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~~2011; 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~~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

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 ox No xo

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 ox 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~~2011 second fiscal quarter was $302,~~508~~392,~~111~~571.

The number of shares outstanding of the registrant’s common stock was 12,~~882~~871,~~607~~385 as of ~~June~~December 158, 2011 (including 9,257,500 shares owned by BFS Bancorp, MHC, a federal mutual holding company).

DOCUMENTS INCORPORATED BY REFERENCE

~~None~~Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the 2012 Annual Meeting of Shareholders are incorporated by reference into Part III.

BROOKLYN FEDERAL BANCORP, INC.

~~2010~~2011 FORM 10-K

TABLE OF CONTENTS

		~~Page Number~~	Page Number
PART I
Item 1.	Business	1	2
Item 1A.	Risk Factors	36	38
Item 1B.	Unresolved Staff Comments	43	44
Item 2.	Properties	44	45
Item 3.	Legal Proceedings	44	45
Item 4.	[Removed and Reserved]	44	47
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	45	48
Item 6.	Selected Financial Data	48	49
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	50	50
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	58	58
Item 8.	Financial Statements and Supplementary Data	60	59
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	~~103~~	101
Item 9A.	Controls and Procedures	~~104~~	101
Item 9B.	Other Information	~~105~~	102
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	~~106~~	103
Item 11.	Executive Compensation	~~109~~	103
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~118~~	103
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~120~~	103
Item 14.	Principal Accounting Fees and Services	~~121~~	103
PART IV
Item 15.	Exhibits, Financial Statement Schedules	~~121~~	104
SIGNATURES		~~124~~	106

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 Brooklyn Federal Bancorp, Inc. and its consolidated subsidiaries (which are referred to herein as the “Company,” ~~operates~~“we,” “our,” and “us”) operate 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~~closing of ~~acquired~~our ~~businesses~~expected merger transactions; 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~~Actual ~~Company~~results ~~wishes~~could todiffer ~~advise~~from ~~readers~~those ~~that~~expressed ~~the~~or ~~factors~~implied ~~listed~~by ~~above could affect~~ the ~~Company’s~~forward-looking ~~financial~~statements ~~performance~~ and certain risks could cause ~~the~~our ~~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. For a description of the material factors that could affect such forward-looking statements, see the discussion contained under the heading “Item 1A. Risk Factors.” 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 the reorganization of Brooklyn Federal Savings Bank’s ~~reorganization~~(the “Bank”) 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~~The ~~further~~Company ~~discussion~~issued of9,257,500 ~~the~~shares ~~Company’s~~to ~~formation~~BFS ~~and~~Bancorp, ~~operations~~MHC, ~~see~~resulting ~~the~~in ~~Company’s~~a ~~Registration~~total ~~Statement~~of ~~on Form S-1~~13,225,000 asshares ~~amended,~~issued ~~declared~~and ~~effective~~outstanding byafter ~~the~~completion ~~Securities~~of ~~and~~the ~~Exchange~~reorganization. At ~~Commission~~September ~~(the~~30, ~~“SEC”)~~2011, onthere ~~February 11~~were 12,871,385 ~~2005~~total ~~(File~~shares ~~Number~~outstanding ~~333-121580)~~resulting in a 71.9% ownership by BFS Bancorp, MHC. 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~~2011, we had total assets of $~~487~~459.81 million, total deposits of $~~423~~400.49 million and stockholders’ equity of $4542.74 million. Our net loss for the fiscal year ended September 30, ~~2010~~2011 was $385.96 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~~Principles ~~Developments:~~of Consolidation

~~Change~~The inconsolidated ~~Accountants~~financial statements include the accounts of the Company, the Bank and the Bank’s wholly owned subsidiaries. The Bank’s wholly-owned subsidiaries are Thrift Investors Service Corporation (“TISCO”), 3D Holding Corp., Inc. and BFS REIT, Inc. BFS REIT is a real estate investment trust formed to hold mortgage-related assets. TISCO’s wholly owned subsidiary, BFS Agency, provides insurance services to the customers of the Bank. 3D Holding Corp. Inc. wholly owned subsidiaries Ash Real Estate Holding Corp. and Birch Real Estate Holding Corp. were formed to hold title to certain properties acquired by the Bank through foreclosure.

OnMerger 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.Agreement

1As previously reported, on August 16, 2011, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and between (i) Investors Savings Bank (“Investors Bank”), Investors Bancorp, Inc. (“Investors Bancorp”), and Investors Bancorp, MHC (“Investors MHC”), and (ii) the Bank, the Company and BFS Bancorp, MHC. The Merger Agreement provides, among other things, that as a result of the merger of the Company into Investors Bancorp, or a newly-formed subsidiary thereof (the “Mid-Tier Merger”), each outstanding share of the Company’s common stock (other than shares owned by BFS Bancorp, MHC), will be converted into the right to receive $0.80 in cash, and potentially an additional $0.07 per share pursuant to settlement of certain litigation relating to the Mergers (as defined below). See “Item 3. Legal Proceedings”.

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.

OnThe ~~March~~merger ~~31,~~transactions ~~2011,~~below ~~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~~which ~~“Company~~are ~~Order”)~~collectively ~~from~~referred ~~the OTS. On the same date, the Bank consented~~ to ~~the~~as ~~issuance of a separate Cease and Desist order (~~the “~~Bank Order~~Mergers”~~, together with the Company Order, the “Orders”~~). Anwill ~~itemization~~be ofeffected ~~the~~as 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 requirementsfollows:

● ~~Maintain~~BFS aBancorp, ~~Tier~~MHC 1will ~~Capital~~merge ~~Ratio~~with ~~equal~~and orinto ~~greater~~Investors ~~than~~MHC, ~~10%~~with Investors MHC as the surviving entity. The separate corporate existence of BFS Bancorp, MHC will cease (the “MHC Merger”). ● Immediately following the MHC Merger, the Company will merge with and ainto ~~Total~~Investors ~~Risk~~Bancorp, or a to-~~Based~~be-formed ~~Capital~~wholly ~~Ratio~~owned ~~equal~~subsidiary toof Investors Bancorp, with Investors Bancorp (or ~~greater~~its ~~than~~wholly-owned ~~15%~~subsidiary) as the surviving entity. The separate corporate existence of the Company will cease. ● The Bank will merge with and into Investors Bank, ~~after~~with Investors Bank as the ~~funding~~surviving entity (the “Bank Merger”). The separate corporate existence of ~~its~~the ~~allowance~~Bank ~~for~~will ~~loan~~cease. This Bank Merger will follow the MHC Merger and ~~lease~~the ~~losses;~~Mid-Tier Merger.

●The ~~Submit~~obligations ~~for~~of ~~review~~the parties to complete the Mergers is subject to various customary conditions, including, among others: the Merger Agreement and ~~approval~~applicable transactions must have been approved by the ~~OTS~~required avote ~~written~~of ~~capital~~the ~~plan~~shareholders toof ~~maintain~~the Company and members of BFS Bancorp, MHC; the ~~Bank’s~~absence ~~Minimum~~of ~~Capital~~any ~~Levels~~law or order prohibiting the closing of the Mergers; receipt of required regulatory approvals; no proceedings shall have been initiated or threatened by the U.S. Securities and Exchange Commission (“SEC”) challenging the merger proxy statement; and Investors Bancorp must have received an opinion from its legal counsel Luse Gorman Pomerenk & Schick, P.C., dated as of the closing date, indicating that the Mergers will qualify as tax-free reorganizations within the meaning of the Internal Revenue Code of 1986, as amended. A special meeting of the stockholders of the Company has been scheduled for December 22, 2011, at which time the stockholders will vote upon approval of the Merger Agreement. If the stockholders of the Company approve the Merger Agreement, and all other conditions are satisfied or waived, the Company expects that the Mergers will be consummated in January 2012.

●If ~~Submit~~the Mergers are terminated under specified situations in the Merger Agreement (because the Company accepts a ~~contingency~~proposal ~~plan~~to ~~for~~acquire ~~review~~it ~~and~~superior ~~approval~~to bythe one contained in the ~~OTS~~Merger ~~that~~Agreement, ~~should~~enters ~~the~~into ~~Bank~~an ~~fail~~agreement related to ~~meet~~such a proposal and terminates the ~~Minimum~~Merger ~~Capital~~Agreement, ~~Levels~~or fails to make, withdraws, modifies or qualifies its recommendation regarding the ~~Bank~~Merger ~~will~~Agreement), ~~merge~~the ~~with~~Company may be required to pay a termination fee to Investors Bancorp of approximately $460,000 or(which may be ~~acquired~~reduced to $300,000 upon settlement of certain litigation relating to the Mergers), plus out-of-pocket expenses not to exceed the sum of $50,000 less certain reimbursable expenses paid by ~~another~~the ~~federally~~Bank. The ~~insured~~Company ~~depository~~agreed ~~institution~~to orthis ~~voluntarily~~termination ~~liquidate;~~fee arrangement in order to induce Investors Bancorp to enter into the Merger Agreement.

●Enforcement ~~Submit~~Actions: ~~for~~Going 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;Concern

●The ~~Revise~~Company ~~its~~and ~~current~~the ~~liquidity~~Bank are subject to enforcement actions and ~~fund~~other ~~management~~requirements ~~policy~~imposed toby ~~include~~federal banking regulators. In particular, and as previously reported, the Bank is subject to a ~~contingency~~Cease ~~funding~~and ~~plan~~Desist Order (the “Bank Order”) issued by the former Office of Thrift Supervision (the “OTS”) on March 31, 2011 that ~~will~~required, ~~identify~~among ~~alternative~~other ~~funding~~things, ~~sources~~the Bank to implement an updated business plan to improve the Bank’s core earnings, ~~establish~~reduce expenses, maintain an appropriate ~~lines~~level of ~~credit,~~liquidity and ~~retain~~achieve ~~investment~~profitability. ~~securities~~The Bank Order also required that the Bank achieve and ~~other~~maintain ~~liquid~~a ~~assets~~Tier at1 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 and continued not to meet the capital requirements through September 30, 2011.

●As ~~Submit~~the ~~for~~Bank ~~review~~failed ~~and~~to ~~approval~~achieve the capital ratios required by the Bank Order, the Bank was required to file a Contingency Plan with the OTS anwithin ~~updated~~15 ~~written~~days ~~program~~of ~~for~~April ~~identifying~~30, ~~monitoring~~2011. The Bank Order required that the Contingency Plan detail actions to be taken and ~~controlling~~specific ~~risks~~time ~~associated~~frames to achieve either a merger with, ~~concentrations~~or acquisition by, another federally insured depository institution or holding company thereof, or a voluntary dissolution by the later of ~~credit~~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 ~~submit~~by ~~quarterly~~letter ~~reports~~dated June 15, 2011, the OTS directed the Bank to immediately implement and adhere to such Contingency Plan. 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 ~~regarding~~on the same date as the Bank’s Order, which required, among other terms, that the Company and BFS Bancorp, MHC ensure the Bank’s compliance with ~~this~~the ~~program;~~terms of the Bank Order. The consummation of the Mergers is intended to comply with the requirements of the Bank Order and related Cease and Desist Order applicable to the Company and BFS Bancorp, MHC.

● 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.

OnThe ~~February~~audited ~~15,~~consolidated ~~2011,~~financial ~~the~~statements ~~Company~~contained ~~received~~in anthis ~~additional~~report ~~letter~~have ~~from~~been prepared on a going concern basis, which contemplates the ~~NASDAQ~~realization ~~stating~~of ~~that~~assets and the ~~Company~~satisfaction ~~was~~of ~~not~~liabilities in ~~compliance~~the ~~with~~normal ~~NASDAQ~~course ~~Listing~~of ~~Rule~~business ~~5250(c)(1)~~for ~~because~~ the ~~Company~~foreseeable ~~did~~future. ~~not~~Failure ~~timely~~to ~~file~~comply ~~its~~with ~~Quarterly~~the ~~Report~~requirements onof ~~Form~~the ~~10-Q~~Contingency ~~for~~Plan to complete the ~~quarter~~Mergers ~~ended~~or ~~December~~an ~~31,~~alternative ~~2010.~~merger Asor ~~previously~~acquisition ~~mentioned,~~would ~~the~~result ~~Company’s~~in ~~independent~~the ~~registered~~imposition ~~public~~of ~~accounting~~the ~~firm~~Contingency ~~resigned~~Plan onrequirement ~~December~~to ~~20,~~voluntarily ~~2010~~dissolve. ~~This~~These ~~delayed~~factors ~~the~~give ~~filing~~rise ofto ~~both~~substantial doubt as to the ~~Form~~Company’s ~~10-K~~ability ~~for~~to ~~the~~continue ~~year~~as ~~ended~~a ~~September~~going ~~30,~~concern. ~~2010,~~The ~~the~~audited ~~Form~~financial ~~10-Q~~statements ~~for~~herein ~~the~~do ~~period~~not ~~ended~~include ~~December~~any ~~31,~~adjustments ~~2010,~~that asmay ~~well~~result asshould the ~~Form~~Company ~~10-Q~~be ~~for~~unable ~~the~~to ~~period~~continue ~~ended~~as ~~March~~a ~~31,~~going ~~2011~~concern.

OnSEC 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.Subpoena

~~Changes~~By letter dated August 11, 2011, as part of a formal investigation being conducted by the U.S. Securities and Exchange Commission’s Division of Enforcement (“Enforcement Division”), the Company received from the Enforcement Division a subpoena to produce, among other things, information related to its provisions and allowances for loan losses and deferred tax asset valuation allowances contained in ~~Directorships~~its &annual ~~Management~~and quarterly reports for fiscal years 2008 through 2010, the restatement of its consolidated financial statements for the first three quarters of 2010 and the effectiveness of its internal controls. The subpoena covers the time period from October 1, 2007 through August 11, 2011. Brooklyn intends to cooperate fully with the investigation.

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.

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.

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~~2011, our market share of deposits represented 0.5651%, 0.2625% and 0.2826% 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~~2010, the median household income for Kings, Nassau, and Suffolk Counties was $4342,~~166~~143, $9291,~~776~~104 and $8381,~~620~~551, 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~~76.70 million, or 3027.81% of our total loans receivable at September 30, ~~2010~~2011. One- to four-family residential real estate mortgage loans represented $7382.54 million, or 1829.93%, of our loans receivable at September 30, ~~2010~~2011. Multi-family real estate loans totaled $6536.3 million, or 1612.89% of the total loans receivable at September 30, ~~2010~~2011. Construction loans totaled $9570.71 million, or 2425.60% and land loans totaled $3415.15 million, or 85.85% of the total loans receivable at September 30, ~~2010~~2011. 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~~On December 3, 2009, 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, which restriction is still in effect for the Bank and is now enforced by the OTS’ successor, the OCC.

6Loans Receivable Portfolio Composition. The following table sets forth the composition of our loan portfolio, excluding loans held-for-sale (which were zero in 2011 and 2010), by type of loan at the dates indicated.

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,
	2011						2010
	Amount			Percent			Amount			Percent
	(Dollars in thousands)

Mortgage loans:
One-to four-family	$	82,397			29.36	%	$	73,457			18.90	%
Multi-family		36,319			12.94	%		65,209			16.77	%
Commercial real estate		75,996			27.07	%		119,727			30.80	%
Construction		70,144			24.99	%		95,824			24.65	%
Land		15,547			5.54	%		34,084			8.77	%
Consumer and other		291			0.10	%		449			0.12	%

Total loans receivable		280,694			100.00	%		388,750			100.00	%

Other items:
Net deferred loan fees		(238	)					(967	)
Allowance for loan losses		(16,853	)					(17,941	)

Total loans receivable, net	$	263,603					$	369,842

													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

Loan Portfolio Maturities. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2011. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

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
Due During the Years	(In thousands)
Ending September 30,

2012	$	6,980	$	18,583	$	44,177	$	70,144	$	15,547	$	89	$	155,520
2013		5,080		3,427		16,821		-		-		54		25,382
2014		4,850		8,391		6,404		-		-		16		19,661
2015 to 2016		9,857		4,945		5,802		-		-		-		20,604
2017 to 2021		20,298		973		2,664		-		-		-		23,935
2022 to 2026		15,271		-		128		-		-		-		15,399
2027 and beyond		20,061		-		-		-		-		132		20,193

Total	$	82,397	$	36,319	$	75,996	$	70,144	$	15,547	$	291	$	280,694

	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

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2011 that are contractually due after September 30, 2012.

	Due After September 30, 2012
	Fixed		Adjustable		Total
	(In thousands)

One-to four-family	$	57,582	$	17,835		75,417
Multi-family		13,152		4,584		17,736
Commercial real estate		23,610		8,209		31,819
Construction		-		-		-
Land		-		-		-
Consumer and other		202		-		202

Total loans	$	94,546	$	30,628	$	125,174

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.

8In loan participation transactions, we originate and fund the full loan amount and subsequently identify other lending institutions that purchase participation interests in the loan. 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. The amounts funded at closing by other syndication lenders, which are not reflected as loan originations and sales in our consolidated financial statements totaled $9.2 million and $41.4 million for syndications completed during the years ended September 30, 2011 and 2010, respectively.

~~The following table shows loan originations (including loans held-for-sale), sales and principal repayments for the years indicated.~~6

	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

One- to Four-Family Residential Loans. At September 30, 2011, approximately $82.4 million, or 29.3% of our loans receivable consisted of one- to four-family residential loans. Our originations of one- to four-family loans increased by $4.0 million compared to 2010. 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, 2011, our largest loan secured by one- to four-family real estate had a principal balance of approximately $1.4 million and our second largest loan secured by one- to four-family real estate had a principal balance of approximately $0.9 million. The loans were secured by a two-family and a one-family residence, respectively.

InWe ~~loan~~also ~~participation~~offer ~~transactions,~~adjustable werate ~~originate~~mortgage ~~and~~loans ~~fund~~with ~~the~~one, ~~full~~three ~~loan amount~~ and ~~subsequently~~five-year ~~identify~~adjustment ~~other~~periods ~~lending~~based ~~institutions~~on ~~that~~changes ~~purchase~~in ~~participation~~a ~~interests~~designated inU.S. ~~the~~Treasury ~~loan~~index. ~~For~~We ~~purposes~~originated of$5.2 ~~the~~million ~~table above, originations~~ of ~~these~~adjustable ~~loans~~rate ~~are~~one- ~~included~~to ~~within~~four-family ~~our~~residential ~~total~~loans ~~origination~~during ~~activity and~~ the ~~subsequent~~year ~~sales~~ended ~~are~~September ~~shown~~30, as2011 ~~deductions~~and $5. ~~Participations~~6 ~~differ~~million ~~from~~during ~~loan~~the ~~syndication~~year ~~transactions~~ended ~~that~~September ~~are~~30, ~~not~~2010. Our ~~transfers~~adjustable ofrate ~~financial~~mortgage ~~assets~~loans provide for ~~financial~~maximum ~~reporting~~rate ~~purposes. As~~adjustments ~~the manager~~ of a200 basis ~~loan~~points ~~syndication,~~per ~~prior to closing the loan~~adjustment, wewith ~~identify~~a ~~other~~lifetime ~~lenders~~maximum ~~who~~adjustment ~~agree to fund portions~~ of ~~the~~600 ~~total~~basis ~~loan at closing~~points. We ~~record~~currently ~~our~~do ~~share~~not ofoffer ~~the~~adjustable ~~loan~~rate ~~syndication~~mortgage ~~as a~~ loans ~~receivable~~with ~~and~~interest ~~therefore~~rates ~~have~~that ~~included~~adjust inbelow the ~~table~~initial ~~above~~interest ~~only~~rate ~~those~~or ~~amounts~~adjustable ~~within~~rate ~~total~~mortgage ~~loan~~loans ~~originations. The~~with ~~amounts~~terms ~~funded~~that byprovide ~~other~~the ~~syndication~~borrower ~~lenders,~~options ~~which~~with ~~are~~regard ~~not~~to ~~reflected as loan originations and sales in our consolidated financial statements and therefore are excluded from~~ the ~~table,~~amount ~~totaled~~or ~~$41.4~~timing ~~million,~~of ~~$59.4~~periodic ~~million and $129~~payments.7 Our ~~million~~adjustable ~~for~~rate ~~syndications~~mortgage ~~completed~~loans ~~during~~amortize ~~the~~over ~~years~~terms ~~ended~~of ~~September~~up to 30, ~~2010, 2009 and 2008, respectively~~years.

~~One-~~Adjustable torate ~~Four-Family~~mortgage ~~Residential Loans. At September 30, 2010, approximately $73.5 million, or 18.9% of our~~ loans ~~receivable~~decrease ~~consisted~~the ofrisk ~~one-~~associated towith ~~four-family~~changes ~~residential~~in ~~loans.~~market ~~Our~~interest ~~originations~~rates ofby ~~one-~~periodically ~~to four~~re-~~family~~pricing, ~~loans~~but ~~increased~~involve byother ~~$5.6~~risks ~~million~~because, ~~compared~~as tointerest ~~2009.~~rates ~~Generally~~increase, ~~one-~~the tointerest ~~four-family~~payments ~~residential~~on ~~mortgage~~the ~~loans~~loan ~~are~~increase, ~~originated~~thus inincreasing ~~amounts~~the uppotential tofor ~~95%~~default ofby the ~~lesser~~borrower. At of the ~~appraised~~same ~~value~~time, orthe ~~purchase~~marketability ~~price~~ of the ~~property.~~underlying ~~Private~~collateral ~~mortgage~~may ~~insurance~~be isadversely ~~required~~affected onby ~~loans~~higher ~~with~~interest arates. Upward ~~loan-to-value~~adjustment ~~ratio~~of inthe ~~excess~~contractual ofinterest ~~80%.~~rate Atis ~~the~~also ~~Bank’s~~limited ~~discretion,~~by wethe ~~originate~~maximum periodic and ~~sell~~lifetime ~~some~~interest ofrate ~~the~~adjustments ~~one-to-four~~permitted ~~family~~by ~~residential~~our ~~mortgage~~loan ~~loans~~documents, ~~into~~and ~~the~~therefore, ~~secondary~~is ~~market.~~potentially ~~Fixed-rate~~limited ~~loans~~in ~~are~~effectiveness ~~originated~~during ~~for~~periods ~~terms~~ of ~~10,~~extended ~~15,~~or ~~20,~~rapidly 25rising ~~and~~interest ~~30 years~~rates. At September 30, ~~2010~~2011, ~~our largest loan secured by one- to four-family real estate had a principal balance of approximately~~ $219.60 million, ~~and~~or ~~our~~23.1%, ~~second~~of ~~largest~~our ~~loan secured by~~ one- to four-family ~~real~~residential ~~estate~~loans had aadjustable ~~principal~~rates ~~balance~~ of ~~approximately $1~~interest.~~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.

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 $6536.3 million, or 1612.89% of the total loans receivable at September 30, ~~2010~~2011. 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~~2011, we had 4734 multi-family real estate loans with an average principal balance of $1.51 million. At September 30, ~~2010~~2011, our largest multi-family real estate loan balance was $86.72 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~~2011, $~~119~~76.70 million, or 3027.81% 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~~2011, we had 8867 commercial real estate loans with an average outstanding balance of $1.41 million. At September 30, ~~2010~~2011, our largest commercial real estate loan balance was $6.20 million.

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~~2011, $9570.71 million, or 2425.60%, 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~~2011, our largest construction loan balance was $78.43 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~~2011, $3415.15 million, or 85.85% 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 $119.6 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~~2011, our largest land loan balance was $32.76 million, and the average land loan balance was $1.41 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.

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~~2011, these other loans totaled $~~449~~291,000 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 residential mortgage loans up to the Fannie Mae limit can be approved by one of the following officers: the President, the Chief Financial Officer and the Vice President and Manager of Residential Lending. All residential mortgage loans above the Fannie Mae limit and up to $850,000 must be approved by two of the following officers: the President, the Chief ~~Lending~~Financial Officer, and 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~~2011, $86114.29 million of our loans ~~net of specific allowances of $1.1 million~~, or 2240.29% of our total loans, were non-accrual and/or past maturity and therefore non-performing. These loans consist of one- to four-family loans of $1.0 million, multi-family loans of $2521.37 million, commercial real estate loans of $3825.61 million, construction loans of $1461.50 million, and land loans of $76.70 million. ~~At September 30, 2010, there were no loans past due 90 days or more and still accruing.~~

At September 30, 2010, $86.2 million of our loans, or 22.2% of our total loans, were non-accrual and/or past maturity and therefore non-performing. These loans consisted of multi-family loans of $25.3 million, commercial real estate loans of $38.7 million, construction loans of $14.5 million and land loans of $7.7 million.

Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets, 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, 2011, eleven loans were modified in troubled debt restructurings totaling $29.0 million versus $28.7 million at September 30, 2010. Of the eleven, 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. 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, 2011, 61 loans totaling $114.9 million, were in non-performing status versus 49 loans totaling $86.2 million, in non-performing status at September 30, 2010.

	At September 30,
	2011			2010
	(Dollars in thousands)
Non-accrual loans:
One-to four-family	$	1,007		$	-
Multi-family		21,688			23,956
Commercial real estate		25,127			34,948
Construction		61,000			7,890
Land		6,035			5,109
Consumer		-			-
Total non-accrual loans		114,857			71,903

Loans past maturity and still accruing		-			14,321
Loans past due 90 days or more and still accruing		-			-
Total non-performing loans		-			14,321
Real estate owned		-			-
Total non-performing assets	$	114,857		$	86,224

Ratios:
Total non-performing loans to total loans		40.92	%		22.18	%
Total non-performing loans to total assets		25.02	%		17.68	%
Total non-performing assets to total assets		25.02	%		17.68	%

Delinquencies. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.

	Loans Delinquent For
	30-89 Days				90 Days and Over				Total
	Number		Amount		Number		Amount		Number		Amount
	(Dollars in thousands)

At September 30, 2011
Mortgage Loans:
1-4 Family(secured by first liens)		3	$	65		2	$	953		5	$	1,018
1-4 Family(secured by junior liens)		3		377		1		54		4		431
Multi-family		-		-		13		21,688		13		21,688
Construction		-		-		18		61,000		18		61,000
Commercial Real Estate		1		323		20		25,127		21		25,450
Land		-		-		7		6,035		7		6,035

Non-Mortgage Loans:
Other-Personal		1		6		-		-		1		6
Total		8	$	771		61	$	114,857		69	$	115,628

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		6,963		22		34,948		25		41,911
Land		2		2,628		7		5,109		9		7,737

Non-Mortgage Loans:
Other-Personal		-		-		-		-		-		-
Total		13	$	19,128		43	$	71,903		56	$	91,031

For the fiscal year ended September 30, 2011, there was $7.9 million in interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms. Interest of $16 thousand was recognized on these loans and recorded in net income for fiscal 2011.

Classified Assets. Regulations of the Office of the Comptroller of the Currency (the “OCC”) 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. Assets classified as substandard, doubtful or loss are considered impaired assets.

~~Non-Performing~~An ~~Assets. The~~institution ~~table~~is ~~below~~required ~~sets~~to ~~forth~~establish ~~the~~general ~~amounts and categories of our non-performing assets, net of specific~~ allowances atfor ~~the~~loan ~~dates~~losses ~~indicated. We~~in ~~may~~an ~~from~~amount ~~time~~deemed toprudent ~~time~~by ~~agree~~management tofor ~~modify~~loans ~~the~~classified ~~contractual~~as ~~terms~~“special ~~of a borrower’s loan~~mention.” InGeneral ~~cases~~allowances ~~where these modifications~~ represent aloss ~~concession~~allowances ~~(for~~ which ahave ~~portion of interest or principal has~~ been ~~forgiven~~established ~~and~~to ~~loans~~recognize ~~modified~~the atinherent ~~interest~~losses ~~rates~~associated ~~materially~~with ~~less~~lending ~~than~~activities, ~~current~~but ~~market~~which, ~~rates)~~unlike tospecific ~~a borrower experiencing financial difficulty~~allowances, ~~the~~have ~~modification~~not isbeen ~~considered~~allocated ato ~~troubled~~particular ~~debt~~problem ~~restructuring~~assets. ~~Loans~~ When ~~modified~~an ininstitution aclassifies ~~troubled~~assets ~~debt~~as ~~restructuring~~“substandard ~~are~~or ~~generally~~doubtful”, ~~placed~~it onis ~~non-accrual~~required ~~status~~either ~~until~~to weestablish ~~determine~~a ~~that~~specific ~~future~~allowance ~~collection~~for oflosses ~~principal~~equal ~~and~~to ~~interest~~the isamount ~~reasonably~~its ~~assured,~~internal ~~which~~analysis ~~requires~~determines ~~that~~ the ~~borrower~~potential ~~demonstrate~~loss ~~performance~~to ~~according~~be toon the ~~restructured~~asset ~~terms~~or ~~generally~~to ~~for~~charge aoff ~~period~~the ~~of six months~~amount. ~~Loans~~When ~~modified~~an ininstitution aclassifies ~~troubled~~problem ~~debt~~assets ~~restructuring~~as ~~that~~“loss,” ~~are~~it ~~not~~is ~~placed~~required oneither ~~non-accrual~~to ~~status~~establish ~~are~~a ~~loans~~specific ~~that~~allowance ~~have~~for ~~demonstrated~~losses ~~performance~~equal up to ~~the~~100% ~~time~~of ~~that~~ the ~~loan~~amount ~~has~~of ~~been~~the ~~restructured.~~asset Atso ~~September~~classified ~~30,~~or ~~2010,~~deemed ~~fourteen~~uncollectable ~~loans~~to ~~were~~charge ~~modified~~off ~~in troubled debt restructurings totaling $28.7 million versus $0.4 million at September 30, 2009. Of~~ the ~~fourteen, one loan totaling $0~~amount.4 An ~~million~~institution’s ~~was~~determination ~~performing~~as atto the ~~time~~classification of its ~~terms~~assets ~~were modified~~ and isthe ~~performing~~amount inof ~~accordance with~~ its ~~new~~valuation ~~terms. Therefore,~~allowances it is ~~not~~subject ~~included~~to inreview ~~the~~by ~~table below. For~~ the ~~periods~~OCC ~~presented~~which ~~from~~can ~~September~~order ~~2006 through 2008, we had no troubled debt restructurings. The recent sharp deterioration in~~ the ~~real~~establishment ~~estate market has resulted in a deterioration~~ of ~~the~~additional ~~Bank’s~~general ~~loans~~or ~~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,~~loss ~~were in non-performing status versus nine loans totaling $22~~allowances.~~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	%

On the basis of management’s review of assets, at September 30, 2011, we classified $16.8 million of our assets as special mention or potential problem loans compared to $62.5 million at September 30, 2010. In addition, at September 30, 2011 we classified $124.9 million as impaired compared to $125.0 million at September 30, 2010.

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.

	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.

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~~impaired:

	September 30, 2010
	As of and for the year ended September 30, 2011
	Recorded Balance		Unpaid Principal Balance		Specific Allowance
	Unpaid
	Principal		Recorded		Specific
	Balance		Balance		Allowance
Loans without a specific valuation allowance:
One-to-Four Family	$	-1,014	$	-953
Multi-Family		3113,~~380~~123		3811,~~903~~454
Commercial Real Estate		4726,~~146~~326		6419,~~191~~877
Construction		2425,~~660~~949		2523,~~726~~911
Land		155,~~938~~061		225,~~582~~061
Consumer and Other		-		-
Loans with a specific valuation allowance:
One-to-Four Family		-54		-54	$	-3
Multi-Family		-11,341		-10,234		-2,030
Commercial Real Estate		516,~~414~~041		512,~~414~~772		12,~~081~~117
Construction		-38,736		-37,089		-6,443
Land		~~437~~4,841		~~437~~3,526		6547
Consumer and Other		-		-		-
Total:
One-to-Four Family		-1,068		-1,007		-3
Multi-Family		3124,~~380~~464		3821,~~903~~688		-2,030
Commercial Real Estate		5242,~~560~~367		6932,~~605~~649		12,~~081~~117
Construction		2464,~~660~~685		2561,~~726~~000		-6,443
Land		169,~~375~~902		238,~~019~~587		6547
Consumer and Other		-		-		-
Total substandard loans	$	124,975	$	157,253	$	1,087
Total impaired loans	$	142,486	$	124,931	$	11,140

1513

Allowance for Loan Losses

	As of and for the year ended September 30, 2010
	Unpaid
	Principal		Recorded		Specific
	Balance		Balance		Allowance
Loans without a specific valuation allowance:
One-to-Four Family	$	-	$	-
Multi-Family		38,903		31,380
Commercial Real Estate		64,191		47,146
Construction		25,726		24,660
Land		22,582		15,938
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		38,903		31,380		-
Commercial Real Estate		69,605		52,560		1,081
Construction		25,726		24,660		-
Land		23,019		16,375		6
Consumer and Other		-		-		-
Total impaired loans	$	157,253	$	124,975	$	1,087

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.14

AAs ~~federally~~discussed ~~chartered~~in ~~savings~~Item ~~association’s~~9A. ~~determinations~~“Controls asand toProcedures” ~~the~~in ~~classification~~this ofannual ~~its assets~~report, ~~charge-offs~~following ~~and~~ the ~~amount~~end of ~~its~~fiscal ~~valuation~~year ~~allowances~~2010 ~~are~~and ~~subject to review by the OTS. The OTS,~~ in ~~conjunction~~connection with the ~~other~~preparation ~~federal~~of ~~banking~~our ~~agencies,~~consolidated ~~provides~~financial ~~guidance~~statements for ~~financial institutions on both~~ the ~~responsibilities~~fiscal ofyear ~~management~~ended ~~for~~September ~~the~~30, ~~assessment~~2010, ~~and~~we ~~establishment~~identified ofcertain ~~adequate~~miscalculations ~~valuation~~in ~~allowances~~our ~~and~~allowance ~~guidance~~ for ~~banking~~loan ~~agency~~losses ~~examiners~~resulting tofrom ~~use~~delays in ~~determining~~ the ~~adequacy~~provision of ~~valuation~~updated ~~allowances. All~~appraisal ~~institutions~~information ~~are required~~ to ~~have~~our ~~effective~~accounting ~~systems~~staff ~~and~~to ~~controls~~enable us to identify, ~~monitor~~impaired loans and ~~address~~appropriately ~~asset~~recognize ~~quality~~charge-offs ~~problems,~~as ~~analyze~~needed. During ~~all significant factors that affect~~ the ~~collectability~~third quarter of ~~the~~fiscal ~~portfolio~~year in2011, awe ~~reasonable~~modified ~~manner~~our ~~and~~procedures ~~establish~~related ~~acceptable~~to ~~allowance~~the ~~evaluation~~handling ~~processes~~of ~~that~~appraisals ~~meet~~and the ~~objectives~~timing of ~~the~~impairment ~~federal~~analysis ~~regulatory~~to ~~agencies. There~~ensure ~~can~~that becharge-offs noare ~~assurance~~recognized ~~that~~in ~~the~~a ~~Office~~timely ~~of Thrift Supervision~~manner. However, aswe aare ~~result~~unable ofto ~~reviewing~~conclude ~~our~~as ~~loan~~to ~~portfolio~~whether ~~and/or~~the ~~allowance,~~previously ~~will~~reported ~~not~~material ~~request~~weakness ~~that~~has webeen ~~alter~~remediated ~~our~~due ~~allowance~~to ~~for~~the ~~loan~~limited ~~losses~~amount orof ~~require~~time ~~additional~~that ~~charge-offs,~~has ~~thereby~~passed ~~affecting~~since ~~our~~these ~~financial~~procedures ~~condition~~were ~~and earnings~~modified.

~~Allowance~~A ~~for~~federally ~~loan~~chartered ~~losses~~savings ~~increased~~association’s bydeterminations ~~$7.1~~as ~~million~~to the classification of its assets, charge-offs and the amount of its valuation allowances are subject to ~~$17~~review by the OCC.9 The ~~million~~OCC, ~~for~~in ~~the~~conjunction ~~fiscal~~with ~~year~~the ~~ended~~other ~~September~~federal 30banking agencies, ~~2010~~provides ~~from~~guidance ~~$10.8~~for ~~million~~financial ~~for~~institutions on both the ~~fiscal~~responsibilities ~~year~~of ~~ended~~management ~~September~~for ~~30,~~the ~~2009. There~~assessment ~~were~~and ~~charge-offs~~establishment of ~~$35.5~~adequate ~~million~~valuation ~~during~~allowances ~~the~~and ~~fiscal~~guidance ~~year~~for ~~ended~~banking ~~September~~agency ~~30,~~examiners ~~2010.~~to ~~The~~use ~~loan~~in ~~loss~~determining ~~provision~~the ~~also~~adequacy ~~increased~~of ~~$34~~valuation allowances.1 All ~~million~~institutions toare ~~$42.7~~required ~~million~~to ~~for~~have ~~fiscal~~effective ~~year~~systems ~~2010~~and ~~compared~~controls to ~~$8.6~~identify, ~~million~~monitor ~~for~~and ~~fiscal~~address ~~year~~asset ~~2009. The~~quality ~~increases~~problems, ~~are~~analyze ~~primarily~~all significant factors that affect the ~~result~~collectability of ~~general~~the ~~decline~~portfolio in ~~economic~~a ~~conditions~~reasonable inmanner ~~our~~and ~~lending~~establish ~~footprint~~acceptable ~~which~~allowance ~~has~~evaluation ~~increased~~processes ~~loans~~that ~~classified~~meet asthe ~~sub-standard~~objectives ~~and~~of ~~special~~the ~~mention.~~federal ~~The~~regulatory ~~national~~agencies. There ~~and~~can ~~local~~be ~~economies~~no ~~were~~assurance ~~generally~~that ~~considered~~the toOCC, beas in a ~~recession~~result ~~from~~of ~~December~~reviewing ~~2007~~our ~~through~~loan ~~the~~portfolio ~~middle~~and/or ofallowance, ~~2009.~~will ~~This~~not ~~has~~request ~~resulted~~that inwe ~~increased~~alter ~~unemployment~~our ~~and~~allowance ~~declining~~for ~~property~~loan ~~values.~~losses ~~While~~or ~~the~~require ~~national~~additional ~~and~~charge-offs, ~~local~~particularly ~~economies~~in ~~have~~light ~~shown~~of ~~signs~~the ofmaterial ~~improvement~~weakness ~~since~~identified ~~the~~in ~~second~~our ~~half~~internal ofcontrol ~~2009~~over financial reporting, ~~unemployment~~thereby ~~has~~affecting ~~remained~~our atfinancial ~~elevated~~condition ~~levels~~and earnings.

Allowance for loan losses decreased by $1.1 million, to $16.9 million for the fiscal year ended September 30, 2011 from $17.9 million for the fiscal year ended September 30, 2010. There were net charge-offs of $2.3 million during the fiscal year ended September 30, 2011 compared to $35.5 million at September 30, 2010. The loan loss provision also decreased $41.5 million to $1.2 million for fiscal year 2011 compared to $42.7 million for fiscal year 2010. Although the charge-offs have decreased we continue to see a general decline in economic conditions in our lending footprint. While the national and local economies have shown signs of improvement since the second half of 2009, unemployment has remained at elevated levels and real estate values continued to be volatile.

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,
	At or For the Years
	2010			2009			2008			2007			2006
	Ended September 30,
	(Dollars in thousands)
	2011			2010
Balance at beginning of year	$	10,750		$	2,205		$	1,806		$	1,757		$	1,321
	(Dollars in thousands)
Charge-offs:
Balance at beginning of year	$	17,941		$	10,750
One-to-four-family		216			-			-			-			-
Charge-offs:
Multi-family		8,741			-			-			-			-
One-to-four-family		61			216
Commercial real estate		18,035			-			-			-			-
Multi-family		448			8,741
Construction		6,644			-			-			-			-
Commercial real estate		695			18,035
Land		1,853			-			-			-			-
Construction		2,339			6,644
Consumer and other		35			-			-			-			-
Land		891			1,853
Recoveries		(33	)		-			-			-			-
Consumer and other		-			35
Net charge-offs		35,491			-			-			-			-
Recoveries		(2,116	)		(33	)
Provision for loan losses		42,682			8,545			399			49			436
Net charge-offs		2,318			35,491
Balance at end of year	$	17,941		$	10,750		$	2,205		$	1,806		$	1,757
Provision for loan losses		1,230			42,682
Ratios:
Balance at end of year	$	16,853		$	17,941
Net charge-offs to average loans outstanding		8.83	%		0.00	%		0.00	%		0.00	%		0.00	%
Ratios:
Allowance for loan losses to total loans at end of period		4.63	%		2.50	%		0.59	%		0.63	%		0.61	%
Net charge-offs to average loans outstanding		0.68	%		8.83	%
Allowance for loan losses to total loans at end of period		6.00	%		4.62	%

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.15

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.

		At September 30,
		2011									2010
							Percent of									Percent of
							Loans in									Loans in
				Percent of			Each						Percent of			Each
				Allowance			Category						Allowance			Category
				to Total			to Total						to Total			to Total
	Amount			Allowance			Loans			Amount			Allowance			Loans
		(Dollars in thousands)									(Dollars in thousands)
Mortgage loans:
One-to four-family		$	939		5.57	%		29.36	%		$	547		3.05	%		18.90	%
Multi-family			2,719		16.13	%		12.94	%			3,125		17.42	%		16.77	%
Commercial real estate			4,957		29.41	%		27.07	%			9,484		52.87	%		30.79	%
Construction			6,942		41.19	%		24.99	%			1,664		17.30	%		24.65	%
Land			1,294		7.69	%		5.54	%			3,104		9.27	%		8.77	%
Consumer and other			2		0.01	%		0.10	%			17		0.09	%		0.12	%

Total allowance for loan losses		$	16,853		100.00	%		100.00	%		$	17,941		100.00	%		100.00	%

	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 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.

~~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 analysis process ~~includes, but~~ is ~~not~~inherently ~~limited to~~subjective, aas ~~periodic~~it ~~review~~requires ofus ~~loan~~to ~~collectability~~make inestimates ~~light of historical experience, the nature and volume of loan activity, conditions~~ that ~~may~~are ~~affect~~susceptible ~~the ability of the borrower~~ to ~~repay,~~revisions ~~the~~as ~~underlying~~more ~~value~~information ofbecomes ~~collateral, if applicable, and economic conditions in our immediate market area~~available. ~~First,~~Although we ~~group~~believe ~~loans~~that bywe ~~delinquency~~have ~~status. All~~established ~~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~~at ~~not~~levels ~~been~~to ~~assigned~~absorb ~~are~~probable ~~segregated by type~~ and ~~delinquency~~estimable ~~status~~losses, ~~and~~future aadditions ~~loss~~may ~~allowance~~be isnecessary ~~established~~if byeconomic ~~using~~or ~~loss experience data and management’s judgment concerning~~ other ~~matters~~conditions itcontinue ~~considers significant. The allowance is allocated~~ to ~~each~~deteriorate ~~category~~from ~~of loans based on~~ the ~~results~~current ~~of the above analysis~~environment.

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~~2011 is classified as available for sale and included $63137.08 million of mortgage-backed securities, $313.02 million of USU.S. Treasury and government agency bonds and $30.15 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 $1.86 million of Federal Home Loan Bank of New York stock.

At September 30, ~~2010~~2011, we held in mortgage-backed securities $24118.42 million issued by Freddie Mac and Fannie Mae, which are ~~United~~U.S. ~~States~~ government-sponsored enterprises, and $1619.56 million issued by Ginnie Mae, which is a ~~United States government agency and $22~~U.~~1 million in mortgage-backed securities representing securities of private issuers~~S. ~~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~~agency. The government-sponsored enterprises’ portion of the mortgage-backed securities portfolio consisted of $37115.74 million in fixed-rate mortgage-backed securities and $32.38 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.16

~~For~~The ~~further~~only ~~discussion~~securities of ~~our~~individual ~~securities~~issuers ~~portfolio,~~that ~~please~~we ~~see~~hold ~~Note~~with 4an ofaggregate ~~Notes~~book tovalue ~~Consolidated~~exceeding ~~Financial~~10% ~~Statements~~of inour ~~Item~~equity 8at September 30, ~~“Financial~~2011, ~~Statements~~were mortgage-backed securities issued by government agencies and ~~Supplementary~~government-sponsored ~~Data~~enterprises.”

For further discussion of our securities portfolio, please see Note 5 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
	2011				2010
	Carrying Cost		Estimated Fair Value		Carrying Cost		Estimated Fair Value		~~Carrying Cost~~		~~Estimated Fair Value~~
	(In thousands)				(In thousands)
Securities available-for-sale:
Mortgage-backed securities:
Government agency	$	1619,~~522~~299	$	1619,~~737~~620	$	-16,522	$	-16,737	$	-	$	-
Government-sponsored enterprises		24114,~~440~~781		24118,~~889~~173		-24,440		-24,889		-		-
Private issuers		~~22,055~~-		~~21,352~~-		-22,055		-21,352		-		-
Government debentures		210,~~990~~044		310,~~029~~184		-2,990		-3,029		-		-
Mutual funds		3,079		3,100		3,305		3,305		3,655		3,655
US Treasury note		3,003		3,063		-		-
Total securities available-for-sale	$	69,086	$	69,107	$	3,305	$	3,305	$	3,655	$	3,655
Mutual funds		500		528		3,079		3,100
Securities held-to-maturity:
Total securities available-for-sale	$	147,627	$	151,568	$	69,086	$	69,107
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

19Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at September 30, 2011 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.

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
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Fair Value		Weighted Average Yield
	(Dollars in thousands)

Government-sponsored enterprises	$	-		0.00	%	$	506		4.43	%	$	14,310		2.67	%	$	99,965		3.41	%		114,781	$	118,173		3.32	%
Government agency		-		0.00	%		-		0.00	%		76		4.00	%		19,223		3.18	%		19,299		19,620		3.18	%
Government debentures		-		0.00	%		-		0.00	%		2,990		2.04	%		7,054		2.39	%		10,044		10,184		2.28	%
US Treasury		-		0.00	%		3,003		1.21	%		-		0.00	%		-		0.00	%		3,003		3,063		1.21	%
Private issuers		-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%		-		-		0.00	%
Total securities available-for-sale	$	-		0.00	%	$	3,509		1.67	%	$	17,376		2.57	%	$	126,242		3.32	%	$	147,127	$	151,040		3.19	%

Sources of Funds

	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	%		13,902		4.57	%		22,055		21,352		4.70	%
Total securities available-for-sale	$	-		0.00	%	$	143		4.50	%	$	14,728		13.72	%	$	51,136		12.86	%	$	66,007	$	66,007		3.73	%

General. Deposits have traditionally been our primary source of funds for our lending and investment activities. In addition to deposits, funds are derived from scheduled loan payments, investment maturities, loan prepayments and income on earning assets. While scheduled loan payments and income on earning assets have been relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings from the Federal Home Loan Bank of New York may be used to compensate for reductions in deposits and to fund loan and securities growth. As of September 30, 2011, we had $8.2 million of borrowings outstanding from the Federal Home Loan Bank of New York.

~~Sources of Funds~~17

~~General.~~ Deposits. Substantially ~~have~~all ~~traditionally been our primary source~~ of ~~funds for~~ our ~~lending~~depositors ~~and investment activities. In addition to deposits, funds~~ are ~~derived~~persons ~~from~~who ~~scheduled~~work ~~loan~~or ~~payments,~~reside ~~investment~~in ~~maturities~~Kings, ~~loan~~Nassau ~~prepayments~~or ~~and~~Suffolk ~~income~~Counties onin ~~earning~~New ~~assets~~York. ~~While~~We ~~scheduled~~offer ~~loan~~a ~~payments~~variety ~~and~~of ~~income~~deposit oninstruments ~~earning~~that ~~assets~~include ~~have~~demand ~~been~~deposits ~~relatively~~consisting ~~stable~~of ~~sources~~non-interest ofbearing ~~funds~~checking accounts, ~~deposit~~negotiable ~~inflows~~order ~~and~~of ~~outflows~~withdrawal ~~can~~(“NOW”) ~~vary~~accounts, ~~widely~~money ~~and~~market ~~are~~accounts, ~~influenced~~passbook bysavings ~~prevailing~~and ~~interest~~club ~~rates~~accounts, ~~market conditions~~ and ~~levels~~fixed-term certificates of ~~competition~~deposit. Deposit ~~Borrowings~~account ~~from~~terms ~~the~~vary, ~~Federal~~with ~~Home~~the ~~Loan~~principal ~~Bank~~differences ofbeing ~~New~~the ~~York~~minimum ~~may~~balance berequired, ~~used~~the toamount ~~compensate~~of ~~for~~time ~~reductions~~the infunds ~~deposits~~must ~~and~~remain toon ~~fund~~deposit ~~loan~~ and ~~securities~~the ~~growth~~interest rate. AsWe ofdo ~~September~~not ~~30,~~have ~~2010,~~any webrokered ~~had~~deposits ~~$10.5~~at ~~million~~this ~~of borrowings outstanding from the Federal Home Loan Bank of New York~~time.

Deposits. Substantially all of our depositors are persons who work or reside in Kings, Nassau or Suffolk Counties, New York. We offer a variety of deposit instruments. These include demand deposits consisting of non-interest bearing checking accounts, NOW accounts, money market accounts, passbook savings and club accounts, and fixed-term certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We do not have any brokered deposits at this time.

We establish and adjust periodically the interest rates paid, maturity terms, service fees and withdrawal penalties on our deposits. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. We rely on personalized customer service and long-standing relationships with customers to attract and retain deposits.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The variety of deposit accounts offered allows us to be competitive in obtaining funds and responding to changes in consumer demand. Based on experience, management believes that our deposits are relatively stable. However, our ability to attract and maintain certificates of deposit, and the rates paid on these deposits, ~~have~~has been and will continue to be significantly affected by market conditions. At September 30, ~~2010~~2011, $~~252~~236.69 million, or 59.71%, of our deposit accounts were certificates of deposit, of which $~~149~~145.2 million had maturities of one year or less.

Deposit Accounts. The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated.

	At September 30,
	2010								2009								2008
	2011								2010
	Balance		Percent			Weighted Average Rate			Balance		Percent			Weighted Average Rate			~~Balance~~		~~Percent~~			~~Weighted Average Rate~~
	(Dollars in thousands)								(Dollars in thousands)
Deposit type:
NOW accounts	$	12,~~817~~463		3.0311	%		0.3525	%	$	1112,~~068~~817		23.7503	%		0.7535	%	$	~~10,251~~		~~2.99~~	%		~~0.75~~	%
Checking accounts		1615,~~033~~757		3.7993	%		0.00	%		16,~~595~~033		43.1379	%		0.00	%		~~18,773~~		~~5.48~~	%		~~0.00~~	%
Money market accounts		7566,~~341~~863		1716.7968	%		0.7372	%		6175,~~716~~341		1517.3579	%		10.4873	%		~~44,890~~		~~13.11~~	%		~~2.58~~	%
Total deposit accounts		~~104~~95,~~191~~083		2423.6172	%		0.5754	%		89104,~~379~~191		2224.2361	%		10.1157	%		~~73,914~~		~~21.58~~	%		~~1.67~~	%
Passbook savings accounts		6668,~~642~~883		1517.7418	%		0.4035	%		6166,~~880~~642		15.3974	%		0.6540	%		~~58,162~~		~~16.98~~	%		~~1.05~~	%
Certificates of deposit		~~252~~236,~~573~~936		59.6510	%		21.1492	%		~~250~~252,~~811~~573		6259.3865	%		2.8714	%		~~210,399~~		~~61.44~~	%		~~3.87~~	%
Total deposits	$	~~423~~400,~~406~~902		100.00	%		1.4832	%	$	~~402~~423,~~070~~406		100.00	%		21.1448	%	$	~~342,475~~		~~100.00~~	%		~~2.92~~	%

~~Deposit~~Large ~~Activity~~Certificates of Deposits. As of September 30, 2011, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $87.2 million. The following table sets forth ~~our~~the ~~deposit~~maturity ~~activity~~of ~~for~~those ~~the~~certificates ~~periods~~as ~~indicated~~of September 30, 2011.

	Years Ended September 30,
	2010		2009		2008
	(In thousands)
Beginning balance	$	402,070	$	342,475	$	287,155
Net increase before interest credited		13,982		50,146		45,721
Interest credited		7,354		9,449		9,599
Net increase in deposits		21,336		59,595		55,320
Ending balance	$	423,406	$	402,070	$	342,475

Large Certificates of Deposits. As of September 30, 2010 the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $86.2 million. The following table sets forth the maturity of those certificates as of September 30, 2010.

	At
	September 30, 2011
	(In thousands)

Three months or less	$	23,122
Over three months through six months		8,966
Over six months through one year		20,184
Over one year to three years		20,010
Over three years		14,904
Total	$	87,186

21Certificate of Deposit Maturity Schedule. The following table presents, by rate category, the remaining period to maturity of certificate of deposit accounts outstanding as of September 30, 2011.

			At
		Less than one year			Over one year to two years		Over two years to three years		Over three years to four years		Over four years to five years		Total		Percentage of total certificate accounts
			September 30, 2010
		(Dollars in thousands)
			(In thousands)
Interest Rate
	Three months or less		$	20,790
0.00% - 1.99%		$	124,029		$	18,624	$	5,448	$	-	$	644	$	148,745		62.78	%
	Over three months through six months			10,060
2.00% - 2.99%			15,991			6,048		10		10,737		9,200		41,986		17.72	%
	Over six months through one year			18,085
3.00% - 3.99%			-			1,924		11,946		15,481		-		29,351		12.39	%
	Over one year to three years			26,641
4.00% - 4.99%			5,144			8,843		2,867		-		-		16,854		7.11	%
	Over three years			10,662
Total		$	145,164		$	35,439	$	20,271	$	26,218	$	9,844	$	236,936		100.00	%
	Total		$	86,238

Certificate of Deposit Maturity Schedule. The following table presents, by rate category, the remaining period to maturity of certificate of deposit accounts outstanding as of September 30, 2010.

															Percentage
			Over one		Over two		Over three			Over four					of total
	Less than		year to		years to		years to			years to					certificate
	one year		two years		three years		four years			five years			Total		accounts
					(Dollars in thousands)
Interest Rate
0.00% - 1.99%	$	116,158	$	20,707	$	3,489		$	-		$	-	$	140,354		55.57	%
2.00% - 2.99%		22,037		15,946		5,964			10			10,639		54,596		21.62	%
3.00% - 3.99%		6,280		-		1,980			12,021			15,485		35,766		14.16	%
4.00% - 4.99%		4,091		5,364		8,922			2,827			-		21,204		8.40	%
5.00% - 5.99%		653		-		-			-			-		653		0.26	%
Total	$	149,219	$	42,017	$	20,355		$	14,858		$	26,124	$	252,573		100.00	%

Certificates of Deposit Classified By Rate. The following table sets forth certificates of deposit classified by range of interest rates as of the dates indicated.

	At September 30,
	2010		2009		2008
	2011		2010
	(In thousands)
Interest Rate
Less than 2%	$	~~140~~148,~~354~~745	$	52140,~~367~~354	$	-
2.00% - 2.99%		5441,~~596~~986		~~107~~54,~~003~~596		~~27,861~~
3.00% - 3.99%		3529,~~766~~351		4635,~~862~~766		~~101,909~~
4.00% - 4.99%		2116,~~204~~854		4321,~~930~~204		~~59,950~~
5.00% - 5.99%		~~653~~-		~~649~~653		~~20,679~~
Total	$	~~252~~236,~~573~~936	$	~~250~~252,~~811~~573	$	~~210,399~~

Borrowings. Our borrowings consist of advances from the Federal Home Loan Bank of New York. At September 30, ~~2010~~2011, we had access to Federal Home Loan Bank advances of up to $6251.41 million. The following table sets forth information concerning balances and interest rates on our borrowings at the dates and for the periods indicated.

2219

		~~At or For the Years Ended September 30,~~	At or For the Years Ended September 30,
		2010				2009				2008
			2011				2010
		~~(Dollars in thousands)~~	(Dollars in thousands)
~~Balance at end of year~~	Balance at end of year	$	~~10,500~~$	8,200		$	~~27,300~~$	10,500		$	~~44,239~~
~~Average balance during year~~	Average balance during year		~~11,833~~	9,072			~~42,281~~	11,833			~~21,480~~
~~Maximum outstanding at any month end~~	Maximum outstanding at any month end		~~25,300~~	29,500			~~64,439~~	25,300			~~44,239~~
~~Weighted average interest rate at end of year~~	Weighted average interest rate at end of year		~~2.51~~	%2.87	%		~~0.78~~	%2.51	%		~~1.73~~	%
~~Average interest rate during the year~~	Average interest rate during the year		~~2.04~~	%2.82	%		~~0.84~~	%2.04	%		~~3.03~~	%

Subsidiary Activities

~~OTS~~OCC regulations permit federal savings associations to invest in the capital stock, obligations or other specified types of securities of certain subsidiaries (referred to as “service corporations”) and to make loans to service corporations and joint ventures in which service corporations are participants in an aggregate amount not exceeding 2% of the association’s assets, plus an additional 1% of assets if the amount over 2% is used for specified community or inner-city development purposes. Service corporations may engage in certain activities not otherwise permissible for the Company but may not take deposits. In addition, ~~Federal~~federal regulations permit associations to make specified types of loans to service corporations (other than special-purpose finance subsidiaries) in ~~which the association owns more than 10% of the stock, in~~ an aggregate amount not exceeding 50% of the association’s regulatory capital if the association’s regulatory capital is in compliance with applicable regulations.

3D Holding Company was incorporated in New York in 1993, for the purpose of acquiring, managing, and disposing of real estate held by the Bank. As of September 30, ~~2010~~2011, ~~the~~3D ~~subsidiary~~Holding Company had two subsidiaries, Ash Real Estate Holdings and Birch Real Estate Holdings, each of which held cash and did not hold any real estate owned as of such date. As of September 30, ~~2010~~2011, total assets of 3D Holding Company were $157,000, and consisted solely of cash ~~at that date~~.

BFS REIT, Inc. was incorporated in New York in 1999. The corporation is a wholly-owned subsidiary of the Bank created for the purpose of acquiring, holding, and investing in certain real estate-related loans and other assets that constitute permissible investments by the Bank. As of September 30, ~~2010~~2011, BFS REIT, Inc.’s total aggregate assets were $8889.12 million. In connection with the expected Mergers, BFS REIT, Inc. is expected to be liquidated.

Thrift Investors Service Corporation (“TISCO”) was incorporated in New York in 1982, for the purpose of holding BFS Agency, Inc., a company that sells insurance and fixed annuity products through licensed employees in the Bank’s branches. As of September 30, ~~2010~~2011, TISCO’s total aggregate assets were $~~275~~274,000 of which $243,000 represented the investment in BFS Agency, Inc.

Legal Proceedings

Except as disclosed in Item 3. “Legal Proceedings”, we are not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business. At September 30, 2010, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations. As previously disclosed, we have entered into Cease and Desist Orders with the OTS that affect the way we conduct our business.

Personnel

As of September 30, ~~2010~~2011, we had 7976 full-time employees and 2920 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good relations with our employees.

2320

FEDERAL, STATE AND LOCAL TAXATION

General. The Bank’s Federal and state tax returns have not been audited during the past five years. The Company’s New York City tax returns have been audited for the 2005, 2006 and 2007 tax years. No adjustments to taxable income resulted from these audits.

Federal Taxation

General. The Company and the Bank are subject to Federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The Company and the Bank file consolidated income tax returns. The following discussion of Federal taxation is intended only to summarize certain pertinent Federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company or the Bank.

Method of Accounting. For Federal income tax purposes, the Bank and Company report their income and expenses on the accrual method of accounting and use a tax year ending September 30 for filing Federal income tax returns.

Bad Debt Reserve and Recapture. Prior to the Small Business Protection Act of 1996 (the “1996 Act”), the Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at our taxable income. The Bank ~~was~~is now required to use the specific charge off method (i.e., to claim a deduction equal to its actual loan loss experience) in computing its bad debt deduction beginning with its 1996 Federal tax return. The Bank ~~was~~has ~~required~~previously torecaptured ~~recapture~~(i.e., ~~any~~taken into income) over a multi-year period its excess reserves established after December 31, 1987~~. The~~ ~~Bank~~and ~~now~~before ~~maintains~~December a31, ~~frozen~~1995. Generally, ~~reserve equal to~~ the ~~balance~~Bank’s ~~of the~~ bad debt ~~reserves~~reserve balance as of December 31, 1987 (the “base year reserve”) is only subject to recapture upon distribution of such reserves. See below “ – Taxable Distributions and Recapture”).

Taxable Distributions and Recapture. AsThe ~~described~~Bank’s ~~above~~“non-dividend distributions,” ~~the~~will ~~1996~~be ~~Act~~considered ~~modified~~distributions ~~the~~from ~~methods by which~~ the Bank’s ~~computes its bad debt deduction and the Bank now maintains a frozen~~ base year reserve., ~~The base year reserve is subject~~ to ~~recapture if~~ the ~~Bank~~extent ~~makes~~thereof, ~~certain~~and ~~non-dividend~~then ~~distributions.~~from Inits ~~such~~supplemental ~~cases,~~tax-basis anreserve ~~amount~~for ~~based~~losses on ~~the amounts distributed will be includable into the Bank’s taxable income~~loans. “Non-dividend distributions” include distributions in excess of the Bank’s current and accumulated earnings and profits, as calculated for federal income tax purposes; distributions in redemption of its stock; and distributions in partial or complete liquidation.

AtIn ~~September~~such 30cases, ~~2010,~~an ~~our~~amount ~~total~~based ~~Federal~~on ~~pre~~the total non-~~1988~~dividend ~~base~~distribution paid will be includable into the Bank’s taxable income in the year of distribution. Dividends paid out of current or accumulated earnings and profits will not be included in the Bank’s income. The amount of additional taxable income created from a non-dividend distribution is the amount that, when reduced by the amount of the tax ~~bad~~attributable ~~debt~~to ~~reserve~~this ~~was~~income, ~~approximately~~is $1equal to the amount of the distribution.6 ~~million~~Thus, assuming a 35% federal corporate income tax rate, approximately one and one-half times the amount of such distribution (but not in excess of the amount of the above-mentioned reserves) would be includable in income for federal income tax purposes.

At September 30, 2011, our base year reserve was approximately $1.6 million.

Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended (the “Code”), imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”). The AMT is payable to the extent such AMTI is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of AMTI. Certain payments of AMT may be used as credits against regular tax liabilities in future years. The Bank has not been subject to the AMT and has no such amounts available as credits for carryover.

Net Operating Loss Carryovers. The Company may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. ~~The Worker, Homeownership, and Business Assistance Act of 2009 generally allows the Bank to elect a 3, 4, or 5-year carry-back period on net operating losses incurred in either 2008 or 2009.~~ At September 30, ~~2010~~2011, the Company iswill ~~carrying~~carry ~~back~~forward the fiscal year ~~2010~~2011 net operating loss 520 years. Due ~~and~~to ~~will carry~~ the ~~balance~~valuation ~~forward. New~~allowance ~~York~~recorded ~~State~~against ~~and~~the ~~New~~Company’s ~~York~~net ~~City~~deferred dotax ~~not~~asset, ~~allow~~the ~~any~~tax ~~carry~~benefit ~~back~~ of ~~the~~these net operating ~~loss~~losses ~~but~~and doother ~~permit~~tax ~~such~~attributes ~~losses~~are tonot becurrently ~~carried~~recorded ~~forward~~on ~~for~~the 20Company’s ~~years,~~balance ~~subject~~sheet toas ~~certain~~of ~~limitations~~September 30, 2011.

Corporate Dividends-Received Deduction. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is 80% in the case of dividends received from corporations with which a corporate recipient does not file a consolidated return, and corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received or accrued on their behalf.21

24Internal Revenue Code Section 382 applies an annual limitation on the use of certain net operating loss carryovers and certain other tax attributes if a corporation experiences an ownership change as defined in that code section. An ownership change generally occurs if there is a greater than 50% shift in ownership of the corporation over a 36 month period, measured by the ownership of the greater than 5% shareholders. Complex rules and calculations apply in determining whether an ownership change has occurred. If the annual limitation of Internal Revenue Code section 382 is applied as a result of an ownership change, the annual limitation can significantly lengthen the period over which the net operating loss carryovers and certain other tax attributes of the corporation can be utilized. Furthermore, as a result of the limited carryforward life of these tax attributes, the annual limitation may, in some cases, render them to be partially worthless to the Company or any successor of the Company after the ownership change.

Corporate Dividends-Received Deduction. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 80% in the case of dividends received from corporations with which a corporate recipient does not file a consolidated return, and corporations which own less than 20% of the stock of a corporation distributing a dividend may generally deduct 70% of dividends received or accrued on their behalf.

Dividends received by the Bank from BFS REIT, Inc., a real estate investment trust, are not entitled to a dividends received deduction.

State and Local Taxation

New York State Taxation. The Company and the Bank are subject to the New York State banking corporation tax. This tax is imposed in an amount equal to the greater of (a) 7.1% of “entire net income” allocable to New York State, (b) 3% of “alternative entire net income” allocable to New York State, (c) 0.01% of the average value of assets allocable to New York State, or (d) a nominal minimum tax. Entire net income is based on Federal taxable income, subject to certain modifications. Alternative entire net income is equal to entire net income without certain modifications. The Company and the Bank are also subject to the New York State tax surcharge equal to 17.0% of the New York State banking corporation tax allocable to business activities carried on in the Metropolitan Commuter Transportation District.

Dividends received by the Bank from BFS REIT, Inc., a real estate investment trust, are subject to a 60% dividends-received deduction, which generally results in only 40% of BFS REIT, Inc.’s earnings being subject to New York State tax.

New York City Taxation. The Company and the Bank isare also subject to the New York City banking corporation tax, which is calculated, subject to a New York City income and expense allocation, on a similar basis as the New York State banking corporation tax. The New York City tax is imposed on ~~entire~~an ~~net~~amount ~~income~~equal isto ~~imposed~~the atgreater of (a) 9.0% of “entire net income” allocable to New York City, (b) 3% of “alternative entire net income” allocable to New York City, (c) 0.01% of the average value of assets allocable to New York City, or (d) a nominal minimum tax. ~~rate~~Alternative entire net income is equal to entire net income with certain modifications.

Bad Debt Reserves. New York State and New York City enacted legislation for tax years beginning in 2010 to ~~comply~~conform with the federal tax law with regards to bad debt ~~reserves and~~ deductions. ~~Thrifts~~As ~~are~~a ~~now~~result, ~~required to follow either~~ the ~~reserve~~Bank ~~method~~no oflonger ~~accounting~~establishes ~~for loan losses~~ or ~~the~~maintains ~~specific charge off method. New York State and New York City do not require~~ a ~~recapture~~reserve ~~of the excess bad debt deductions over the amount deducted~~ for ~~federal~~losses ~~purposes. Prior~~on toloans ~~this change in law, New York State~~ and ~~New~~is ~~York~~required ~~City decoupled from the Federal tax law in 1996, when the federal tax law changed, with regards~~ to ~~bad~~claim ~~debt~~a deduction for ~~thrifts. New York State and City continued to permit the use of the~~ bad ~~debt~~debts ~~provisions~~in ~~that~~an ~~applied~~amount ~~under~~equal ~~Federal tax law prior~~ to ~~the~~its ~~enactment~~actual ofloan ~~the~~loss ~~1996 Act~~experience. ~~Provided~~ ~~the~~In ~~Bank~~addition, ~~continued~~this tolegislation ~~satisfy~~eliminated ~~certain~~the ~~definitional~~potential ~~tests~~recapture of athe thrift and a specified qualifying-assets ratio for New York State and New York City income tax purposes, it was permitted to continue to take deductions from entire net income for additions to reserves for losses on bad debts. The deductible annual addition to such reserves was computed using a specific formula based on an institutionBank’s ~~loss~~reserve ~~history~~that ~~(the~~could ~~“experience~~have ~~method”)~~otherwise oroccurred ain ~~statutory~~certain ~~percentage~~circumstances ~~equal~~under ~~to 32% of its~~ New York State and New York City ~~taxable~~law ~~income~~prior ~~(the~~to ~~“percentage method”) before bad debt deduction~~2010.

~~Recapture~~Net ofOperating ~~Bad~~Loss ~~Debt Reserves~~Carryovers. ~~Bad~~ ~~debt~~Neither ~~reserves consist of a defined “base-year” amount, plus additional amounts accumulated after the base year. As of September 30, 2010, our federal,~~ New York State ~~and~~nor New York City ~~pre-1988~~allow ~~base-year~~net ~~reserve~~operating ~~for~~losses ~~the~~to ~~purposes~~be ofcarried ~~calculating~~back ~~any~~but ~~recapture~~both ofpermit ~~bad~~such ~~debt~~losses ~~reserves~~to ~~was~~be ~~approximately~~carried ~~$1.6~~forward ~~million. Under~~for ~~current~~20 ~~federal~~years, ~~New York State and New York City tax laws, bad debt reserves are~~ subject to ~~recapture if the Bank (i) makes~~ certain ~~“non-dividend distributions” – see “Taxable Distributions and Recapture” under the Federal taxation analysis above~~limitations.

SUPERVISION AND REGULATION

General

~~The~~BFS ~~Bank~~Bancorp, isMHC ~~a federal savings association that is examined~~ and ~~supervised by~~ the ~~Office~~Company ofare ~~Thrift~~non-diversified ~~Supervision~~savings ~~(“OTS”). The~~and ~~Bank~~loan isholding ~~regulated~~companies towithin ~~a lesser extent by~~ the ~~Federal~~meaning ~~Deposit Insurance Corporation (“FDIC”), with respect to the insurance~~ of ~~deposit accounts held at~~ the ~~Bank. The~~Home ~~Bank~~Owners’ isLoan ~~also~~Act, ~~subject~~as toamended ~~the regulations of Board of Governors of the Federal Reserve System~~ (“~~Federal Reserve~~HOLA”)~~, with respect to reserves required to be maintained against deposits and other matters~~. ~~This~~Accordingly, ~~regulation~~BFS ~~and~~Bancorp, ~~supervision~~MHC ~~establishes a comprehensive framework for the types of permissible activities in which an institution may engage~~ and ~~is intended primarily for~~ the ~~protection~~Company ofare ~~the~~registered ~~Deposit~~with ~~Insurance Fund, which is administered by~~ the ~~FDIC~~Federal ~~for~~Reserve ~~the~~and ~~benefit of the Bank’s depositors. Under this system of federal regulation, financial institutions~~ are ~~periodically~~subject ~~examined~~ to ~~ensure~~primary ~~that they satisfy applicable standards with respect to their capital adequacy~~regulation, ~~assets,~~examination ~~management, earnings, liquidity~~ and ~~sensitivity~~supervision toby ~~market~~the ~~interest~~Federal ~~rates~~Reserve. ~~Following~~In ~~completion of its examination~~addition, the ~~primary~~Federal ~~federal~~Reserve ~~agency~~has ofenforcement anauthority ~~institution~~over ~~critiques~~ the ~~institution’s~~Company ~~operations~~ and ~~assigns~~BFS ~~its~~Bancorp, ~~rating (known as an institution’s CAMELS rating). As the Bank’s primary regulator~~MHC, ~~the OTS examines the Bank~~ and ~~prepares~~their ~~reports of examination with respect to any operating deficiencies~~subsidiaries. ~~Under~~Among ~~federal~~other ~~law~~things, anthis ~~institution~~authority ~~may~~permits ~~not disclose its CAMELS rating to~~ the ~~public. The Bank also is a member of and owns stock in the~~ Federal ~~Home~~Reserve ~~Loan~~to ~~Bank~~restrict ofor ~~New~~prohibit ~~York,~~activities ~~which~~that isare ~~one~~determined ~~of the 12 regional banks in the Federal Home Loan Bank System. The Bank’s relationship with its depositors and borrowers is regulated~~ to be a ~~great~~serious ~~extent~~risk ~~by both federal and state laws, e.g., with respect~~ to ~~matters concerning~~ the ~~ownership~~subsidiary ofsavings ~~deposit accounts and laws that govern the form and content of the Bank’s mortgage documents~~institution.

25The Bank is a federal savings association that is subject to primary regulation, examination and supervision by the OCC. The Bank is regulated to a lesser extent by the Federal Deposit Insurance Corporation (“FDIC”), with respect to the insurance of deposit accounts held at the Bank. This regulation and supervision establishes a comprehensive framework for the types of permissible activities in which the Bank may engage and is intended primarily for the protection of the Deposit Insurance Fund, which is administered by the FDIC for the benefit of the Bank’s depositors. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates.

~~Any~~On ~~change~~March 31, 2011, the Company and BFS Bancorp, MHC (together, the “Holding Companies”), and the Bank became subject to Cease and Desist Orders (the “Orders”) issued by the OTS. The Order issued to the Bank which we refer to as the “Bank Order” required, among other things, the Bank to submit a contingency plan for review and approval by the OTS if the Bank failed to meet certain minimum capital levels established in ~~these~~the ~~laws~~Bank Order, or ~~regulations~~comply with the terms of a required capital plan, ~~whether~~or is otherwise requested by the ~~FDIC~~OTS to submit a contingency plan, ~~OTS~~which contingency plan would require the Bank to merge with, ~~Federal~~or ~~Reserve~~be acquired by another federally insured depository institution or voluntarily liquidate. Upon determining that the ~~United~~minimum ~~States~~capital ~~Congress~~levels set forth in the Bank Order would not be achieved by the deadline, ~~could~~on ~~have~~April 29, 2011, the Holding Companies and the Bank each sent a ~~material~~letter ~~adverse~~to ~~impact~~the onOTS confirming that, since the ~~Company~~Bank would not be able to meet the minimum capital levels contained in the Bank Order by the deadline, it was agreed-upon with the OTS staff that, rather than submitting a capital plan as mandated by the Bank Order, the Bank would submit its contingency plan to the OTS. On May 12, 2011, the Bank submitted a contingency plan to the OTS. The contingency plan detailed the Holding Companies’ and the Bank’s proposed actions to engage in a transaction involving the merger or acquisition of the Bank and, ~~their~~should ~~operations~~the Bank not be able to complete that transaction, to adopt a plan for the Bank to voluntarily liquidate.

On July 211, ~~2010~~2011, the ~~President~~Bank ~~signed~~received ~~the~~a ~~Dodd-Frank~~letter ~~Wall~~from ~~Street Reform and Consumer Protect Act (“Dodd-Frank Act”) into law. Among other things,~~ the Dodd-Frank Act dramatically impacts the rules governing the provision of consumer financial products and services, and implementation of the many requirements of the new law will require new mandatory and discretionary rulemakings by numerous federal regulatory agencies over the next several years. The Dodd-Frank Act significantly affects the operations of federal savings associations and their holding companies as, among other things, the Dodd-Frank Act: (1) abolishes our primary federal regulator, the OTS, ~~effective~~with ~~90 days after the transfer of the OTS’s supervisory and other functions to the Federal Reserve, FDIC, and the OCC; (2) creates the Bureau of Consumer Financial Protection,~~ a ~~new~~proposed ~~independent~~Amended ~~consumer~~Order ~~watchdog agency housed within the Federal Reserve that will have primary rulemaking authority with respect~~ to ~~all~~Cease ~~federal consumer financial laws; (3) requires that formal capital requirements be imposed on savings~~ and ~~loan~~Desist ~~holding companies generally commencing July 2015;~~ (~~4) codifies the~~ “~~source~~Proposed ofOTS ~~strength~~Order” ~~doctrine for all depository institution holding companies; (5~~) ~~grants~~which towas ~~the~~intended ~~U.S. Department of the Treasury, FDIC and the Federal Reserve broad new powers~~ to ~~seize,~~supplement ~~close~~ and ~~wind~~partially ~~down~~supersede ~~“too~~the ~~big~~Bank toOrder ~~fail” financial (including non-bank) institutions in an orderly fashion; (6) establishes a new Financial Stability Oversight Council that is charged with identifying and responding~~ to ~~emerging risks throughout~~ the ~~financial~~extent ~~system,~~proposed. ~~composed~~On ~~primarily~~July ~~of federal financial services regulators and chaired by the Secretary of the Treasury Department; (7) adopts new standards and rules for the mortgage industry; (8) adopts new bank~~21, ~~thrift and holding company regulation; (9) permanently increases the standard maximum deposit insurance limit to $250~~2011,~~000~~ ~~per depositor, per institution for each account ownership category; (10) temporarily provides for unlimited deposit insurance coverage for “noninterest-bearing transaction accounts;” (11) repeals~~ the ~~long-standing~~Bank ~~statutory~~was ~~prohibition~~notified onby the ~~payment~~OCC ofthat ~~interest~~it onintended ~~demand~~to ~~deposits~~issue ~~including~~a ~~commercial~~Consent ~~transaction~~Order ~~accounts;~~to ~~(12) adopts new federal regulation of~~ the ~~derivatives market; (13) adopts the so-called Volcker Rule~~Bank, which ~~substantially~~would ~~restricts~~replace ~~proprietary~~the ~~trading~~Bank byOrder ~~depository institutions~~ and ~~their~~also ~~holding~~encompass ~~companies; (14) imposes requirements for “funeral plans” by large, complex financial companies; (15) establishes new regulation of~~ the ~~asset securitization market through “skin in the game” and enhanced disclosure~~ requirements; ~~(16) establishes new regulation~~ of ~~interchange fees; (17) establishes new and enhanced compensation and corporate governance oversight for~~ the ~~financial~~Proposed ~~services~~OTS industry; (18) provides enhanced oversight of municipal securities; (19) provides a specific framework for payment, clearing and settlement regulation; (20) tasks the federal banking agencies with adopting new and enhanced capital standards for all depository institutions; and (21) significantly narrows the scope of federal preemption for national banks and federal savings associationsOrder.

~~Many~~On ofAugust ~~the~~16, ~~provisions~~2011, of the ~~Dodd-Frank~~Holding ~~Act~~Companies ~~affecting the Company~~ and ~~Bank have effective dates ranging from immediately upon enactment of~~ the ~~legislation to several years following enactment. Given that many of the new laws mandated by the Dodd-Frank Act which affect the Company and~~ Bank ~~are~~entered ~~not~~into ~~yet~~an ~~effective~~Agreement ~~at this time~~ and ~~much~~Plan of ~~the~~Merger ~~details~~with ~~and~~Investors ~~substance~~Bancorp, ofMHC, ~~such~~Investors ~~new laws will be shaped through the rulemaking process~~Bancorp, ~~the~~Inc. ~~full impact of the Dodd-Frank Act on the business~~ and ~~operations~~Investors ~~of the Company and~~ Bank ~~currently~~(formerly ~~cannot~~known beas ~~fully~~Investors ~~assessed.~~Savings ~~For example~~Bank), ~~the~~which ~~Dodd-Frank~~contemplates ~~Act repealed~~ the ~~federal~~mergers ~~prohibition on the payment~~ of ~~interest~~BFS ~~on demand deposits~~Bancorp, ~~thereby permitting depository institutions to pay interest on business transaction and other accounts beginning July 21~~MHC, ~~2011. The ultimate impact of this change in law on~~ the ~~operations of the~~ Company and ~~Bank has not yet been determined. Additionally,~~ the ~~Dodd-Frank~~Bank ~~Act~~with ~~provides that the functions of the OTS in regard to the Company~~ and ~~Bank~~into ~~will~~Bancorp, ~~formally~~MHC, beInvestors ~~transferred~~Bancorp, toInc. ~~the FRB~~ and ~~the~~Investors ~~OCC respectively on July 21~~Bank, ~~2011~~respectively. The ~~Federal~~consummation ~~Reserve has indicated its intent to apply certain parts~~ of its current consolidated supervisory program for bank holding companies (including significantly enhanced reporting requirements) to savings and loan holding companies after assuming supervisory responsibility for savings and loan holding companies on the ~~transfer date. Accordingly~~Mergers, wewhich ~~may~~are ~~see~~expected ~~changes~~to close in the ~~way~~second wequarter ~~are~~of ~~supervised~~fiscal ~~and~~year ~~examined sooner~~2012, ~~and~~is ~~may~~intended ~~experience~~to ~~operational~~comply ~~challenges~~with in the ~~course~~Bank ~~of transition to our new regulators~~Order.

26To date, the OCC has not issued such Consent Order to the Bank, and the Holding Companies and the Bank continue to operate under the requirements and restrictions imposed on them under the March 31, 2011 Orders.

~~Like~~The all other financial institutions and in particular, community thrift organizations, the Company and Bank are continuing to closely monitor developments and is currently evaluating the potential impact of the Dodd-Frank ~~Act~~Wall onStreet ~~our~~Reform ~~business, financial condition, results of operations~~ and ~~prospects~~Consumer ~~and~~Protection ~~expect~~Act ~~that some provisions of the new law may have adverse effects on us, such as the cost of complying with the numerous new regulations and reporting requirements mandated by the~~ (“Dodd-Frank Act.”)

~~The~~Major ~~following~~financial ~~discussion~~reform ~~summarizes~~legislation, ~~material~~known ~~laws~~as ~~and~~the ~~regulations~~Dodd-Frank ~~applicable~~Act, towas signed into law by the ~~Bank~~President on July 21, ~~Company~~2010. Among other things, the Dodd-Frank Act impacts the rules governing the provision of consumer financial products and services, and many of the provisions of the Dodd-Frank Act affecting BFS Bancorp, MHC, the Company and the Bank have effective dates ranging from immediately upon enactment of the legislation to several years following enactment of the Dodd-Frank Act. It isOf ~~not~~particular ~~intended~~significance to befederal savings associations and their holding companies is that, as a ~~comprehensive~~result ~~explanation~~of regulatory restructuring called for by the Dodd-Frank Act, BFS Bancorp, MHC, the Company and the Bank transitioned to the jurisdiction of ~~all~~their ~~applicable~~current ~~laws~~new and ~~regulations~~separate primary federal regulators on July 21, 2011. Prior to that date, BFS Bancorp, MHC, the Company and isthe ~~qualified~~Bank inhad ~~its~~been ~~entirety~~subject to consolidated supervision and regulation by ~~reference~~the toOffice of Thrift Supervision, or the ~~actual~~OTS, ~~laws~~which has now been abolished as a result of the completed transfer of all of the OTS’ supervisory and ~~regulations~~rulemaking ~~involved~~responsibilities to other federal agencies.

Along with the transfer of ongoing responsibilities for the supervision and examination of federal savings associations and their holding companies, the Dodd-Frank Act also transferred to the Federal Reserve and OCC rulemaking authority (except for consumer protection) of the OTS relating to savings and loan holding companies and all savings associations, respectively. The legislation continues in effect all OTS orders, resolutions, determinations, agreements, regulations, interpretive rules, other interpretations, guidelines, procedures and other advisory materials in effect the day before the transfer date, and allows the Federal Reserve and OCC to enforce these issuances with respect to savings and loan holding companies and federal savings associations, respectively, unless the Federal Reserve or OCC modifies, terminates, or sets aside such guidance or until superseded by the Federal Reserve or OCC, a court, or operation of law.

The following discussion is intended to provide a summary of the material statutes and regulations applicable to savings and loan holding companies and federal savings associations as they are to be administered and enforced by the Federal Reserve and OCC respectively, going forward as of July 21, 2011, and does not purport to be a comprehensive explanation of all applicable laws and regulations and is qualified in its entirety by reference to the actual laws and regulations involved. Any change in these laws or regulations, whether by the FDIC, OCC, Federal Reserve or the United States Congress, could have a material adverse impact on the Company and the Bank and their operations.

Regulation of Federal Savings Associations

~~Business~~Primary ~~Activities~~Regulation by the OCC. AAs ~~federal~~of ~~savings~~July ~~association~~21, ~~derives~~2011, ~~its~~the ~~lending~~OCC ~~and~~has ~~investment~~extensive ~~powers~~authority ~~from~~to regulate and supervise the ~~Home~~operations ~~Owners’~~of ~~Loan~~federal ~~Act~~savings associations, asincluding ~~amended~~the ~~(“HOLA”),~~Bank. This regulation and ~~the~~supervision ~~implementing~~establishes ~~regulations~~a comprehensive framework of ~~the~~activities ~~OTS. Under~~in ~~these~~which ~~laws~~a federal savings association can engage and ~~regulations,~~is intended primarily for the ~~Bank~~protection ~~may~~of ~~originate~~the ~~mortgage~~deposit ~~loans~~insurance ~~secured~~fund byand ~~residential~~depositors, and ~~commercial~~to ~~real~~assure ~~estate,~~the ~~commercial~~ongoing ~~business~~safety and ~~consumer~~soundness ~~loans,~~of ~~and~~institutions itregulated ~~may~~by ~~invest~~the inOCC. ~~certain~~The ~~types~~regulatory ofstructure ~~debt~~also ~~securities~~gives ~~and~~the ~~certain~~regulatory ~~other~~authorities ~~assets. Certain~~extensive ~~types~~discretion ofin ~~lending,~~connection ~~such~~with astheir ~~commercial~~supervisory and ~~consumer~~enforcement ~~loans,~~activities ~~are~~and ~~subject~~examination topolicies, anincluding ~~aggregate~~policies ~~limit~~with ~~calculated~~respect asto athe ~~specified~~classification ~~percentage~~ of assets and the ~~Bank’s~~establishment ~~capital~~of ~~assets. The~~adequate ~~Bank~~loan ~~also~~loss ~~may~~reserves ~~establish~~for ~~subsidiaries~~regulatory ~~that~~purposes. The ~~may~~Bank ~~engage~~is inrequired ~~activities~~to ~~not~~file ~~otherwise~~periodic ~~permissible~~reports ~~for~~with the ~~Bank,~~OCC ~~including~~and ~~real~~is ~~estate~~subject ~~investment~~to ~~and~~periodic ~~securities~~examinations ~~and~~primarily ~~insurance~~by ~~brokerage~~the OCC.

AsGiven ~~noted~~the ~~above~~extensive transfer of former OTS authority to multiple agencies, section 316 of the Dodd-Frank Act ~~authorizes~~requires ~~depository~~the ~~institutions~~OCC to ~~pay~~identify ~~interest~~and onpublish ~~business~~in ~~transaction~~the ~~accounts~~Federal Register separate lists of the current OTS regulations that the OCC will continue to enforce for federal savings associations after the transfer date. In carrying out this mandate, ~~effective~~and in connection with its assumption of responsibility for the ongoing examination, supervision, and regulation of federal savings associations, the OCC published a final rule on July 21, 2011 that republishes those OTS regulations that the OCC has the authority to promulgate and enforce as of the July 21 transfer date, ~~prior~~with nomenclature and other technical amendments to ~~which~~reflect ~~payment~~OCC supervision of ~~interest~~federal onsavings ~~such~~associations. The ~~accounts~~OCC’s ~~was~~regulations ~~prohibited~~supersede the OTS regulations for purposes of OCC supervision and regulation of federal savings associations.

~~Capital~~In ~~Requirements~~promulgating the final rule, the OCC noted that the final rule is part of the OCC’s review of its regulations and those of the OTS to determine what changes are needed for the transition to OCC supervision of federal savings associations, and that in future phases of the OCC’s regulatory review, the OCC will consider more comprehensive substantive amendments, as necessary, to these regulations. For example, the OCC notes that it may propose to repeal or combine provisions in cases where OCC and former OTS ~~regulations~~rules ~~require~~are substantively identical or substantially overlap. In addition, the OCC may propose to repeal or modify OCC or former OTS rules where differences in regulatory approach are not required by statute or warranted by features unique to either charter. This substantive review also will provide an opportunity for the OCC to ask for comments suggesting revisions to the rules for both national banks and federal savings associations that would remove provisions that are ‘‘outmoded, ineffective, insufficient, or excessively burdensome,’’ consistent with the goals outlined in an executive order issued by the President. Accordingly, it is possible that additional OCC rulemaking could require significant revisions to the regulations under which the Bank operates and is supervised. Any change in such aslaws and regulations or interpretations thereof, whether by the OCC, the FDIC or through legislation, could have a material adverse impact on the Bank, toand ~~meet~~its ~~three~~operations ~~minimum~~and ~~capital~~on ~~standards:~~us and our stockholders.

~~(1) a tangible capital ratio requirement of 1.5% of total assets, as adjusted under the OTS regulations;~~24

~~(2) a~~Business ~~leverage~~Activities. The ~~ratio~~activities ~~requirement~~ of ~~4.0%~~federal ofsavings ~~core~~associations ~~capital~~are togenerally ~~such~~governed ~~adjusted~~by ~~total~~federal ~~assets~~laws (3and regulations.0% ifThese alaws ~~savings~~and ~~association~~regulations ~~has~~delineate ~~been~~the ~~assigned~~nature and extent of the ~~highest~~activities ~~composite~~in ~~rating~~which federal savings associations may engage. In particular, many types of 1lending ~~under~~authority ~~the~~for ~~Uniform~~federal ~~Financial~~savings ~~Institutions~~associations ~~Rating~~are ~~System);~~limited ~~and~~to a specified percentage of the institution’s capital or assets.

~~(3) a~~Lending ~~risk-based~~and ~~capital~~Investment ~~ratio~~Authority. ~~requirement~~The Bank derives its lending and investment powers from the HOLA and the implementing regulations of 8the OCC.0% Under ofthese ~~core~~laws and ~~supplementary~~regulations, ~~capital~~the toBank ~~total~~may ~~risk-based~~originate mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, and it may invest in certain types of debt securities and certain other assets, ~~provided~~up ~~that~~to limits prescribed in the ~~amount~~HOLA and implementing regulations. Certain types of ~~supplementary~~lending, ~~capital~~such ~~used~~as commercial and consumer loans, are subject to ~~satisfy~~an ~~this~~aggregate ~~requirement~~limit ~~shall~~calculated as a specified percentage of the Bank’s capital assets. The Bank also may establish service corporations that may engage in activities not ~~exceed~~otherwise permissible for the ~~amount~~Bank, including real estate equity investments and securities and insurance brokerage activities. In addition to the statutory limits on its lending and investment activities, the Bank is also subject to lending and asset restrictions imposed by the OTS (now currently enforced by the OCC) as a result of ~~core~~the ~~capital~~Bank Order.

~~The~~Capital ~~risk-based~~Requirements. OCC ~~capital~~regulations ~~standard~~require ~~for~~ savings associations ~~requires~~such ~~the maintenance of Tier 1 (core) and total capital (which is defined~~ as ~~core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining~~ the ~~amount~~Bank ~~of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0%~~ to ~~100%~~meet ~~assigned~~three byminimum ~~the OTS based on the risks believed inherent in the type of asset. Core~~ capital is defined to include common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock, certain accounts and deposits and related surplus and minority interests in equity accounts of consolidated subsidiaries, less goodwill, certain credit-enhancing credit only strips, certain deferred tax assets and intangibles other than certain servicing assets and credit card relationships. The components of Tier2 (supplementary) capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.standards:

Loans to One Borrower. A federal savings association generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of the Bank’s unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of September 30, 2010, the Bank was in compliance with the loans-to-one borrower limitations.

	(1)	a tangible capital ratio requirement of 1.5% of total assets, as adjusted under the OCC regulations;

	(2)	a leverage ratio requirement of 4.0% of core capital to such adjusted total assets (3.0% if a savings association has been assigned the highest composite rating of 1 under the Uniform Financial Institutions Rating System); and

	(3)	a risk-based capital ratio requirement of 8.0% of core and supplementary capital to total risk-based assets, provided that the amount of supplementary capital used to satisfy this requirement shall not exceed the amount of core capital.

27The risk-based capital standard for savings associations could require the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% assigned by the OCC based on the risks believed inherent in the type of asset. Core capital is defined to include common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock, certain accounts and deposits and related surplus and minority interests in equity accounts of consolidated subsidiaries, less goodwill, certain credit-enhancing credit only strips, certain deferred tax assets and intangibles other than certain servicing assets and credit card relationships. The components of Tier 2 (supplementary) capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

~~Qualified~~However, ~~Thrift~~as ~~Lender~~a ~~Test. As~~result aof ~~federal~~the ~~savings~~Bank ~~association~~Order, the Bank is subject to aenhanced ~~qualified~~capital ~~thrift lender~~requirements, orhaving ~~“QTL,”~~been ~~test. Under~~required ~~the~~to ~~QTL~~achieve ~~test,~~and ~~the~~maintain ~~Bank~~a ~~must~~Tier ~~maintain~~1 atCapital ~~least~~Ratio 65equal to or greater than 10% ofand ~~its~~a ~~“portfolio~~Total ~~assets”~~Risk-Based inCapital ~~“qualified~~Ratio ~~thrift~~equal ~~investments”~~to inor atgreater ~~least~~than ~~nine~~15%, ~~months~~after the funding of ~~the~~its ~~most~~allowance ~~recent~~for ~~12-month~~loan ~~period. “Portfolio~~and ~~assets”~~lease ~~means~~losses, inby ~~general~~April 30, 2011. As of April 30, 2011, the Bank’s ~~total~~did ~~assets~~not ~~less~~meet ~~the~~these ~~sum~~capital ~~of:~~requirements.

In assessing an institution’s capital adequacy, the OCC takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where necessary.

Loans to One Borrower. Under the HOLA, the Bank is generally subject to the same limits on loans to one borrower as a national bank. Specifically, a federal savings association generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of the Bank’s unimpaired capital and surplus, if the loan is fully secured by readily marketable collateral, which generally does not include real estate. As of September 30, 2011, the Bank was in compliance with the loans-to-one borrower limitations

Qualified Thrift Lender Test. Under the HOLA, the Bank must comply with the qualified thrift lender, or “QTL,” test. Under the QTL test, the Bank is required to maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities, credit card loans, student loans and small business loans) in at least nine months of the most recent 12-month period. “Portfolio assets” means, in general, the Bank’s total assets less the sum of:

● specified liquid assets up to 20% of total assets;

● goodwill and other intangible assets; and

● the value of property used to conduct the Bank’s business.

~~“Qualified~~A ~~thrift~~savings ~~investments”~~association ~~includes~~that ~~various~~fails ~~types~~the ofQTL ~~loans~~test ~~made for residential~~ and ~~housing~~is ~~purposes,~~unable ~~investments related~~ to ~~those~~demonstrate ~~purposes,~~a ~~including~~reasonable ~~certain~~likelihood ~~mortgage-backed~~of ~~and~~meeting ~~related~~it ~~securities,~~in ~~and~~the ~~loans~~future ~~for~~may ~~personal,~~be ~~family,~~required ~~household~~to ~~and~~convert ~~certain other purposes up~~ to a ~~limit~~commercial ofbank ~~20%~~charter ofand ~~portfolio~~will ~~assets. “Qualified~~generally ~~thrift~~be ~~investments”~~prohibited ~~also~~from: ~~include~~(i) ~~100%~~engaging ofin anany ~~institution’s~~new ~~credit~~activity ~~card~~not ~~loans,~~permissible ~~education~~for ~~loans~~a ~~and~~national ~~small~~bank, ~~business~~(ii) ~~loans. The~~paying ~~Bank~~dividends ~~also~~not ~~may~~permissible ~~satisfy~~under ~~the~~national ~~QTL~~bank ~~test~~regulations, byand ~~qualifying~~(iii) asestablishing aany ~~“domestic~~new ~~building~~branch ~~and~~office ~~loan~~in ~~association”~~a aslocation ~~defined~~not inpermissible ~~the~~for ~~Internal~~a ~~Revenue~~national ~~Code~~bank.

AIn ~~savings~~addition, ~~association~~if ~~that~~the institution fails to regain the QTL ~~test~~status ~~must~~within ~~operate~~one ~~under~~year ~~specified~~after ~~restrictions.~~failing ~~As provided under~~ the ~~Dodd-Frank Act~~test, ~~noncompliance~~then ~~with~~its ~~the~~holding ~~QTL~~company ~~test~~will ~~would~~be ~~trigger~~deemed ~~dividend~~to ~~restrictions~~be ona ~~the~~bank ~~savings~~holding ~~association~~company and awill ~~potential~~be ~~enforcement~~required ~~action~~to byregister with the ~~OTS~~Federal ~~for~~Reserve aas ~~violation of law~~such.

At September 30, ~~2010~~2011, the Bank maintained substantially all of its portfolio assets in qualified thrift investments and in each of the prior 12 months, and therefore is a “qualified thrift lender.”

~~Capital Distributions~~Assessments. ~~OTS~~ The ~~regulations~~Dodd-Frank ~~govern~~Act ~~capital~~transferred ~~distributions~~authority byto acollect assessments for federal savings ~~association~~associations from the OTS to the OCC, ~~which~~effective ~~include~~as ~~cash~~of ~~dividends~~the transfer date, ~~stock~~July ~~repurchases~~21, 2011. The Dodd-Frank Act also provides that, in establishing the amount of an assessment, the Comptroller of the Currency may consider the nature and scope of the activities of the entity, the amount and type of assets it holds, the financial and managerial condition of the entity, and any other ~~transactions~~factor ~~charged~~that is appropriate. Prior to the ~~capital~~transfer ~~account~~date, the OCC and the OTS assessed banks and savings associations, respectively, using different methodologies, although the agencies’ methodologies generally resulted in similar levels of assessments. AUnder ~~savings~~the ~~association~~OTS ~~must~~assessment ~~file~~system, assessments were due each year on January 31 and July 31, and were calculated based on an ~~application~~institution’s ~~for~~asset ~~approval~~size, condition, and complexity. Under the OCC assessment system, assessments are due March 31 and September 30 of aeach ~~capital~~year, ~~distribution~~based ~~if:~~on call report information as of December 31 and June 30 respectively.

The OCC final rule effective on July 21, 2011 amended the assessment rules applicable to federal savings associations by using the same methodologies, rates, fees, and payment due dates that apply currently to national banks. However, during the first two assessment cycles after the transfer date, the OCC will base savings association assessments on either the OCC’s assessment regulation (as amended to include federal savings associations) or the former OTS assessment structure, whichever yields the lower assessment for that savings association. After the March 2012 assessment, all national banks and federal savings associations will be assessed using the OCC’s assessment structure. Under the OCC’s assessment system, some savings associations will pay marginally more assessments than in the past, while others will pay lower assessments.

Capital Distributions. OCC regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the capital account, to the association’s holding company or other stockholders. A savings association must file an application for approval of a capital distribution if:

●

the total capital distributions for the applicable calendar year exceed the sum of the association’s net income for that year to date plus the association’s retained net income for the preceding two years;

●

the association would not be at least adequately capitalized following the distribution;

● the distribution would violate any applicable statute, regulation, agreement or OTS-imposed or OCC-imposed condition, which would include restrictions in the cease and desist order issued to the Bank by the OTS on March 31, 2011; or

●

the association is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required, every savings association that is a subsidiary of a holding company must ~~still~~ file a notice of a declaration of a dividend with the ~~OTS~~Federal Reserve at least 30 days before the board of directors declares a dividend or approves a capital distribution. In the case of cash dividends, OCC regulations require that federal savings associations that are subsidiaries of a stock savings and loan holding company and that are not otherwise specifically required to file an application with the OCC must file an informational copy of that notice with the OCC at the same time it is filed with the Federal Reserve.

~~The~~A ~~OTS~~federal ~~may~~savings ~~disapprove~~association proposing to make a ~~notice~~capital ordistribution and that is not otherwise specifically required to file an application with the OCC is required to submit a prior notice to the OCC if: (1) the association would not be well capitalized following the distribution; (2) the proposed capital distribution would reduce the amount of or retire any part of the association’s common or preferred stock or retire any part of debt instruments such as notes or debentures included in the association’s capital (other than regular payments required under a debt instrument); or (3) the association is a subsidiary of a savings and loan holding company and is not otherwise required to file a notice regarding the proposed distribution with the Federal Reserve (as noted above), in which case only an informational copy of the notice filed with the Federal Reserve needs to be simultaneously provided to the OCC.

The Federal Reserve or the OCC may disapprove a notice or application if:

●

the association would be undercapitalized following the distribution;

●

the proposed capital distribution raises safety and soundness concerns; or

● the capital distribution would violate a prohibition contained in any statute, regulation or a regulatory agreement or order issued to the association or holding company, which would include the cease and desist orders issued by the OTS to the Bank, Company and BFS Bancorp, MHC on March 31, 2011.

In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution, if after making the distribution the institution would be undercapitalized.

28Liquidity. All federal savings associations, including the Bank, are required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. For a discussion of what the Bank includes in liquid assets, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.

~~Liquidity~~Community Reinvestment Act. ~~OTS~~Under the Community Reinvestment Act (“CRA”), as implemented by OCC regulations, ~~require~~the Bank has a ~~federal~~continuing ~~savings~~and ~~association~~affirmative isobligation, ~~required~~consistent with its safe and sound operation, to ~~maintain~~help ameet ~~sufficient~~the ~~amount~~credit needs of ~~liquid~~the ~~assets~~entire communities in which they serve, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for the Bank, nor does it limit the Bank’s discretion to ~~ensure~~develop the types of products and services that it believes are best suited to its ~~safe~~particular community, consistent with the CRA. Rather, the CRA requires the OCC, in connection with its examination of the Bank, to assess the association’s record of meeting the credit needs of its community and ~~sound~~to ~~operation~~take such record into account in its evaluation of certain applications by the Bank. An association’s failure to comply with the provisions of the CRA could result in denial of certain corporate applications, such as branches or mergers, or restrictions on its activities.

Community Reinvestment Act. All savings associations have a responsibility under the Community Reinvestment Act (“CRA”) and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for the Bank, nor does it limit the Bank’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. Rather, the CRA requires the OTS, in connection with its examination of the Bank, to assess the association’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the Bank. An association’s failure to comply with the provisions of the CRA could result in denial of certain corporate applications, such as branches or mergers, or restrictions on its activities.27

The CRA regulations establish an assessment system that bases an institution’s rating on its actual performance in meeting community needs. The rules establish a streamlined examination approach to evaluate the CRA performance of smaller institutions. The OCC (and formerly, the OTS) evaluates intermediate small savings associations, such as the Bank, using the following lending criteria:

●

the savings association’s loan-to-deposit ratio, adjusted for seasonal variation and, as appropriate, other lending-related activities, such as loan originations for sale to the secondary markets, community development loans or qualified investments;

●

the percentage of loans and, as appropriate, other lending-related activities located in the savings association’s assessment areas;

●

the savings association’s record of lending to and, as appropriate, engaging in other lending-related activities for borrowers of different income levels and business sizes;

●

the geographic distribution of the savings association’s loans; and

●

the savings association’s record of taking action, if warranted, in response to written complaints about its performance in helping to meet credit needs in its assessment areas.

In a CRA exam, an intermediate small savings association’s community development performance also is evaluated pursuant to the following criteria:

●

the number and amount of community development loans;

●

the number and amount of qualified investments;

●

the extent to which the savings association provides community development services; and

●

the savings association’s responsiveness through such activities to community development lending, investment, and services needs.

The CRA also requires all institutions to publicly disclose their CRA ratings. The Bank received a CRA rating of “satisfactory” in its most recent federal examination.

Consumer Protection and Other Laws and Regulations. The Bank is subject to various laws and regulations dealing generally with consumer protection matters. The Bank may be subject to potential liability under these laws and regulations for material violations, in the form of litigation by governmental and consumer groups, as well as enforcement actions by the ~~OTS~~Consumer Financial Protection Bureau (“CFPB”), the OCC and other federal regulatory agencies including the Department of Justice. The CFPB is a new agency created under the Dodd-Frank Act that has broad powers to supervise and enforce the federal consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings associations, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks and savings associations with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will continue to be examined by their applicable primary bank regulators. The Bank’s lending operations are subject to federal laws applicable to credit transactions, such as the:

●

Federal Truth In Lending Act, governing disclosures of credit terms for open-end and closed-end loan products to consumer borrowers;

● Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;28

●

Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

●

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

●

Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections and certain credit and other disclosures;

●

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

●

Servicemembers’ Civil Relief Act, providing certain protections to members of the armed forces while in active military service;

●

Real Estate Settlement Procedures Act, governing disclosures of fee estimates that would be incurred by a borrower during the mortgage process; and

● Rules and regulations of the ~~various~~ federal agencies, primarily the CFPB, charged with the responsibility of implementing these federal laws.

The Bank’s deposit operations are subject to federal laws applicable to deposit transactions, such as the:

●

Truth in Savings Act, which imposes disclosure obligations to enable consumers to make informed decisions about their deposit accounts at depository institutions;

29● Electronic Fund Transfer Act, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

● Electronic Funds Transfer Act, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

●

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and

● Rules and regulations of the ~~various~~ federal agencies, primarily the CFPB, charged with the responsibility of implementing these federal laws.

Transactions with ~~Related~~Affiliates ~~Parties~~and Insiders. A federal savings association’s authority to engage in transactions with its “affiliates” is limited by Sections 23A and 23B of the Federal Reserve Act (“FRA”) and its implementing regulations. The term “affiliates” for these purposes generally means any company that controls, is controlled by, or is under common control with an institution. The Company is an affiliate of the Bank. In general, transactions with affiliates must be on terms that are as favorable to the association as comparable transactions with non-affiliates. In addition, ~~certain~~under ~~types~~the ofFRA ~~these~~and ~~transactions~~Regulation ~~are~~W ~~restricted~~of tothe anFederal Reserve, the aggregate ~~percentage~~amount of ~~the~~covered transactions that an association’s ~~capital. Collateral~~may engage in ~~specified~~with ~~amounts~~any ~~must~~individual ~~usually~~affiliate beis ~~provided~~generally bylimited ~~affiliates~~to in10% ~~order~~of tothe ~~receive~~unimpaired ~~loans~~capital ~~from~~and surplus of the savings association. In ~~addition,~~The ~~OTS~~aggregate ~~regulations~~amount ~~prohibit~~of acovered ~~savings~~transactions ~~association~~with ~~from~~all ~~lending~~affiliates is generally limited to ~~any~~20% of ~~its~~the ~~affiliates~~association’s ~~that~~unimpaired ~~are~~capital ~~engaged~~and insurplus. ~~activities~~Loans ~~that~~and other specified transactions with affiliates are ~~not~~required ~~permissible~~to ~~for~~be ~~bank~~secured ~~holding~~by ~~companies~~collateral in an amount and ~~from~~of ~~purchasing~~a ~~the~~type ~~securities~~described under federal law. The purchase of ~~any~~low-quality ~~affiliate,~~assets ~~other~~from ~~than~~affiliates ~~the~~is ~~shares~~permitted ofonly aunder ~~subsidiary~~certain circumstances.

The Bank’s authority to extend credit to its directors, executive officers and 10% shareholders (“Insiders”), as well as to entities controlled by insiders, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Board of Governors of the Federal Reserve System. Among other things, these provisions generally require that extensions of credit to Insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and (ii) not exceed certain limitations on the amount of credit extended to Insiders, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital. In addition, the Bank’s board of directors must approve extensions of credit in excess of certain limits.29

~~Enforcement. The~~In ~~OTS~~addition, ~~has~~amendments ~~primary~~to ~~enforcement~~Regulation ~~responsibility~~W ~~over~~address ~~federal~~additional restrictions on savings associations ~~and~~under ~~has~~Section ~~the~~11 ~~authority~~of tothe ~~bring enforcement action against all “institution-affiliated parties~~HOLA,” including ~~stockholders,~~provisions ~~attorneys,~~prohibiting ~~appraisers~~a ~~and~~savings ~~accountants~~association ~~who~~from ~~knowingly~~making ora ~~recklessly~~loan ~~participate~~to inan ~~wrongful~~affiliate ~~action~~that ~~likely~~is toengaged ~~have~~in anactivities ~~adverse~~that ~~effect~~are onnot anpermitted ~~insured~~for ~~institution. Formal~~bank ~~enforcement~~holding ~~action~~companies ~~may~~under ~~range from~~ the ~~issuance~~Bank ofHolding aCompany ~~capital~~Act ~~directive~~(“BHCA”) ~~or cease~~ and ~~desist~~provisions ~~order~~prohibiting toa ~~prohibition~~savings orassociation ~~removal~~from ofpurchasing ~~officers and/~~or ~~directors~~investing ofin ~~the~~securities ~~institution,~~issued ~~receivership,~~by ~~conservatorship~~an oraffiliate ~~the~~that ~~termination~~is ofnot ~~deposit insurance. Civil money penalties cover~~ a ~~wide range of violations and actions, and can range up to $1~~subsidiary.~~375~~ ~~million~~A ~~per~~savings ~~day~~association ~~for~~also ~~findings~~may ofnot ~~knowing~~purchase or ~~reckless~~invest ~~conduct that results~~ in asecurities ~~substantial~~issued ~~loss~~by toany ~~the~~affiliate ~~savings~~other ~~associations~~than orwith arespect ~~substantial pecuniary gain or other benefit~~ to ~~such~~shares ~~party by reason~~ of a ~~violation of law~~subsidiary, ~~unsafe~~which ormay ~~unsound~~include ~~practice,~~a orbank ~~breach~~and ~~of fiduciary duty. The FDIC also has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to~~ a ~~particular~~ savings association. ~~If the Director does not take action, the FDIC has authority to take action under specified circumstances.~~

AsThe ~~noted~~Bank’s ~~above,~~authority onto ~~July~~extend 21credit to its directors, ~~2011~~executive officers and 10% shareholders (“Insiders”), as awell ~~result~~as ofto ~~regulatory~~entities ~~restructuring~~controlled ~~called~~by ~~for~~Insiders, is currently governed by the ~~Dodd-Frank~~requirements ~~Act,~~of Sections 22(g) and 22(h) of the ~~supervisory~~FRA and ~~rulemaking~~Regulation O of the Federal Reserve. Among other things, these provisions generally require that extensions of credit to Insiders (~~except~~i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with ~~respect~~unaffiliated topersons ~~consumer~~and ~~protection~~that ~~laws)~~do ~~functions~~not ofinvolve more than the ~~OTS~~normal ~~pertaining~~risk toof ~~all~~repayment ~~federal~~or ~~savings~~present ~~associations~~other ~~will~~unfavorable ~~formally~~features, beand ~~transferred~~(ii) tonot exceed certain limitations on the ~~OCC~~amount of credit extended to Insiders, individually and in the ~~OTS~~aggregate, ~~will~~which belimits ~~abolished~~are 90based, ~~days~~in ~~thereafter~~part, on the amount of the Bank’s capital. In addition, the Bank’s board of directors must approve extensions of credit in excess of certain limits.

~~Standards~~Section ~~for~~402 ~~Safety~~of ~~and~~the ~~Soundness. Federal~~Sarbanes-Oxley ~~law~~Act ~~requires~~of ~~each~~2002 ~~federal~~(the ~~banking~~“Sarbanes-Oxley ~~agency~~Act”) toprohibits ~~prescribe~~the ~~certain~~extension ~~standards~~of ~~for~~personal ~~all~~loans ~~insured depository institutions. These standards relate~~ to, ~~among~~directors ~~other things, internal controls, information systems~~ and ~~audit~~executive ~~systems,~~officers ~~loan~~of ~~documentation,~~issuers ~~credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards~~ (as ~~the~~defined ~~agency~~in ~~deems appropriate. The federal banking agencies adopted Interagency Guidelines Establishing Standards for Safety and Soundness to implement~~ the ~~safety~~Sarbanes-Oxley ~~and soundness standards required under federal law~~Act). The ~~guidelines~~prohibition, ~~set~~however, ~~forth~~does ~~the~~not ~~safety~~apply ~~and soundness standards that the federal banking agencies use~~ to ~~identify~~mortgages ~~and~~advanced ~~address~~by ~~problems~~an at insured depository ~~institutions~~institution, ~~before~~such ~~capital~~as ~~becomes~~the ~~impaired. The guidelines address internal controls and information systems~~Bank, ~~internal~~that ~~audit~~is ~~systems,~~subject ~~credit~~to ~~underwriting,~~the ~~loan~~insider ~~documentation,~~lending ~~interest~~restrictions ~~rate~~of ~~risk~~Section ~~exposure,~~22(h) ~~asset~~of ~~growth,~~the ~~compensation, fees and benefits~~FRA.

Enforcement. The OCC has primary enforcement responsibility over federal savings associations and has the authority to bring enforcement actions against all “institution-affiliated parties,” including controlling stockholders, attorneys, appraisers and accountants, who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement actions may range from the issuance of a capital directive or cease and desist order to prohibition or removal of officers and/or directors of the institution, receivership, conservatorship or the termination of deposit insurance. Civil money penalties cover a wide range of violations and actions, and can range up to $1.375 million per day for findings of knowing or reckless conduct that results in a substantial loss to the savings association or a substantial pecuniary gain or other benefit to such party by reason of a violation of law, unsafe or unsound practice, or breach of fiduciary duty. The FDIC also has the authority to recommend to the OCC that enforcement action be taken with respect to a particular savings association. If the OCC does not take action, the FDIC has authority to take action under specified circumstances.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Establishing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder.

Moreover, the OCC has adopted regulations that authorize, but do not require, the OCC to require the submission of a compliance plan from a savings association that has been given notice that it is not satisfying safety and soundness standards. If, after being notified, a savings association fails to submit an acceptable plan or fails in any material respect to implement an accepted plan, the OCC must issue an order directing action to correct the deficiency. Further, the OCC may issue an order directing other actions of the types to which an undercapitalized association is subject under the “prompt corrective action” provisions of federal law. If a savings association fails to comply with such an order, the OCC may seek to enforce the order in judicial proceedings and/or impose civil money penalties.

~~The~~Prompt ~~OTS~~Corrective ~~has~~Action ~~adopted~~Regulations. Under ~~regulations~~the ~~that~~“prompt ~~authorize,~~corrective ~~but~~action doregulations” ~~not~~of ~~require,~~ the ~~OTS~~OCC, ~~to require~~ the ~~submission~~agency ~~of a compliance plan from a savings association that has been given notice that it~~ is ~~not~~required ~~satisfying~~to ~~safety~~take ~~and soundness standards. If~~certain, ~~after~~and ~~being~~is ~~notified,~~authorized ~~a savings association fails~~ to ~~submit~~take ~~an acceptable plan or fails in any material respect to implement an accepted plan~~other, ~~the~~supervisory ~~OTS~~actions ~~must~~against ~~issue~~undercapitalized ansavings ~~order directing action to correct the deficiency. Further~~associations, ~~the~~including ~~OTS~~restrictions ~~may~~on ~~issue~~growth anof ~~order~~assets ~~directing~~and other ~~actions~~forms of ~~the~~expansion. For ~~types~~this topurpose, ~~which~~a ansavings ~~undercapitalized~~ association is ~~subject~~placed ~~under~~in ~~the~~one ~~“prompt corrective action” provisions~~ of ~~federal law. If a savings association fails to comply with such an order,~~ the ~~OTS~~following ~~may~~five ~~seek~~categories tobased ~~enforce~~on the ~~order~~association’s ~~in judicial proceedings and/or impose civil money penalties.~~capital:

Prompt Corrective Action Regulations. Under the “prompt corrective action regulations” of the OTS the agency is required to take certain, and is authorized to take other, supervisory actions against undercapitalized savings associations. For this purpose, a savings association is placed in one of the following five categories based on the association’s capital:

●

well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);

●

adequately capitalized (at least 4% leverage capital (or at least 3% for associations receiving the highest CAMELS rating), 4% Tier 1 risk-based capital and 8% total risk-based capital);

● undercapitalized (less than 4% leverage capital (or less than 3% for associations receiving the highest CAMELS rating) , 4% Tier 1 risk-based capital and 8% total risk-based capital);

●

significantly undercapitalized (less than 3% leverage capital, 3% Tier 1 risk-based capital and 6% total risk-based capital); and

●

critically undercapitalized (less than 2% tangible capital).

Generally, the ~~OTS~~OCC is required by law to appoint a receiver or conservator for a federal savings association within a specific time frame from when the association becomes “critically undercapitalized.” The ~~OTS~~OCC regulations provide that a capital restoration plan must be filed with the ~~OTS~~OCC within 45 days (or earlier, if so notified) of the date an association receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” the performance of which must be guaranteed by any company controlling the association up to specified limits. The aggregate liability of a holding company is limited to the lesser of (i) an amount equal to 5% of the savings association’s total assets at the time it was notified that it became undercapitalized; and (ii) the amount that is necessary to restore the savings association’s capital ratios to the levels required to be classified as “adequately capitalized.” If the association fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized.” In addition, numerous mandatory supervisory actions become immediately applicable to the association, including, but not limited to, restrictions on growth, investment activities, capital distributions and affiliate transactions. The ~~OTS~~OCC may also take any one of a number of discretionary supervisory actions against undercapitalized associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.

~~Insurance~~As ofan ~~Deposit~~institution’s ~~Accounts.~~capital ~~The~~decreases ~~Bank~~within isthe athree ~~member~~undercapitalized ~~of,~~categories ~~and~~listed ~~pays deposit assessments to~~above, the ~~Deposit~~severity ~~Insurance~~of ~~Fund~~the ~~(“DIF”)~~action ~~which~~that is ~~administered~~authorized byor ~~the~~required ~~FDIC. As~~to abe ~~result~~taken ofby ~~such~~the ~~membership,~~institution’s ~~all~~regulator ~~deposit~~under ~~accounts held at~~ the ~~Bank~~prompt ~~are~~corrective ~~insured~~action upregulations ~~to $250,000 per depositor, per institution for each account ownership category~~increases. ~~This~~All ~~standard~~banks ~~maximum~~are ~~deposit~~prohibited ~~insurance coverage was raised~~ from ~~$100,000~~paying ~~first~~dividends onor aother ~~temporary~~capital ~~basis~~distributions ~~under~~or ~~the~~paying ~~Emergency~~management ~~Economic~~fees ~~Stabilization~~to ~~Act~~any ofcontrolling ~~2008~~person ~~and~~if, ~~then~~following ~~made~~such ~~permanent~~distribution, ~~under~~ the ~~Dodd-Frank~~bank ~~Act.~~would Inbe ~~order to maintain the DIF, member institutions are assessed an insurance premium~~undercapitalized. The ~~amount~~OCC ofis ~~each~~required ~~institution’s~~to ~~premium~~monitor ~~has~~closely ~~historically generally been based on~~ the ~~balance~~condition of ~~insured~~an ~~deposits~~undercapitalized institution and ~~the~~to ~~degree~~restrict ~~of risk~~ the ~~institution~~growth ~~poses~~of toits ~~the DIF~~assets.

Insurance of Deposit Accounts. The Bank is a member of, and pays deposit insurance assessments to, the Deposit Insurance Fund, or DIF, which is administered by the FDIC. As a result of such membership, all deposit accounts held at the Bank are permanently insured up to $250,000 per depositor for each account ownership category. This standard maximum deposit insurance coverage was raised from $100,000 first on a temporary basis under the Emergency Economic Stabilization Act of 2008 and then made permanent under the Dodd-Frank Act. The Dodd-Frank Act extended the FDIC’s provision of unlimited deposit insurance on non-interest bearing transaction accounts (subject to a modified definition for eligible accounts) through December 31, 2012.

FDIC insurance of deposits is backed by the full faith and credit of the U.S. government. In order to maintain the DIF, member institutions are assessed an insurance premium. The FDIC imposes deposit insurance premiums on insured institutions and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the DIF. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the OCC an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or unsound condition.

OnIn December ~~31,~~ 2009, along with each institution’s risk-based deposit insurance assessment for the third quarter of 2009, all non-exempt insured depository institutions were required to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. For purposes of calculating the prepaid amount, the base assessment rate in effect at September 30, 2009 was used for 2010. That rate is to be increased by an annualized 3 basis points for 2011 and 2012 assessments. The prepayment calculation also assumes a five percent annual deposit growth rate, increased quarterly, through the end of 2012. As provided for in the final rule implementing the prepaid assessment requirement, institutions ~~accounted~~were instructed to account for the prepayment by recording the entire amount of its prepaid assessment as a prepaid expense (an asset) as of December 31, 2009. Subsequently, each institution ~~will~~records ~~record~~ an expense (charge to earnings) for its regular quarterly assessment and an offsetting credit to the prepaid assessment until the asset is exhausted. Once the asset is exhausted, the institution will resume paying and accounting for quarterly deposit insurance assessments as they would normally. On ~~Under~~December ~~the~~30, ~~final rule~~2009, the ~~FDIC~~Bank ~~stated~~paid ~~that~~$2.3 ~~its~~million ~~requirement~~which ~~for~~was ~~prepaid~~recorded ~~assessments~~as ~~does~~a ~~not~~prepaid ~~preclude~~asset ~~the~~and ~~FDIC~~will ~~from~~be ~~changing~~proportionally ~~assessment~~expensed ~~rates~~over ~~or from further revising the risk-based assessment system in~~ future ~~years, pursuant to notice-and-comment rulemaking procedures provided by statute~~periods. ~~Therefore,~~At ~~continued~~September ~~actions~~30, by2011, the ~~FDIC~~remaining ~~could~~balance ~~significantly~~recorded ~~increase~~as ~~the~~a ~~Bank’s~~prepaid ~~noninterest~~asset ~~expense~~was in$0.4 ~~fiscal 2011 and for the foreseeable future~~million.

The ~~Dodd-Frank~~amount ~~Act~~of ~~extended~~each ~~the FDIC~~institution’s ~~provision~~premium has historically generally been based on the balance of ~~unlimited~~insured deposits and the degree of risk the institution poses to the DIF. On February 7, 2011, the FDIC Board approved a final rule that implements a new deposit insurance onassessment ~~non-interest~~system ~~bearing~~for ~~transaction~~insured ~~accounts~~depository ~~(subject~~institutions, toincluding a ~~modified~~new ~~definition~~pricing structure for ~~eligible~~institutions ~~accounts)~~with ~~through~~more ~~December~~than 31$10 billion in assets. Effective April 1, ~~2012~~2011, and beginning with the invoice payable on September 30, 2011, the new assessment structure modified an institution’s current deposit insurance assessment base from adjusted domestic deposits to an institution’s average consolidated total assets minus average tangible equity, as required by the Dodd-Frank Act. Pursuant ~~The~~to ~~FDIC~~the ~~charges~~final rule, Tier 1 capital is used as the ~~insured~~measure ~~financial~~for tangible equity. Depository institutions ~~premiums~~with less than $1 billion in assets report average weekly balances during the calendar quarter, unless they elect to ~~maintain~~report daily averages. The new assessment base is larger than the ~~Deposit~~former ~~Insurance~~base ~~Fund;~~and noincludes ~~institution~~revisions ~~may~~to ~~pay~~the total base assessment rate schedule by lowering assessment rates, after adjustments, to a ~~dividend~~range ifbetween 2.5 and 9 basis points for depository institutions in ~~default~~the lowest risk category, and 30 to 45 basis points for institutions in the highest risk category. The various adjustments incorporated into the schedule take into account the heightened risk with respect to certain types of ~~its~~funding ~~FDIC~~such ~~assessment~~as unsecured debt and brokered deposits. The final rule eliminated the secured liability adjustment and includes a new adjustment requirement for long-term debt held by an insured depository institution where the debt is issued by another insured depository institution.

On February 7, 2011, the FDIC Board approved a final rule that implements a new deposit insurance assessment system for insured depository institutions, including a new pricing structure for institutions with more than $10 billion in assets. The ~~new assessment structure modifies an institution~~Bank’s ~~current deposit insurance~~ assessment ~~base~~rate ~~from~~utilized ~~adjusted~~for ~~domestic deposits to an institution’s average consolidated total assets minus average tangible equity, as required by~~ the ~~Dodd-Frank Act. Pursuant to the~~ final ~~rule,~~quarter ~~Tier~~of 1fiscal ~~capital~~year isending ~~used~~September as30, ~~the measure for tangible equity. Depository institutions with less than $1 billion in assets will report average weekly balances during the calendar quarter~~2011, ~~unless~~was ~~they elect to report daily averages~~0.06 ~~The~~% ~~new assessment base is larger than the former base~~ and ~~includes revisions to~~ the ~~total~~premium ~~base~~paid ~~assessment~~for ~~rate~~fiscal ~~schedule~~2011 bywas ~~lowering~~$0.8 ~~assessment~~million. No ~~rates,~~institution ~~after~~may ~~adjustments,~~pay to a ~~range~~dividend ~~between~~if ~~2.5 and 9 basis points for depository institutions~~ in ~~the~~default ~~lowest~~of ~~risk~~its ~~category,~~FDIC ~~and 30 to 45 basis points for institutions in the highest risk category~~assessment. The ~~various~~FDIC ~~adjustments~~has ~~incorporated~~authority ~~into the schedule take into account the heightened risk with respect~~ to ~~certain~~increase ~~types~~insurance ofassessments. A ~~funding~~significant ~~such~~increase asin ~~unsecured~~insured ~~debt~~premiums ~~and~~would ~~brokered~~have ~~deposits.~~an ~~The~~adverse ~~final~~effect ~~rule~~on ~~eliminated~~ the ~~secured~~operating ~~liability~~expenses ~~adjustment~~ and ~~includes~~results aof ~~new~~operations ~~adjustment~~of ~~requirement for long-term debt held by an insured depository institution where~~ the ~~debt is issued by another insured depository institution~~Bank.

~~The~~Under ~~new~~federal ~~deposit~~law, insurance ~~assessment~~of ~~base~~deposits ~~changes~~may ~~generally took effect on April 1, 2011 and will~~ be ~~reflected~~terminated inby the ~~June~~FDIC ~~30,~~upon ~~2011~~a ~~fund~~finding ~~balance and the invoices for assessments due September 30, 2011. The Company and Bank are currently evaluating the impact~~ that ~~the~~an ~~new~~institution ~~assessment~~has ~~base~~engaged ~~final~~in ~~rule~~unsafe ~~will~~or ~~have~~unsound onpractices, ~~our~~is ~~financial~~in ~~position~~an ~~and~~unsafe ~~results~~or ofunsound ~~operations.~~condition ~~While the final rule is expected~~ to ~~have~~continue aoperations ~~positive~~or ~~effect~~has onviolated ~~small~~any ~~institutions~~applicable ~~(those with less than $10 billion in assets) given that~~law, ~~in the aggregate~~regulation, ~~the large bulk of such institutions are expected to see a decrease in assessments, the impact of the final~~ rule, ~~and/or~~order ~~additional FDIC special assessments~~ or ~~other~~condition ~~regulatory~~imposed ~~changes~~by ~~affecting~~ the ~~financial~~FDIC ~~services~~or ~~industry could negatively affect~~ the ~~Company’s liquidity and financial results in future periods~~OCC.

~~The~~In addition to the FDIC ~~has~~assessments, ~~authority~~the Financing Corporation (“FICO”) is authorized to ~~increase~~impose ~~insurance~~and ~~assessments. A~~collect, ~~significant~~with ~~increase~~the inapproval ~~insured~~of ~~premiums~~the ~~would~~FDIC, ~~likely~~assessments ~~have~~for ananticipated ~~adverse~~payments, ~~effect~~issuance costs and custodial fees on bonds issued by FICO in the ~~operating~~1980’s ~~expenses~~to recapitalize the former Federal Savings and ~~results~~Loan ofInsurance ~~operations~~Corporation. The ofbonds ~~the~~issued ~~Bank~~by FICO are due to mature in 2017 through 2019. ~~Management~~For ~~cannot~~the ~~predict~~quarter ~~what~~ended ~~insurance~~September 30, 2011, the annualized FICO assessment ~~rates~~was ~~will~~equal beto 0.680 basis points for each $100 in domestic deposits maintained at an institution. Assessments related to the ~~future~~FICO bond obligations were not subject to the prepayment requirements described above.

~~Insurance~~Reserve ofRequirements. Under ~~deposits~~the ~~may~~FRA beand ~~terminated~~the byFederal Reserve’s regulations, the ~~FDIC~~Bank ~~upon~~is arequired ~~finding~~to maintain reserves against its transaction accounts (primarily negotiable order of withdrawal (“NOW”) and regular checking accounts). The FRA provides that, anbefore ~~institution~~December ~~has~~31 ~~engaged~~of ineach ~~unsafe~~year, orthe ~~unsound~~Federal ~~practices~~Reserve shall issue regulations adjusting the reserve requirement exemption amount for the next calendar year if total reservable liabilities held at all depository institutions increase from one year to the next. For 2012, isreserve requirement thresholds set forth in anthe ~~unsafe~~Federal orReserve’s ~~unsound~~regulations ~~condition~~exempt the first $11.5 million of otherwise reservable balances from the reserve requirements. A 3% reserve is required for transaction account balances over $11.5 million and up to ~~continue~~$71.0 ~~operations~~million. Transaction oraccount ~~has~~balances ~~violated~~over $71.0 million are subject to a reserve requirement of approximately $1.785 million plus 10% of any ~~applicable~~amount ~~law,~~over ~~regulation,~~$71.0 ~~rule~~million. Because required reserves must be maintained in the form of vault cash, ~~order~~a noninterest-bearing account at a Federal Reserve Bank, or ~~condition~~a ~~imposed~~pass-through account as defined by the ~~FDIC~~Federal Reserve, the effect of this reserve requirement is to reduce the Bank’s interest-earning assets. The Webalances domaintained ~~not~~to ~~currently~~meet ~~know~~the ofreserve ~~any~~requirements ~~practice,~~imposed ~~condition~~by orthe ~~violation~~Federal ~~that~~Reserve may ~~lead~~be used to ~~termination~~satisfy ofliquidity ~~our~~requirements ~~deposit~~imposed ~~insurance~~by the OCC. At September 30, 2011, the Bank was in compliance with these reserve requirements.

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by FICO are due to mature in 2017 through 2019. For the quarter ended September 30, 2010, the annualized FICO assessment was equal to 1.02 basis points for each $100 in domestic deposits maintained at an institution. Assessments related to the FICO bond obligations were not subject to the prepayment requirements described above.

~~Reserve~~Prohibitions ~~Requirements. Under~~Against ~~the~~Tying Arrangements. Federal ~~Reserve~~savings ~~Act~~associations ~~and~~are ~~the Federal Reserve’s regulations~~prohibited, ~~the~~subject ~~Bank is required~~ to ~~maintain~~some ~~reserves~~exceptions, against its transaction accounts (primarily negotiable order of withdrawal (“NOW”) and regular checking accounts). The regulations exempt the first $10.7 million of otherwise reservable balances from ~~the~~extending ~~reserve~~credit ~~requirements. A 3% reserve is required for transaction account balances over $10.7 million and up~~ to ~~$58.8~~or ~~million. Transaction~~offering ~~account balances over $58.8 million are subject to a reserve requirement of approximately $1.44 million plus 10% of~~ any ~~amount~~other ~~over~~service, ~~$58.8~~or ~~million. The~~fixing ~~Bank~~or isvarying ~~in compliance with~~ the ~~foregoing~~consideration ~~reserve~~for ~~requirements. Because~~such ~~required~~extension ~~reserves must be maintained in the form~~ of ~~vault~~credit ~~cash,~~or ~~a noninterest-bearing account at a Federal Reserve Bank~~service, oron ~~a pass-through account as defined by~~ the ~~Federal~~condition ~~Reserve,~~that the ~~effect~~customer ofobtain ~~this~~some ~~reserve~~additional ~~requirement~~service isfrom ~~to reduce~~ the ~~Bank’s~~association ~~interest-earning~~or ~~assets. The~~its ~~balances~~affiliates ~~maintained~~or tonot ~~meet~~obtain ~~the~~services ~~reserve~~of ~~requirements~~a ~~imposed~~competitor byof the ~~Federal Reserve may be used to satisfy liquidity requirements imposed by the OTS~~association. ~~At September 30, 2010, the Bank was in compliance with these reserve requirements.~~

~~Prohibitions~~Privacy ~~Against~~Regulations. The ~~Tying~~Bank ~~Arrangements~~is subject to OCC regulations implementing the privacy protection provisions of the Gramm-Leach Bliley Act (the “GLB Act”). ~~Federal~~ ~~savings~~These ~~associations~~regulations ~~are~~require ~~prohibited,~~the ~~subject~~Bank to ~~some~~disclose ~~exceptions~~its privacy policy, ~~from~~including ~~extending~~identifying ~~credit~~with towhom orit ~~offering~~shares ~~any~~“nonpublic ~~other~~personal ~~service~~information,” orto ~~fixing~~customers orat ~~varying~~the time of establishing the ~~consideration~~customer ~~for~~relationship anand ~~extension~~annually ofthereafter. ~~credit~~The orregulations ~~service,~~also onrequire the ~~condition~~Bank to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. The Bank is also required to provide its customers with the ~~customer~~ability ~~obtain~~to ~~some~~“opt-out” ~~additional~~of ~~service~~having ~~from~~their personal information shared with unaffiliated third parties except under limited circumstances, such as the ~~association~~processing of transactions requested by the consumer or ~~its~~when ~~affiliates~~the financial institution is jointly sponsoring a product or service with a nonaffiliated third party. Additionally, financial institutions generally may not ~~obtain~~disclose ~~services~~consumer ofaccount anumbers ~~competitor~~to ofany ~~the~~nonaffiliated ~~association~~third party for use in telemarketing, direct mail marketing or other marketing to consumers.

~~Privacy Provisions.~~ The Bank ~~has~~is asubject ~~privacy~~to ~~policy~~regulatory inguidelines ~~place~~establishing ~~and~~standards isfor ~~required~~safeguarding tocustomer ~~disclose~~information. ~~its~~These ~~privacy~~regulations ~~policy,~~implement ~~which~~certain ~~includes~~provisions ~~identifying~~of ~~parties~~the ~~with~~GLB ~~whom~~Act. itThe ~~shares~~guidelines adescribe ~~customer~~the agencies’s ~~“non-public~~expectations ~~personal~~for ~~information~~the creation,” toimplementation ~~customers~~and atmaintenance ~~the~~of ~~time~~an ofinformation ~~establishing~~security ~~the~~program, ~~customer~~which ~~relationship~~would ~~and~~include ~~annually~~administrative, ~~thereafter. The~~technical ~~Bank~~and isphysical ~~required~~safeguards appropriate to ~~provide~~the ~~its~~size ~~customers~~and ~~with~~complexity of the ~~ability~~institution toand ~~“opt-out”~~the ofnature ~~having~~and ~~their~~scope ~~personal~~of ~~information~~its ~~shared~~activities. ~~with~~The ~~unaffiliated~~standards ~~third~~set ~~parties~~forth ~~except~~in ~~under~~the ~~limited~~guidelines ~~circumstances,~~are ~~such~~intended asto ensure the ~~processing~~security and confidentiality of ~~transactions~~customer ~~requested~~records byand ~~the~~information, ~~consumer~~protect against any anticipated threats or ~~when~~hazards to the ~~financial~~security ~~institution~~or isintegrity ~~jointly~~of ~~sponsoring~~such arecords ~~product~~and orprotect ~~service~~against ~~with~~unauthorized aaccess ~~nonaffiliated~~to ~~third~~or ~~party. Additionally,~~use ~~financial~~of ~~institutions~~such ~~generally~~records ~~may~~or ~~not~~information ~~disclose~~that ~~consumer~~could ~~account~~result ~~numbers~~in substantial harm or inconvenience to any ~~nonaffiliated~~customer. ~~third~~Federal ~~party~~guidelines ~~for~~also ~~use~~impose incertain ~~telemarketing,~~customer ~~direct~~disclosures ~~mail~~and ~~marketing~~other oractions ~~other~~in ~~marketing~~the event of unauthorized access to ~~consumers~~customer information.

~~Affiliate~~In ~~Marketing. The federal banking agencies~~addition, ~~including~~pursuant ~~the~~to ~~OTS,~~section ~~have~~114 ~~issued a joint rule implementing Section 214~~ of the Fair and Accurate Credit Transactions Act ~~of 2003, or~~ (the “FACT Act,”) ~~which~~and ~~provides consumers with~~ the ~~ability~~implementing toregulations ~~restrict~~of companies from using certain information obtained from affiliates to make marketing solicitations. In general, a person is prohibited from using information received from an affiliate to make a solicitation for marketing purposes to a consumer, unless the ~~consumer~~federal isbanking ~~given~~agencies ~~notice~~ and ~~had~~Federal aTrade reasonable opportunity to opt out of such solicitations. The rule permits opt-out notices to be given by any affiliate that has a preexisting business relationship with the consumer and permits a joint notice from two or more affiliates. MoreoverCommission, ~~such notice would not be applicable to~~ the ~~company~~Bank ~~using the information if it has a pre-existing business relationship with the consumer. The notice that~~ is required ~~under~~to ~~the~~have ~~FACT~~in ~~Act~~place ~~may~~an be“identity ~~combined~~theft ~~with~~red ~~other~~flags” ~~required~~program ~~disclosures~~ to ~~be provided under other provisions of law~~detect, ~~including~~prevent ~~notices~~and ~~required~~mitigate ~~under~~identity ~~the privacy provisions of the Gramm-Leach-Bliley Act~~theft.

~~Federal~~Affiliate ~~Home~~Marketing. ~~Loan~~The ~~Bank~~federal ~~System. The~~banking ~~Bank~~agencies, isincluding the OCC, have issued a ~~member~~joint ofrule ~~the~~implementing ~~Federal~~Section ~~Home~~214 ~~Loan~~of ~~Bank~~the ~~System~~FACT Act, which ~~consists~~provides ofconsumers 12with ~~regional~~the ~~Federal~~ability ~~Home~~to ~~Loan~~restrict ~~Banks~~companies from using certain information obtained from affiliates to make marketing solicitations. ~~The~~In ~~Federal~~general, ~~Home~~a ~~Loan~~person ~~Bank~~is ~~System~~prohibited ~~provides~~from ausing ~~central~~information ~~credit~~received ~~facility~~from ~~primarily~~an affiliate to make a solicitation for ~~member~~marketing ~~institutions. As~~purposes to a ~~member~~consumer, ofunless the ~~Federal~~consumer ~~Home~~is ~~Loan~~given ~~Bank~~notice and had a reasonable opportunity to opt out of ~~New~~such ~~York,~~solicitations. The ~~the~~rule ~~Bank~~permits isopt-out ~~required~~notices to ~~acquire~~be given by any affiliate that has a preexisting business relationship with the consumer and ~~hold~~permits a ~~certain~~joint ~~minimum~~notice ~~number~~from oftwo ~~shares~~or ofmore ~~capital~~affiliates. Moreover, ~~stock~~such innotice would not be applicable to the ~~Federal~~company ~~Home~~using ~~Loan~~the ~~Bank~~information if it has a pre-existing business relationship with the consumer. AsThe ofnotice ~~September~~that ~~30,~~is ~~2010,~~required under the ~~Bank~~FACT ~~was~~Act inmay ~~compliance~~be combined with ~~this~~other ~~requirement~~required disclosures to be provided under other provisions of law, including notices required under the privacy provisions of the GLB Act.

Federal Home Loan Bank System. The ~~USA~~Bank ~~PATRIOT~~is ~~Act~~a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of New York, the Bank is required to acquire and hold a certain minimum number of shares of capital stock in the Federal Home Loan Bank. As of September 30, 2011, the Bank was in compliance with this requirement.

The Bank and Company are subject to the Bank Secrecy Act, as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (“USA PATRIOT Act”), which gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers, and mandatory transaction reporting obligations.

~~Title~~The ~~III of the~~ USA PATRIOT Act takes measures intended to encourage information sharing among financial institutions, bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, the USA PATRIOT Act imposes the following obligations on financial institutions:

Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among financial institutions, bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, the USA PATRIOT Act and OCC regulations impose the following obligations on financial institutions:

●

financial institutions must establish an anti-money laundering program that includes, at a minimum: (i) internal policies, procedures, and controls designed to detect and prevent money laundering activities, (ii) specific designation of an anti-money laundering compliance officer, (iii) ongoing employee training programs, and (iv) an independent audit function to test the anti-money laundering program;

●

financial institutions must establish and meet minimum standards for customer due diligence, identification and verification;

●

financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) must establish appropriate, specific and, where necessary, enhanced due diligence policies, procedures, and controls to detect and report instances of money laundering through those accounts;

●

financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country) and are subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks; and

● bank regulators are directed to consider a bank’s or holding company’s effectiveness in combating money laundering when ruling on ~~Federal~~FRA ~~Reserve Act~~ and Bank Merger Act applications.

The Office of Foreign Assets Control (“OFAC”), which is a division of the U.S. Department of the Treasury (“Treasury”), is responsible for helping to ensure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. The Bank and the Company, like all United States companies and individuals, are prohibited from transacting business with the individuals and entities named on OFAC’s list of Specially Designated Nationals and Blocked Persons. If the Bank finds a name on any transaction account or wire transfer that is on an OFAC list, the Bank is required to investigate, and if the match is confirmed, the Bank must take additional actions including freezing such account, filing a suspicious activity report and notifying the FBI. Failure to comply may result in fines and other penalties. OFAC has issued guidance directed at financial institutions in which it asserted that it may, in its discretion, examine institutions determined to be high-risk or to be lacking in their efforts to comply with these prohibitions.

The USA PATRIOT Act also requires the federal banking agencies to take into consideration the effectiveness of controls designed to combat money laundering activities in determining whether to approve a merger or other acquisition application of a member institution. Accordingly, if we engage in a merger or other acquisition, our controls designed to combat money laundering would be considered as part of the application process. We have established policies, procedures and systems designed to comply with these regulations.

Holding Company Regulation

General. BFS Bancorp, MHC and the Company are non-diversified savings and loan holding companies within the meaning of the HOLA. Accordingly, BFS Bancorp, MHC and the Company are registered with the OTS and are subject to OTS’ regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and BFS Bancorp, MHC, and their subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.

As noted above, on July 21, 2011, as a result of regulatory restructuring called for by the Dodd-Frank Act, the supervisory and rulemaking functions of the OTS pertaining to all savings and loan holding companies and their non-institution subsidiaries will formally be transferred to the Federal Reserve, and the OTS will be abolished 90 days thereafter.

~~Federal~~Holding ~~law~~Company prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring “control” (as defined under OTS Regulations) of another savings association or holding company thereof, without prior written approval of the OTS. It also prohibits the acquisition or retention of, with specified exceptions, more than 5% of the equity securities of a company engaged in activities that are not closely related to banking or financial in nature or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings associations, the OTS must consider the financial and managerial resources and future prospects of the savings association involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.Regulation

~~Capital~~General. ~~Savings~~BFS ~~and~~Bancorp, ~~loan~~MHC ~~holding~~and ~~companies~~the Company are ~~not~~non-diversified ~~currently~~savings ~~subject~~and toloan ~~specific~~holding ~~regulatory~~companies ~~capital~~within ~~requirements. The~~the ~~Dodd-Frank~~meaning ~~Act,~~of ~~however, requires~~ the ~~Federal~~HOLA. Accordingly, ~~Reserve~~BFS toBancorp, ~~promulgate~~MHC ~~consolidated~~and ~~capital~~the ~~requirements~~Company ~~for depository institution holding companies that~~ are ~~not~~registered ~~less~~with ~~stringent,~~the ~~both~~Federal ~~quantitatively~~Reserve and inare ~~terms~~subject ofto ~~components~~Federal ofReserve’s ~~capital~~regulations, ~~than~~examinations, ~~those~~supervision ~~applicable~~and toreporting ~~institutions themselves~~requirements. ~~Accordingly~~In addition, ~~such~~the ~~mandate~~Federal ~~eliminates~~Reserve ~~the~~has ~~inclusion~~enforcement ofauthority ~~certain~~over ~~instruments,~~the ~~such~~Company asand ~~trust~~BFS ~~preferred~~Bancorp, ~~securities~~MHC, ~~from~~and ~~Tier~~their ~~1 holding company capital~~subsidiaries. ~~Instruments~~Among ~~issued~~other ~~by mutual holding companies before May 19~~things, ~~2010~~this ~~are~~authority ~~grandfathered. There~~permits isthe aFederal ~~five~~Reserve ~~year~~to ~~transition~~restrict ~~period~~or ~~from~~prohibit ~~the~~activities ~~July~~that ~~21,~~are ~~2010~~determined ~~date~~to ofbe ~~enactment~~a ofserious ~~the~~risk ~~Dodd-Frank~~to ~~Act before~~ the ~~consolidated~~subsidiary ~~capital requirements will apply to~~ savings ~~and loan holding companies~~institution.

~~Source~~As noted above, pursuant to the Dodd-Frank Act, the Federal Reserve assumed responsibility for the primary supervision and regulation of ~~Strength~~all savings and loan holding companies, including the Company, on July 21, 2011. ~~The~~Given the extensive transfer of former OTS authority to multiple agencies, the Dodd-Frank Act ~~also~~requires ~~extends~~ the Federal Reserve ~~“source~~to identify and publish in the Federal Register separate lists of ~~strength”~~the ~~doctrine~~OTS regulations that the Federal Reserve will continue to enforce for savings and loan holding companies after the transfer date. ~~Such~~ ~~policy~~In ~~requires~~carrying out this mandate, and in connection with its assumption of responsibility for the ongoing examination, supervision, and regulation of savings and loan holding companies, tothe ~~act~~Federal asReserve ahas ~~source~~published ofan ~~financial~~interim ~~strength~~final torule ~~their~~which ~~subsidiary~~became ~~depository~~effective ~~institutions~~on bySeptember ~~providing~~13, ~~capital~~2011, ~~liquidity~~that ~~and~~provides ~~other~~for ~~support~~the incorresponding ~~times~~transfer from the OTS to the Federal Reserve of anthe ~~institution’s~~regulations ~~financial~~necessary ~~distress~~for the Federal Reserve to administer the statutes governing savings and loan holding companies. The ~~regulatory~~Federal ~~agencies~~Reserve’s ~~must~~regulations ~~issue~~supersede ~~joint~~OTS regulations ~~implementing~~for ~~this~~purposes ~~policy~~of Federal Reserve supervision and regulation of savings and loan holding companies.

~~Waivers of Dividends by BFS Bancorp, MHC~~Capital. ~~OTS~~Savings ~~regulations~~and ~~allow~~loan ~~federally chartered mutual~~ holding companies toare ~~waive~~currently ~~dividends~~not ~~without~~subject ~~taking~~to ~~into~~specific ~~account~~regulatory ~~the~~capital ~~amount of waived dividends in determining an appropriate exchange ratio in the event of a conversion of a mutual holding company to stock form~~requirements. ~~However,~~Pursuant ~~under~~to the Dodd-Frank Act, ~~the~~however, ~~powers~~savings and ~~duties~~loan ~~of the OTS relating to mutual~~ holding companies will befor ~~transferred~~the tofirst ~~the~~time ~~Federal~~become ~~Reserve,~~subject ~~and~~to the ~~OTS~~same ~~will~~capital beand ~~eliminated. Accordingly,~~activity ~~the~~requirements ~~Federal~~as ~~Reserve~~those ~~will~~applicable ~~become~~to ~~the~~bank ~~new~~holding ~~regulator~~companies. ofAll ~~the~~savings ~~Company~~ and ~~BFS~~loan ~~Bancorp,~~holding ~~MHC. The~~companies ~~Dodd-Frank~~generally ~~Act~~have ~~provides that~~ a ~~mutual~~five ~~holding~~year ~~company~~phase-in ~~will~~period befrom ~~required to give~~ the ~~Federal~~date ~~Reserve~~of ~~notice~~enactment ~~before~~of ~~waiving~~ the ~~receipt~~Dodd-Frank ofAct ~~dividends,~~to ~~and~~comply ~~sets~~with ~~forth~~ the ~~standards~~new ~~for~~capital ~~granting a waiver~~requirements. Moreover, ~~The~~the Dodd-Frank Act ~~further~~requires ~~provides that~~ the Federal Reserve ~~shall~~to ~~consider~~promulgate ~~waived~~consolidated ~~dividends~~capital inrequirements ~~determining~~for andepository ~~appropriate~~institution ~~exchange ratio in the event of a full conversion of the mutual~~ holding ~~company~~companies ~~to stock form, except~~ that ~~the~~are ~~Federal Reserve may~~ not ~~consider~~less ~~waived~~stringent, ~~dividends~~both inquantitatively ~~determining~~and ~~an appropriate exchange ratio~~ in aterms ~~conversion~~of tocomponents ~~stock~~of ~~form~~capital, bythan ~~any~~those ~~federal~~applicable ~~mutual holding company that has waived dividends prior~~ to ~~December~~institutions ~~1, 2009~~themselves. ~~There~~Accordingly, ~~can~~such bemandate noeliminates ~~assurance that~~ the ~~Federal~~inclusion ~~Reserve~~of ~~would~~certain ~~approve~~instruments, ~~waivers~~such inas ~~the~~trust ~~future~~preferred orsecurities ~~predictions~~issued ason toor ~~what~~after ~~conditions~~May 19, ~~if any~~2010, ~~the~~from ~~Federal~~Tier ~~Reserve~~1 ~~would~~holding ~~place~~company ~~on future dividend waiver, if approved~~capital.

~~Conversion~~In ~~of BFS Bancorp~~addition, ~~MHC~~the toFederal ~~Stock~~Reserve ~~Form. The~~has ~~OTS~~indicated ~~regulations permit BFS Bancorp~~that, ~~MHC~~together towith ~~convert from~~ the ~~mutual~~other ~~form~~federal ofbanking ~~organization~~agencies, toit ~~the~~is ~~capital~~currently ~~stock~~reviewing ~~form~~consolidated ofcapital ~~organization~~requirements (afor ~~“Conversion~~all ~~Transaction”). There~~depository ~~can~~institutions ~~be no assurance when, if ever, a Conversion Transaction will occur,~~ and ~~the~~their ~~board~~holding ofcompanies ~~directors~~pursuant ~~of BFS Bancorp, MHC currently has no intention or plan~~ to ~~undertake~~section a171 ~~Conversion Transaction. In the event~~ of ~~a Conversion Transaction, a new holding company would be formed as~~ the ~~successor~~Dodd-Frank toAct ~~the~~and ~~Company (~~the ~~“New~~Basel ~~Holding~~Committee ~~Company”),~~on ~~BFS~~Banking ~~Bancorp, MHC~~Supervision’s ~~corporate~~“Basel ~~existence~~III: ~~would~~A ~~end,~~global ~~and~~regulatory ~~certain~~framework ~~depositors of the Bank would receive the right to subscribe~~ for ~~additional~~more ~~shares~~resilient ofbanks ~~the~~and ~~New~~banking ~~Holding~~systems” ~~Company. In~~report ~~a Conversion Transaction, each share of common stock held by stockholders other than BFS Bancorp, MHC~~ (“~~Minority~~Basel ~~Stockholders~~III”). ~~would~~It beis ~~automatically~~expected ~~converted into a number of shares of common stock of the New Holding Company determined pursuant to an exchange ratio~~ that ~~ensures that Minority Stockholders own~~ the ~~same~~Basel ~~percentage~~III notice of ~~common~~proposed ~~stock~~rulemaking inalso ~~the New Holding Company as they owned in the Company immediately prior to the Conversion Transaction. Under OTS regulations, Minority Stockholders~~ would ~~not~~address beany ~~diluted~~proposed ~~because~~application of ~~any~~Basel ~~dividends~~III-based ~~waived~~requirements byto ~~BFS~~savings ~~Bancorp, MHC (~~and ~~waived~~loan ~~dividends~~holding ~~would~~companies. ~~not~~When ~~be considered in determining an appropriate exchange ratio), in~~ the ~~event BFS Bancorp, MHC converts to stock form. The Dodd~~rule-~~Frank~~making ~~Act~~process ~~addresses~~is ~~exchange ratios and waived dividends~~complete, asthis ~~discussed~~definition inwill ~~the~~be ~~preceding~~changed ~~paragraph.~~to ~~The total number of shares held by Minority Stockholders after a Conversion Transaction also would~~ be ~~increased~~more byclosely ~~any~~aligned ~~purchases~~to ~~by Minority Stockholders in~~ the ~~stock~~definition ~~offering~~of ~~conducted~~well-capitalized asfor ~~part~~bank ofholding ~~the Conversion Transaction~~companies.

Examination. In connection with its assumption of responsibility for the ongoing supervision and examination of savings and loan holding companies, the Federal Reserve issued a supervisory letter on July 21, 2011 that describes the supervisory approach the Federal Reserve will use during the first supervisory cycle and going forward generally for savings and loan holding companies. For purposes of the guidance, the first supervisory cycle is the period of time between July 21, 2011, and the close of the first required inspection. To help facilitate the transition of savings and loan holding companies to the supervisory jurisdiction of the Federal Reserve, the Federal Reserve noted in its letter that the first cycle of savings and loan holding company inspections will be instructive to both the Federal Reserve and savings and loan holding company management in terms of practical issues that arise in the supervision of a savings and loan holding company. In particular, examiners will be using the first supervisory cycle to inform savings and loan holding companies how their operations compare to the Federal Reserve’s supervisory expectations, which is expected to allow for savings and loan holding company management to make operational changes in response to the Federal Reserve’s supervisory expectations, if necessary. Also, the Federal Reserve plans to use the first inspections for the Federal Reserve supervisory staff to better understand a savings and loan holding company’s operations and business model and how the Federal Reserve’s holding company supervision framework can most effectively be implemented at these companies. Accordingly, the Federal Reserve’s focus for inspection activities during the first supervisory cycle will be on gaining an understanding of the structure and operations of each savings and loan holding company.

After the first supervisory cycle and going forward, the Federal Reserve intends, to the greatest extent possible taking into account any unique characteristics of savings and loan holding companies and the requirements of the HOLA, to assess the condition, performance, and activities of savings and loan holding companies on a consolidated basis in a manner that is consistent with the Federal Reserve’s established risk-based approach regarding bank holding company supervision. As with bank holding companies, the Federal Reserve’s objective will be to ensure that a savings and loan holding company and its nondepository subsidiaries are effectively supervised and can serve as a source of strength for, and do not threaten the soundness of, its subsidiary depository institution(s).

In accordance with its goal to assess the condition, performance, and activities of savings and loan holding companies on a consolidated basis in a manner that is consistent with the Federal Reserve’s established risk-based approach regarding bank holding company supervision, the Federal Reserve anticipates transitioning savings and loan holding companies to the Federal Reserve’s “RFI/C(D)” rating system (commonly referred to as “RFI”). The Federal Reserve expects to issue a notice shortly outlining application of the RFI rating system to savings and loan holding companies and any modifications that the Federal Reserve believes are necessary to accommodate savings and loan holding companies. That notice will provide the public with an additional opportunity to comment and will provide for a transition period before Federal Reserve examiners will assign final RFI ratings.

Source of Strength. The Dodd-Frank Act extends the Federal Reserve “source of strength” doctrine to savings and loan holding companies. Such policy requires holding companies to act as a source of financial strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of an institution’s financial distress. The regulatory agencies must issue joint regulations implementing this policy.

Change of Control. The federal banking laws require that appropriate regulatory approvals must be obtained before an individual or company may take actions to “control” a bank or savings association. The definition of control found in the HOLA is similar to that found in the BHCA for bank holding companies. Both statutes apply a similar three-prong test for determining when a company controls a bank or savings association. Specifically, a company has control over either a bank or savings association if the company:

(1)

directly or indirectly or acting in concert with one or more persons, owns, controls, or has the power to vote 25% or more of the voting securities of a company;

(2)

controls in any manner the election of a majority of the directors (or any individual who performs similar functions in respect of any company, including a trustee under a trust) of the board; or

(3)

directly or indirectly exercises a controlling influence over the management or policies of the bank.

The Federal Reserve has adopted an interim final rule that became effective on September 13, 2011 which, among other things, implements the HOLA to govern the operations of savings and loan holding companies. The new rule, known as Regulation LL, includes a specific definition of “control” similar to the statutory definition, with certain additional provisions. Additionally, Regulation LL modifies the regulations previously used by the OTS for purposes of determining when a company or natural person acquires control of a savings association or savings and loan holding company under the HOLA or the Change in Bank Control Act (“CBCA”). In light of the similarity between the statutes governing bank holding companies and savings and loan holding companies, the Federal Reserve has indicated that it intends to use its established rules and processes with respect to control determinations under HOLA and the CBCA to ensure consistency between equivalent statutes administered by the same agency.

The Federal Reserve stated in its rulemaking that it will review investments and relationships with savings and loan holding companies by companies using the current practices and policies applicable to bank holding companies to the extent possible. Overall, the indication of control used by the Federal Reserve under the BHCA to determine whether a company has a controlling influence over the management or policies of a banking organization (which for Federal Reserve purposes, will now include savings associations and savings and loan holding companies) are similar to the control factors found in the former OTS regulations. However, the OTS rules weighed these factors somewhat differently and used a different review process designed to be more mechanical.

Among the differences highlighted by the Federal Reserve with respect to OTS procedures on determinations of control, the Federal Reserve noted that it does not limit its review of companies with the potential to have a controlling influence to the two largest shareholders. Specifically, the Federal Reserve reviews all investors based on all of the facts and circumstances to determine if a controlling influence is present.

The federal banking laws require minority investors that are unwilling to bear the responsibilities associated with controlling a banking organization to limit their influence over the management and policies of the banking organization. That is, investors seeking the protection of being free from regulation and oversight as a savings and loan holding company under the HOLA are limited in their involvement and influence over the management and policies of the savings and loan holding company and its subsidiaries. In situations where investors believe no application is required, the Federal Reserve encourages investors to consult with staff at the appropriate Reserve Bank or the Federal Reserve to determine what type of review is appropriate to confirm that the Federal Reserve concurs that no BHCA or HOLA filing is necessary. As with OTS practice, the Federal Reserve often obtains a series of commitments from investors seeking non-control determinations.

Waivers of Dividends by BFS Bancorp, MHC. The Dodd-Frank Act and implementing regulations of the Federal Reserve require a mutual holding company to give the Federal Reserve notice before waiving the receipt of dividends, and prescribe the standards for granting a waiver. The Dodd-Frank Act and implementing regulations further provide that the Federal Reserve shall consider waived dividends in determining an appropriate exchange ratio in the event of a full conversion of the mutual holding company to stock form, except that the Federal Reserve may not consider waived dividends in determining an appropriate exchange ratio in a conversion to stock form by any federal mutual holding company that has waived dividends prior to December 1, 2009. Notwithstanding the Company’s plans to consummate the Mergers contemplated in the Agreement and Plan of Merger dated August 16, 2011, there can be no assurance that the Federal Reserve would approve waivers in the future or predictions as to what conditions, if any, the Federal Reserve would place on future dividend waivers, if we continue as an independent organization.

Effect of Governmental Monetary Polices

Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve has, and is likely to continue to have, an important impact on the operating results of financial institutions through its power to implement national monetary policy, among other things, in order to curb inflation or combat a recession. The Federal Reserve affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

Federal Securities Laws

Shares of our common stock are registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We are also subject to the proxy rules, tender offer rules, insider trading restrictions, annual and periodic reporting, and other requirements of the Exchange Act.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 was enacted in response to public concerns regarding corporate accountability in connection with certain accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the SEC, under the ~~Securities~~ Exchange Act ~~of 1934~~.

The Sarbanes-Oxley Act includes specific additional disclosure requirements, requires the SEC and national securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules, and mandates further studies of certain issues by the SEC. The Sarbanes-Oxley Act represents significant ~~Federal~~federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.

We have incurred and anticipate that we will continue to incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the regulations that have been promulgated to implement the Sarbanes-Oxley Act, particularly those regulations relating to the establishment of internal controls over financial reporting.

Item 1A. Risk Factors

WeFailure ~~Have~~to ~~Stipulated~~consummate Tothe ~~Cease~~Mergers ~~And~~could ~~Desist~~materially ~~Orders~~and ~~With~~adversely ~~The~~affect ~~OTS.~~the ~~These~~Company’s ~~Orders~~results ~~Will~~of ~~Significantly~~operations ~~Restrict~~and ~~Our~~stock ~~Operations. The~~price ~~Failure~~and Tocause ~~Comply~~the ~~With~~Bank ~~These~~to ~~Orders~~be ~~Can~~placed ~~Result~~into Inconservatorship ~~Significant~~or ~~Penalties~~receivership.

~~Effective~~If ~~March 31, 2011,~~ the ~~Company,~~Mergers ~~BFS~~are ~~Bancorp,~~not ~~MHC~~consummated ~~and~~for ~~the~~any ~~Bank, consented to the issuance of Cease and Desist Orders from the OTS. The Orders provide, among other things, that within specified time frames~~reason:

● ~~the~~The ~~Bank~~Company ~~must~~will ~~obtain~~remain ~~and~~liable ~~maintain~~for asignificant ~~Tier~~transaction 1costs ~~Capital~~relating ~~Ratio equal~~ to ~~or greater than 10% and a Total Risk-Based Capital Ratio equal to or greater than 15% (~~the ~~“Minimum Capital Levels”), after the funding of its allowance for loan and lease losses~~Mergers;

● The market price of the ~~Bank~~Company’s ~~must~~common ~~submit~~stock ~~for~~may ~~review~~further ~~and~~decline ~~approval~~to bythe extent that the ~~OTS~~current market price reflects a ~~written~~market ~~capital~~belief ~~plan~~that tothe ~~maintain~~offer and the ~~Bank’s~~Mid-Tier ~~Minimum~~Merger ~~Capital~~will ~~Levels~~be completed; and

● ~~the~~BFS ~~Bank~~Bancorp, ~~must~~MHC, ~~submit~~the aCompany ~~contingency plan for review~~ and ~~approval by~~ the ~~OTS~~Bank ifwill itbe ~~fails~~unable to ~~meet the Minimum Capital Levels, or~~ comply with the terms of the capital plan, or is otherwise requested by the OTS to submit the contingency plan, which contingency plan would require the Bank to merge with, or be acquired by another federally insured depository institution or voluntarily liquidateOrders;

36Accordingly, should the Mergers not be consummated, there is substantial risk that the Bank will be placed into receivership by the OCC, which would appoint the FDIC as a receiver and that the Company will be unable to continue as a going concern, which would likely result in a complete loss of a shareholder’s investment.

●Additionally, the ~~Bank~~failure ~~must~~to ~~submit~~consummate ~~for review and approval by~~ the ~~OTS~~Mergers anmay ~~updated~~lead ~~business plan~~ to ~~improve~~uncertainty for the ~~Bank~~Company’s ~~core~~employees ~~earnings, reduce expenses, maintain appropriate levels of liquidity~~ and ~~achieve~~its ~~profitability~~customers ~~on a consistent basis~~ and ~~submit~~suppliers. ~~quarterly~~This ~~reports~~uncertainty tomay ~~the OTS regarding compliance with the plan;~~mean:

● ~~the~~The ~~Bank~~attention ~~must~~of ~~revise~~the ~~its~~Company’s ~~current liquidity and funds~~ management ~~policy to include a contingency funding plan that will identify alternative funding sources, establish appropriate lines of credit,~~ and ~~retain~~employees ~~investment~~may ~~securities~~be ~~and~~diverted ~~other~~from ~~liquid~~day-to-day ~~assets at the Bank~~operations; and

● ~~the~~The ~~Bank~~Company’s ~~must~~ability ~~submit~~to ~~for~~attract ~~review~~new employees and ~~approval~~retain byexisting ~~the~~employees ~~OTS~~may anbe ~~updated~~harmed ~~written~~by ~~program~~uncertainties ~~for identifying, monitoring and controlling risks~~ associated with ~~concentrations of credit and submit quarterly reports to~~ the ~~OTS regarding compliance with the program;~~Mergers.

●The ~~the~~occurrence ~~Bank~~of ~~must~~any ~~submit~~of ~~for~~these ~~review~~events individually or in combination could materially and ~~approval~~adversely byaffect the ~~OTS~~Company’s aresults ~~plan~~of ~~for~~operations ~~enhancing~~and ~~its~~stock ~~staffing~~price ~~resources~~and in the ~~loan~~Company’s ~~underwriting/credit~~ability ~~administration~~to ~~functions~~continue atas ~~the~~a ~~Bank;~~going concern.

●We ~~the~~Have ~~Bank~~Stipulated ~~must~~To ~~submit~~Cease ~~for~~And ~~review~~Desist ~~and~~Orders ~~approval~~With byThe OTS, Which Are Now Enforced By the OTS’ anSuccessor ~~updated~~Agencies. ~~plan~~So ~~with~~Long ~~specific~~As ~~strategies~~These or Additional Orders Are in Effect, ~~targets~~They ~~and~~Will ~~timeframes~~Continue to ~~reduce~~Significantly ~~the~~Restrict ~~Bank’s~~Our ~~level~~Operations. The ofFailure ~~problem~~To ~~assets;~~Comply With These Orders Can Result In Significant Penalties.

●Effective March 31, 2011, the Company, BFS Bancorp, MHC and the Bank, ~~may~~consented ~~not~~to ~~make~~the issuance of Cease and Desist Orders from the OTS, ~~invest~~which inare ornow ~~purchase~~enforced ~~any~~by ~~new~~the ~~commercial~~Federal ~~real~~Reserve ~~estate~~(for ~~loans~~the Company and BFS Bancorp, MHC) and ~~may~~the ~~not~~OCC ~~extend~~(for the Bank). While the entry into the Merger Agreement was intended to satisfy several requirements of the Orders, ~~refinance~~the orCompany, ~~otherwise~~BFS ~~modify~~Bancorp, ~~classified~~MHC orand ~~special~~the ~~mention~~Bank ~~loans~~continue to be subject to the significant restrictions imposed on our operations, ~~except~~including ~~under~~asset ~~certain~~growth ~~conditions;~~limitations, an inability to originate new commercial real estate loans without prior regulatory approval and restrictions on the Bank’s and Company’s abilities to make capital distributions.

●In the ~~Bank~~event ~~must~~we ~~conduct~~are ain ~~review~~material ~~and~~non-compliance ~~analysis~~with of the ~~management~~terms ~~study~~of ~~performed~~the byOrders, the ~~independent~~Federal ~~consultant~~Reserve and ~~shall~~OCC ~~prepare~~have ~~and~~the ~~submit~~authority to ~~the~~subject ~~OTS~~us ~~for~~to ~~its~~the ~~review~~terms ~~and~~of ~~approval~~more arestrictive ~~written~~enforcement ~~management~~orders, ~~plan~~to ~~that~~impose ~~addresses~~civil ~~all~~money ofpenalties ~~the~~on ~~conclusions~~us and ~~recommendations~~our ~~noted~~directors inand ~~that management study~~officers, ~~including~~and ~~a plan with specific timeframes~~ to ~~obtain~~remove atdirectors ~~least~~and ~~three~~officers ~~new~~from ~~independent~~their ~~directors~~positions ~~for~~with ~~its~~the ~~Board~~Company and tothe ~~retain a new Chief Executive Officer;~~Bank.

● the Bank will not be permitted to increase its total assets during any quarter in excess of an amount equal to the net interest credited on deposit liabilities during the prior quarter, without the prior written non-objection of the OTS;

● the Bank must comply with regulations limiting its ability to accept, renew or roll over brokered deposits;

● the Bank will not be permitted to declare a dividend without the prior written approval of the OTS, and the Company and BFS Bancorp, MHC cannot declare or pay dividends or make any other capital distributions without prior OTS approval;

● the Bank will not be permitted to enter into, renew or modify any contractual arrangement relating to compensation or benefits for any senior executive officers or directors, unless it provides prior written notice of the proposed transaction to the OTS;

● the Bank must submit for review and approval of the OTS a plan to revise its compensation and remuneration of directors and senior executive officers;

● the Bank must comply with regulatory prior notification requirements with respect to changes in directors and senior executive officers;

● the Bank must 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;

● the Company and BFS Bancorp, MHC must submit for review and approval by the OTS a written plan to maintain and enhance the capital of the Company, BFS Bancorp, MHC and the Bank, and to ensure that the Bank complies with the capital requirements imposed by its enforcement order with the OTS; and

● the Company and BFS Bancorp, MHC cannot declare or pay dividends or make any other capital distributions without prior OTS approval.

In the event we are in material non-compliance with the terms of such cease and desist orders, the OTS has the authority to subject us to the terms of a more restrictive enforcement order, to impose civil money penalties on us and our directors and officers, and to remove directors and officers from their positions with the Company and the Bank.

An Inability To Improve Our Regulatory Capital Position Could Adversely Affect Our Operations.

At Due ~~March~~to 31the capital requirements imposed by the Bank Order, as of September 30, 2011, the Bank was classified as “adequately capitalized,” and not “well capitalized.” ~~This further restricts our operations beyond restrictions that have been imposed by the cease and desist orders.~~ As a result of our capital levels: (i) our loans to one borrower limit has been reduced, which affects the size of the loans that we can originate and also requires us to sell, participate, or refuse to renew loans that exceed our lower loans to one borrower limit, both of which could negatively impact our earnings; (ii) we cannot renew or accept brokered deposits without prior regulatory approval; (iii) we must obtain prior regulatory approval to undertake any branch expansion activities; and (iv) we will pay higher insurance premiums to the ~~Federal Deposit Insurance Corporation~~FDIC, which will reduce our earnings. We may not be able to raise additional capital or reduce the Bank’s assets on favorable terms. In addition, equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution.

We Experienced An Operating Loss During The Year Ended September 30, 2010 And We May Not Return To Profitability In The Future.

We experienced a net loss of $38.9 million for the year ended September 30, 2010. The loss was caused primarily by a significant increase in non-performing assets, which necessitated a provision for loan losses of $42.7 million, compared to a provision of $8.5 million for the year ended September 30, 2009. We charged off $35.5 million of loans during fiscal 2010 (compared to none during fiscal 2009), and non-accrual loans (generally loans 90 days or more past due in principal or interest payments) increased to $71.9 million, or 18.5% of total loans at September 30, 2010, compared to $22.1 million, or 5.1% of total loans at September 30, 2009. In addition, we recognized $11.6 million of other-than-temporary impairment losses on securities during the year ended September 30, 2010, compared to $9.0 million of such losses during the year ended September 30, 2009 (of which $2.9 million was recognized as expenses). We may not be able to generate net income or achieve profitability in the future.

We have had material weaknesses in our internal control over financial reporting that have required remediation. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent or detect fraud.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U. S. generally accepted accounting principles. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent or detect fraud. Any inability to provide reliable financial reports or prevent or detect fraud could harm our business. In the second quarter of fiscal year 2010 and as of the end of fiscal year 2010, certain material weaknesses were identified in our internal control over financial reporting related to our determination of our allowance for loan losses, which we have endeavored to remediate. We are continuing to evaluate and, where appropriate, enhance our policies, procedures and internal controls. However, we may in the future discover additional areas of our internal controls that need improvement or that constitute deficiencies or material weaknesses. Our failure to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, could result in material misstatements in our financial statements or failure to prevent or detect fraud. We may be required to incur significant costs in the future to remediate any additional inadequacies or material weaknesses in our internal controls, which could materially adversely impact our results of operations.

~~Our~~There ~~Commercial~~is ~~Real~~substantial ~~Estate,~~doubt ~~Multi-Family,~~as ~~Construction~~to our ability to continue as a going concern and ~~Land~~it ~~Loan~~is ~~Portfolios~~possible ~~Have~~that ~~Increased~~the Bank may fail, ~~Increasing~~which ~~the~~would ~~Risk~~result ~~that~~in ~~Some~~the ofFDIC ~~Our~~being ~~Loans~~appointed ~~Will~~as ~~Not~~receiver Beof ~~Paid~~the Bank.

~~Our~~A ~~lending~~going inconcern ~~commercial~~emphasis ~~real~~paragraph ~~estate, construction and land~~ has ~~expanded~~been ~~during~~included ~~the previous five years. Lending~~ in ~~these~~the ~~sectors~~audit ~~has~~report ~~increased as a percentage of~~ our ~~total~~financial ~~loan~~statements ~~portfolio~~for ~~from~~fiscal ~~47.3%~~year atended September 30, ~~2006~~2011 related to ~~64.2%~~the atuncertainty ~~September~~about ~~30,~~our ~~2010. Lending~~ability into ~~these~~continue ~~sectors~~as ~~generally exposes~~ a ~~lender~~going ~~to greater credit risk than loans secured by residential lending~~concern. AtFailure ~~September~~to ~~30,~~comply ~~2010,~~with wethe ~~had~~requirements ~~forty three loans for an aggregate~~ of ~~$71.9~~the ~~million~~Contingency inPlan ~~non-accrual~~to ~~status~~complete ~~compared~~the toMergers ~~nine~~or ~~loans~~an ~~for~~alternative anmerger ~~aggregate~~or ofacquisition ~~$22.1~~would ~~million~~result in ~~non-accrual~~the ~~status~~imposition atof ~~September 30, 2009. In addition, our multi-family, commercial real estate and construction loan portfolio is not as seasoned as~~ the ~~loan~~Contingency ~~portfolio~~Plan ofrequirement ~~some~~to ofvoluntarily ~~our competitors~~dissolve. If ~~the~~These ~~local~~factors ~~real~~give ~~estate~~rise ~~market or economy continues~~ to ~~weaken,~~substantial wedoubt ~~may~~as ~~continue~~ to ~~experience higher levels of non-performing loans. The Bank agreed with~~ the ~~OTS~~Company’s ~~that~~ability ~~the~~to ~~Bank~~continue ~~will~~as ~~not~~a ~~originate~~going ~~any commercial real estate loans without prior OTS approval~~concern.

There is uncertainty regarding the impact to our business of the formal investigation by the Securities and Exchange Commission.

In August 2011, the Securities and Exchange Commission’s Division of Enforcement notified the Company that the Division is conducting a formal investigation into the Company’s provisions and allowances for loan losses contained in its annual and quarterly reports for fiscal years 2008 through 2010. The Company intends to cooperate fully with the Division. However, we cannot predict the timing or eventual outcome of this investigation. This investigation could possibly result in penalties, sanctions, or a restatement of our previously issued financial statements. For additional information about the investigation, see “Item 3. Legal Proceedings.”

We incurred significant losses in 2010 and 2011 and may continue to do so in the future, and we can make no assurances as to when we will be profitable.

Throughout 2010 and 2011, economic conditions in the markets in which our borrowers operate continued to deteriorate and the levels of loan delinquencies and defaults that we experienced were substantially higher than historical levels. Our loan customers continue to operate in an economically stressed environment.

As a result, our net loss available to common shareholders for the year ended September 30, 2011 was $5.6 million or $0.44 per common diluted share, as compared with net loss available to common shareholders of $38.9 million or $3.08 per common diluted share for the year ended September 30, 2010. The net loss for the year ended September 30, 2011 was primarily attributable to an increase in non-performing assets. Our net interest margin and net interest income declined during 2011 as a result of increasing non-performing assets. Our net interest margin declined to 2.71% in 2011 compared to 4.50% in 2010, and our net interest income decreased $10.2 million for the year ended September 30, 2011 as compared to the same period in 2010. This trend may continue and could adversely impact our ability to become profitable. In light of the current economic environment, significant additional provisions for loan losses also may be necessary to supplement the allowance for loan losses in the future. As a result, we may continue to incur significant credit costs in the future, which would continue to adversely impact our financial condition and results of operations and the value of our common stock.

We previously identified material weaknesses in our internal control over financial reporting that required remediation. If the actions taken to address the material weakness prove inadequate or we otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately report our financial results or prevent or detect fraud.

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, certain material weaknesses were identified in our internal control over financial reporting related to our determination of our allowance for loan losses. During the third quarter of fiscal year 2011, we 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. However, we are unable to conclude as to whether the previously reported material weakness has been remediated due to the limited amount of time that has passed since these procedures were modified.

Additionally, we may in the future discover other areas of our internal controls that need improvement or that constitute deficiencies or material weaknesses. Our failure to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, could result in material misstatements in our financial statements or failure to prevent or detect fraud. We may be required to incur significant costs in the future to remediate any inadequacies or material weaknesses in our internal controls, which could materially adversely impact our results of operations.

Our Commercial Real Estate, Multi-Family, Construction and Land Loan Portfolios Have Increased in Recent Years, Increasing the Risk that Some of Our Loans Will Not Be Paid.

Our lending in commercial real estate, construction and land expanded from 2005 through 2010, and such loans continue to represent a significant portion of our portfolio, representing approximately 57.6% of our total loan portfolio at September 30, 2011. Lending in these sectors generally exposes a lender to greater credit risk than loans secured by residential lending. At September 30, 2011, we had loans for an aggregate of $114.9 million in non-performing status compared to forty-three loans for an aggregate of $71.9 million in non-performing status at September 30, 2010. In addition, our multi-family, commercial real estate and construction loan portfolio is not as seasoned as the loan portfolio of some of our competitors. If the local real estate market or economy continues to weaken, we may continue to experience higher levels of non-performing loans. The Bank agreed with the OTS that the Bank will not originate any commercial real estate, construction and land loans without prior OTS approval, which restriction remains in effect and is enforced by the OTS’ successor, the OCC.

We May Experience Increased Costs Of Liquidity In Future Periods As A Result Of Our Current Financial Condition.

In recent periods, we have experienced an increase in non-performing assets, an increase in our allowance for loan losses and an increase in competition in our primary market area, as well as a decrease in interest rates. As aan ~~result~~“adequately ofcapitalized” ~~the~~institution ~~cease~~for ~~and~~bank ~~desist~~regulatory ~~orders~~purposes, ~~minimum capital levels requirement~~ the Bank may not accept brokered deposits without prior regulatory approval. Collectively, these factors reduce our liquidity and require us to seek alternative sources of liquidity to fund our operations and, in particular, the origination of new loans, the support of our continued growth and other strategic initiatives. Historically, we have had access to a number of alternative sources of liquidity, but given our financial performance and the recent downturn in the credit and liquidity markets, there is no assurance that we will have access to funding sources or whether terms will be favorable to us. If our funding costs increase, this will impede our growth and will have an adverse effect on our business, financial condition and results of operations.

If Our Non-Performing Loans And Other Non-Performing Assets Increase, Our Earnings Will Decrease.

At September 30, ~~2010~~2011, our non-performing assets (which ~~consist~~includes of non-accrual loans, and loans 90 days or more delinquent~~, loans past contractual maturity and still accruing, and real estate owned~~) totaled $86114.29 million, which is an increase of $6443.10 million over our non-performing assets at September 30, ~~2009~~2010. Our non-performing assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans, and we must establish reserves for probable losses on non-performing loans. These reserves are established through a current period charge to income in the provision for loan losses. There are also legal fees associated with the resolution of problem assets. Additionally, our real estate owned results in carrying costs such as taxes, insurance and maintenance fees. Further, the resolution of non-performing assets requires the active involvement of management, which can distract us from the overall supervision of operations and other income-producing activities of the Bank. Finally, if our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance accordingly, which is affected by recording a provision for loan losses.

If Economic Conditions Continue to Deteriorate, Particularly in the Metropolitan New York Area, Our Results of Operations and Financial Condition Will Continue to Be Adversely Affected as Borrowers’ Ability to Repay Loans Declines and the Value of the Collateral Securing Our Loans Decreases.

Our financial results have been and will continue to be adversely affected by changes in prevailing economic conditions, particularly in the metropolitan New York area, including decreases in real estate values, changes in interest rates which may cause a decrease in interest rate spreads, adverse employment conditions, the monetary and fiscal policies of the ~~Federal~~federal government and other significant external events. At September 30, ~~2010~~2011, loans secured by real estate represented nearly all of our total loans, with substantially all of these loans being made in the New York metropolitan area. Decreases in local real estate values would continue to adversely affect the value of property used as collateral for our loans. Adverse changes in the economy also may have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings.

39The Current Economic Downturn Coupled With Turmoil and Uncertainty in the Financial Markets May Adversely Impact Our Earnings.

The ~~Current~~current ~~Economic~~economic ~~Downturn~~downturn ~~Coupled~~may ~~With~~adversely ~~Turmoil~~impact the financial condition of the households and ~~Uncertainty~~businesses comprising our loan customers. Such a deteriorating financial condition could arise from loss of employment or business revenue exacerbated by a reduction in the ~~Financial~~value ~~Markets~~of ~~May~~real ~~Adversely~~estate ~~Impact~~collateralizing ~~Our~~our ~~Earnings~~customers’ ~~and~~loans. As ~~Our~~a ~~Ability~~consequence, we may continue to ~~Successfully~~experience ~~Execute~~an ~~Our~~increase ~~Business~~in ~~Plan~~nonperforming loans that will negatively impact earnings through reduced collections of interest income coupled with possible increases in the provision for loan losses and associated charge offs.

The current economic downturn may adversely impact the financial condition of the households and businesses comprising our loan customers. Such a deteriorating financial condition could arise from loss of employment or business revenue exacerbated by a reduction in the value of real estate collateralizing our customers’ loans. As a consequence, we may continue to experience an increase in nonperforming loans that will negatively impact earnings through reduced collections of interest income coupled with possible increases in the provision for loan losses and associated charge offs. Additionally, our ability to originate new loans in accordance with our business plan goals and objectives may be diminished as a result of these same factors.

If Our Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses, Our Earnings Could Decrease.

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. Material additions to our allowance would materially decrease our net income.

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.

We ~~Are~~and ~~Subject~~the toBank are currently undergoing changes in the ~~Risk~~way we are supervised and examined as a result of ~~Additional~~the ~~Impairment~~consolidation ~~Charges~~of ~~Relating~~federal banking regulators called for by the Dodd-Frank Act, and may experience operational challenges or increased costs in the course of full transition to ~~Our~~our ~~Securities~~new ~~Portfolio~~regulators.

~~The~~As ~~value~~a result of ~~our~~regulatory ~~investment~~restructuring ~~portfolio~~called ~~has~~for ~~been~~by ~~adversely~~the ~~affected~~Dodd-Frank byAct, effective July 21, 2011, the ~~unfavorable~~Federal ~~conditions~~Reserve ofbecame the ~~capital~~primary ~~markets~~federal inregulator ~~general~~of asthe ~~well~~Company asand ~~declines~~the inOCC ~~values~~became the primary federal regulator of the ~~securities~~Bank. weThe ~~hold~~Federal Reserve has issued an interim final rule that governs the activities of savings and loan holding companies and has begun to apply certain parts of its current consolidated supervisory program for bank holding companies, including significantly enhanced reporting requirements, to savings and loan holding companies. WeAlso, ~~have~~the ~~taken~~OCC published an ~~aggregate~~interim final rule that reissues, as new OCC regulations, the former OTS regulations that the OCC has authority to promulgate and enforce as of ~~$11~~the transfer date.6 As ~~million~~noted in ~~charges~~the ~~against~~rulemaking, ~~earnings~~the ~~since~~interim ~~October~~final 1,rule ~~2009~~is ~~for~~part ~~impairments~~of a larger OCC review of OCC and OTS regulations to determine what changes are needed for the ~~value~~transition to OCC supervision of ~~securities~~federal savings associations. The OCC announced that, weas ~~have~~a ~~concluded~~continuation ~~were~~of ~~“other~~this ~~than~~review, ~~temporary~~it will consider more comprehensive substantive amendments to these regulations, as appropriate, in the near future.~~” There~~ ~~may~~Accordingly, bethe ~~additional~~Company ~~material~~and ~~impairment~~Bank ~~charges~~are currently transitioning to the jurisdiction of our new regulators and expect that some aspects of the regulatory restructuring process may result in increased costs, which could have aan ~~material~~ adverse ~~effect~~impact on our ~~financial condition and~~ results of operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act Will, Among Other Things, Tighten Capital Standards, Create A New Consumer Financial Protection Bureau And Result In New Laws And Regulations That Are Expected To Increase Our Costs Of Operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

Certain provisions of the Dodd-Frank Act are expected to have a near term effect on us. For example, the new law provides that the supervisory and rulemaking functions of the OTS, which is the current primary federal regulator for the Company and the Bank, will formally be transferred to other banking agencies on July 21, 2011, unless extended by up to six months by the Secretary of the Treasury. The Office of the Comptroller of the Currency, which is currently the primary federal regulator for national banks, will become the primary federal regulator for federal savings associations including the Bank. Moreover, the Board of Governors of the Federal Reserve System will supervise and regulate all savings and loan holding companies that were formerly regulated by the OTS, including the Company and BFS Bancorp, MHC.

Also effective by July 21, 2011, is a provision of the Dodd-Frank Act that eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest-bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse effect on our interest expense.

The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.

It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.

Recently enacted legislation may not result in stabilization of the U.S. financial system, which could have a material adverse effect on our business and various aspects of our financial results.

In recent years, the U.S. Congress and the Obama Administration have taken actions that were intended to help stabilize and provide liquidity to the financial system. There can be no assurance, however, as to the actual impact that the various legislative actions taken by Congress or any governmental programs will have on the financial markets. The failure of the legislation or programs to serve their intended purposes, or the worsening of the current financial market conditions, could have a material adverse effect on our business, our financial condition, the results of our operations, our access to credit or the trading price of our common stock as well as the financial condition of our customers. It could also result in declines in our investment portfolio which could be “other-than-temporary impairments.”

We operate in a highly regulated environment, and changes in laws and regulations to which we are subject may adversely affect our results of operations.

We are subject to extensive regulation, supervision and examination by the OTS, as the current primary regulator of BFS Bancorp, MHC, the Company and the Bank, and by the FDIC as the insurer of the Bank’s deposits up to certain limits. (As noted above, BFS Bancorp, MHC, the Company and Bank will be transitioning to the jurisdiction of new primary federal regulators in July 2011 as a result of the Dodd-Frank Act.) We also belong to the FHLB System and, as a member of such system, we are subject to certain limited regulations promulgated by the FHLB of New York. This regulation and supervision limits the activities in which we may engage. The purpose of regulation and supervision is primarily to protect our depositors and borrowers and, in the case of FDIC regulation, the FDIC’s insurance fund. Regulatory authorities have extensive discretion in the exercise of their supervisory and enforcement powers. They may, among other things, impose restrictions on the operation of a banking institution, the classification of assets by such institution and such institution’s allowance for loan losses. Regulatory and law enforcement authorities also have wide discretion and extensive enforcement powers under various consumer protection and civil rights laws, including the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act, and the Real Estate Settlement Procedures Act. Any change in the laws or regulations applicable to us, or in a banking regulator’s supervisory policies or examination procedures, whether by our primary federal banking regulator, the FDIC, other state or federal regulators, the U.S. Congress or the New York legislature, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The Dodd-Frank Act has had a significant impact on the bank regulatory structure for community banking organizations and particularly thrift organizations, as well as the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. Much of the impact of the Dodd-Frank Act still remains to be seen in the coming months or years, as thrifts and their holding companies settle into the jurisdictions of their new respective regulators, and as the effective dates of the many implementing regulations of the Dodd-Frank Act are gradually phased in.

Certain provisions of the Dodd-Frank Act are expected to have a near term effect on us. For example, effective July 21, 2011, a federal prohibition on the payment of interest on demand deposits was eliminated, thus allowing businesses to have interest-bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse effect on our interest expense.

Also, the Dodd-Frank Act creates a new Consumer Financial Protection Bureau, or CFPB, with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, such as the Bank, will be examined by their applicable bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.

As the Company and Bank continue to monitor developments under the Dodd-Frank Act and to assess the ultimate impact of the legislation and yet to be written implementing rules and regulations on community banks, at a minimum we have experienced an increase in our operating and compliance costs, which is expected to continue and further impact our interest expense.

We operate in a highly regulated environment, and changes in laws and regulations to which we are subject may adversely affect our results of operations.

The Bank is subject to extensive regulation, supervision and examination by the OCC, as its chartering authority, and by the FDIC as the insurer of its deposits up to certain limits. In addition, the Federal Reserve currently regulates and oversees the Company and BFS Bancorp, MHC. We also belong to the Federal Home Loan Bank System and, as a member of such system, we are subject to certain limited regulations promulgated by the FHLB-NY. This regulation and supervision limits the activities in which we may engage. The purpose of regulation and supervision is primarily to protect our depositors and borrowers and, in the case of FDIC regulation, the DIF. Regulatory authorities have extensive discretion in the exercise of their supervisory and enforcement powers. They may, among other things, impose restrictions on the operation of a banking institution, the classification of assets by such institution and such institution’s allowance for loan losses. Regulatory and law enforcement authorities also have wide discretion and extensive enforcement powers under various consumer protection and civil rights laws, including the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act, and the Real Estate Settlement Procedures Act. In addition to the changes discussed herein that are mandated by the Dodd-Frank Act, any change in the laws or regulations applicable to us, or in banking regulators’ supervisory policies or examination procedures, whether by the OCC, the FDIC, other state or federal regulators, or the United States Congress could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be relied upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure. There is no assurance that any such losses would not materially and adversely affect our results of operations.

The results of our operations may be adversely affected if asset valuations cause additional other-than-temporary impairment charges.

We may be required to record future impairment charges on our investment securities if they suffer declines in value that are considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on the Company’s investment portfolio in future periods. If an impairment charge is significant enough, it could affect the ability of the Bank to upstream dividends to the Company, which could have a material adverse effect on the Company’s liquidity and its ability to pay dividends to shareholders and could also negatively impact its regulatory capital ratios.

Changes in interest rates could adversely affect our results of operations and financial condition.

Our profitability, like that of most financial institutions, depends substantially on our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest expense paid on our interest-bearing liabilities. Increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans. In addition, as market interest rates rise, we will have competitive pressures to increase the rates we pay on deposits, which could result in a decrease in our net interest income.

We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities as borrowers refinance to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities.

Competition in our primary market area may reduce our ability to attract and retain deposits and originate loans.

We operate in a competitive market for both attracting deposits, which is our primary source of funds, and originating loans. Historically, our most direct competition for savings deposits has come from credit unions, community banks, large commercial banks and thrift institutions in our primary market area. Particularly in times of extremely low or extremely high interest rates, we have faced additional significant competition for investors’ funds from brokerage firms and other firms’ short-term money market securities and corporate and government securities. Our competition for loans comes principally from mortgage brokers, commercial banks, other thrift institutions, and insurance companies. Such competition for the origination of loans may limit our future growth and earnings prospects. Competition for loan originations and deposits may limit our future growth and earnings prospects.

If external funds were not available, this could adversely impact our growth and prospects.

We rely on retail deposits, the amortization and prepayment of loans, the maturity and calls of investment securities, our operations and advances from the FHLB of New York to fund our operations. Although we have historically been able to replace maturing deposits and advances as necessary, we might not be able to replace such funds in the future if, among other things, our results of operations or financial condition or the results of operations or financial condition of the FHLB of New York or market conditions were to change. In addition, certain Federal Home Loan Banks have experienced lower earnings from time to time and paid out lower dividends to its members. Future problems at the Federal Home Loan Banks may impact the collateral necessary to secure borrowings and limit the borrowings extended to its member banks, require additional capital contributions by its member banks, and reduce or eliminate the dividends paid by the FHLB of New York. Should this occur, we could have difficulty meeting our short term liquidity needs and the Bank’s net interest income could be affected. In addition, future problems at the Federal Home Loan Banks could also cause the value of the equity investment we have in the stock of FHLB of New York to decline or become impaired. In addition, ifas wean ~~fall~~“adequately ~~below~~capitalized” ~~the~~institution ~~FDIC’s~~for ~~thresholds~~regulatory tocapital bepurposes, ~~considered~~the ~~“well~~Bank ~~capitalized”~~may wenot ~~will~~accept bebrokered ~~unable~~deposits towithout ~~continue~~prior ~~with~~regulatory ~~uninterrupted~~approval, ~~access~~which tofurther limits the ~~brokered~~availability ~~funds~~of ~~markets~~our funding sources.

We may not be able to pay dividends in the future ~~in accordance with past practice~~ as our ability to pay dividends in the future is subject to regulatory approval.

Our ability to pay dividends to our stockholders is primarily dependent on the Bank’s earnings. The payment of dividends also is subject to legal and regulatory restrictions. Any payment of dividends in the future will depend, in large part, on the Bank’s earnings, capital requirements, financial condition and other factors considered relevant by the Company’s board of directors. Moreover, in connection with the Cease and Desist Orders to which BFS Bancorp, MHC, the Company and Bank are currently subject, any payment of dividends or other capital distributions is subject to the prior written non-objection of the ~~OTS~~Federal ~~Regional~~Reserve ~~Director~~and/or OCC, as applicable.

We are not in compliance with certain NASDAQ Stock Market continued listing bid requirements and are subject to delisting if the Company does not regain compliance by March 5, 2012.

On September 6, 2011, the Company received a letter from The NASDAQ Stock Market LLC (“NASDAQ”) advising that for the previous 30 consecutive business days, the Company failed to comply with the minimum closing bid price of $1.00 per share requirement for continued listing on the NASDAQ Capital Market. This notification has no effect on the listing of the Company’s common stock at this time.

NASDAQ stated in its letter that the Company will be provided 180 calendar days, or until March 5, 2012, to regain compliance with the minimum closing bid price of $1.00 per share requirement for continued listing. The NASDAQ letter also states that if, at any time before March 5, 2012, the minimum closing bid price is at least $1.00 per share or more for a minimum of 10 consecutive business days, the NASDAQ staff will provide the Company with written notification that it has achieved compliance with the continued listing requirement and the matter will be closed.

If the Company does not regain compliance with the minimum closing bid price of $1.00 per share continued listing requirement by March 5, 2012, the NASDAQ staff will provide the Company with written notification that the Company’s common stock will be delisted from the NASDAQ Capital Market. The Company may, however, be eligible for an additional grace period if certain conditions are met. The Company may also appeal NASDAQ’s delisting determination to a NASDAQ Hearings Panel.

However, the Company is also a party to the Merger Agreement, under which the Company is expected to merge with Investors Bancorp, Inc, which would result in the cancellation of all of the Company’s outstanding common stock, thereby rendering the Bid Price Rule deficiency moot.

Nevertheless, if the Mergers are not approved or do not close, our common stock could be delisted. The delisting of our common stock from trading on NASDAQ may have a material adverse effect on the market for, and liquidity and price of, our common stock and impair our ability to raise capital. Delisting from NASDAQ could also have other negative results, including, without limitation, the potential loss of confidence by customers and employees, the loss of institutional investor interest and fewer business development opportunities.

Item 1B. Unresolved Staff Comments

None.

4344

Item 2. Properties

Properties

The following table provides certain information with respect to our offices as of September 30, ~~2010~~2011:

	Leased	Year Acquired
Location	or Owned	or Leased

Main Office	Owned	1965
81 Court Street
Brooklyn, NY 11201

Branch Office	Leased	1960
3780 Nostrand Avenue
Brooklyn, NY 11235

Branch Office	Leased	1973
1164 Wantagh Avenue
Wantagh, NY 11793

Branch Office	Leased	1999
1752 Veterans Memorial Highway
Islandia, NY 11749

Branch Office	Leased	2007
1174 Jericho Turnpike
Commack, NY 11725

The net book value of our premises and equipment was approximately $1.85 million at September 30, ~~2010~~2011.

Item 3. Legal Proceedings

Except as set forth below, there are no material pending legal proceedings to which the Company or it subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.

~~The~~Class Bank is currently subject to two cases filed after the end of the second quarter of fiscal year 2011, as described below, that resulted from actions taken by borrowers whose loans were in default. We believe that such defensive actions are often taken by defaulting borrowers during times of economic uncertainty in an attempt to incentivize the negotiation of more favorable payment terms, but we are not routinely subject to such actions and thus cannot characterize them as ordinary routine litigation incidental to the Bank’s business.Action

~~The~~On ~~Bank~~August is24, a2011, ~~defendant~~Joseph inUnderwood, ana ~~action~~shareholder ~~brought~~represented by ~~50-01~~the ~~Realty~~law ~~LLC~~firm ~~filed~~of onBrower ~~April~~Piven, 13a Professional Corporation, ~~2011~~filed a purported class action lawsuit (“Lawsuit”) in the Supreme Court of the State of New York, County of Kings. ~~50-01~~against ~~Realty~~Brooklyn ~~LLC~~Federal isBancorp, ~~claiming~~Inc., ~~damages~~BFS ofBancorp, ~~approximately~~MHC, ~~$44~~Brooklyn ~~million~~Federal ~~for~~Savings ~~alleged~~Bank ~~breach~~and oftheir ~~contract~~respective directors, and ~~misrepresentation~~Investors ~~regarding~~Bancorp, aInc., ~~right~~Investors ofBancorp, ~~first~~MHC, ~~refusal~~and toInvestors ~~purchase~~Bank an(formerly ~~outstanding~~known ~~loan.~~as ~~The~~Investors Savings Bank). The ~~has~~Lawsuit ~~filed~~alleges, aamong ~~motion~~other tothings, ~~dismiss~~that the ~~complaint.~~Company’s ~~Management~~directors ~~believes~~breached ~~that~~their ~~this~~fiduciary ~~case~~duties isand ~~without~~obligations ~~merit~~to ~~and~~the ~~intends~~Company’s tominority ~~vigorously~~shareholders ~~defend~~(“Public ~~the~~Shareholders”) ~~case.~~and Itthat isInvestors ~~too~~participated, ~~preliminary~~aided and abetted in ~~the~~such ~~proceedings~~alleged breaches, by failing to ~~predict~~obtain the ~~ultimate~~highest ~~results~~available ofvalue ~~this~~for ~~matter;~~the ~~however,~~Company ~~management~~and ~~does~~to ~~not~~take ~~currently~~steps ~~expect~~to ~~that~~maximize ~~the~~its ~~resolution~~value ofwhen ~~these~~facilitating ~~proceedings~~its ~~will~~acquisition ~~have~~by aentering ~~material~~into ~~adverse~~the ~~effect~~Merger onAgreement. The Lawsuit seeks, among other things, an injunction against the Company and the other defendants from consummating the Mergers, rescissory and compensatory damages and attorney’s ~~consolidated~~fees. The ~~financial~~parties ~~position~~to orthe ~~results~~Lawsuit began settlement discussions shortly after receiving notice of ~~operations~~the existence of the Lawsuit.

~~The~~On ~~Bank~~September is16, ~~also~~2011, Russ Bastin, a ~~defendant~~shareholder inrepresented anby ~~action~~the ~~brought~~law byfirm ~~The~~of ~~Mazel~~Brodsky ~~Group~~& Smith, LLC, filed a similar and ~~Yehuda~~substantially ~~Backer~~identical onshareholder ~~May~~action ~~23,~~against ~~2011~~the same defendants in the Supreme Court of the State of New York, County of Kings. ~~The~~(the ~~plaintiffs~~“Bastin ~~are~~Matter”). On ~~claiming~~October ~~damages~~18, of2011, upthe parties to ~~$100~~the ~~million,~~Bastin ~~including~~Matter ~~punitive~~and ~~damages,~~the ~~for~~Lawsuit ~~alleged~~filed ~~breach~~a ofStipulation ~~contract,~~and ~~tortious~~Proposed ~~interference~~Order ~~with~~Consolidating ~~precontractual~~Related ~~negotiations~~Shareholder Actions and ~~breach~~Appointing ofInterim ~~duty~~Co-Lead toCounsel ~~protect~~for ~~confidential~~the ~~information.~~Plaintiffs ~~Management intends~~with ~~to vigorously defend~~ the ~~matter~~court. The Itparties’ isstipulation ~~too~~provides ~~preliminary~~for, inamong ~~the~~other ~~proceedings~~things, ~~to predict~~ the ~~ultimate~~consolidation ~~results~~ of ~~this~~the ~~matter;~~Bastin ~~however~~Matter, ~~management~~the ~~does~~Lawsuit, ~~not~~and ~~currently~~any ~~expect~~other ~~that~~shareholder ~~the~~action ~~resolution~~filed ofin ~~these~~or ~~proceedings~~transferred ~~will~~to ~~have~~the acourt ~~material~~that ~~adverse~~involves ~~effect~~similar onquestions ~~the~~of ~~Company’s~~law ~~consolidated~~or ~~financial~~fact. The ~~position~~Proposed orOrder ~~results~~is ofawaiting ~~operations~~approval by the court.

~~Effective March 31, 2011, the Company, BFS Bancorp, MHC and the Bank, consented to the issuance of Cease and Desist Orders from the OTS.~~45

On September 20, 2011, plaintiffs to the Lawsuit served defendants with a settlement demand letter requesting, among other things, that additional consideration be paid to the Public Shareholders. After protracted negotiations over the course of approximately ten days, on September 30, 2011, the parties reached an oral agreement in principle to settle the Lawsuit. That agreement was later memorialized in a Memorandum of Understanding, executed on or about October 28, 2011. Pursuant to the Memorandum of Understanding and in exchange for the actions described below, the following actions are expected to be or have been taken by the defendants:

●

Investors Bancorp, Inc. without admitting any liability or wrong doing, will pay the Public Shareholders of record as of the effective date of the Mergers an additional $0.07 per share, upon consummation thereof, in consideration for settlement of all claims in the Shareholder Actions and the releases described below, provided, however, that such shareholders do not opt out of the settlement;

●

Section 10.02(b)(iii) of the Merger Agreement has been modified to provide that the Investors Bancorp Fee, as defined in the Merger Agreement, will be reduced to $300,000, subject to the condition that the Stipulation of Settlement, to be prepared by the parties, is approved by the appropriate court. If the Stipulation of Settlement is not approved by the court, the Investors Bancorp Fee shall be equal to $460,000, plus out-of-pocket expenses not to exceed the sum of $50,000 less any loan inventory expenses paid by Brooklyn Federal Savings pursuant to Section 5.03 of the Merger Agreement; and

●

The plaintiffs have been provided with a copy of the proxy statement before issuance for their review, and the defendants considered in good faith any changes thereto proposed by plaintiffs up prior to the time the definitive proxy was filed.

Pursuant to the Memorandum of Understanding, the parties contemplate entering into a Stipulation of Settlement that will settle and release all claims that were asserted and/or could have been asserted by the parties in connection with the Shareholder Actions. The Stipulation of Settlement will include terms proposing the certification of a non-opt out class with respect to all claims for injunctive, declaratory and other equitable relief. Non-New York resident members of the class may opt out solely to preserve any right to pursue potential claims for monetary damages but will otherwise be bound by terms of the settlement. Investors Bancorp may terminate the settlement if class members holding an agreed-to percentage or number of Company shares opt out of the settlement, as set forth in a supplemental agreement to be executed by the parties.

The Memorandum of Understanding also contemplates that the Stipulation of Settlement will be subject to, among other things, the satisfactory completion of confirmatory discovery and the plaintiffs not having any objection to the Proxy Statement on the grounds that the Proxy Statement contains any material misstatement or omission. The Memorandum of Understanding and the Stipulation of Settlement will be conditioned upon class certification and final approval by the Supreme Court of New York, County of Kings. Plaintiffs intend to petition the court for an award of expenses and fees in connection with its approval of the Stipulation of Settlement.

There can be no assurances that the Stipulation of Settlement will be approved by the court, or the timing of any such approval. One of the conditions to the closing of the Mergers is that none of the parties may be subject to any order, decree or injunction of a court or agency that enjoins or prohibits the consummation of the transactions contemplated by the Merger Agreement. Accordingly, if the proposed settlement does not proceed, and, thereafter, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Mergers, then such injunction may prevent the Mergers from becoming effective, or from becoming effective within the expected timeframe. Alternatively, if the Mergers are not approved by the regulators and the shareholders, or close prior to any approval of the settlement, there can be no assurance that the settlement will be approved by the court.

SEC Subpoena

As previously indicated, by letter dated August 11, 2011, as part of a formal investigation being conducted by the U.S. Securities and Exchange Commission’s Division of Enforcement (“Enforcement Division”), the Company received from the Enforcement Division a subpoena to produce, among other things, information related to its provisions and allowances for loan losses and deferred tax asset valuation allowances contained in its annual and quarterly reports for fiscal years 2008 through 2010, the restatement of its consolidated financial statements for the first three quarters of 2010 and the effectiveness of its internal controls. The subpoena covers the time period from October 1, 2007 through August 11, 2011. Brooklyn intends to cooperate fully with the investigation.

Other Litigation

The Bank is a defendant in three cases filed during the fiscal year ended September 30, 2011, as described below, that resulted from actions taken by borrowers whose loans were in default. We believe that such defensive actions are often taken by defaulting borrowers during times of economic uncertainty in an attempt to incentivize the negotiation of more favorable payment terms, but we are not routinely subject to such actions and thus cannot characterize them as ordinary routine litigation incidental to the Bank’s business.

The Bank is a defendant in an action brought by 50-01 Realty LLC filed on April 13, 2011 in the Supreme Court of the State of New York County of Kings. 50-01 Realty LLC initially claimed damages of approximately $44 million for alleged breach of contract and misrepresentation regarding a right of first refusal to purchase an outstanding loan. After the Bank filed a motion to dismiss the complaint, the plaintiff filed an amended complaint modifying the basis upon which it was seeking recovery. The Bank agreed to withdraw its initial motion to dismiss and has now filed a motion to dismiss the amended complaint. Oral arguments were heard on the motion following the end of the 2011 fiscal year. Management believes that this case is without merit and intends to vigorously defend the case. Management does not currently expect that the resolution of these proceedings will have a material adverse effect on the Company’s consolidated financial position or results of operations.

The Bank was a defendant in an action brought by The Mazel Group and Yehuda Backer on May 23, 2011 in the Supreme Court of the State of New York, County of Kings. The Mazel Group is claimed damages of up to $100 million, including punitive damages, for alleged breach of contract, tortious interference with precontractual negotiations and breach of duty to protect confidential information. In a separate matter, the Bank had brought suit against The Mazel Group and Yehuda Backer seeking enforcement of certain payment obligations to the Bank. The parties reached a settlement of both suits in August 2011 and both suits have been dismissed with prejudice. Pursuant to the settlement, The Mazel Group and Yehuda Backer and the Bank have agreed upon a payment amount and schedule in full satisfaction of the amounts owed to the Bank. If the schedule is not met, the Bank has the right to pursue payment of the full amount of the obligations.

The Bank was also made a defendant on certain counterclaims in an action brought by Orchard Hotel, LLC against D.A.B. Group LLC et.al. in the Supreme Court of the State of New York, County of New York. The counterclaims were filed on August 15, 2011. The counterclaims relate to certain loans by the Bank to D.A.B. Group LLC and its affiliates, which were subsequently sold by the Bank to Orchard Hotel, LLC. The counterclaiming plaintiff claimed damages of an undetermined amount and asserts damages in excess of $50 million, for allegedly false and fraudulent representations regarding extension of maturity of the loan and miscalculation of interest and late charges. Management believes that this case is without merit and intends to vigorously defend the case. Management does not currently expect that the resolution of these proceedings will have a material adverse effect on the Company’s consolidated financial position or results of operations.

The Bank has also been named as a defendant in other ordinary course lawsuits.

Effective on March 31, 2011, the Company, BFS Bancorp, MHC and the Bank, consented to the issuance of Cease and Desist Orders from the OTS. Such Orders remain in effect and continue to be enforced by the Federal Reserve (for the Company and BFS Bancorp, MHC) and the OCC (for the Bank).

Item 4. [Removed and Reserved]

4447

PART II.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock trades on the ~~Nasdaq~~NASDAQ ~~Global~~Capital Market under the symbol “BFSB.” Trading in the Company’s common stock commenced on April 6, 2005.

On ~~January~~September 126, 2011, the Company received a letter ~~from~~ (the ~~NASDAQ Stock Market (~~“~~NASDAQ~~Notification Letter”) ~~stating~~from ~~that~~the NASDAQ notifying the Company isthat ~~not~~it inno ~~compliance~~longer ~~with~~meets the NASDAQ ~~Listing~~Capital ~~Rule~~Markets ~~5250(c)(1)~~continued ~~because~~listing ~~the~~requirements ~~Company~~as ~~did~~the ~~not~~common ~~timely~~stock ~~file~~had ~~its~~traded ~~Annual~~below ~~Report~~$1.00 onper ~~Form~~share ~~10-K~~ for the ~~year~~requisite ~~ended~~period ~~September~~of ~~30,~~time ~~2010~~ and that the Company ~~also~~was ~~failed~~no tolonger ~~comply~~in compliance with ~~NASDAQ’s~~the ~~minimum~~Bid ~~market~~Price ~~value of publicly held shares of $5~~Rule.0 The ~~million.~~Notification AsLetter ~~disclosed~~had tono ~~the~~effect ~~SEC via a Form 12b-25~~ on ~~December 27, 2010,~~ the Company’s ~~Form~~common ~~10-K~~stock ~~for~~which ~~the~~now ~~year~~trades ~~ended~~on ~~September~~the ~~30,~~NASDAQ ~~2010~~Capital ~~was~~Markets. The ~~delayed~~Notification ~~due~~letter toafforded the ~~resignation of the~~ Company’s ~~independent~~180 ~~registered~~days ~~public accounting firm on December 20, 2010. The Company had~~ until March 145, ~~2011~~2012 to ~~submit a plan to~~ regain compliance with ~~delinquent~~the ~~periodic~~Bid ~~reports~~Price ~~(which requirement it met timely) and now has and until June 27, 2011 to regain compliance~~Rule. The Company ~~has~~would ~~until~~be ~~July~~eligible ~~11,~~for ~~2011~~a tograce ~~regain~~period ~~compliance~~if ~~with~~certain ~~the~~conditions ~~minimum~~were ~~market value of publicly held stock~~met.

OnThe ~~February 15, 2011, the~~ Company ~~received~~has anentered ~~additional~~into ~~letter from~~ the ~~NASDAQ~~Merger ~~stating~~Agreement, ~~that~~which ~~the~~will ~~Company~~result ~~was not~~ in ~~compliance with NASDAQ Listing Rule 5250(c)(1) because the Company did not timely file~~ its ~~Quarterly~~merger ~~Report~~with onand ~~Form~~into ~~10-Q~~Investors ~~for the quarter ended December 31~~Bancorp, ~~2010~~Inc., Assubject ~~previously~~to ~~mentioned,~~ the ~~Company’s~~terms ~~independent~~and ~~registered~~conditions ~~public~~set ~~accounting~~forth ~~firm~~in ~~resigned~~the onMerger ~~December 20~~Agreement, ~~2010.~~which ~~This~~is ~~delayed~~expected ~~the~~to ~~filing~~result ofin the ~~Form~~delisting ~~10-K~~and ~~for~~cancellation ~~the~~of ~~fiscal year ended September 30, 2010, as well as~~ the ~~Form~~Company’s ~~10-Q~~outstanding ~~for~~common ~~the~~stock. The ~~period~~Company ~~ended~~anticipates ~~December~~that ~~31, 2010, and~~ the ~~Form~~merger ~~10-Q~~will ~~for~~be ~~the~~consummated ~~period~~in ~~ended~~January ~~March 31~~2012, ~~2011.~~

OnAs ~~March~~of 7September 30, 2011, ~~the~~there ~~Company~~were ~~received~~13,484,210 ashares ~~letter~~of ~~from the NASDAQ stating that the~~ Company ~~was~~common ~~not~~stock inissued ~~compliance~~and ~~with~~12,871,385 ~~the~~common ~~NASDAQ~~shares ~~Listing~~outstanding ~~Rules~~and ~~because~~approximately ~~the~~648 ~~Company~~stockholders ~~did not maintain a minimum bid price~~ of $1record.00 Of ~~per share for~~ the ~~requisite~~total ~~period~~outstanding ofshares ~~time.~~9,257,500 ~~The~~were ~~Company~~held ~~has~~by ~~until~~BFS ~~September 6~~Bancorp, ~~2011~~MHC toand ~~regain~~3,613,885 ~~compliance~~were ~~with~~held ~~the~~by ~~minimum~~other ~~bid requirement~~shareholders.

AsThe oftable ~~June~~below ~~15,~~shows ~~2011,~~the ~~there~~high ~~were 13,484,210 shares of Company common stock issued~~ and ~~12,882,607~~low ~~common~~closing ~~shares~~prices ~~outstanding~~reported ~~and~~on ~~approximately~~the ~~674~~NASDAQ ~~stockholders~~Capital ofMarket ~~record. Of~~for the ~~total~~Company’s ~~outstanding~~common ~~shares~~stock ~~9,257,500~~during ~~were~~the ~~held~~periods ~~by BFS Bancorp, MHC and 3,625,107 were held by other shareholders~~indicated.

The table below shows the high and low closing prices reported on the Nasdaq Global Market for the Company’s common stock during the periods indicated.

2011	High		Low		Dividend

Fourth Quarter (July 1, 2011 – September 30, 2011)	$	1.44	$	0.75	$	-
Third Quarter (April 1, 2011 – June 30, 2011)	$	1.55	$	0.40	$	-
Second Quarter (January 1, 2011 – March 31, 2011)	$	1.34	$	0.66	$	-
First Quarter (October 1, 2010 - December 31, 2010)	$	2.64	$	1.25	$	-

2010	High		Low		Dividend

Fourth Quarter (July 1, 2010 – September 30, 2010)	$	4.83	$	1.78	$	0.01
Third Quarter (April 1, 2010 – June 30, 2010)	$	9.48	$	4.20	$	0.06
Second Quarter (January 1, 2010 – March 31, 2010)	$	10.20	$	7.36	$	0.11
First Quarter (October 1, 2009 - December 31, 2009)	$	12.98	$	9.90	$	0.11

2010	High		Low		Dividend
Fourth Quarter (July 1, 2010 – September 30, 2010)	$	4.83	$	1.78		$	0.01
Third Quarter (April 1, 2010 – June 30, 2010)	$	9.48	$	4.20		$	0.06
Second Quarter (January 1, 2010 – March 31, 2010)	$	10.20	$	7.36		$	0.11
First Quarter (October 1, 2009 - December 31, 2009)	$	12.98	$	9.90		$	0.11
2009	High		Low		Dividend
Fourth Quarter (July 1, 2009 – September 30, 2009)	$	14.19	$	11.15		$	0.10
Third Quarter (April 1, 2009 – June 30, 2009)	$	12.67	$	10.25		$	0.10
Second Quarter (January 1, 2009 – March 31, 2009)	$	14.20	$	9.50		$	0.10
First Quarter (October 1, 2008 - December 31, 2008)	$	14.99	$	12.31		$	0.10

See Part I, Item 1. “Business—Supervision and Regulation––Regulation of Federal Savings Associations––Capital Distributions” for a discussion of certain limitations imposed on the Bank’s ability to declare and pay dividends to the Company.

See Part III. Item 12 below regarding equity compensation plan information categorized by those plans that have been approved by stockholders. At September 30, ~~2010~~2011, there were no plans that have not been approved by stockholders.

Stock Performance Graph

Set forth hereunder is a stock performance graph comparing (a) the cumulative total return on the Common Stock between September 30, 2005 and September 30, 2010, (b) the cumulative total return on stock included in the SNL Thrift Index over those periods, and (c) the cumulative total return on stocks included in the Russell 2000 Index over those periods. Cumulative return assumes the reinvestment of dividends, and is expressed in dollars based on an assumed investment of $100.

Brooklyn Federal Bancorp, Inc.

	Period Ending
Index	09/30/05		09/30/06		09/30/07		09/30/08		09/30/09		09/30/10
Brooklyn Federal Bancorp, Inc.		100.00		110.35		118.46		130.17		110.81		16.93
SNL Thrift Index		100.00		116.40		106.23		54.72		41.91		41.85
Russell 2000		100.00		109.92		123.49		105.60		95.52		108.27

There can be no assurance that the Company’s stock performance will continue in the future with the same or similar trend depicted in the graph. The Company will not make or endorse any predictions as to future stock performance.

When the Company pays dividends to its minority stockholders, it also is required to pay dividends to BFS Bancorp, MHC, unless BFS Bancorp, MHC elects to waive the receipt of dividends. We anticipate that BFS Bancorp, MHC would waive any dividends paid by the Company. Any decision to waive dividends is subject to regulatory approval. See Part I. Item 1. “Business––Holding Company Regulation––Waivers of Dividends by BFS Bancorp, MHC” for the regulatory guidelines for requesting a waiver and conditions for regulatory approval in BFS Bancorp, MHC received regulatory approval to waive dividends for the fiscal year ended September 30, 2010. Under OTS regulations, public stockholders would not be diluted for any dividends waived by BFS Bancorp, MHC in the event that BFS Bancorp, MHC converts to stock form.

Dividends are payable at the sole discretion of the Company, and any dividends will depend, in part, upon receipt of dividends from the Bank, because the Company presently has no source of income other than dividends from the Bank, earnings from the investment of offering proceeds it retained and interest on the Company’s loan to the employee stock ownership plan. During the 12 months ended September 30, 2010, we paid a quarterly dividend of $0.11 per common share of our stock during the first and second quarters of fiscal year 2010, $0.06 per common share during the third quarter and $0.01 per common share during the last quarter of fiscal year 2010 compared to $0.10 per common share for all four quarters of fiscal year 2009. The OTS regulations impose limitations on “capital distributions” by savings associations such as the Bank. As disclosed further below in Part II. Item 7 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Strategy,” the OTS issued a supervisory directive and entered into supervisory agreements, dated September 28, 2010, with each of the Bank and the Company, and on March 31, 2011, the Bank, the Company and BFS Bancorp, MHC entered into Cease and Desist Orders with the OTS, all of which impose significant restrictions on the business and operations of the Bank, including restrictions on growth, commercial real estate lending and capital distributions. These restrictions include, but are not limited to, the Company declaring or paying dividends or making any other capital distributions without the prior written approval of the OTS Regional Director.

The Company did not repurchase any of our common stock in the quarter ending September 30, 2010. Through September 30, 2010 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, 2010 the Company has repurchased 106,674 shares at an average cost of $11.44 per share. Stock repurchases will be made from time to time and may be effected through open market purchases, block trades and in privately negotiated transactions. Repurchased stock will be held as treasury stock and will be available for general corporate purposes.

Item 6. Selected Financial Data

The summary information presented below is derived in part from and should be read in conjunction with the consolidated financial statements of the Company presented in Item 8. On April 5, 2005, the Bank completed its reorganization into the mutual holding company structure, and in connection therewith the Company sold 3,967,500 shares of common stock which resulted in $37.9 million of net proceeds of which $20.5 million was utilized to acquire all of the outstanding common stock of the Bank. The Company issued 9,257,500 shares of its common stock to BFS Bancorp, MHC.

	At September 30,
	2010			2009			2008		2007		2006
	(In thousands)
Selected Financial Condition Data:
Total assets	$	487,755		$	521,445		$	483,833	$	390,434	$	408,045
Cash and cash equivalents		14,201			3,472			5,053		5,398		4,078
Investments in certificates of deposit		-			-			1,397		3,890		7,160
Securities available-for-sale		69,107			3,305			3,655		4,601		4,389
Securities held-to-maturity		-			66,201			78,086		73,354		86,972
Loans receivable, net		369,842			419,685			239,149		225,467		194,355
Loans held-for-sale		-			-			134,171		59,153		92,243
Deposits		423,406			402,070			342,475		287,155		271,003
Borrowings		10,500			27,300			44,239		9,271		49,407
Stockholders’ equity		45,739			81,874			86,323		85,259		79,963
	Years Ended September 30,
	2010			2009			2008		2007		2006
	(In thousands, except per share data)
Selected Operating Data:
Interest income	$	30,447		$	34,111		$	28,314	$	27,736	$	22,035
Interest expense		7,597			9,810			10,265		10,703		7,338
Net interest income before provision for loan losses		22,850			24,301			18,049		17,033		14,697
Provision for loan losses		42,682			8,545			399		49		436
Net interest income after provision for loan losses		(19,832	)		15,756			17,650		16,984		14,261
Non-interest (loss) income		(9,855	)		(736	)		2,703		3,135		2,336
Non-interest expense		14,630			13,648			11,454		14,091		9,274
Income before income taxes		(44,317	)		1,372			8,899		6,028		7,323
(Benefit) provision for income taxes		(5,386	)		85			3,318		2,181		2,765
Net (loss) income	$	(38,931	)	$	1,287		$	5,581	$	3,847	$	4,558
Dividends paid per common share	$	0.29		$	0.40		$	0.29	$	0.10	$	-

	At or For the Years Ended September 30,
	2010			2009			2008			2007			2006
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets		-7.40	%		0.25	%		1.30	%		0.96	%		1.25	%
Return on average equity		-53.09	%		1.47	%		6.49	%		4.61	%		5.91	%
Interest rate spread (1)		4.21	%		4.32	%		3.67	%		3.55	%		3.52	%
Net interest margin (2)		4.50	%		4.88	%		4.40	%		4.43	%		4.21	%
Efficiency ratio (3)		60.36	%		52.13	%		52.84	%		70.76	%		54.60	%
Non-interest expense to average total assets		2.78	%		2.65	%		2.66	%		3.50	%		2.55	%
Average interest-earning assets to average interest-bearing liabilities		119.40	%		128.51	%		129.55	%		131.40	%		132.97	%
Asset Quality Ratios:
Non-performing assets as a percent of total assets		17.72	%		4.23	%		0.42	%		0.17	%		0.07	%
Non-performing loans as a percent of total loans		22.22	%		5.13	%		0.54	%		0.23	%		0.10	%
Allowance for loan losses as a percent of total loans		4.63	%		2.50	%

Filing Compare · Brooklyn Federal Bancorp, Inc.