3,305



3,305Securities held-to-maturity


63,770



57,674



66,201



59,334Loans held-for-sale


299



277



--



--Loans receivable, net


428,564



430,372



419,685



421,085FHLB stock


1,723



1,723



2,382



2,382Accrued interest receivable


2,717



2,717



2,799



2,799Financial liabilities:Deposits


426,353



430,512



402,070



405,548Borrowings


12,100



12,159



27,300



27,390Accrued Interest Payable


25



25



24



24


The following methods and assumptions were utilized by the Company in estimating the fair values of its financial instruments at December 31, 2009 and September 30, 2009:





(a)
Cash and Due from Banks





The estimated fair values of cash and due from banks are assumed to equal the carrying values, as these balances are due on demand.





(b)
Securities Available-for-Sale and Held-to-Maturity





The estimated fair values for securities available-for-sale were based principally on quoted market prices.  The fair values of securities held-to-maturity (carried at amortized cost) are primarily determined by obtaining matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without
relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs.)





(c)
Loans Held-for-Sale





The estimated fair value of loans held-for-sale is based on current prices established in the secondary market, or for those loans committed to be sold, based upon the price established by the commitment.





(d)
Loans Receivable, Net





The loan portfolio was segregated into various components for valuation purposes in order to group loans based on their significant financial characteristics, such as loan type, interest rate, interest rate type (adjustable or fixed) and payment status (performing or non-performing).





Fair values were estimated for each component as described below.





15


The fair values of performing mortgage loans and consumer loans were estimated by discounting the anticipated cash flows from the respective portfolios. The discount rates reflected current market rates for loans with similar terms to borrowers of similar credit quality.





The fair values of non-performing mortgage loans and consumer loans were based on recent collateral appraisals or management’s analysis of estimated cash flows based upon expected proceeds discounted at rates commensurate with the credit risk involved.





(e)
Federal Home Loan Bank Stock





The estimated fair value of the Bank’s investment in Federal Home Loan Bank stock is deemed to equal its carrying value, which represents the price at which it may be redeemed.





(f)
Accrued Interest Receivable and Payable





The fair value of accrued interest receivable and payable is estimated to be the carrying value since it is currently due.





(g)
Deposits





The estimated fair value of deposits with no stated maturity, which include NOW, money market, and passbook savings accounts are deemed to be equal to the amount payable on demand at the valuation date. The estimated fair values of certificates of deposit represent contractual cash flows discounted using interest rates currently offered
on deposits with similar characteristics and remaining maturities.





(h)
Borrowings





The fair values of borrowings are estimated using a discounted cash flow analysis based on the current incremental borrowing rates for similar types of borrowing arrangements.





(i)
Commitments





Fair values of commitments outstanding are estimated based on the fees that would be charged for similar agreements, considering the remaining term of the agreement, the rate offered and the creditworthiness of the parties. The estimated fair values of commitments outstanding as of  December 31, 2009 and September 30, 2009 are
not considered significant and are not included in the above table.











16


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION 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 (the “SEC”), 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, “may,”
“could,” “will,” “believe,” “expect,” “intend,” “should,” “potential,” “will likely result,” “are expected to,” “projected,” “estimate,” “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms.  Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those
related to the economic environment, particularly in the market areas in which the Company operates and which affect the creditworthiness of borrowers; competitive products and pricing; the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond our control; the difficulty or expense of implementing successfully our new business strategy; fiscal and monetary policies of the U.S. Government; the ability of customers to repay their obligations; the adequacy of the allowance
for loan losses (and position of banking regulators with respect to the adequacy of loan losses); changes in deposit flows; changes in loan delinquency rates or in our levels of non-performing assets; changes in real estate values; changes in accounting or tax principles, policies, or guidelines;  changes in legislation and regulation, particularly those affecting financial institutions, including regulatory fees and capital requirements; changes in prevailing interest rates; acquisitions and the integration
of acquired businesses; credit risk management; asset-liability management; the financial and securities markets and the availability of and costs associated with sources of liquidity.




The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investing
activities, and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.




The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.




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.




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:





17


Allowance for Loan Losses.The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date.  The allowance
is established through the provision for loan losses that is charged against income.  In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of the most critical for the Bank.  The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic
environment that could result in changes to the amount of the recorded allowance for loan losses.





As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans.  Assumptions for appraisals and discounted cash flow
valuations are instrumental in determining the value of properties.  Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined.  The assumptions supporting appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.





Management performs a quarterly evaluation of the adequacy of the allowance for loan losses.  Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral,
the financial strength of the borrower, results of internal and external loan reviews and other relevant factors.  This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions.





The analysis of the allowance for loan losses has two components:  specific and general allocations.  Specific allocations are made for loans that are determined to be impaired.  Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair
value of the collateral adjusted for market conditions and selling expenses.  The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history.  We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations.  This analysis establishes factors that are applied to the loan groups to determine the amount of the general allocations.  Actual
loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results.





Other-than-Temporary Impairment of Securities.We evaluate on a quarterly basis whether any securities are other-than-temporarily impaired.  In making this determination, we consider the extent and duration of the impairment, the nature and
financial health of the issuer and our ability and intent to hold the securities for a period sufficient to allow for any anticipated recovery in market value.  Other considerations include, without limitation, a review of the credit quality of the issuer and the existence of a guarantee or insurance, if applicable to the security.  If a security is determined to be other-than-temporarily impaired, we record an impairment loss as a charge to income for the period in which the impairment loss
is determined to exist, resulting in a reduction to our earnings for that period.





The fair value of the Bank’s investment in a mutual fund that invests primarily in agency and private label mortgage-backed securities has been steadily decreasing, which has caused a corresponding decrease in the fund’s net asset value.  In addition, the fund implemented a temporary prohibition on cash redemptions,
lessening the ability of the Bank to dispose of its remaining $2.7 million investment in this asset. During the three months ended December 31, 2009, we concluded that this available-for-sale investment did incur an other-than-temporary impairment totaling $0.1 million and the Bank charged current earnings for the impairment.





18


Regarding the securities held-to-maturity, which are composed completely of debt securities, an other-than-temporary impairment loss must be fully recognized in earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of
its amortized cost basis.  However, even if an investor does not expect to sell a debt security, it must evaluate the expected cash flows to be received and determine if a credit loss has occurred.  In the event of an other-than-temporary impairment loss, only the amount of impairment associated with the credit loss is recognized in earnings.  An other-than-temporary impairment loss relating to factors other than credit losses are recorded in accumulated other comprehensive loss.  For
the securities held-to-maturity, we concluded that a portion of the unrealized loss was an other-than-temporary impairment in nature due to marketability and market interest rates and not the underlying credit quality of the issuers of the securities and did not incur an other-than-temporary impairment.  The Bank charged current earnings for the impairment related to credit losses totaling $0.2 million and recorded in accumulated other comprehensive loss the remaining loss related to market factors
totaling $0.9 million.  Additionally, we have the intent to hold these investments and it is unlikely that we will be required to sell 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.





Deferred Income Taxes.  We use the asset and liability method of accounting for income taxes.  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established.  We consider the determination of this valuation allowance
to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income.  These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.  A valuation allowance for deferred tax assets may be required if the amount of taxes recoverable through loss carry-back declines, or if we project lower levels
of future taxable income.  Such a valuation allowance would be established through a charge to income tax expense which would adversely affect our operating results.





Comparison of Financial Condition at December 31, 2009 and September 30, 2009




Total Assets.  Total assets increased $11.0 million, or 2.1%, to $532.4 million at December 31, 2009, from $521.4 million at September 30, 2009.  This increase was primarily due to increases in cash and due from banks, loans held-for-sale, loans
receivable, net, and other assets, offset in part by decreases in securities available-for-sale, securities held-to-maturity and FHLB of New York stock.




Cash and Due from Banks.Cash and due from banks increased $1.5 million, or 43.9%, to $5.0 million at December 31, 2009, from $3.5 million at September 30, 2009.




Securities.Security investments, which represent securities available-for-sale and securities held-to-maturity, decreased $2.5 million, or 3.6%, to $67.0 million at December 31, 2009, from $69.5 million at September 30, 2009.  This decrease
was primarily due to repayments in mortgage-backed securities of approximately $4.8 million and the recording of an other-than-temporary impairment of approximately $1.1 million partially offset by security purchases of $3.4 million.  Our holdings of mortgage-backed securities and securities available-for-sale totaled $63.8 million and $3.2 million, respectively, at December 31, 2009.




Net Loans.  Loans before allowance for loan losses, which includes loans held-for-sale, increased $10.3 million, or 2.4%, to $440.7 million at December 31, 2009, from $430.4 million at September 30, 2009, 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, $0.3 million in one-to four-family loans and $0.1 million in consumer and other loans.  Net deferred fees and costs increased approximately $0.3 million.




On the basis of management’s review of assets, at December 31, 2009, we classified $60.2 million of our assets as special mention or potential problem loans compared to $56.4 million at September 30, 2009.  This increase was due to the continuing deterioration in the real estate market that resulted in a deterioration of
the Company’s loans receivable portfolio.  In addition, at December 31, 2009 we classified $57.6 million as substandard compared to $54.4 million at September 30, 2009.  Of the $57.6 million of loans classified as substandard, $55.5 million are in non-accrual status.  We have provided $5.8 million in specific allowances for $23.6 million of the loans classified as substandard, which were comprised of four commercial real estate loans (consisting of two relationships),
one construction loan, one multi-family loan and one land loan.  We classified as loss two unsecured consumer loans for $35,000 and charged them off during the quarter ended December 31, 2009.





19


The first commercial real estate relationship consists of two loans having an aggregate outstanding balance of $9.8 million, that are secured by fee and leasehold mortgages on two adjoining properties. These loans are currently in default and the Company has recorded a $2.3 million specific allowance based upon the current appraised value
of $8.8 million and potential foreclosure costs.  The loans are cross-collateralized. The second relationship also consists of two loans with an aggregate balance of $5.3 million that are secured by an industrial warehouse. These loans are currently in default and the Company has recorded a $0.8 million specific allowance based upon the properties’ current appraised value of $5.6 million and potential foreclosure costs.  The construction loan is a $0.8 million loan for which the Company
has recorded a $0.2 million specific allowance based upon the properties’ current appraised value of $0.6 million.  The multi-family loan is a $1.9 million loan secured by vacant corner residential property in Manhattan for which the Company has recorded a $1.2 million specific allowance based on the property’s current appraised value and anticipated foreclosure costs.  The Company also has recorded a $1.2 million specific allowance on a $5.7 million land loan which was prompted
by a decrease in the current appraised value of the property.





Federal Home Loan Bank of New York Stock.  FHLB of New York stock decreased $0.7 million, or 27.7%, to $1.7 million at December 31, 2009 from $2.4 million at September 30, 2009.  This decrease was primarily due to the decrease in FHLB borrowings,
which triggered redemptions of FHLB stock.  We have evaluated the FHLB of New York stock for impairment as of December 31, 2009, concluding there was no impairment.




Prepaid Expenses and Other Assets.Prepaid expenses and other assets increased $2.0 million, or 112.3%, to $3.7 million at December 31, 2009, from $1.7 million at September 30, 2009.  The increase was primarily due to $2.1 million in prepaid
FDIC insurance assessments.  The FDIC prepaid insurance assessment covers the estimated premiums to be paid by the Bank through December 31, 2012.




Deposits.  Deposits increased by $24.3 million, or 6.0%, to $426.4 million at December 31, 2009, from $402.1 million at September 30, 2009.  The increase was primarily due to the Bank’s efforts to remain competitive with all of its deposit
offerings.




Borrowed Funds.  Total funds borrowed from the FHLB of New York, decreased $15.2 million, or 55.7%, to $12.1 million at December 31, 2009, from $27.3 million at September 30, 2009. The primary reason for the decrease was the increase in deposits offset
by the funding of mortgage loan originations.




Accrued Expenses and Other Liabilities.  Accrued expenses and other liabilities increased $1.8 million, or 22.2%, to $9.8 million at December 31, 2009, from $8.1 million at September 30, 2009.  This increase was primarily due to an increase
in income tax payables of approximately $1.2 million, due to increases in current taxable income and effective tax rate.




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.





20


A significant portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities.  At December 31, 2009, $5.0 million of our assets were invested in cash and due from banks.  Our primary sources
of cash are principal repayments on loans, proceeds from the calls and maturities of investment securities, principal repayments of mortgage-backed securities and increases in deposit accounts.  Currently, we sell longer-term fixed rate mortgage loans, and we syndicate and sell participation interests in portions of our multi-family, commercial real estate and construction loans.  This activity may continue so long as it meets our operational and financial needs.  In addition, we
invest excess funds in short-term interest-earning assets and other assets, which provide liquidity to meet our lending requirements.  There were no certificates of deposit and short-term investment securities (maturing in less than three years) at December 31, 2009.  As of December 31, 2009, we had $12.1 million in borrowings outstanding from the Federal Home Loan Bank of New York and we have access to additional Federal Home Loan Bank advances of up to $57.2 million.





At December 31, 2009, we had $102.4 million in loan commitments outstanding, which included $68.0 million in undisbursed construction loans, $1.8 million in one- to four-family loans, $10.9 million in commercial real estate lines of credit, $4.1 million in unused home equity lines of credit,
and $17.6 million to originate primarily multi-family and nonresidential mortgage loans.  The Bank agreed with the Office of Thrift Supervision ( the “OTS”) that, other than contractual commitments entered into prior to December 3, 2009, the Bank will not originate any multi-family loans, commercial real estate loans, construction loans, or land loans without
prior OTS approval.  Certificates of deposit due within one year of December 31, 2009 totaled $190.0 million, or 72.3%, of certificates of deposit.  The large percentage of certificates of deposits that mature within one year reflects our customers’ hesitancy to invest their funds for long periods in the current low interest rate environment.  If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of
deposit and borrowings.  Depending on market conditions, we may be required to pay higher rates on these deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2010.  We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us.  We have the ability to attract and retain deposits by adjusting the interest rates offered.





The following table sets forth the Bank’s capital position at December 31, 2009 and September 30, 2009, as compared to the minimum regulatory capital requirements:




Actual


For capital adequacy
purposes


To be well capitalized
under prompt corrective
action provisionsAmount


Ratio


Amount


Ratio


Amount


RatioAt December 31, 2009:

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

$
81,289



15.6
%

$
41,614



8.0
%

$
52,017



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


70,688



13.6
%


20,807



4.0
%


31,210



6.0
%Tangible capital (to tangible assets)


70,688



13.4
%


7,901



1.5
%


N/A



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


70,688



13.4
%


15,803



3.0
%


26,338



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

$
79,779



14.5
%

$
43,938



8.0
%

$
54,922



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


71,192



13.0
%


21,969



4.0
%


32,953



6.0
%Tangible capital (to tangible assets)


71,192



13.8
%


7,760



1.5
%


N/A



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


71,192



13.8
%


15,521



3.0
%


25,868



5.0
%





21


Off-Balance Sheet Arrangements





The following tables set forth the Bank’s contractual obligations and commercial commitments at December 31, 2009:




Commitment Expiration by Period


More than


More ThanOne Year


Three YearsOne Year


Through


Through


More ThanOff-Balance Sheet Arrangements

Total


or Less


Three Years


Five Years


Five YearsTo originate loans

$
19,341


$
19,341


$
--


$
--


$
--Unused lines of credit, including undisbursed construction loans


83,094



79,047



228



324



3,495Total

$
102,435


$
98,388


$
228


$
324


$
3,495




Analysis of Earnings





The Company’s profitability is primarily dependent upon net interest income and further affected by provisions for loan losses, non-interest income, non-interest expense and income taxes.  The earnings of the Company, which are principally earnings of the Bank, are significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, and to a lesser extent by government policies and actions of regulatory authorities.





The following table sets forth, for the periods indicated, certain information relating to the Company’s average interest-earning assets, average interest-bearing liabilities, net interest income, interest rate spread and interest rate margin.  It reflects the average yield on assets and the average cost of liabilities.  Such
yields and costs are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods shown.  Average balances are derived from daily or month-end balances as available.  Management does not believe that the use of average monthly balances instead of average daily balances represents a material difference in information presented.  The average balance of loans includes loans on which the Company has discontinued accruing
interest.  The yield and cost include fees, which are considered adjustments to yields.





22





BROOKLYN FEDERAL  BANCORP, INC. AND SUBSIDIARYCONSOLIDATED AVERAGE BALANCES
 Three months ended December 31,2009


2008Average
Balance


Interest


Average Yield/Cost


Average
Balance


Interest


Average Yield/CostInterest-earning assets:Loans

$
433,297


$
7,188



6.64
%

$
383,552


$
7,172



7.48Mortgage-backed securities


72,931
(1)


910



4.99



80,016



925



4.62Investments securities and other interest-earning assets


6,505
(1)


92



5.67



9,167



78



3.41Total interest-earning assets


512,733



8,190



6.39



472,735



8,175



6.92Non interest-earning assets


17,400











21,082Total Assets

$
530,133










$
493,817Interest-bearing liabilities:Savings accounts

$
61,287



101



0.66


$
57,010



152



1.07Money market/NOW accounts


83,617



262



1.26



58,249



289



1.99Certificates of deposits


255,609



1,702



2.67



215,531



2,059



3.83Total interest-bearing deposits


400,513



2,065



2.06



330,790



2,500



3.02Borrowings


18,116



54



1.20



45,694



122



1.07Total interest-bearing liabilities


418,629



2,119



2.03



376,484



2,622



2.79Non interest-bearing liabilities


28,567











30,475Total liabilities


447,196











406,959Stockholders' equity


82,937











86,858Total liabilities & stockholder's equity

$
530,133










$
493,817Net interest income





$
6,071










$
5,553Average interest rate spread










4.36
%










4.13Net interest-earning assetsNet interest margin










4.75
%










4.70Ratio of average interest-earning assets to interest-bearing liabilities










122.48
%










125.57(1) These amounts represent net amounts after OTTI charges




23


Comparison of Operating Results for the Three Months Ended December 31, 2009 and 2008




Net Income.  Net income increased by $0.1 million, or 14.3%, to $1.1 million for the three months ended December 31, 2009, from net income of $1.0 million for the three months ended December 31, 2008.  The primary reasons for the increase was
the increase of net interest income before provision for loan losses totaling $0.5 million coupled with an increase in non-interest income of $0.2 million offset in part by the increases in the provision for loan losses of $0.3 million, income tax expense of $0.2 million and non-interest expense of $0.1 million.




Net Interest Income Before Provision for Loan Losses.Net interest income before provision for loan losses increased by $0.5 million, or 9.3%, to $6.1 million for the three months ended December 31, 2009, from $5.6 million for the three months
ended December 31, 2008.  The increase in net interest income resulted primarily from a net decrease in the average balance of interest-earning assets to interest bearing liabilities of $2.1 million. The Bank’s net interest rate spread increased 23 basis points to 4.36% for the three months ended December 31, 2009, compared to 4.13% for the three months ended December 31, 2008.  The Bank’s net interest margin increased five basis points to 4.75% for the three months ended December
31, 2009 compared to 4.70% for the three months ended December 31, 2008.




Interest Income.Interest income remained unchanged at $8.2 million for the three months ended December 31, 2009 and 2008, respectively.  Interest income on loans remained unchanged at $7.2 million for the three months ended December 31, 2009
and 2008, respectively.  Interest on construction loans increased by $0.8 million offset by decreases of $0.6 million in multi-family and commercial real estate loan income and $0.2 million in one- to four-family loan income.  The average balance of the loan portfolio increased by $49.7 million, or 13.0%, to $433.3 million for the three months ended December 31, 2009, from $383.6 million for the three months ended December 31, 2008. The average yield on loans decreased 84 basis points to 6.64%
for the three months ended December 31, 2009, from 7.48% for the three months ended December 31, 2008. Interest income on mortgage-backed securities remained unchanged at $1.0 million for the three months ended December 31, 2009 and 2008, respectively.  The average balance on the mortgage-backed securities portfolio decreased $7.1 million, or 8.9%, to $72.9 million at December 31, 2009 from $80.0 million at December 31, 2008.  The average yield on mortgage-backed securities increased 37 basis
points to 4.99% for the quarter ended December 31, 2009, compared to the average yield of 4.62% for the quarter ended December 31, 2008.   Interest income on investment securities and other interest-earning assets remained unchanged at $0.1 million for the three months ended December 31, 2009 and 2008, respectively.  The average balance on investment securities and other interest-earning assets decreased $2.7 million, or 29.3%, to $6.5 million at December 31, 2009 from $9.2 million at
December 31, 2008. The average yield on investment securities and other interest-earning assets increased by 226 basis points to 5.67% for the quarter ended December 31, 2009, compared to the average yield of 3.41% for the quarter ended December 31, 2008.




Interest Expense.  Interest expense decreased $0.5 million, or 19.2%, to $2.1 million for the three months ended December 31, 2009, compared to $2.6 million for the three months ended December 31, 2008.  Interest expense on deposits decreased
$0.4 million, or 17.4%, to $2.1 million at December 31, 2009, compared to $2.5 million for three months ended December 31, 2008.  Interest expense on FHLB of New York borrowings decreased $68,000, or 55.7%, to $54,000 at December 31, 2009, from $122,000 at December 31, 2008.  The decrease in total interest expense was primarily the result of decreases in the average cost of interest-bearing deposits of 94 basis points to 2.06% at December 31, 2009, compared to 3.02% at December 31, 2008 and
average balances of FHLB of New York borrowings of $18.1 million at December 31, 2009, from $45.7 million at December 31, 2008.  The decrease in total interest expense was offset in part by increases in the average balances of interest-bearing deposits of $69.7 million to $400.5 million at December 31, 2009, from $330.8 million at December 31, 2008 and the average cost of FHLB of New York borrowings of 13 basis points, to 1.20% for the quarter ended December 31, 2009, compared to the average cost of
1.07% for the quarter ended December 31, 2008.  The average cost of total interest-bearing liabilities decreased 76 basis points to 2.03% for the three months ended December 31, 2009, from 2.79% for the three months ended December 31, 2008.




24


Provision for Loan Losses and Asset Quality





The Company maintains an allowance for loan losses that management believes is sufficient to absorb inherent losses in its loan portfolio. The adequacy of the allowance for loan and lease losses (“ALLL”) is determined by management’s continuing review of the Company’s loan portfolio, which includes identification
and review of individual factors that may affect a borrower’s ability to repay. Management reviews overall portfolio quality through an analysis of delinquency and non-performing loan data, estimates of the value of underlying collateral and current charge-offs. A review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and composition of the loan portfolio are all taken into consideration. The ALLL reflects management’s evaluation of the
loans presenting identified loss potential as well as the risk inherent in various components of the portfolio. As such, an increase in the size of the portfolio or any of its components could necessitate an increase in the ALLL even though there may not be a decline in credit quality or an increase in potential problem loans.





For additional information regarding the Company’s ALLL policy, refer to Note 2(h) of Notes to Consolidated Financial Statements, “Nature of Business and Summary of Significant Accounting Policies” included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009.





The following table summarizes the activity in allowance for loan losses for the three-month period ended December 31, 2009 and fiscal year-end September 30, 2009 (dollars in thousands):








December


September2009


2009Balance at beginning of period

$
10,750


$
2,205Charge-offs:Consumer and other


35



--Recoveries


--



--Net charge-offs


35



--Provision for loan losses


1,083



8,545Balance at end of period

$
11,798


$
10,750Ratios:Net charge-offs to average loans outstanding


0.00
% (1)


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


2.68
%


2.50
%(1)  Percentage is less than 0.01%.





The Company provided $1.1 million in loan loss provision for the first quarter of fiscal 2010, an increase of $0.4 million compared to $0.7 million provision in the prior year period. The $1.1 million provided in provision since September 30, 2009 reflects increases of $0.6 million in specific loss allowances for criticized
assets and $0.5 million in general loss allowance for the potential risk of further loan deterioration resulting from a continued and prolonged downturn in the real estate market. The Company’s future level of non-performing loans will be influenced by economic conditions, including the impact of those conditions on the Bank’s customers, interest rates and other factors existing at the time.  Based on management’s evaluation of residential and commercial real estate markets and the
overall economy, coupled with the composition of our delinquencies, non-performing loans, net loan charge-offs and overall loan portfolio, we determined that a $1.1 million provision for loan losses was warranted for the three months ended December 31, 2009.





25


At December 31, 2009 and September 30, 2009, the Bank’s allowance for loan losses was $11.8 million and $10.7 million, respectively. The ratio of the allowance for loan losses to non-performing loans was 23.8% at December 31, 2009 compared to 48.7% at September 30, 2009. The ratio of the allowance for loan losses
to total loans was 2.68% at December 31, 2009 compared to 2.50% at September 30, 2009.





Non-Performing Loans and Potential Problem Assets





After a one- to four-family residential loan becomes 15 days late, the Bank delivers a computer-generated late charge notice to the borrower.  Approximately one week later, we deliver a reminder notice.  When a loan becomes 30 days delinquent, the loan servicing department manager determines whether to send an acceleration
letter to the borrower and attempts to make personal contact.  After 60 days, we will generally refer the matter to legal counsel who is authorized to commence foreclosure proceedings.  Management is authorized to begin foreclosure proceedings on any loan after 60 days, after determining that it is prudent to do so and the proper acceleration letter has been sent.





After a multi-family, commercial real estate or construction loan becomes ten days delinquent, the Bank delivers a computer-generated late charge notice to the borrower and attempts to make personal contact with the borrower.  If there is no successful resolution of the delinquency at that time, we may accelerate the payment
terms of the loan and issue a letter notifying the borrower of this acceleration.  After such a loan is 15 days delinquent, we may refer the matter to legal counsel who is authorized to commence foreclosure proceedings.  Management is authorized to begin foreclosure proceedings on any loan after determining that it is prudent to do so.





Mortgage loans are reviewed on a regular basis by management’s Asset Classification Committee and are placed on non-accrual status when they become 90 days or more delinquent and collection is doubtful or when, regardless of how many days delinquent the loan is, other factors indicate that the collection of these amounts is doubtful.  When
loans are placed on non-accrual status, unpaid accrued interest is reversed, and further income is recognized only to the extent received.





Non-Performing Loans.Non-performing loans are either in non-accrual status and/or past contractual maturity date.  At December 31, 2009, $62.2 million of our loans net of specific allowances,
or 14.13%, of our total loans, compared to $22.1 million at September 30, 2009, were non-accrual and/or past maturity and therefore non-performing.  These loans consist of multi-family, commercial real estate, construction and land loans.





Non-Performing Assets.The table below sets forth the amounts and categories of our non-performing assets, net of specific allowances at the dates indicated.  We may from time to time agree to modify the contractual terms of a borrower’s
loan.  In cases where these modifications represent a concession (for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates) to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring.   At December 31, 2009, loans modified in a troubled debt restructuring totaled $0.8 million.  Two loans for a total of $0.4 million at the time their terms were modified
are non-performing and included in the table below.   One loan for $0.4 million at the time its terms were modified is performing in accordance with its new terms and, therefore, not included in the table below.   The recent sharp deterioration in the real estate market has resulted in a deterioration of the Company’s loans receivable portfolio, which in turn has caused increases in non-performing loans.




26


The following table sets forth information with respect to the Company’s non-performing assets (dollars in thousands):





December


September2009


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

$
--


$
--Multi-family


20,453



902Commercial real estate


25,678



15,623Construction


591



832Land


4,557



4,722Consumer


--



--Total non-accrual loans


51,279



22,079Loans past maturity and still accruing


10,925



--Total non-performing assets

$
62,204


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


14.13
%


5.13
%Total non-performing loans to total assets


11.68
%


4.23
%Total non-performing assets to total assets


11.68
%


4.23
%








Non-interest Income. Non-interest income increased by $0.2 million, or 614.7%, to $0.2 million for the quarter ended December 31, 2009 from a loss of $34,000 for the quarter December 31, 2008.  The increase was primarily due to a decrease in the impairment
charge of $0.3 million, or 45.8%, to $0.3 million for the three months ended December 31, 2009, from $0.6 million for the three months ended December 31, 2008.




Non-interest Expense.  Non-interest expense increased by $0.1 million, or 2.3%, to $3.3 million for the three months ended December 31, 2009, from $3.2 million for the three months ended December 31, 2008.  The increase resulted primarily
from increases in FDIC insurance of $0.1 million and professional fee expenses of $0.1 million offset by a $0.1 million decrease in compensation and employee benefits expense.




Income Taxes.Income tax expense increased $0.2 million, or 31.3%, to $0.8 million for the three months ended December 31, 2009, from $0.6 million for the three months ended December 31, 2008.  The primary reason for this increase was the increase
in income before provision for income taxes.  The effective income tax rate of the Company for the three months ended December 31, 2009 was 40.2%, compared to the effective income tax rate of 36.9% for the three months ended December 31, 2008.




27


ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





The majority of the Company’s assets and liabilities are monetary in nature.  Consequently, the Company’s most significant form of market risk is interest rate risk.  The Company’s assets, consisting primarily of mortgage loans, have longer maturities than the Company’s liabilities, consisting
primarily of deposits.  As a result, a principal part of the Company’s business strategy is to manage interest rate risk and reduce the exposure of its net interest income to changes in market interest rates.  Accordingly, the Company’s board of directors has approved guidelines for managing the interest rate risk inherent in its assets and liabilities, given the Company’s business strategy, operating environment, capital, liquidity and performance objectives.  Senior
management monitors the level of interest rate risk on a regular basis and the finance committee of the board of directors meets as needed to review the Company’s asset/liability policies and interest rate risk position.





The Company seeks to manage its interest rate risk in order to minimize the exposure of its earnings and capital to changes in interest rates.  During the low interest rate environment that has existed in recent years, the Company has implemented the following strategies to manage its interest rate risk: (i) maintaining a high
level of short-term liquid assets invested in cash and cash equivalents, short-term securities and mortgage-related securities that provide significant cash flows; (ii) generally selling longer-term mortgage loans; and (iii) lengthening the average term of the Bank’s certificates of deposit.  By investing in short-term, liquid instruments, the Company believes it is better positioned to react to increases in market interest rates.  However, investments in shorter-term securities
and cash and cash equivalents generally bear lower yields than longer-term investments.  Thus, during the recent environment of decreased interest rates, the Bank’s strategy of investing in liquid instruments has resulted in lower levels of interest income than would have resulted from investing in longer-term loans and investments.  Management intends to lengthen the maturity of the Company’s earning-assets as interest rates increase, which in turn should result in a higher yielding
portfolio of interest-earning assets.  There have been no material changes in the Company’s interest rate risk since September 30, 2009.





ITEM 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, 2009.  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.




PART II - OTHER INFORMATION




ITEM 1.
LEGAL PROCEEDINGS




There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.




ITEM 1A.
RISK FACTORS





There are no material changes to the risk factors as previously disclosed in the Company’s Form 10-K for the year ended September 30, 2009, as filed with the SEC on January 6, 2010.




28


ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


The Company did not repurchase Common Stock in the quarter ending December 31, 2009.  Through September 30, 2009, the Board of Directors of the Company approved four common stock repurchase plans.  The first repurchase plan was completed
in August 2007, purchasing $1.5 million or 102,370 shares at an average cost of $14.65 per share.  The second repurchase plan was completed in March 2008, purchasing $2.0 million or 147,339 shares at an average cost of $13.57 per share.  The third repurchase plan was completed in October 2008, purchasing $3.0 million or 238,483 shares at an average cost of $12.58 per share.  The fourth plan was authorized in November 2008 and through September 30, 2009, the Company has repurchased
105,264 shares at an average cost of $11.47 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.








ITEM 3.
DEFAULTS UPON SENIOR SECURITIES




None.




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




None.




ITEM 5.
OTHER INFORMATION




None.




ITEM 6.
EXHIBITS




3.1

Certificate of Incorporation of Brooklyn Federal Bancorp, Inc. 13.2

Bylaws of Brooklyn Federal Bancorp, Inc. 14

Form of Common Stock of Brooklyn Federal Bancorp, Inc. 111

Computation of Earnings Per Share31.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


1
Filed as exhibits to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the SEC (Registration Statement No. 333-121580).

29


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 10, 2010
By:
/s/ Richard A. KieltyPresident and Chief Executive Officer






Date:  February 10, 2010
By:
/s/ Ralph WaltherRalph Walther
Vice President and
Chief Financial Officer