General

The Holding Company is a Delaware corporation and parent company of the Bank, a federally-chartered stock savings bank. The Bank maintains its headquarters in the Williamsburg section of Brooklyn, New York and operates twenty-three full service retail banking offices located in the New York City ("NYC") boroughs of Brooklyn, Queens, and the Bronx, and in Nassau County, New York. The Bank's principal business has been, and continues to be, gathering deposits from customers within its market area, and investing them primarily in multifamily residential, commercial real estate, one- to four-family residential, construction and land acquisition loans, consumer loans, MBS, obligations of the U.S. government and GSEs, and corporate debt and equity securities.

Executive Summary

The Holding Company's primary business is the operation of the Bank. The Company's consolidated results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and securities, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings. The Bank additionally generates non-interest income such as service charges and other fees, as well as income associated with Bank Owned Life Insurance. Non-interest expense primarily consists of employee compensation and benefits, federal deposit insurance premiums, data processing costs, and occupancy and equipment, marketing and other operating expenses. The Company's consolidated results of operations are also significantly affected by general economic and competitive conditions (particularly fluctuations in market interest rates), government policies, changes in accounting standards and actions of regulatory agencies.

The Bank's primary strategy is generally to seek to increase its product and service utilization for each individual depositor, and to increase its household and deposit market shares in the communities that it serves. The Bank's primary strategy additionally includes the origination of, and investment in, mortgage loans, with an emphasis on multifamily residential and mixed use real estate loans. During 2008, the Company grew assets due to continued loan demand and favorable marketplace conditions surrounding the origination of multifamily residential real estate loans. In late 2008 and during the three-month and six-month periods ended June 30, 2009, the Company restricted asset growth due to concerns over the health of the commercial real estate markets, and the desire to preserve capital levels to accommodate these concerns.

The Company believes that multifamily residential and mixed use loans provide advantages as investment assets. Initially, they offer a higher yield than investment securities of comparable maturities or terms to repricing. In addition, origination and processing costs for the Bank's multifamily residential and mixed use loans are lower per thousand dollars of originations than comparable one-to four-family loan costs. Further, the Bank's market area has generally provided a stable flow of new and refinanced multifamily residential and mixed use loan originations. In order to address the credit risk associated with multifamily residential and mixed use lending, the Bank has developed underwriting standards that it believes are reliable in order to maintain consistently high credit quality for its loans.

The year ended December 31, 2008 and the three-month and six-month periods ended June 30, 2009 were dominated by a global real estate and economic recession fueled by significant weakness in and/or failures of many of the world's largest financial institutions. As a result, the Bank recognized higher credit costs on portfolio loans and OTTI on investment securities during the three-month and six-month periods ended June 30, 2009 compared to the corresponding periods of 2008. However, historically high dislocations in credit markets caused origination spreads from the benchmark origination interest rate to increase significantly during the year ended December 31, 2008 and the three-month and six-month periods ended June 30, 2009. This increase, coupled with a reduction in benchmark short-term interest rates by the Federal Open Market Committee ("FOMC") (which significantly impact the pricing of the Bank's retail deposits), favorably impacted the Company's net interest spread and net interest margin during the three-month and six-month periods ended June 30, 2009 compared to the corresponding periods of 2008.

Recent Market Developments

Emergency Economic Stabilization Act of 2008 ("EESA")

The U.S. and global economies are experiencing significantly reduced activity as a result of, among other factors, disruptions in the financial system during the past year as well as various other recessionary conditions. Reflecting concern about the stability of the financial markets, many lenders and institutional investors have reduced, and in some cases ceased to provide, funding to borrowers, including other financial institutions. These factors resulted in limited availability of credit, reduced confidence in the financial sector, and an increased level of volatility in the financial markets.

In response to the financial crises affecting the banking system and financial markets, the EESA was enacted on October 3, 2008. The EESA grants the U.S. Department of Treasury ("Treasury") the authority, among others, to establish the TARP to purchase up to $700 billion of certain troubled assets, including mortgages, MBS and certain other financial instruments, from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

If a publicly-traded financial institution sells troubled assets into the TARP, Treasury will receive a warrant giving it the right to receive nonvoting common stock or preferred stock in such financial institution, or voting stock with respect to which Treasury agrees not to exercise voting power, subject to certain de minimis exceptions. Further, all financial institutions that sell troubled assets to the TARP and satisfy certain conditions will also be subject to certain executive compensation restrictions.

In addition to establishing the TARP, the EESA urges the Secretary of the Treasury to establish a program that will guarantee the principal of, and interest on, troubled assets originated or issued prior to March 14, 2008. The Secretary of the Treasury will establish premiums for financial institutions that participate in this program and may provide for variations in such rates in accordance with the credit risk associated with the particular troubled asset being guaranteed.

TARP Capital Purchase Program

Under the TARP, on October 14, 2008, the Treasury announced the TARP Capital Purchase Program to strengthen the capital and liquidity positions of viable institutions and encourage banks and thrifts to increase lending to creditworthy borrowers. Under the TARP Capital Purchase Program, qualifying financial institutions were able to sell senior preferred shares to the Treasury, which qualify as Tier 1 capital for regulatory capital purposes. In conjunction with its senior preferred investment, Treasury also receives warrants to purchase common stock of the participating institution with an aggregate market price equal to 15% of the senior preferred investment. The minimum amount of preferred stock that would be issued was equal to 1% of the institution's risk-weighted assets, and the maximum was the lesser of $25 billion or 3% of the institution's risk-weighted assets. Participating financial institutions are required to adopt Treasury's standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the program.

On January 5, 2009, after receiving approval of its application from Treasury, the Company announced that it decided to forego participation in the TARP Capital Purchase Program. The Company conducted extensive financial analysis and concluded that the benefits of the TARP Capital Purchase Program to the Company and its shareholders were mitigated by several factors, including the Company's strong capital levels and historically prudent investment and underwriting practices, and the potential dilution to both earnings and book value that participation in the TARP Capital Purchase Program would have created over the next three to five years.

On November 21, 2008, the Federal Deposit Insurance Corporation ("FDIC") adopted the Temporary Liquidity Guarantee Program ("TLGP") pursuant to its authority to prevent "systematic risk" in the U.S banking system. It was adopted as an initiative to counter the system-wide crisis in the nation's financial sector. Under the TLGP, the FDIC will (i) guarantee, through the earlier of maturity or June 30, 2012, certain senior unsecured debt issued by participating institutions on or after October 14, 2008 and before June 30, 2009 under the Debt Guarantee Program ("DGP"), and (ii) fully insure non-interest bearing transaction deposit accounts held at participating FDIC-insured institutions through December 31, 2009 under the Transaction Account Guarantee Program ("TAGP"). The Company elected not to participate in the TLGP.

Eligible institutions were covered under the TLGP at no cost for the first 30 days. Institutions that elected not to participate in one or both parts of the TLGP were required to notify the FDIC of their election to opt out on or before December 5, 2008. Institutions that did not opt out are subject to a fee of 50 to 100 basis points per annum based on the length of maturity of senior unsecured debt issued under the DGP. Under the TAGP, a 10 basis point surcharge will be added to the institution's current insurance assessment, quarterly, for balances in non-interest bearing transaction accounts that exceed the existing deposit insurance limit of $250,000. Although the TLGP was originally scheduled to expire in June 2009, on February 10, 2009 the FDIC announced its intention to extend the TLGP through October 2009 for an additional premium.

On January 16, 2009, in an effort to further strengthen the financial system and U.S economy, the FDIC announced that it will soon propose rule changes to the TLGP to extend the maturity of the guarantee from three to up to 10 years where the debt is supported by collateral and the issuance supports new consumer lending. The FDIC's final rule regarding the extension of the DGP was published June 3, 2009. The final rule restates without change those provisions of the interim rule that extended the FDIC's guarantee until the earliest of the opt-out date, the maturity of the debt, the mandatory conversion date for mandatory convertible debt, or December 31, 2012. Until the details of this extended program are finalized and published, management cannot determine the extent, if any, that the Company would participate in this program.

It is unclear what impact the EESA, TARP Capital Purchase Program, TLGP, other previously announced liquidity and funding initiatives of the Federal Reserve and other agencies, and any additional programs that may be initiated in the future will have on the financial markets and the other difficulties described above, including the current levels of volatility and limited credit availability, or on the U.S. banking and financial industries and the broader U.S. and global economies. Further negative effects could have an adverse impact on the Company and its business.

Proposed Financial Regulatory Reforms

On June 17, 2009, President Obama and the Treasury announced a financial regulatory reform white paper in which they proposed several reforms to the existing financial services regulatory structure. Among other matters, the plan would create a new consumer protection agency and authorize greater powers for the Federal Reserve Board. The House and Senate are expected to consider competing proposals over the coming years. There can be no assurance that the financial stability plan proposed by Treasury, the other proposals under consideration or any other legislation or regulatory initiatives will be effective at dealing with the ongoing economic crisis and improving economic conditions globally, nationally or in the Company's markets, or that the measures adopted will not have adverse consequences.

Insurance of Deposit Accounts

On February 27, 2009, the FDIC adopted a final rule modifying the risk-based assessment system and set the initial base assessment rates beginning April 1, 2009 at 12 to 45 basis points depending on an institution's risk category, with adjustments resulting in increased assessment rates generally for institutions with a significant reliance on secured liabilities and brokered deposits.

On February 27, 2009, the FDIC also adopted an interim rule imposing a 20 basis point emergency special assessment on the industry on June 30, 2009, to be collected on September 30, 2009. The interim rule also permits the FDIC to impose an emergency special assessment of up to 10 basis points after June 30, 2009, if necessary to maintain public confidence in federal deposit insurance. On May 22, 2009, the FDIC adopted a final rule implementing a 0.05% special assessment of each insured depository institution's assets minus Tier 1 capital as of June 30, 2009, but no more than 0.10% times the institution's assessment base for the second quarter of 2009, to be collected by the FDIC on September 30, 2009. Additional special assessments may be imposed by the FDIC for future periods.

Based upon the Bank's insured deposit balances at June 30, 2009, the Bank estimated that its total assessments will range between 15 and 17 basis points (not including special assessments) during the year ending December 31, 2009. The adopted increases in assessments will result in total pre-tax assessment expense of approximately $3.5 million to $4.0 million during 2009. In addition, the Bank recognized a special assessment of $1.8 million during the quarter ended June 30, 2009, representing 0.05% of the Bank's total assets (net of

Tier 1 capital) at June 30, 2009. The Bank is currently anticipating another $1.8 million special assessment to be charged by the FDIC in the third quarter of 2009, although such assessment has not been formally announced by the FDIC.

                  Selected Financial Highlights and Other Data
                (Dollars in Thousands Except Per Share Amounts)

                                           At or For the Three     At or For the Six
                                        Months Ended June 30,    Months Ended June 30,
                                          2009          2008         2009       2008
Performance and Other Selected
Ratios:
Return on Average Assets                   0.69%         0.92%        0.49%      0.80%
Return on Average Stockholders'
Equity                                    9.84         12.44         6.97      10.66
Stockholders' Equity to Total Assets      7.13          7.33         7.13       7.33
Tangible Equity to Total Tangible
Assets                                    6.00          6.11         6.00       6.11
Loans to Deposits at End of Period      141.55        150.65       141.55     150.65
Loans to Earning Assets at End of
Period                                   90.76         88.16        90.76      88.16
Net Interest Spread                       2.54          2.39         2.37       2.20
Net Interest Margin                       2.78          2.67         2.64       2.50
Average Interest Earning Assets to
Average Interest Bearing Liabilities    108.57        109.02       108.61     108.77
Non-Interest Expense to Average
Assets                                    1.53          1.34         1.44       1.37
Efficiency Ratio                         52.62         48.84        53.75      52.77
Effective Tax Rate                       34.57         32.07        32.26      32.98
Dividend Payout Ratio                    66.67         53.85        93.33      63.64
Average Tangible Equity               $233,376      $221,171     $233,416   $218,909
Per Share Data:
Reported EPS (Diluted)                   $0.21         $0.26        $0.30      $0.44
Cash Dividends Paid Per Share             0.14          0.14         0.28       0.28
Stated Book Value                         8.24          8.05         8.24       8.05
Tangible Book Value                       6.84          6.63         6.84       6.63
Asset Quality Summary:
Net Charge-offs                           $528           $116      $2,404       $260
Non-performing Loans                    12,878         6,852       12,878      6,852
Non-performing Loans/Total Loans           0.40%         0.22%        0.40%      0.22%
Non-performing Assets                  $14,118         6,852      $14,118      6,852
Non-performing Assets/Total Assets         0.36%        0.18          0.36%     0.18
Allowance for Loan Loss/Total Loans       0.62          0.49         0.62       0.49
Allowance for Loan
Loss/Non-performing Loans               155.23        224.55       155.23     224.55
Regulatory Capital Ratios (Bank
Only):
Tangible Capital                           7.63%         7.83%        7.63%      7.83%
Leverage Capital                          7.63          7.83         7.63       7.83
Tier 1 Risk-based Capital                10.70         10.70        10.70      10.70
Total Risk-based Capital                 11.46         11.46        11.46      11.46
Earnings to Fixed Charges Ratios(1)
Including Interest on Deposits             1.40x         1.46x        1.26x      1.38x
Excluding Interest on Deposits             1.73          2.01         1.50       1.92

(1) Please refer to Exhibit 12.1 for further detail on the calculation of these ratios.

Critical Accounting Policies

Various elements of the Company's accounting policies are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. The Company's policies with respect to the methodologies it uses to determine the allowance for loan losses, reserves for loan commitments, the liability for the First Loss Position, the valuation of MSR, asset impairments (including the valuation of goodwill and other than temporary declines in the valuation of securities), the recognition of deferred tax assets and unrecognized tax positions, the recognition of loan income, the valuation of financial instruments and accounting for defined benefit plans are its most critical accounting policies because they are important to the presentation of the Company's consolidated financial condition and results of operations, involve a significant degree of complexity and require

management to make difficult and subjective judgments which often necessitate assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material variations in the Company's consolidated results of operations or financial condition.

The following are descriptions of the Company's critical accounting policies and explanations of the methods and assumptions underlying their application.

Allowance for Loan Losses. GAAP requires the Bank to maintain an appropriate allowance for loan losses. Management uses available information to estimate losses on loans and believes that the Bank maintains its allowance for loan losses at appropriate levels. Adjustments may be necessary, however, if future economic, market or other conditions differ from the current operating environment.

Although the Bank believes it utilizes the most reliable information available, the level of the allowance for loan losses remains an estimate subject to significant judgment. These evaluations are inherently subjective because, although based upon objective data, it is management's interpretation of the data that determines the amount of the appropriate allowance. The Company, therefore, periodically reviews the actual performance and charge-offs of its portfolio and compares them to the previously determined allowance coverage percentages. In doing so, the Company evaluates the impact that the variables discussed below may have on the portfolio to determine whether or not changes should be made to the assumptions and analyses.

The Bank's loan loss reserve methodology consists of several components, including a review of the two elements of its loan portfolio: problem loans
[i.e., classified loans and impaired loans under SFAS No. 114, "Accounting By Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures an amendment of FASB Statement No. 114" ("Amended SFAS 114")] and performing loans. The Bank applied the process of determining the allowance for loan losses consistently throughout the three-month and six-month periods ended June 30, 2009 and 2008.

Performing Loans

At June 30, 2009, the majority of the allowance for loan losses was allocated to performing loans, which represented the overwhelming majority of the Bank's loan portfolio. Performing loans are reviewed at least quarterly based upon the premise that there are losses inherent within the loan portfolio that have not been identified as of the review date. The Bank thus calculates an allowance for loan losses related to its performing loans by deriving an expected loan loss percentage and applying it to its performing loans. In deriving the expected loan loss percentage, the Bank generally considers, among others, the following criteria: the Bank's historical loss experience; the age and payment history of the loans (commonly referred to as their "seasoned quality"); the type of loan (i.e., one- to four-family, multifamily residential, commercial real estate, cooperative apartment, construction and land acquisition or consumer); the underwriting history of the loan (i.e., whether it was underwritten by the Bank or a predecessor institution acquired by the Bank and, therefore, originally subjected to different underwriting criteria); both the current condition and recent history of the overall local real estate market (in order to determine the accuracy of utilizing recent historical charge-off data to derive the expected loan loss percentages); the level of, and trend in, non-performing loans; the level and composition of new loan activity; and the existence of geographic loan concentrations (as the overwhelming majority of the Bank's loans are secured by real estate located in the NYC metropolitan area) or specific industry conditions within the portfolio segments. Since these criteria affect the expected loan loss percentages that are applied to performing loans, changes in any of them may affect the amounts of the allowance and the provision for loan losses.

Problem Loans

OTS regulations and Bank policy require that loans possessing certain weaknesses be classified as Substandard, Doubtful or Loss assets. Assets that do not expose the Bank to risk sufficient to justify classification in one of these categories, however, which possess potential weaknesses that deserve management's attention, are designated Special Mention. Loans classified as Special Mention, Substandard or Doubtful are reviewed individually on a quarterly basis by the Bank's Loan Loss Reserve Committee to determine the level of possible loss, if any, that should be provided for within the Bank's allowance for loan losses.

The Bank's policy is to charge-off immediately all balances classified as ''Loss'' and record a reduction of the allowance for loan losses for the full amount of the outstanding loan balance. The Bank applied this process consistently throughout the three-month and six-month periods ended June 30, 2009 and 2008.

Under the guidance established by Amended SFAS 114, loans determined to be impaired (i.e., loans where it is probable that all contractual amounts due will not be collected in accordance with the terms of the loan; generally, non-accrual one- to four-family loans in excess of $625,500 and non-accrual and troubled-debt restructured multifamily residential and commercial real estate loans) are evaluated at least quarterly in order to establish impairment. For each loan that the Bank determines to be impaired, impairment is measured by the amount that the carrying balance of the loan, including all accrued interest, exceeds the estimated fair value of the collateral. A specific reserve is established on all impaired loans to the

Non-performing one- to four-family loans of $625,500 or less are not required to be evaluated for impairment, and are classified as Substandard, Doubtful or Loss, and reviewed and reserved for or recorded in the manner discussed above for loans of such classification.

Reserve for Loan Commitments. The Bank maintains a separate reserve within other liabilities associated with commitments to fund future loans that have been accepted by the borrower. This reserve is determined based upon the historical loss experience of similar loans owned by the Bank at each period end. Any increases in this reserve amount are obtained via a transfer of reserves from the Bank's allowance for loan losses, with any resulting shortfall in the Bank's allowance for loan losses being satisfied through the quarterly provision for loan losses. Any decreases in this reserve amount are recognized as a transfer of reserve balances back to the allowance for loans losses at each period end.

Liability for the First Loss Position on Multifamily Loans Sold to FNMA. A liability is also recorded related to the First Loss Position on multifamily residential real estate loans sold with recourse under an agreement with FNMA. This liability reserve, which is included in other liabilities in the Company's consolidated statements of financial condition, is determined in a manner similar to the Company's allowance for loan losses related to loans held in portfolio.

Valuation of MSR. The cost of mortgage loans sold with servicing rights retained by the Bank is allocated between the loans and the servicing rights based on their estimated fair values at the time of the loan sale. In accordance with GAAP, MSR are carried at the lower of cost or fair value and are amortized in proportion to, and over the period of, anticipated net servicing income. The Company adopted SFAS No. 156, "Accounting for Servicing of Financial Assets" ("SFAS 156") effective January 1, 2007. SFAS 156 requires all separately recognized MSR to be initially measured at fair value, if practicable. The estimated fair value of MSR is determined by calculating the present value of estimated future net servicing cash flows, using estimated prepayment, default, servicing cost and discount rate assumptions. All estimates and assumptions utilized in the valuation of MSR are derived based upon actual historical results for the Bank, or, in the absence of such data, from historical results for the Bank's peers.

The fair value of MSR is sensitive to changes in assumptions. Fluctuations in prepayment speed assumptions have the most significant impact on the estimated fair value of MSR. In the event that loan prepayment activities exceed the . . .