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EX-32.1 - EXHIBIT 32.1 - Brooklyn Federal Bancorp, Inc.ex32-1.htm
EX-23.2 - EXHIBIT 23.2 - Brooklyn Federal Bancorp, Inc.ex23-2.htm
EX-32.2 - EXHIBIT 32.2 - Brooklyn Federal Bancorp, Inc.ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - Brooklyn Federal Bancorp, Inc.ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Brooklyn Federal Bancorp, Inc.ex31-1.htm
EX-23.1 - EXHIBIT 23.1 - Brooklyn Federal Bancorp, Inc.ex23-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-K
(Mark One)
x           Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 2010; OR
 
o           Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to _______
 
Commission file Number:   000-51208
 
  BROOKLYN FEDERAL BANCORP, INC.  
(Exact name of registrant as specified in its charter)
 
  Federal       20-2659598  
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
 
81 Court Street, Brooklyn, New York      11201  
(Address of principal executive offices)  (Zip Code)
 
  (718) 855-8500  
(Registrant’s telephone number, including area code)
 
  Common Stock, $.01 par value  
(Securities registered pursuant to Section 12(b) of the Act)
 
  None  
(Securities registered pursuant to Section 12(g) of the Act)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o   No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o   No x
 
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 o   No x
 
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 (§232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K of any amendment to this Form 10-K. x
 
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 o
Non-accelerated filer   o (Do not check if a smaller reporting company)  Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company.       Yes o   No x
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the price at which the common equity was last sold on the NASDAQ Stock Market as of the last business day of the registrant’s 2010 second fiscal quarter was $30,508,111.
 
The number of shares outstanding of the registrant’s common stock was 12,882,607 as of June 15, 2011 (including 9,257,500 shares owned by BFS Bancorp, MHC, a federal mutual holding company).
 
DOCUMENTS INCORPORATED BY REFERENCE
 
None.
 
 
 

 
 
BROOKLYN FEDERAL BANCORP, INC.
2010 FORM 10-K
TABLE OF CONTENTS
 
 
   
Page
Number
       
PART I
 
       
Item 1.
 
Business
1
Item 1A.
 
Risk Factors
36
Item 1B.
 
Unresolved Staff Comments
43
Item 2.
 
Properties
44
Item 3.
 
Legal Proceedings
44
Item 4.
 
[Removed and Reserved]
44
       
PART II
 
       
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
45
Item 6.
 
Selected Financial Data
48
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operation
50
Item 7A.
 
Quantitative and Qualitative Disclosures about Market Risk
58
Item 8.
 
Financial Statements and Supplementary Data
60
Item 9.
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
103
Item 9A.
 
Controls and Procedures
104
Item 9B.
 
Other Information
105
       
PART III
 
       
Item 10.
 
Directors, Executive Officers and Corporate Governance
106
Item 11.
 
Executive Compensation
109
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
118
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
120
Item 14.
 
Principal Accounting Fees and Services
121
       
PART IV
 
       
Item 15.
 
Exhibits, Financial Statement Schedules
121
       
SIGNATURES
124
 
 
 

 
 
Warning About Forward-Looking Statements
 
Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Such forward-looking statements may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “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 forward-looking statements, which speak only as of the date made.  The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.  The Company does not undertake and specifically declines any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of the original statement or to reflect the occurrence of anticipated or unanticipated events.
 
 
 

 
 
PART I
 
Item 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 managing its 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.  For further discussion of the Company’s formation and operations, see the Company’s Registration Statement on Form S-1, as amended, declared effective by the Securities and Exchange Commission (the “SEC”) on February 11, 2005 (File Number 333-121580).  The Company completed its initial public offering on April 5, 2005.
 
The Company issued 9,257,500 shares to BFS Bancorp, MHC, resulting in a total of 13,225,000 shares issued and outstanding after completion of the reorganization.  At September 30, 2010, there were 12,889,344 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.  The telephone number at our main office is (718) 855-8500.
 
At September 30, 2010, we had total assets of $487.8 million, total deposits of $423.4 million and stockholders’ equity of $45.7 million.  Our net loss for the fiscal year ended September 30, 2010 was $38.9 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.
 
Recent Developments:
 
Change in Accountants
 
On January 6, 2010, the “Company” dismissed ParenteBeard LLC (“ParenteBeard”) as the Company’s independent registered public accounting firm. For the fiscal years ended September 30, 2009 and September 30, 2008 and from October 1, 2009 through January 6, 2010, there were no disagreements with ParenteBeard on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of ParenteBeard, would have caused it to make reference to such disagreements in its reports. In addition, there were no “reportable events” as such term is described in Item 304(a)(1)(iv) of Regulation S-K. The dismissal was approved by the Audit Committee of the Company’s Board of Directors.
 
 
1

 
 
On January 7, 2010, Grant Thorton LLP (“Grant Thorton”) was engaged as the Company’s independent registered public accounting firm. Prior to engaging Grant Thorton, the Company did not consult with Grant Thorton regarding the application of accounting principles to a specific completed or contemplated transaction or regarding the type of audit opinions that might be rendered by Grant Thorton on the Company’s financial statements, and Grant Thorton did not provide any written or oral advice that was an important factor considered by the Company in reaching a decision as to any such accounting, auditing or financial reporting issue.
 
On December 20, 2010, Grant Thorton LLP informed the Company of its resignation as the Company’s independent registered public accounting firm effective as of December 20, 2010. Grant Thorton was engaged by the Company after the Company filed its Annual Report on Form 10-K for the fiscal year ended September 30, 2009.  Grant Thorton resigned prior to completing an audit of the Company’s financial statements for the fiscal year ended September 30, 2010, and did not issue any audit reports on the consolidated financial statements of the Company during the time it was engaged as the Company’s independent registered public accounting firm.  Accordingly, there were no reports issued by Grant Thorton during the past two years that contained an adverse opinion or disclaimer of opinion, or that were qualified or modified as to uncertainty, audit scope or accounting principles.  From the date Grant Thorton was engaged through December 20, 2010, the date of resignation, there were no disagreements with Grant Thorton on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Grant Thorton would have caused it to make reference to such disagreement in connection with its report.
 
During the period of Grant Thorton’s engagement there was one reportable event as described in Item 304(a)(1)(v) of Regulation S-K.  As a result of its review of interim financial statements for the period ended March 31, 2010, Grant Thorton reported one material weakness in the Company’s internal control over financial reporting for its allowance for loan and lease losses.
 
Management also concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2010.  Management’s conclusion was primarily related to the methodologies the Company used to assess the adequacy of the allowance for loan losses and concluded such methodologies relied too heavily on subjective factors, and did not adequately take into account directional trends.  Management concluded that this was a material weakness in the Company’s internal control over financial reporting.  Disclosure of this material weakness was included in Item 4T on the Company’s Form 10-Q for the quarterly period ended March 31, 2010.  
 
From December 21, 2010 through February 3, 2011, the Company considered prospective independent registered public accounting firms and selected an appropriate firm for engagement with the Company. On February 4, 2011, the Company engaged Crowe Horwath LLP (“Crowe Horwath”) as the Company’s independent registered public accounting firm.  Prior to engaging Crowe Horwath, the Company did not consult with Crowe Horwath regarding the application of accounting principles to a specific completed or contemplated transaction or regarding the type of audit opinions that might be rendered by Crowe Horwath on the Company’s financial statements, and Crowe Horwath did not provide any written or oral advice that was an important factor considered by the Company in reaching a decision as to any such accounting, auditing or financial reporting issue.
 
Entry Into Cease and Desist Orders
 
On September 28, 2010, the Company entered into a supervisory agreement with the Office of Thrift Supervision (the “OTS”). An itemization of the requirements of the supervisory agreement and attached Exhibits by and between the Company and OTS was disclosed in the Company’s Current Report on Form 8-K filed with the SEC on October 4, 2010.
 
In order to meet the requirements of the supervisory agreement, the Company’s management determined that it was in the best interest of the Company to enter into an engagement with a financial advisor to assist the Company in evaluating strategic alternatives. On February 7, 2011, following notification by OTS of its non-objection to the engagement, the Company engaged Sandler O’Neill & Partners, L.P for this purpose.
 
 
2

 
 
On March 31, 2011, the OTS terminated the supervisory agreement and both the Company and BFS Bancorp, MHC consented to the issuance of a Cease and Desist Order (the “Company Order”) from the OTS. On the same date, the Bank consented to the issuance of a separate Cease and Desist order (the “Bank Order”, together with the Company Order, the “Orders”). An itemization of the requirements of the Orders and attached Exhibits by and between BFS Bancorp, MHC, the Company, the Bank and OTS was disclosed in the Company’s Current Report on Form 8-K filed with the SEC on April 1, 2011. Among other requirements of the Orders, the Company and Bank are subject to the following requirements:
 
 
Maintain a Tier 1 Capital Ratio equal or greater than 10% and a Total Risk-Based Capital Ratio equal to or greater than 15%, after the funding of its allowance for loan and lease losses;
 
Submit for review and approval by the OTS a written capital plan to maintain the Bank’s Minimum Capital Levels;
 
Submit a contingency plan for review and approval by the OTS that, should the Bank fail to meet the Minimum Capital Levels, the Bank will merge with, or be acquired by another federally insured depository institution or voluntarily liquidate;
 
Submit for review and approval by the OTS an updated business plan to improve the Bank’s core earnings, reduce expenses, maintain appropriate levels of liquidity and achieve profitability on a consistent basis and submit quarterly reports to the OTS regarding compliance with the plan;
 
Revise its current liquidity and fund management policy to include a contingency funding plan that will identify alternative funding sources, establish appropriate lines of credit, and retain investment securities and other liquid assets at the Bank;
 
Submit for review and approval by the OTS an updated written program for identifying, monitoring and controlling risks associated with concentrations of credit and submit quarterly reports to the OTS regarding compliance with this program;
 
Submit for review and approval by the OTS a plan for enhancing its staffing resources in loan underwriting and credit administration at the Bank;
 
Submit for review and approval by the OTS an updated plan with specific strategies, targets and timeframes to reduce the Bank’s level of problem assets;
 
Refrain from making, investing in or purchasing any new commercial real estate loans, refinancing or modifying classified or special mention loans, except under certain conditions;
 
Conduct and review a management study performed by an independent consultant and submit to the OTS a written management plan that addresses all the conclusions and recommendations noted in the management study, including a specific plan to obtain at least three new independent directors for its Board and to retain a new Chief Executive Officer;
 
Refrain from increasing its total assets during any quarter in excess of an amount equal to the net interest credited on deposit liabilities, without the prior written non-objection of the OTS;
 
Comply with regulations limiting its ability to accept, renew, or roll over brokered deposits;
 
Refrain from declaring a dividend or any other capital distributions without the prior written approval of the OTS;
 
Refrain from entering into, renewing, or modifying any contractual arrangement relating to compensation or benefits for any senior executive officers or directors, without prior written notice of the transaction to the OTS;
 
Submit for review and approval by the OTS a plan to revise its compensation and remuneration of directors and senior executive officers;
 
Comply with regulatory prior notification requirements with respect to changes in directors and senior executive officers;
 
Comply with regulatory prior notification requirements before entering into any arrangement or contract with a third party service provider that is significant to the overall operation or financial condition of the Bank, or is outside the Bank’s normal course of business; and
 
Submit for review and approval by the OTS a written plan to maintain and enhance the capital of the Company, BFS Bancorp, the MHC, and the Bank, and ensure that the Bank complies with the capital requirements imposed by the Orders.
 
Notice of Potential Delisting from The NASDAQ Stock Market
 
On January 12, 2011, the Company received a letter from the NASDAQ Stock Market (“NASDAQ”) stating that the Company is not in compliance with NASDAQ Listing Rule 5250(c)(1) because the Company did not timely file its Annual Report on Form 10-K for the year ended September 30, 2010 and that the Company also failed to comply with NASDAQ’s minimum market value of publicly held shares of $5.0 million. As disclosed to the SEC via a Form 12b-25 on December 27, 2010, the Company’s Form 10-K for the year ended September 30, 2010 was delayed due to the resignation of the Company’s independent registered public accounting firm on December 20, 2010. The Company had until March 14, 2011 to submit a plan to regain compliance with delinquent periodic reports (which requirement it met timely) and now has until June 27, 2011 to regain compliance. The Company has until July 11, 2011 to regain compliance with the minimum market value of publicly held stock.
 
 
3

 
 
On February 15, 2011, the Company received an additional letter from the NASDAQ stating that the Company was not in compliance with NASDAQ Listing Rule 5250(c)(1) because the Company did not timely file its Quarterly Report on Form 10-Q for the quarter ended December 31, 2010. As previously mentioned, the Company’s independent registered public accounting firm resigned on December 20, 2010. This delayed the filing of both the Form 10-K for the year ended September 30, 2010, the Form 10-Q for the period ended December 31, 2010, as well as the Form 10-Q for the period ended March 31, 2011.
 
On March 7, 2011, the Company received a letter from the NASDAQ stating that the Company was not in compliance with the NASDAQ Listing Rules because the Company did not maintain a minimum bid price of $1.00 per share for the requisite period of time. The Company has until September 6, 2011 to regain compliance with the minimum bid requirement.
 
Changes in Directorships & Management
 
On January 21, 2010, Ralph Walther, the Vice President and Chief Financial Officer of the Company, resigned effective February 26, 2010. His decision to resign was not related to any disagreement with the Company’s financial or reporting practices or the Company or its management. On February 16, 2010, the Company appointed Michael A. Trinidad as the Company’s Chief Financial Officer. Mr. Trinidad served with the Company as its Vice President and Controller since April 2009. Mr. Trinidad has been employed in community banking since 1977.
 
On August 27, 2010, Robert J.A. Zito resigned as a director of the Company. Mr. Zito served as a member of the Company’s Compensation, Governance, Nominating and Auditing Committees.
 
On November 9, 2010, the Company appointed Joanne B. Gallo as Vice President and Chief Credit Officer with OTS approval.
 
On November 9, 2010, the Company also appointed Rebecca Northey to the Boards of Directors of the Company, the Bank, and BFS Bancorp, MHC with OTS approval.
 
On January 21, 2011, John C. Gallin resigned as a director of the Company. Mr. Gallin served as a member of the Company’s Compensation, Nominating and Auditing Committees.
 
On March 15, 2011, the Company accepted the resignation of Marc Leno as Executive Vice President and Chief Lending Officer.
 
On April 7, 2011, John A. Loconsolo resigned as a director of the Company, Bank, and BFS Bancorp, MHC. Mr. Loconsolo was a member of the Company’s Compensation Committee.
 
On May 9, 2011, the Company appointed Mark Hughes to the Boards of Directors of the Company, Bank, and BFS Bancorp, MHC with OTS approval.
 
Effective May 23, 2011, Richard A. Kielty resigned as President and Chief Executive Officer of the Company, Bank and BFS Bancorp, MHC and Gregg J. Wagner was appointed as his replacement with OTS approval.
 
On June 6, 2011, the Company appointed Gregg J. Wagner to the Board of Directors of the Company, Bank and BFS Bancorp, MHC with OTS approval.
 
 
4

 
 
Management’s Plan
 
The consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company reported a net loss of $38.9 million in 2010. This was largely due to a significant increase in the provision for loan losses from $8.5 million in 2009 to $42.7 million in 2010, as well as an $11.6 million net loss on other-than-temporary impairment recognized in earnings in 2010 compared to $2.9 million in 2009.
 
The Company and the Bank are subject to enforcement actions and other requirements imposed by federal banking regulators. In particular, and as noted above, the Bank is subject to a Cease and Desist Order (the “Bank Order”) issued by the OTS on March 31, 2011 that requires, among other things, the Bank to implement an updated business plan to improve the Bank’s core earnings, reduce expenses, maintain an appropriate level of liquidity and achieve profitability. The Bank Order also requires that the Bank achieve and maintain a Tier 1 Capital Ratio equal to or greater than 10% and a Total Risk-Based Capital Ratio equal to or greater than 15%, after the funding of its allowance for loan and lease losses, by April 30, 2011. As of April 30, 2011, the Bank did not meet these capital requirements.
 
As the Bank failed to achieve the capital ratios required by the Bank Order, the Bank was required to file a Contingency Plan with the OTS within 15 days of April 30, 2011.  The Bank Order required that the Contingency Plan detail actions to be taken and specific time frames to achieve either a merger with, or acquisition by, another federally insured depository institution or holding company thereof, or a voluntary dissolution by the later of the date of all required regulatory approvals or sixty (60) days after implementation of the Contingency Plan.  The Bank filed the Contingency Plan with the OTS on May 12, 2011 and by letter dated June 15, 2011 the OTS directed the Bank to immediately implement and adhere to such Contingency Plan.   The Bank intends to comply with the Contingency Plan and the directive.  Moreover, as the holding companies of the Bank, the Company and BFS Bancorp, MHC also are subject to a separate but related Cease and Desist Order issued by the OTS on the same date as the Bank’s Order, which requires, among other terms, that the Company and BFS Bancorp, MHC ensure the Bank’s compliance with the terms of the Bank Order. The Company and BFS Bancorp, MHC intend to comply with their respective orders to ensure the Bank’s compliance with the terms of the Bank Order, including the implementation of the Contingency Plan.
 
The Bank experienced a significant increase in 2010 in non-accrual loans to $71.9 million at September 30, 2010, or 18.5% of total loans, from $22.1 million at September 30, 2009, or 5.1% of total loans. The Bank has agreed to not originate any commercial real estate, construction or multi-family loans without prior OTS approval. This restricts the Bank’s efforts to increase core earnings.
 
From 2010 through 2011, the Company and Bank recruited new senior executive leadership to consider and pursue strategies in the Contingency Plan and focus towards continuing as a going concern. Imposition of additional enforcement actions could damage our reputation and have a material adverse effect on our business.
 
However, in light of the OTS directive in the letter dated June 15, 2011, our primary focus to address the Bank’s challenges is to successfully implement the Contingency Plan.
 
There can be no assurance that the actions referred to above will successfully resolve all of the concerns of the federal banking regulatory authorities. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
 
 
5

 
 
Competition
 
We face intense competition within our market area both in making loans and attracting deposits.  The New York City metropolitan area has a high concentration of financial institutions including large money center and regional banks, community banks and credit unions.  Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking.  As of June 30, 2010, our market share of deposits represented 0.56%, 0.26% and 0.28% of deposits in each of Kings, Nassau and Suffolk Counties, New York, respectively.
 
Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions.  We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies.  Our primary focus is to develop and build profitable customer relationships across all lines of business while maintaining our role as a community bank.
 
Market Area
 
We are part of the diverse economy of the New York City metropolitan area.  Brooklyn (Kings County) is an urban market area while Nassau and Suffolk Counties are suburban.  Our market area has a stable population and household base.  In 2009, the median household income for Kings, Nassau, and Suffolk Counties was $43,166, $92,776 and $83,620, respectively.  Our primary lending area is concentrated in Brooklyn and Nassau and Suffolk Counties, New York, although we originate loans in all five boroughs of New York City as well as Westchester County, New York.  One- to four-family residential real estate in our market area is characterized by a large number of attached and semi-detached houses, including a number of two- and three-family homes and cooperative apartments.  Most of our deposit customers are residents of the greater New York metropolitan area.  Our customer base consists primarily of middle-income households, and to a lesser extent, low- to moderate-income households.  The median household income for Brooklyn is below the national and New York state median household incomes.  In addition, the unemployment rate in Kings County is higher than in the surrounding suburbs.
 
Lending Activities
 
Commercial real estate loans totaled $119.7 million, or 30.8% of our total loans receivable at September 30, 2010.  One- to four-family residential real estate mortgage loans represented $73.5 million, or 18.9%, of our loans receivable at September 30, 2010.  Multi-family real estate loans totaled $65.3 million, or 16.8% of the total loans receivable at September 30, 2010.  Construction loans totaled $95.7 million, or 24.6% and land loans totaled $34.1 million, or 8.8% of the total loans receivable at September 30, 2010. We originate consumer loans on a limited basis.  We sell most of our longer-term residential loans to the Federal Home Loan Bank of New York and other investors, on a servicing-retained basis. We syndicate and sell participation interests in portions of our multi-family, commercial real estate and construction loans because of our legal lending limits and our internal portfolio management guidelines. The Bank agreed with the OTS that the Bank will not originate any commercial real estate, construction or multi-family loans without prior OTS approval.
 
 
6

 

Loans Receivable Portfolio Composition.  The following table sets forth the composition of our loan portfolio, excluding loans held-for-sale (which were zero in 2010 and 2009), by type of loan at the dates indicated.
 
                           
At September 30,
                         
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
                           
(Dollars in thousands)
                         
                                                             
Mortgage loans:
                                                           
One-to four-family
  $ 73,457       18.90 %   $ 77,064       17.85 %   $ 82,144       33.99 %   $ 74,103       32.57 %   $ 56,722       28.88 %
Multi-family
    65,300       16.80 %     92,399       21.40 %     32,243       13.34 %     42,192       18.54 %     46,255       23.55 %
Commercial real estate
    119,728       30.80 %     143,239       33.18 %     103,336       42.76 %     96,534       42.43 %     71,805       36.56 %
Construction
    95,732       24.63 %     73,314       16.98 %     13,761       5.69 %     11,926       5.24 %     18,169       9.25 %
Land
    34,084       8.77 %     45,027       10.43 %     9,288       3.84 %     1,793       0.79 %     2,924       1.49 %
Consumer and other
    449       0.12 %     684       0.16 %     909       0.38 %     970       0.43 %     551       0.28 %
                                                                                 
Total loans receivable
    388,750       100.00 %     431,727       100.00 %     241,681       100.00 %     227,518       100.00 %     196,426       100.00 %
                                                                                 
Other items:
                                                                               
Unearned discounts
    -               (87 )             -               -               -          
Net deferred loan fees
    (967 )             (1,205 )             (327 )             (245 )             (314 )        
Allowance for loan losses
    (17,941 )             (10,750 )             (2,205 )             (1,806 )             (1,757 )        
                                                                                 
Total loans receivable, net
  $ 369,842             $ 419,685             $ 239,149             $ 225,467             $ 194,355          
 
Due to the impact of the recent economic downturn and increased tightening in the credit markets affecting the Company’s ability to sell the loans in the held-for-sale portfolio during fiscal year 2009, the Company transferred all of the loans held-for-sale amounting to $200.5 million to the loans receivable portfolio.  These loan transfers occurred throughout the fiscal year ended September 30, 2009 and are reflected in the loans receivable portfolio balances as of September 30, 2009.  As of September 30, 2010 and 2009, the Company held no loans in the loans held-for-sale portfolio.
 
Loan Portfolio Maturities.  The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2010.  Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.
 
   
One-to
         
Commercial
               
Consumer
       
   
Four-Family
   
Multi-Family
   
Real Estate
   
Construction
   
Land
   
and Other
   
Total
 
                     
(In thousands)
                   
Due During the Years
                                         
Ending September 30,
                                         
2011
  $ 5,592     $ 42,901     $ 60,665     $ 95,732     $ 32,851     $ 289     $ 238,030  
2012
    4,506       1,724       16,921       -       21       114       23,286  
2013
    4,382       1,970       24,202       -       23       40       30,617  
2014 to 2015
    8,544       13,360       13,649       -       1,189       6       36,748  
2016 to 2020
    16,132       5,345       4,137       -       -       -       25,614  
2021 to 2025
    10,717       -       154       -       -       -       10,871  
2026 and beyond
    23,584       -       -       -       -       -       23,584  
                                                         
Total
  $ 73,457     $ 65,300     $ 119,728     $ 95,732     $ 34,084     $ 449     $ 388,750  
 
 
7

 
 
The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2010 that are contractually due after September 30, 2011.
 
     
Due After September 30, 2011
 
     
Fixed
   
Adjustable
   
Total
 
           
(In thousands)
       
                     
 
 One-to four-family
  $ 49,081     $ 18,784       67,865  
 
 Multi-family
    18,362       4,037       22,399  
 
 Commercial real estate
    46,844       12,219       59,063  
 
 Construction
    -       -       -  
 
 Land
    1,233       -       1,233  
 
 Consumer and other
    160       -       160  
                           
 
 Total loans
  $ 115,680     $ 35,040     $ 150,720  
 
Loan Originations, Sales and Repayments.  Historically, we have originated one- to four-family  mortgage loans pursuant to underwriting standards that generally conform to government-sponsored agency guidelines.  Loan origination activities are primarily concentrated in New York, Kings, Nassau and Suffolk Counties, New York.  New loans are generated primarily from walk-in customers, customer referrals, a network of mortgage brokers, and other parties with whom we do business, and from the efforts of employees and advertising.  Loan applications are underwritten and processed at our main office in Brooklyn, New York.  We syndicate and sell participation interests in portions of our multi-family, commercial real estate and construction loans because of our legal lending limits and our internal portfolio management guidelines. We generally sell longer-term, fixed rate mortgage loans and generally retain in our portfolio the majority of our adjustable rate and shorter-term, fixed rate mortgage loans.
 
 
8

 
 
The following table shows loan originations (including loans held-for-sale), sales and principal repayments for the years indicated.
 
     
Years Ended September 30,
 
     
2010
   
2009
   
2008
 
     
(In thousands)
 
                     
 
 Total loans at beginning of period
  $ 431,727     $ 376,719     $ 286,869  
 
 Loans originated:
                       
 
 One- to four-family
    26,806       21,255       26,071  
 
 Multi-family
    6,729       24,966       56,421  
 
 Commercial real estate
    2,808       13,443       70,930  
 
 Construction
    59,052       62,392       35,583  
 
 Land
    8,994       9,745       10,892  
 
 Consumer and other
    171       340       574  
 
 Total loans originated
    104,560       132,141       200,471  
 
 Loans purchased
    1,500       -       5,848  
 
 Deduct:
                       
 
 Principal repayments
    (97,659 )     (61,696 )     (82,623 )
 
 Charge-offs
    (35,522 )     -       -  
 
 Sales of whole loans
    (7,215 )     (8,476 )     (4,430 )
 
 Sales of participation interests
    (8,641 )     (6,961 )     (29,416 )
 
 Net loan activity
    (42,977 )     55,008       89,850  
 
 Total loans at end of period
  $ 388,750     $ 431,727     $ 376,719  
 
In loan participation transactions, we originate and fund the full loan amount and subsequently identify other lending institutions that purchase participation interests in the loan.  For purposes of the table above, originations of these loans are included within our total origination activity and the subsequent sales are shown as deductions.  Participations differ from loan syndication transactions that are not transfers of financial assets for financial reporting purposes.  As the manager of a loan syndication, prior to closing the loan, we identify other lenders who agree to fund portions of the total loan at closing.  We record our share of the loan syndication as a loans receivable and therefore have included in the table above only those amounts within total loan originations.  The amounts funded by other syndication lenders, which are not reflected as loan originations and sales in our consolidated financial statements and therefore are excluded from the table, totaled $41.4 million, $59.4 million and $129.7 million for syndications completed during the years ended September 30, 2010, 2009 and 2008, respectively.
 
One- to Four-Family Residential Loans. At September 30, 2010, approximately $73.5 million, or 18.9% of our loans receivable consisted of one- to four-family residential loans. Our originations of one- to four-family loans increased by $5.6 million compared to 2009. Generally, one- to four-family residential mortgage loans are originated in amounts up to 95% of the lesser of the appraised value or purchase price of the property. Private mortgage insurance is required on loans with a loan-to-value ratio in excess of 80%. At the Bank’s discretion, we originate and sell some of the one-to-four family residential mortgage loans into the secondary market. Fixed-rate loans are originated for terms of 10, 15, 20, 25 and 30 years.  At September 30, 2010, our largest loan secured by one- to four-family real estate had a principal balance of approximately $2.6 million and our second largest loan secured by one- to four-family real estate had a principal balance of approximately $1.4 million.  The loans were secured by a two-family and a one-family residence, respectively.
 
We also offer adjustable rate mortgage loans with one, three and five-year adjustment periods based on changes in a designated U.S. Treasury index.  We originated $5.6 million of adjustable rate one- to four-family residential loans during the year ended September 30, 2010 and $9.3 million during the year ended September 30, 2009.  Our adjustable rate mortgage loans provide for maximum rate adjustments of 200 basis points per adjustment, with a lifetime maximum adjustment of 600 basis points.  We currently do not offer adjustable rate mortgage loans with interest rates that adjust below the initial interest rate or adjustable rate mortgage loans with terms that provide the borrower options with regard to the amount or timing of periodic payments.  Our adjustable rate mortgage loans amortize over terms of up to 30 years.
 
 
9

 
 
Adjustable rate mortgage loans decrease the risk associated with changes in market interest rates by periodically re-pricing, but involve other risks because, as interest rates increase, the interest payments on the loan increase, thus increasing the potential for default by the borrower.  At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates.  Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents, and therefore, is potentially limited in effectiveness during periods of extended or rapidly rising interest rates.  At September 30, 2010, $18.9 million, or 25.8%, of our one- to four-family residential loans had adjustable rates of interest.
 
All one- to four-family residential mortgage loans that we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid.
 
Investor guidelines limit the amount that a savings association may lend relative to the appraised value of the real estate securing the loan, as determined by an appraisal of the property at the time the loan is originated.  For all loans, we utilize outside independent appraisers approved by our board of directors.  All borrowers are required to obtain title insurance, except for equity loans with balances under $50,000.  We also require fire and casualty insurance and, where circumstances warrant, flood insurance.
 
Multi-Family Real Estate Loans. Loans secured by multi-family real estate totaled approximately $65.3 million, or 16.8% of the total loans receivable at September 30, 2010.  Multi-family real estate loans generally are secured by rental properties (including multi-family apartment buildings).  Substantially all multi-family real estate loans are secured by properties located within our lending area.  At September 30, 2010, we had 47 multi-family real estate loans with an average principal balance of $1.5 million.  At September 30, 2010, our largest multi-family real estate loan balance was $8.7 million.  Multi-family real estate loans generally are offered with fixed interest rates.  Multi-family real estate loans also generally are originated for terms ranging from one year to 15 years with the majority of these loans being originated for shorter terms within this range.
 
We consider a number of factors in originating multi-family real estate loans.  We evaluate the qualifications and financial condition of the borrower (including credit history), profitability and expertise, as well as the value and condition of the mortgaged property securing the loan.  When evaluating the qualifications of a borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions.  In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service) to ensure that it is at least 120% of the monthly debt service.  Multi-family real estate loans are originated in amounts up to 75% of the appraised value of the mortgaged property securing the loan.  All multi-family loans are appraised by outside independent appraisers approved by our board of directors.
 
Loans secured by multi-family real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances.  This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans.  Furthermore, the repayment of loans secured by multi-family real estate typically depends upon the successful operation of the real estate property securing the loan.  If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.  All borrowers are required to obtain title insurance.  We also require fire and casualty insurance and, where circumstances warrant, flood insurance.
 
Commercial Real Estate Loans. At September 30, 2010, $119.7 million, or 30.8% of our total loans receivable, consisted of commercial real estate loans.  Commercial real estate loans are secured by office buildings, mixed-use properties and other commercial properties. We generally originate fixed-rate commercial real estate loans with an initial term ranging from one to five years and a re-pricing option, and a maximum term of up to 20 years.  The majority of commercial real estate loans originated have shorter terms within this range.  The maximum loan-to-value ratio at origination of our commercial real estate loans is 75%.  At September 30, 2010, we had 88 commercial real estate loans with an average outstanding balance of $1.4 million.  At September 30, 2010, our largest commercial real estate loan balance was $6.2 million.
 
 
10

 
 
We consider a number of factors in originating commercial real estate loans.  We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the mortgaged property securing the loan.  When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions.  In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service) to ensure that it is at least 120% of the monthly debt service.  All commercial real estate loans are appraised by outside independent appraisers approved by our board of directors.  Personal guarantees are obtained from commercial real estate borrowers although we will consider waiving this requirement based upon the loan-to-value ratio of the proposed loan.  All borrowers are required to obtain title insurance.  We also require fire and casualty insurance and, where circumstances warrant, flood insurance.
 
Loans secured by commercial real estate generally are larger than one- to four-family residential loans and involve greater credit risk.  Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers.  Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on this property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general.  Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate.
 
Construction Loans.  At September 30, 2010, $95.7 million, or 24.6%, of our total loans receivable consisted of construction loans.  Most of our construction loans are for the construction of multi-family and mixed-use properties.  The majority of our construction loans are referred by mortgage brokers who make the initial contact with the potential borrower and forward to us additional loan information that we review to determine whether the applicant satisfies our underwriting criteria.  If the loan information meets our criteria, we issue a letter of intent listing the terms and conditions of any potential loan.  If the potential borrower agrees to these terms and conditions, we will continue our standard underwriting practice.  We offer primarily adjustable rate residential construction loans.  Construction loans are generally structured with an option for permanent mortgage financing once the construction is completed.  Construction loans generally have a two-year term and are generally repaid from the sale of units or refinancing upon completion.  These loans generally have interest rates that adjust daily with prime and generally will not have an interest rate that adjusts below the initial interest rate.  Construction loans require only the payment of interest during the construction period.  Construction loans will generally be made in amounts of up to 75% of the appraised value of the completed property, or the actual cost of the improvements.  Funds are disbursed based on our inspections in accordance with a schedule reflecting the completion of portions of the project.   At September 30, 2010, our largest construction loan balance was $7.4 million.
 
Construction loans generally involve a greater degree of credit risk than one- to four-family residential mortgage loans.  The risk of loss on a construction loan depends upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost of construction as well as the ability to complete construction on a timely basis, and the ability to sell or refinance the property.  For all loans, we utilize outside independent appraisers approved by our board of directors.  All borrowers are required to obtain title insurance.  We also require fire and casualty insurance and, where circumstances warrant, flood insurance.
 
Land Loans.  In 2005, we began to originate land loans based on our increased construction loan activity.  At September 30, 2010, $34.1 million, or 8.8% of our total loans receivable consisted of land loans.  Our land loans are made generally in conjunction with anticipated construction loan financing.  The highest combined exposure is $11.6 million.  In most cases the value of the land represents the borrower’s up-front equity in our construction loans.  When the land value exceeds the borrower’s equity requirement, which is usually 25% of total project costs, including land, we will consider originating this type of land loan.  The majority of our land loans are referred by mortgage brokers who make the initial contact with the potential borrower and forward to us additional loan information that we review to determine whether the applicant satisfies our underwriting criteria.  If the loan information meets our criteria, we issue a letter of intent listing the terms and conditions of any potential loan.  If the potential borrower agrees to these terms and conditions, we will continue our standard underwriting practice.  We currently offer primarily adjustable rate residential land loans.  At September 30, 2010, our largest land loan balance was $3.7 million, and the average land loan balance was $1.4 million.  Land loans are generally repaid at the end of a two-year period.  These loans generally have interest rates that adjust daily in conjunction with the prime rate and generally will not have an interest rate that adjusts below the initial interest rate.  Land loans will generally be made in amounts of up to 75% of the appraised value.
 
 
11

 
 
Land loans generally involve a greater degree of credit risk than one- to four-family residential mortgage loans.  The risk of loss on a land loan depends upon the accuracy of the initial estimate of the value of the property as well as being able to complete development on a timely basis.  For all loans, we utilize outside independent appraisers approved by our board of directors.  All borrowers are required to obtain title insurance.  We also require fire and casualty insurance and, where circumstances warrant, flood insurance.
 
Other Loans.  We offer loans that are either unsecured or secured by property other than real estate.  These loans include loans secured by deposits and personal loans.  At September 30, 2010, these other loans totaled $449,000 or 0.1% of the loans receivable portfolio.
 
Loan Approval Procedures and Authority.  The loan approval process is intended to assess the borrower’s ability to repay the loan, the viability of the loan, and the adequacy of the value of the property that will secure the loan.  To assess the borrower’s ability to repay, we review each borrower’s employment and credit history and information on the historical and projected income and expenses of mortgagors.  All mortgage loans up to $850,000 must be approved  by two of the following officers:  the President, the Chief Lending Officer, the Senior Vice President and the Manager of Residential Lending.  All loans in excess of $850,000 must be approved by the Directors’ Loan Committee.  In addition, the board of directors ratifies all loans approved by management including those approved by the Management Loan Committee. The Bank agreed with the OTS that the Bank will not originate any multi-family, commercial real estate, construction and land loans without prior OTS approval.
 
Non-Performing Loans and Potential Problem Assets
 
After a one- to four-family residential loan becomes 15 days late, we deliver 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 10 days delinquent, we deliver a computer generated late charge notice to the borrower and attempt 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, past due 90 days or more and still accruing, and/or past contractual maturity date.  At September 30, 2010, $86.2 million of our loans net of specific allowances of $1.1 million, or 22.2% of our total loans, were non-accrual and/or past maturity and therefore non-performing.  These loans consist of multi-family loans of $25.3 million, commercial real estate loans of $38.6 million, construction loans of $14.5 million and land loans of $7.7 million. At September 30, 2010, there were no loans past due 90 days or more and still accruing.
 
 
12

 
 
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. Loans modified in a troubled debt restructuring are generally placed on non-accrual status until we determine that future collection of principal and interest is reasonably assured, which requires that the borrower demonstrate performance according to the restructured terms generally for a period of six months.  Loans modified in a troubled debt restructuring that are not placed on non-accrual status are loans that have demonstrated performance up to the time that the loan has been restructured. At September 30, 2010, fourteen loans were modified in troubled debt restructurings totaling $28.7 million versus $0.4 million at September 30, 2009. Of the fourteen, one loan totaling $0.4 million was performing at the time its terms were modified and is performing in accordance with its new terms.  Therefore, it is not included in the table below.  For the periods presented from September 2006 through 2008, we had no troubled debt restructurings.  The recent sharp deterioration in the real estate market has resulted in a deterioration of the Bank’s loans receivable portfolio, which in turn has caused increases in non-performing loans.  At September 30, 2010, 49 loans totaling $86.2 million, net of specific allowances, were in non-performing status versus nine loans totaling $22.1 million in non-performing status at September 30, 2009.

   
At September 30,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(Dollars in thousands)
 
Non-accrual loans:
                             
One-to four-family
  $ -     $ -     $ -     $ -     $ 154  
Multi-family
    23,956       902       1,883       41       145  
Commercial real estate
    34,908       15,623       130       -       -  
Construction
    7,890       832       -       611       -  
Land
    5,103       4,722       -       -       -  
Consumer
    -       -       -       -       -  
Total non-accrual loans
    71,857       22,079       2,013       652       299  
                                         
Loans past maturity and still accruing
    14,321       -       -       -       -  
Loans past due 90 days or more and still accruing
    -       -       -       -       -  
Total non-performing loans
    86,178       22,079       2,013       652       299  
Real estate owned     -        -        -        -        -  
Total non-performing assets
  $ 86,178     $ 22,079     $ 2,013     $ 652     $ 299  
                                         
Ratios:
                                       
Total non-performing loans to total loans
    22.22 %     5.13 %     0.54 %     0.23 %     0.10 %
Total non-performing loans to total assets
    17.72 %     4.23 %     0.42 %     0.17 %     0.07 %
Total non-performing assets to total assets
    17.72 %     4.23 %     0.42 %     0.17 %     0.07 %
 
Delinquencies.  The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated, net of specific reserves of $1.1 million.
 
 
13

 
 
   
Loans Delinquent For
 
   
30-89 Days
   
90 Days and Over
   
Total
 
   
Number
   
Amount
   
Number
   
Amount
   
Number
   
Amount
 
   
(Dollars in thousands)
 
                                     
At September 30, 2010
                                   
Mortgage Loans:
                                   
1-4 Family(secured by first liens)
    3     $ 115       -     $ -       3     $ 115  
1-4 Family(secured by junior liens)
    -       -       -       -       -       -  
Multi-family
    3       2,807       7       23,956       10       26,763  
Construction
    2       6,615       7       7,890       9       14,505  
Commercial Real Estate
    3       5,922       22       34,908       25       40,830  
Land
    2       2,628       7       5,103       9       7,731  
                                                 
Non-Mortgage Loans:
                                               
Other-Personal (64-)
    -       -       -       -       -       -  
Total
    13     $ 18,087       43     $ 71,857       56     $ 89,944  
                                                 
At September 30, 2009
                                               
Mortgage Loans:
                                               
1-4 Family(secured by first liens)
    -     $ -       -     $ -       -     $ -  
1-4 Family(secured by junior liens)
    -       -       -       -       -       -  
Multi-family
    1       345       1       902       2       1,247  
Construction
    2       311       1       832       3       1,143  
Commercial Real Estate
    2       3,979       6       15,623       8       19,602  
Land
    -       -       1       4,722       1       4,722  
                                                 
Non-Mortgage Loans:
                                               
Other-Personal (64-)
    -       -       -       -       -       -  
Total
    5     $ 4,635       9     $ 22,079       14     $ 26,714  
                                                 
At September 30, 2008
                                               
Multi-family
    -     $ -       -     $ -       -     $ -  
Construction
    -       -       -       -       -       -  
Total
    -     $ -       -     $ -       -     $ -  
 
For the fiscal year ended September 30, 2010, there was $5.5 million in interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms. Interest of $0.6 million was recognized on these loans and recorded in net income for fiscal 2010.
 
Classified Assets. OTS regulations and our Asset Classification Policy provide that loans and other assets should be classified as “substandard,” “doubtful” or “loss” assets where a significant question as to collectability arises.  An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the institution will sustain “some loss” if the deficiencies are not corrected.  Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that they should be entirely charged-off.  We classify an asset as “special mention” if the asset has a potential weakness that warrants management’s close attention.  While “special mention” assets have not deteriorated to the point of being classified as “substandard,” management has concluded that if the potential weakness in the asset is not addressed, the value of the asset may deteriorate, thereby adversely affecting the repayment of the asset.
 
 
14

 
 
An institution is required to establish general allowances for loan losses in an amount deemed prudent by management for loans classified as “special mention.”  General allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.  When an institution classifies assets as “substandard or doubtful”, it is required either to establish a specific allowance for losses equal to the amount its internal analysis determines the potential loss to be on the asset or to charge off the amount.  When an institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or deemed uncollectable to charge off the amount.  An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS which can order the establishment of additional general or specific loss allowances.
 
On the basis of management’s review of assets, at September 30, 2010, we classified $62.5 million of our assets as special mention or potential problem loans compared to $56.4 million at September 30, 2009. In addition, at September 30, 2010 we classified $125.0 million as substandard compared to $54.4 million at September 30, 2009.  We have provided $1.1 million in specific allowances for $5.9 million of the loans classified as substandard, which were comprised of four commercial real estate loans.
 
The majority of the specific allowance is attributable to a $2.2 million loan which is secured by a middle school. The Company is recording a $1.0 million specific allowance based on the current appraised value.
 
The loan portfolio is reviewed on a regular basis by management’s Asset Classification Committee to determine whether any loans require classification in accordance with applicable regulations.  Not all classified assets constitute non-performing assets.
 
The following table sets forth certain information related to our assets classified as substandard:
 
   
September 30, 2010
 
   
Recorded Balance
   
Unpaid Principal
Balance
   
Specific Allowance
 
Loans without a specific valuation allowance:
                 
One-to-Four Family
  $ -     $ -        
Multi-Family
    31,380       38,903        
Commercial Real Estate
    47,146       64,191        
Construction
    24,660       25,726        
Land
    15,938       22,582        
Consumer and Other
    -       -        
                       
Loans with a specific valuation allowance:
                     
One-to-Four Family
    -       -     $ -  
Multi-Family
    -       -       -  
Commercial Real Estate
    5,414       5,414       1,081  
Construction
    -       -       -  
Land
    437       437       6  
Consumer and Other
    -       -       -  
                         
Total:
                       
One-to-Four Family
    -       -       -  
Multi-Family
    31,380       38,903       -  
Commercial Real Estate
    52,560       69,605       1,081  
Construction
    24,660       25,726       -  
Land
    16,375       23,019       6  
Consumer and Other
    -       -       -  
Total substandard loans
  $ 124,975     $ 157,253     $ 1,087  
 
 
15

 
 
Allowance for Loan Losses
 
Our allowance for loan losses is intended to be maintained at a level necessary to absorb loan losses that are both probable and reasonably estimable.  Management, in determining the allowance for loan losses, considers the losses inherent in its loan portfolio and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions.  We utilize a two-tier approach: (1) identification of impaired loans and establishment of specific loss allowances on impaired loans, if any; and (2) establishment of general valuation allowances on the remainder of our loan portfolio.  We maintain a loan review system, which provides for a periodic review of our loan portfolio and the identification of potential impaired loans.  This system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers.  Specific loan loss allowances are established for identified losses based on a review of this information.  A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.  We do not aggregate these loans for evaluation purposes.  Loan impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.  General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management’s judgment.  The allowance is increased through provisions charged against current earnings and recoveries of previously charged-off loans.  Loans that are determined to be uncollectible are charged against the allowance.  While management uses available information to recognize probable and reasonably estimable loan losses, future loss provisions may be necessary based on changing economic conditions, particularly in the real estate sector.
 
As discussed in Item 9A. “Controls and Procedures” in this annual report, following the end of fiscal year 2010 and in connection with the preparation of our consolidated financial statements for the fiscal year ended September 30, 2010, we identified certain miscalculations in our allowance for loan losses resulting from delays in the provision of updated appraisal information to our accounting staff to enable us to identify impaired loans and appropriately recognize charge-offs as needed.  During the third quarter of fiscal year 2011 we have modified our procedures related to the handling of appraisals and the timing of impairment analysis to ensure that charge-offs are recognized in a timely manner.
 
A federally chartered savings association’s determinations as to the classification of its assets, charge-offs and the amount of its valuation allowances are subject to review by the OTS.  The OTS, in conjunction with the other federal banking agencies, provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate valuation allowances and guidance for banking agency examiners to use in determining the adequacy of valuation allowances.  All institutions are required to have effective systems and controls to identify, monitor and address asset quality problems, analyze all significant factors that affect the collectability of the portfolio in a reasonable manner and establish acceptable allowance evaluation processes that meet the objectives of the federal regulatory agencies.  There can be no assurance that the Office of Thrift Supervision, as a result of reviewing our loan portfolio and/or allowance, will not request that we alter our allowance for loan losses or require additional charge-offs, thereby affecting our financial condition and earnings.
 
Allowance for loan losses increased by $7.1 million, to $17.9 million for the fiscal year ended September 30, 2010 from $10.8 million for the fiscal year ended September 30, 2009.  There were charge-offs of $35.5 million during the fiscal year ended September 30, 2010. The loan loss provision also increased $34.1 million to $42.7 million for fiscal year 2010 compared to $8.6 million for fiscal year 2009.  The increases are primarily the result of general decline in economic conditions in our lending footprint which has increased loans classified as sub-standard and special mention. The national and local economies were generally considered to be in a recession from December 2007 through the middle of 2009. This has resulted in increased unemployment and declining property values. While the national and local economies have shown signs of improvement since the second half of 2009, unemployment has remained at elevated levels.
 
 
16

 
 
The transfer of the held-for-sale portfolio in fiscal year 2009 was due to the increased tightening in the credit markets, which has hampered the Company’s ability to sell these loans.  Management decided to transfer these loans to its loans receivable portfolio and in accordance with its allowance for loan and lease losses policy established a general provision.  Loans held-for-sale are carried at the lower of cost or market and therefore do not require a general allowance for loan losses.  The Company also increased its general provision due to an increase in potential problem loans.  Potential problem loans are loans that may or may not be delinquent but are loans that the Company has identified as showing characteristics of potential inability on the part of the borrower to make payments in accordance with the terms of the loan agreement.
 
The following table sets forth activity in our allowance for loan losses for the periods indicated.
 
   
At or For the Years Ended September 30,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(Dollars in thousands)
 
                               
Balance at beginning of year
  $ 10,750     $ 2,205     $ 1,806     $ 1,757     $ 1,321  
                                         
Charge-offs:
                                       
One-to-four-family
    216       -       -       -       -  
Multi-family
    8,741       -       -       -       -  
Commercial real estate
    18,035       -       -       -       -  
Construction
    6,644       -       -       -       -  
Land
    1,853       -       -       -       -  
Consumer and other
    35       -       -       -       -  
Recoveries
    (33 )     -       -       -       -  
Net charge-offs
    35,491       -       -       -       -  
                                         
Provision for loan losses
    42,682       8,545       399       49       436  
                                         
Balance at end of year
  $ 17,941     $ 10,750     $ 2,205     $ 1,806     $ 1,757  
                                         
Ratios:
                                       
Net charge-offs to average loans outstanding
    8.83 %     0.00 %     0.00 %     0.00 %     0.00 %
Allowance for loan losses to total loans at end of period
    4.63 %     2.50 %     0.59 %     0.63 %     0.61 %
 
The recent sharp deterioration in the real estate market, related to the extended recession of 2008 through mid-2009 and current elevated unemployment rates, has resulted in a deterioration of the Bank’s loan portfolio, including increases in non-performing loans and problem assets which led to charge-offs. At September 30, 2010 total charge-offs of $35.5 million consisted of two one-to-four-family, eight multi-family, thirty commercial, eight construction, twelve land and one consumer loans.
 
Allocation of Allowance for Loan Losses.  The following table sets forth the allowance for loan losses allocated by loan category, the percentage of the allowance for loan losses in each category to the total allowance for loan losses, and the percent of loans in each category to total loans at the dates indicated.  The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
 
 
17

 
 
   
At September 30,
 
   
2010
   
2009
   
2008
 
   
Amount
   
Percent of Allowance
to Total Allowance
   
Percent of Loans in
Each
Category
to Total
Loans
   
Amount
   
Percent of Allowance
 to Total Allowance
   
Percent of Loans in
Each
Category
to Total
Loans
   
Amount
   
Percent of Allowance
to Total Allowance
   
Percent of Loans in
Each Category
to Total
Loans
 
   
(Dollars in thousands)
 
Mortgage loans:
                                                     
One-to four-family
  $ 547       3.05 %     18.90 %   $ 79       0.73 %     17.85 %   $ 80       3.63 %     33.99 %
Multi-family
    3,125       17.42 %     16.77 %     1,682       15.65 %     21.40 %     248       11.25 %     13.34 %
Commercial real estate
    9,485       52.87 %     30.79 %     5,529       51.43 %     33.18 %     1,316       59.68 %     42.76 %
Construction
    3,104       17.30 %     24.65 %     1,170       10.88 %     16.98 %     196       8.89 %     5.69 %
Land
    1,664       9.27 %     8.77 %     2,268       21.10 %     10.43 %     357       16.19 %     3.84 %
Consumer and other
    16       0.09 %     0.12 %     22       0.20 %     0.16 %     8       0.36 %     0.38 %
                                                                         
Total allowance for loan losses
  $ 17,941       100.00 %     100.00 %   $ 10,750       100.00 %     100.00 %   $ 2,205       100.00 %     100.00 %
                                                                         
   
At September 30,
                         
    2007     2006                          
   
Amount
   
Percent of Allowance
to Total Allowance
   
Percent of Loans in
Each Category
to Total Loans
   
Amount
   
Percent of Allowance
 to Total Allowance
   
Percent of Loans in
Each Category
to Total
Loans
                         
   
(Dollars in thousands)
                         
Mortgage loans:
                                                                       
One-to four-family
  $ 69       3.82 %     32.57 %   $ 60       3.41 %     28.87 %                        
Multi-family
    365       20.21 %     18.54 %     496       28.23 %     23.55 %                        
Commercial real estate
    1,089       60.30 %     42.43 %     666       37.91 %     36.56 %                        
Construction
    185       10.24 %     5.24 %     292       16.62 %     9.25 %                        
Land
    90       4.98 %     0.79 %     239       13.60 %     1.49 %                        
Consumer and other
    8       0.44 %     0.43 %     4       0.23 %     0.28 %                        
                                                                         
Total allowance for loan losses
  $ 1,806       100.00 %     100.00 %   $ 1,757       100.00 %     100.00 %                        
 
Each quarter, management evaluates the total balance of the allowance for loan losses based on several factors that are reflective of the inherent losses in the loan portfolio.  This process includes, but is not limited to, a periodic review of loan collectability in light of historical experience, the nature and volume of loan activity, conditions that may affect the ability of the borrower to repay, the underlying value of collateral, if applicable, and economic conditions in our immediate market area.  First, we group loans by delinquency status.  All loans deemed impaired are evaluated individually, based primarily on the value of the collateral securing the loan.  Specific loss allowances are established as required by this analysis.  All loans for which a specific loss allowance has not been assigned are segregated by type and delinquency status and a loss allowance is established by using loss experience data and management’s judgment concerning other matters it considers significant.  The allowance is allocated to each category of loans based on the results of the above analysis.
 
 
18

 
 
This analysis process is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available.  Although we believe that we have established the allowance at levels to absorb probable and estimable losses, future additions may be necessary if economic or other conditions continue to deteriorate in the future from the current environment.
 
Investments
 
Investments and Mortgage-Backed Securities.  Our investment portfolio at September 30, 2010 is classified as available for sale and included $63.0 million of mortgage-backed securities, $3.0 million of US government agency bonds and $3.1 million of mutual fund shares, comprised primarily of a $2.6 million ultra-short term mutual fund. Our investment policy objectives are to maintain liquidity within the guidelines established by the board of directors. We also hold at cost $1.8 million of Federal Home Loan Bank of New York stock.
 
At September 30, 2010, we held in mortgage-backed securities $24.4 million issued by Freddie Mac and Fannie Mae, which are United States government-sponsored enterprises, $16.5 million issued by Ginnie Mae, which is a United States government agency and $22.1 million in mortgage-backed securities representing securities of private issuers.  Private issuer securities typically offer rates above those paid on securities of government-sponsored enterprises, but lack the guaranty of those enterprises and are often less liquid.  The government-sponsored enterprises’ portion of the mortgage-backed securities portfolio consisted of $37.7 million in fixed-rate mortgage-backed securities and $3.3 million in adjustable rate mortgage-backed securities.
 
The only securities of individual issuers that we hold with an aggregate book value exceeding 10% of our equity at September 30, 2010, were mortgage-backed securities issued by government agencies and government-sponsored enterprises.
 
For further discussion of our securities portfolio, please see Note 4 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”
 
The following table sets forth the composition of our investment securities portfolio at the dates indicated
 
   
At September 30,
 
   
2010
         
2009
         
2008
       
   
Carrying
Cost
   
Estimated
Fair
Value
   
Carrying
Cost
   
Estimated
Fair
 Value
   
Carrying
Cost
   
Estimated
Fair
Value
 
   
(In thousands)
 
Securities available-for-sale:
                                   
Mortgage-backed securities:
                                   
Government agency
  $ 16,522     $ 16,737     $ -     $ -     $ -     $ -  
Government-sponsored enterprises
    24,440       24,889       -       -       -       -  
Private issuers
    22,055       21,352       -       -       -       -  
Government debentures
    2,990       3,029       -       -       -       -  
Mutual funds
    3,079       3,100       3,305       3,305       3,655       3,655  
Total securities available-for-sale
  $ 69,086     $ 69,107     $ 3,305     $ 3,305     $ 3,655     $ 3,655  
                                                 
Securities held-to-maturity:
                                               
Mortgage-backed securities:
                                               
Government-sponsored enterprises
  $ -     $ -     $ 20,474     $ 20,863     $ 30,136     $ 29,222  
Government agency
    -       -       125       123       152       146  
Private issuers
    -       -       45,602       38,348       47,798       41,628  
Total securities held-to-maturity
  $ -     $ -     $ 66,201     $ 59,334     $ 78,086     $ 70,996  
 
 
19

 
 
Portfolio Maturities and Yields.  The composition and maturities of the investment securities portfolio at September 30, 2010 are summarized in the following table.  Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur.  This table does not reflect the Bank’s investment in mutual funds which have no contractual maturity date and are classified as available-for-sale.
 
   
One Year or Less
   
More than One Year through Five Years
   
More than Five Years through Ten Years
   
More than Ten Years
   
Total Securities
 
   
Carrying Value
   
Weighted Average Yield
   
Carrying Value
   
Weighted Average Yield
   
Carrying Value
   
Weighted Average Yield
   
Carrying Value
   
Weighted Average Yield
   
Carrying Value
   
Fair Value
   
Weighted Average Yield
 
   
(Dollars in thousands)
 
                                                                   
Government-sponsored enterprises
  $ -       0.00 %   $ 143       4.50 %   $ 6,485       4.18 %   $ 17,812       3.51 %     24,440     $ 24,889       3.70 %
Government agency
    -       0.00 %     -       0.00 %     90       4.62 %     16,432       2.77 %     16,522       16,737       2.78 %
Government debentures
    -       0.00 %     -       0.00 %     -       0.00 %     2,990       2.01 %     2,990       3,029       2.01 %
Private issuers
    -       0.00 %     -       0.00 %     8,153       4.92 %