Edgar Filing: FLUSHING FINANCIAL CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

Commission file number 000-24272


FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

	Delaware	11-3209278

	(State or other jurisdiction of	(I.R.S. Employer Identification No.)
	incorporation or organization)

1979 Marcus Avenue, Suite E140, Lake Success, New York 11042

(Address of principal executive offices)

(718) 961-5400

(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:
Common Stock $0.01 par value (and
associated Preferred Stock Purchase Rights).		NASDAQ Global Select Market

(Title of each class)		(Name of exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act. o Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No

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. x Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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


Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
o Yes x No

As of June 29, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was $324,977,000. This figure is based on the closing price on that date on the NASDAQ Global Select Market for a share of the registrant’s Common Stock, $0.01 par value, which was $16.06.

The number of shares of the registrant’s Common Stock outstanding as of February 29, 2008 was 21,336,786 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 20, 2008 are incorporated herein by reference in Part III.

TABLE OF CONTENTS


		Page

	PART I

Item 1. Business		1

	GENERAL

	Overview	1
	Market Area and Competition	2
	Lending Activities	3
	Loan Portfolio Composition	3
	Loan Maturity and Repricing	7
	Multi-Family Residential Lending	7
	Commercial Real Estate Lending	8
	One-to-Four Family Mortgage Lending – Mixed-Use Properties	8
	One-to-Four Family Mortgage Lending – Residential Properties	9
	Construction Loans	10
	Small Business Administration Lending	10
	Commercial Business and Other Lending	10
	Loan Approval Procedures and Authority	11
	Loan Concentrations	11
	Loan Servicing	11
	Asset Quality	11
	Loan Collection	11
	Delinquent Loans and Non-performing Assets	12
	Real Estate Owned	13
	Environmental Concerns Relating to Loans	13
	Allowance for Loan Losses	13
	Investment Activities	17
	General	17
	Mortgage-backed securities	18
	Sources of Funds	21
	General	21
	Deposits	21
	Borrowings	25
	Subsidiary Activities	26
	Personnel	27
	Omnibus Incentive Plan	27

	FEDERAL, STATE AND LOCAL TAXATION

	Federal Taxation	27
	General	27
	Bad Debt Reserves	27
	Distributions	27
	Corporate Alternative Minimum Tax	28
	State and Local Taxation	28
	New York State and New York City Taxation	28
	Delaware State Taxation	28


	REGULATION

	General	28
	Holding Company Regulation	29
	Investment Powers	30
	Real Estate Lending Standards	30
	Loans-to-One Borrower Limits	30
	Insurance of Accounts	31
	Qualified Thrift Lender Test	31
	Transactions with Affiliates	32
	Restrictions on Dividends and Capital Distributions	32
	Federal Home Loan Bank System	33
	Assessments	33
	Branching	33
	Community Reinvestment	33
	Brokered Deposits	33
	Capital Requirements	34
	General	34
	Tangible Capital Requirement	34
	Leverage and Core Capital Requirement	34
	Risk-Based Requirement	34
	Federal Reserve System	35
	Financial Reporting	35
	Standards for Safety and Soundness	35
	Gramm-Leach-Bliley Act	35
	USA Patriot Act	36
	Prompt Corrective Action	36
	Federal Securities Laws	36
	Available Information	37
Item 1A. Risk Factors		37
	Changes in Interest Rates May Significantly Impact the Company’s Financial Condition and Results of Operations	37
	The Bank’s Lending Activities Involve Risks that May Be Exacerbated Depending on the Mix of Loan Types	37
	The Markets in Which the Bank Operates Are Highly Competitive	38
	The Company’s Results of Operations May Be Adversely Affected by Changes in National and/or Local Economic Conditions	38
	Changes in Laws and Regulations Could Adversely Affect Our Business	39
	Certain Anti-Takeover Provisions May Increase the Costs to or Discourage an Acquiror	39
	The Bank May Not Be Able To Successfully Implement Its New Commercial Business Banking Initiative	39
Item 1B. Unresolved Staff Comments		39
Item 2. Properties		40
Item 3. Legal Proceedings		41
Item 4. Submission of Matters to a Vote of Security Holders		41


	PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		41
Item 6. Selected Financial Data		43
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		45
	General	45
	Overview	45
	Interest Rate Sensitivity Analysis	49
	Interests Rate Risk	51
	Analysis of Net Interest Income	51
	Rate/Volume Analysis	53
	Comparison of Operating Results for the Years Ended December 31, 2007 and 2006	53
	Comparison of Operating Results for the Years Ended December 31, 2006 and 2005	55
	Liquidity, Regulatory Capital and Capital Resources	56
	Critical Accounting Policies	58
	Contractual Obligations	59
	Impact of New Accounting Standards	60
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		62
Item 8. Financial Statements and Supplementary Data		63
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		106
Item 9A. Controls and Procedures		107
Item 9B. Other Information		107

	PART III

Item 10. Directors, Executive Officers and Corporate Governance		108
Item 11. Executive Compensation		108
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		108
Item 13. Certain Relationships and Related Transactions, and Director Independence		109
Item 14. Principal Accounting Fees and Services		109

	PART IV

Item 15. Exhibits, Financial Statement Schedules		109
	(a) 1. Financial Statements	109
	(a) 2. Financial Statement Schedules	109
	(a) 3. Exhibits Required by Securities and Exchange Commission Regulation S-K	110

	SIGNATURES

	POWER OF ATTORNEY

iii

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

Statements contained in this Annual Report on Form 10-K (this “Annual Report”) relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments and other statements that are not descriptions of historical facts may be 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. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed under the captions “Business — General — Allowance for Loan Losses” and “Business — General — Market Area and Competition” in Item 1 below, “Risk Factors” in Item 1A below, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview” in Item 7 below, and elsewhere in this Annual Report and in other documents filed by the Company with the Securities and Exchange Commission from time to time. Forward-looking statements may be identified by terms such as “may”, “will”, “should”, “could”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “forecasts”, “potential” or “continue” or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The Company has no obligation to update these forward-looking statements.

PART I

Item 1. Business.

GENERAL

Overview

Flushing Financial Corporation (the “Holding Company”) is a Delaware corporation organized in May 1994 at the direction of Flushing Savings Bank, FSB (the “Bank”). The Bank was organized in 1929 as a New York State chartered mutual savings bank. In 1994, the Bank converted to a federally chartered mutual savings bank and changed its name from Flushing Savings Bank to Flushing Savings Bank, FSB. The Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank on November 21, 1995, at which time the Holding Company acquired all of the stock of the Bank. The primary business of the Holding Company at this time is the operation of its wholly owned subsidiary, the Bank. The Bank owns four subsidiaries: Flushing Commercial Bank, Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc. In November, 2006, the Bank launched an internet branch, iGObanking.com^®. The activities of the Holding Company are primarily funded by dividends, if any, received from the Bank. Flushing Financial Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol “FFIC.”

The Holding Company also owns Flushing Financial Capital Trust II, Flushing Financial Capital Trust III, and Flushing Financial Capital Trust IV (the “Trusts”), special purpose business trusts formed during 2007 to issue capital securities. The Trusts used the proceeds from the issuance of these capital securities, and the proceeds from the issuance of their common stock, to purchase junior subordinated debentures from the Holding Company. In accordance with the requirements of FASB Interpretation No. 46R, the Trusts are not included in the consolidated financial statements of the Holding Company. The Holding Company previously owned Flushing Financial Capital Trust I (the “Trust”), which was a special purpose business trust formed in 2002 similar to the Trusts discussed above. The Trust called its outstanding capital securities during July 2007, and was then liquidated. Prior to 2004, the Trust was included in the consolidated financial statements of the Company. Effective January 1, 2004, in accordance with the requirements of FASB Interpretation No. 46R, the Trust was deconsolidated.

Unless otherwise disclosed, the information presented in this Annual Report reflects the financial condition and results of operations of the Holding Company, the Bank and the Bank’s subsidiaries on a consolidated basis (collectively, the “Company”). At December 31, 2007, the Company had total assets of $3.4 billion, deposits of $2.0 billion and stockholders’ equity of $233.7 million.

The Bank’s principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from ongoing operations and borrowings, primarily in (1) originations and purchases of one-to-four family (focusing on mixed-use properties – properties that contain both residential dwelling units and commercial units), multi-family residential and commercial real estate mortgage loans; (2) construction loans, primarily for multi-family residential properties; (3) Small Business Administration (“SBA”) loans and other small business loans; (4) mortgage loan surrogates such as mortgage-backed securities; and (5) U.S. government securities, corporate fixed-

income securities and other marketable securities. The Bank also originates certain other consumer loans. The Bank’s revenues are derived principally from interest on its mortgage and other loans and mortgage-backed securities portfolio, and interest and dividends on other investments in its securities portfolio. The Bank’s primary sources of funds are deposits, Federal Home Loan Bank of New York (“FHLB-NY”) borrowings, repurchase agreements, principal and interest payments on loans, mortgage-backed and other securities, proceeds from sales of securities and, to a lesser extent, proceeds from sales of loans. As a federal savings bank, the Bank’s primary regulator is the Office of Thrift Supervision (“OTS”). The Bank’s deposits are insured to the maximum allowable amount by the Federal Deposit Insurance Corporation (“FDIC”). Additionally, the Bank is a member of the Federal Home Loan Bank (“FHLB”) system.

In addition to operating the Bank, the Holding Company invests primarily in U.S. government securities, mortgage-backed securities, and corporate securities. The Holding Company also holds a note evidencing a loan that it made to an employee benefit trust established by the Holding Company for the purpose of holding shares for allocation or distribution under certain employee benefit plans of the Holding Company and the Bank (the “Employee Benefit Trust”). The funds provided by this loan enabled the Employee Benefit Trust to acquire 2,328,750 shares, or 8% of the common stock issued in our initial public offering.

On June 30, 2006, the Company acquired all of the outstanding common stock of Atlantic Liberty Financial Corporation (“Atlantic Liberty”), the parent holding company for Atlantic Liberty Savings, F.A., based in Brooklyn, New York. The aggregate purchase price was $42.5 million, which consisted of $14.7 million of cash, common stock valued at $26.6 million, and $1.3 million assigned to the fair value of Atlantic Liberty’s outstanding stock options. Under the terms of the Agreement and Plan of Merger, dated December 20, 2005, Atlantic Liberty’s shareholders received $24.00 in cash, 1.43 Holding Company shares per Atlantic Liberty share owned, or a combination thereof, subject to aggregate allocation to all Atlantic Liberty’s shareholders of 65% stock / 35% cash. In connection with the merger, the Company issued 1.6 million shares of common stock, the value of which was determined based on the closing price of the Company’s common stock on the announcement date of December 21, 2005, and two days prior to and after the announcement date. The Company acquired $186.9 million in assets, $116.2 million in net loans and assumed $106.8 million in deposits. This acquisition provided the Bank a presence on Montague Street and on Avenue J in Brooklyn, two highly attractive markets.

During 2006, the Bank established a business banking unit. The Bank’s business plan includes a transition from a traditional thrift to a more ‘commercial like’ banking institution by focusing on the development of a full complement of commercial business deposit, loan and cash management products.

On November 27, 2006, the Bank launched an internet branch, iGObanking.com®, as a new division which provides the Bank access to markets outside its geographic locations. Accounts can be opened online at www.iGObanking.com or by mail.

During 2007, the Bank formed a wholly owned subsidiary, Flushing Commercial Bank, a New York State chartered commercial bank, for the limited purpose of accepting municipal deposits and state funds, including certain court ordered funds from New York State Courts, in the State of New York. The commercial bank was formed in response to a New York State Finance Law which requires that municipal deposits and state funds must be deposited into a bank or trust company designated by the New York State Comptroller. The Bank is not considered a bank or trust company for this purpose. The commercial bank offers a full range of deposit products to municipalities and New York State, similar to the products currently being offered by the Bank, but does not make loans. To date, the operations of Flushing Commercial Bank have not been material.

Market Area and Competition

The Bank is a community oriented savings institution offering a wide variety of financial services to meet the needs of the communities it serves. The Bank’s main office is in Flushing, New York, located in the Borough of Queens. At December 31, 2007, the Bank operated out of its main office and thirteen branch offices, located in the New York City Boroughs of Queens, Brooklyn, and Manhattan, and in Nassau County, New York. The Bank also operates an internet branch, iGObanking.com^®. The Bank maintains its executive offices in Lake Success in Nassau County, New York. Substantially all of the Bank’s mortgage loans are secured by properties located in the New York City metropolitan area. During the last three years, real estate values in the New York City metropolitan area have been stable, which has favorably impacted the Bank’s asset quality. See “— Asset Quality” and “Risk Factors – Local Economic Conditions” included in Item 1A of this Annual Report. There can be no assurance that the stability of these economic factors will continue.

The Bank faces intense and increasing competition both in making loans and in attracting deposits. The Bank’s market area has a high density of financial institutions, many of which have greater financial resources, name recognition and market presence than the Bank, and all of which are competitors of the Bank to varying degrees. Particularly intense competition exists for deposits and in all of the lending activities emphasized by the Bank. The internet banking arena, which the Bank entered in November 2006, also has many larger financial institutions which have greater financial resources, name recognition and market presence than the Bank. The future earnings prospects of the Bank will be affected by the Bank’s ability to compete effectively with other financial institutions and to implement its business strategies. See “Risk Factors – The Markets in Which the Bank Operates Are Highly Competitive” included in Item 1A of this Annual Report.

For a discussion of the Company’s business strategies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Management Strategy” included in Item 7 of this Annual Report.

Lending Activities

Loan Portfolio Composition. The Bank’s loan portfolio consists primarily of mortgage loans secured by multi-family residential, commercial real estate, one-to-four family mixed-use property, one-to-four family residential property, and construction loans. In addition, the Bank also offers SBA loans, other small business loans and consumer loans. Substantially all the Bank’s mortgage loans are secured by properties located within the Bank’s market area. At December 31, 2007, the Bank had gross loans outstanding of $2,694.7 million (before the allowance for loan losses and net deferred costs).

Beginning in late 2001, the Bank shifted its focus from originating one-to-four family residential property mortgage loans to the origination of multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans. These loans generally have higher yields than one-to-four family residential properties, and include prepayment penalties that the Bank collects if the loans pay in full prior to the contractual maturity. From December 31, 2001 to December 31, 2007, multi-family residential mortgage loans increased $594.8 million, or 160.9%, commercial real estate mortgage loans increased $411.4 million, or 191.9%, one-to-four family mixed-use property mortgage loans increased $577.1 million, or 525.6%, while one-to-four family residential property mortgage loans decreased $190.3 million, or 54.1%. The Bank expects to continue this emphasis through marketing and by maintaining competitive interest rates and origination fees. The Bank’s marketing efforts include frequent contacts with mortgage brokers and other professionals who serve as referral sources. From time-to-time, the Bank may purchase loans from mortgage bankers and other financial institutions. Loans purchased comply with the Bank’s underwriting standards.

Fully underwritten one-to-four family residential mortgage loans generally are considered by the banking industry to have less risk than other types of loans. Multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans generally have higher yields than one-to-four family residential property mortgage loans and shorter terms to maturity, but typically involve higher principal amounts and generally expose the lender to a greater risk of credit loss than one-to-four family residential property mortgage loans. The Bank’s increased emphasis on multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans has increased the overall level of credit risk inherent in the Bank’s loan portfolio. The greater risk associated with multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans could require the Bank to increase its provision for loan losses and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance currently maintained by the Bank. To date, the Bank has not experienced significant losses in its multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loan portfolios, and has determined that, at this time, additional provisions are not required.

The Bank’s mortgage loan portfolio consists of adjustable rate mortgage (“ARM”) loans and fixed-rate mortgage loans. Interest rates charged by the Bank on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rate offered by the Bank’s competitors and the creditworthiness of the borrower. Many of those factors are, in turn, affected by regional and national economic conditions, and the fiscal, monetary and tax policies of the federal government.

In general, consumers show a preference for ARM loans in periods of high interest rates and for fixed-rate loans when interest rates are low. In periods of declining interest rates, the Bank may experience refinancing activity in ARM loans, as borrowers show a preference to lock-in the lower rates available on fixed-rate loans. In the case of ARM loans originated by the Bank, volume and adjustment periods are affected by the interest rates and other market factors as

discussed above as well as consumer preferences. The Bank has not in the past, nor does it currently, originate ARM loans that provide for negative amortization.

In recent years, the Bank has grown its construction loan portfolio. The Bank obtains a first lien position on the underlying collateral, and generally obtains personal guarantees on construction loans. These loans generally have a term of two years or less. Construction loans involve a greater degree of risk than other loans because, among other things, the underwriting of such loans is based on an estimated value of the developed property, which can be difficult to ascertain in light of uncertainties inherent in such estimations. In addition, construction lending entails the risk that the project may not be completed due to cost overruns or changes in market conditions. The greater risk associated with construction loans could require the Bank to increase its provision for loan losses, and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance currently maintained by the Bank. To date, the Bank has not incurred significant losses in its construction loan portfolio.

The business banking unit was formed in 2006 to focus on loans to businesses located within the Bank’s market area. These loans are generally personally guaranteed by the owners, and may be secured by the assets of the business. The interest rate on these loans is generally an adjustable rate based on a published index, usually the prime rate. These loans, while providing a higher rate of return to the Bank, also present a higher level of risk. The greater risk associated with business loans could require the Bank to increase its provision for loan losses, and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance currently maintained by the Bank. To date, the Bank has not incurred significant losses in its business loan portfolio.

The Bank’s lending activities are subject to federal and state laws and regulations. See “— Regulation.”

The following table sets forth the composition of the Bank’s loan portfolio at the dates indicated.


	At December 31,

	2007						2006						2005						2004						2003

	Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total

	(Dollars in thousands)
Mortgage Loans:
Multi-family residential	$	964,455			35.79	%	$	870,912			37.52	%	$	788,071			41.92	%	$	646,922			42.61	%	$	541,837			42.53	%
Commercial real estate		625,843			23.23			519,552			22.38			399,081			21.23			334,048			22.00			290,332			22.79
One-to-four family - mixed-use property		686,921			25.49			588,092			25.33			477,775			25.42			332,805			21.92			226,225			17.76
One-to-four family - residential (1)		161,666			6.01			161,889			6.98			134,641			7.17			151,737			10.00			178,474			14.01
Co-operative apartment (2)		7,070			0.26			8,059			0.35			2,161			0.11			3,132			0.21			3,729			0.29
Construction		119,745			4.44			104,488			4.50			49,522			2.63			31,460			2.07			23,622			1.85

Gross mortgage loans		2,565,700			95.22			2,252,992			97.06			1,851,251			98.48			1,500,104			98.81			1,264,219			99.23

Small Business Administration loans		18,922			0.70			17,521			0.75			9,239			0.49			5,633			0.37			4,931			0.39

Commercial business and other loans		110,046			4.08			50,899			2.19			19,362			1.03			12,505			0.82			4,894			0.38

Gross loans		2,694,668			100.00	%		2,321,412			100.00	%		1,879,852			100.00	%		1,518,242			100.00	%		1,274,044			100.00	%

Unearned loan fees and deferred costs, net		14,083						10,393						8,409						4,798						2,030

Less: Allowance for loan losses		(6,633	)					(7,057	)					(6,385	)					(6,533	)					(6,553	)

Loans, net	$	2,702,118					$	2,324,748					$	1,881,876					$	1,516,507					$	1,269,521


(1)	One-to-four family residential mortgage loans also include home equity and condominium loans. At December 31, 2007, gross home equity loans totaled $36.1 million and condominium loans totaled $8.7 million.

(2)	Consists of loans secured by shares representing interests in individual co-operative units that are generally owner occupied.

The following table sets forth the Bank’s loan originations (including the net effect of refinancings) and the changes in the Bank’s portfolio of loans, including purchases, sales and principal reductions for the years indicated:


	For the years ended December 31,

(In thousands)	2007		2006		2005

Mortgage Loans

At beginning of year	$	2,252,992	$	1,851,251	$	1,500,104

Mortgage loans originated:
Multi-family residential		222,625		166,744		222,065
Commercial real estate		165,440		150,804		103,090
One-to-four family mixed-use property		159,331		154,456		186,700
One-to-four family residential		36,397		13,786		13,186
Co-operative apartment		828		125		—
Construction		54,151		73,107		46,414

Total mortgage loans originated		638,772		559,022		571,455

Mortgage loans purchased:
Multi-family residential		8,717		—		1,009
Commercial real estate		2,902		3,087		—
Construction		—		1,980		—

Acquisition of Atlantic Liberty loans:
Multi-family residential		—		16,299		—
Commercial real estate		—		31,914		—
One-to-four family mixed-use property		—		9,333		—
One-to-four family residential		—		51,033		—
Co-operative apartment		—		6,665		—
Construction		—		13,781		—

Total mortgage loans purchased/acquired		11,619		134,092		1,009

Less:
Principal reductions		284,608		270,416		217,199
Mortgage loan sales		53,075		20,957		4,118
Mortgage loan foreclosures		—		—		—

At end of year	$	2,565,700	$	2,252,992	$	1,851,251

SBA, Commercial Business & Other Loans

At beginning of year	$	68,420	$	28,601	$	18,138

Loans originated:
SBA loans		12,840		19,914		12,249
Small business loans (1)		92,240		49,909		12,410
Other loans		1,953		1,671		1,537

Total other loans originated		107,033		71,494		26,196

Less:
Sales		4,925		7,477		6,630
Repayments (1)		41,090		24,116		8,940
Charge-offs		470		82		163

At end of year	$	128,968	$	68,420	$	28,601

1) 2006 includes an $11.5 million loan to Atlantic Liberty prior to the merger.

Loan Maturity and Repricing. The following table shows the maturity of the Bank’s commercial mortgage loan, construction loan and non-mortgage loan portfolios at December 31, 2007. Scheduled repayments are shown in the maturity category in which the payments become due.


(In thousands)	Commercial Mortgage Loans			Construction			SBA		Commercial Business and Other			Total

Amounts due within one year		$	68,505		$	98,282	$	7,729		$	54,692	$	229,208

Amounts due after one year:
One to two years			60,932			16,396		1,992			31,701		111,021
Two to three years			51,594			5,067		1,929			13,806		72,396
Three to five years			106,524			—		3,163			6,128		115,815
Over five years			338,288			—		4,109			3,719		346,116

Total due after one year			557,338			21,463		11,193			55,354		645,348

Total amounts due		$	625,843		$	119,745	$	18,922		$	110,046	$	874,556


Sensitivity of loans to changes in interest rates - loans due after one year:
Fixed rate loans		$	118,998		$	10,570	$	116		$	45,273	$	174,957
Adjustable rate loans			438,340			10,893		11,077			10,081		470,391

Total loans due after one year		$	557,338		$	21,463	$	11,193		$	55,354	$	645,348

Multi-Family Residential Lending. Loans secured by multi-family residential properties were $964.5 million, or 35.79% of gross loans, at December 31, 2007. The Bank’s multi-family residential mortgage loans had an average principal balance of $497,000 at December 31, 2007, and the largest multi-family residential mortgage loan held in the Bank’s portfolio had a principal balance of $11.2 million. The Bank offers both fixed-rate and adjustable rate multi-family residential mortgage loans, with maturities up to 30 years.

In underwriting multi-family residential mortgage loans, the Bank reviews the expected net operating income generated by the real estate collateral securing the loan, the age and condition of the collateral, the financial resources and income level of the borrower and the borrower’s experience in owning or managing similar properties. The Bank typically requires debt service coverage of at least 125% of the monthly loan payment. The Bank generally originates these loans up to only 75% of the appraised value or the purchase price of the property, whichever is less. Any loan with a final loan-to-value ratio in excess of 75% must be approved by either the Board of Directors or its Executive Committee as an exception to policy. The Bank generally relies on the income generated by the property as the primary means by which the loan is repaid. However, personal guarantees may be obtained for additional security from these borrowers. The Bank typically orders an environmental report on its multifamily and commercial real estate loans.

Loans secured by multi-family residential property generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. The increased credit risk is a result of several factors, including the concentration of principal in a smaller number of loans and borrowers, the effects of general economic conditions on income producing properties and the increased difficulty in evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family residential property is typically dependent upon the successful operation of the related property. If the cash flow from the property is reduced, the borrower’s ability to repay the loan may be impaired. Loans secured by multi-family residential property also may involve a greater degree of environmental risk. The Bank seeks to protect against this risk through obtaining an environmental report. See “—Asset Quality — Real Estate Owned.”

The Bank’s fixed-rate multi-family mortgage loans are originated for terms up to 15 years and are competitively priced based on market conditions and the Bank’s cost of funds. The Bank originated and purchased $72.1 million, $47.0 million and $44.3 million of fixed-rate multi-family mortgage loans in 2007, 2006 and 2005, respectively. At December 31, 2007, $244.8 million, or 25.4%, of the Bank’s multi-family mortgage loans consisted of fixed rate loans.

The Bank offers ARM loans with adjustment periods typically of five years and for terms of up to 30 years. Interest rates on ARM loans currently offered by the Bank are adjusted at the beginning of each adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate. From time to time, the Bank may

originate ARM loans at an initial rate lower than the index as a result of a discount on the spread for the initial adjustment period. Multi-family adjustable-rate mortgage loans generally are not subject to limitations on interest rate increases either on an adjustment period or aggregate basis over the life of the loan. The Bank originated and purchased multi-family ARM loans totaling $159.3 million, $119.8 million and $178.8 million during 2007, 2006 and 2005, respectively. At December 31, 2007, $719.6 million, or 74.6%, of the Bank’s multi-family mortgage loans consisted of ARM loans.

Commercial Real Estate Lending. Loans secured by commercial real estate were $625.8 million, or 23.23% of the Bank’s gross loans, at December 31, 2007. The Bank’s commercial real estate mortgage loans are secured by improved properties such as office buildings, hotels/motels, nursing homes, small business facilities, strip shopping centers, warehouses, and, to a lesser extent, religious facilities. At December 31, 2007, the Bank’s commercial real estate mortgage loans had an average principal balance of $778,000, and the largest of such loans, which was secured by a multi-tenant shopping center, had a principal balance of $11.5 million. Commercial real estate mortgage loans are generally originated in a range of $100,000 to $6.0 million. Commercial real estate mortgage loans are generally offered at adjustable rates tied to a market index for terms of five to 15 years, with adjustment periods from one to five years. Commercial real estate mortgage loans are also made at fixed interest rates for terms of seven, 10 or 15 years.

In underwriting commercial real estate mortgage loans, the Bank employs the same underwriting standards and procedures as are employed in underwriting multi-family residential mortgage loans.

Commercial real estate mortgage loans generally carry larger loan balances than one-to-four family residential mortgage loans and involve a greater degree of credit risk for the same reasons applicable to multi-family loans.

The Bank’s fixed-rate commercial mortgage loans are originated for terms up to 20 years and are competitively priced based on market conditions and the Bank’s cost of funds. The Bank originated and purchased $28.4 million, $20.5 million and $17.7 million of fixed-rate commercial mortgage loans in 2007, 2006 and 2005, respectively. At December 31, 2007, $149.8 million, or 23.9%, of the Bank’s commercial mortgage loans consisted of fixed rate loans.

The Bank offers ARM loans with adjustment periods of one to five years and for terms of up to 15 years. Interest rates on ARM loans currently offered by the Bank are adjusted at the beginning of each adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate. From time to time, the Bank may originate ARM loans at an initial rate lower than the index as a result of a discount on the spread for the initial adjustment period. Commercial adjustable-rate mortgage loans generally are not subject to limitations on interest rate increases either on an adjustment period or aggregate basis over the life of the loan. The Bank originated and purchased commercial ARM loans totaling $140.0 million, $133.4 million and $85.4 million during 2007, 2006 and 2005, respectively. At December 31, 2007, $476.1 million, or 76.1%, of the Bank’s commercial mortgage loans consisted of ARM loans.

One-to-Four Family Mortgage Lending – Mixed-Use Properties. The Bank offers mortgage loans secured by one-to-four family mixed-use properties. These properties contain up to four residential dwelling units and a commercial unit. The Bank offers both fixed-rate and adjustable-rate one-to-four family mixed-use property mortgage loans with maturities of up to 30 years and a general maximum loan amount of $1,000,000. Loan originations primarily result from applications received from mortgage brokers and mortgage bankers, existing or past customers, and persons who respond to Bank marketing efforts and referrals. One-to-four family mixed-use property mortgage loans were $686.9 million, or 25.49% of gross loans, at December 31, 2007.

During the three-year period ended December 31, 2007, the Bank focused its origination efforts with respect to one-to-four family mortgage loans on mixed-use properties. The primary income-producing units of these properties are the residential dwelling units. One-to-four family mixed-use property mortgage loans generally have a higher interest rate than residential mortgage loans. One-to-four family mixed-use property mortgage loans also have a higher degree of risk than residential mortgage loans, as repayment of the loan is usually dependent on the income produced from renting the residential units and the commercial unit. At December 31, 2007, one-to-four family mixed-use property mortgage loans amounted to $686.9 million, as compared to $588.1 million at December 31, 2006, $477.8 million at December 31, 2005, and $332.8 million at December 31, 2004, representing an increase of $354.1 million during the three-year period.

In underwriting one-to-four family mixed-use property mortgage loans, the Bank employs the same underwriting standards as are employed in underwriting multi-family residential mortgage loans.

The Bank’s fixed-rate one-to-four family mixed-use property mortgage loans are originated for terms of up to 30 years and are competitively priced based on market conditions and the Bank’s cost of funds. The Bank originated and purchased $33.7 million, $30.8 million and $39.4 million of fixed-rate one-to-four family mixed-use property mortgage

loans in 2007, 2006 and 2005, respectively. At December 31, 2007, $171.2 million, or 24.9%, of the Bank’s one-to-four family mixed-use property mortgage loans consisted of fixed rate loans.

The Bank offers adjustable-rate one-to-four family mixed-use property mortgage loans with adjustment periods typically of five years and for terms of up to 30 years. Interest rates on ARM loans currently offered by the Bank are adjusted at the beginning of each adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate. From time to time, the Bank may originate ARM loans at an initial rate lower than the index as a result of a discount on the spread for the initial adjustment period. One-to-four family mixed-use property adjustable-rate mortgage loans generally are not subject to limitations on interest rate increases either on an adjustment period or aggregate basis over the life of the loan. The Bank originated and purchased one-to-four family mixed-use property ARM loans totaling $125.7 million, $123.7 million and $147.3 million during 2007, 2006 and 2005, respectively. At December 31, 2007, $515.7 million, or 75.1%, of the Bank’s one-to-four family mixed-use property mortgage loans consisted of ARM loans.

One-to-Four Family Mortgage Lending – Residential Properties. The Bank offers mortgage loans secured by one-to-four family residential properties, including townhouses and condominium units. For purposes of the description contained in this section, one-to-four family residential mortgage loans, co-operative apartment loans and home equity loans are collectively referred to herein as “residential mortgage loans.” The Bank offers both fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 years and a general maximum loan amount of $750,000. Loan originations generally result from applications received from mortgage brokers and mortgage bankers, existing or past customers, and referrals. Residential mortgage loans were $168.7 million, or 6.27% of gross loans, at December 31, 2007.

The Bank generally originates residential mortgage loans in amounts up to 80% of the appraised value or the sale price, whichever is less. The Bank may make residential mortgage loans with loan-to-value ratios of up to 90% of the appraised value of the mortgaged property; however, private mortgage insurance is required whenever loan-to-value ratios exceed 80% of the appraised value of the property securing the loan.

The Bank originates residential mortgage loans to self-employed individuals within the Bank’s local community without verification of the borrower’s level of income, provided that the borrower’s stated income is considered reasonable for the borrower’s type of business. These loans involve a higher degree of risk as compared to the Bank’s other fully underwritten residential mortgage loans as there is a greater opportunity for self-employed borrowers to falsify or overstate their level of income and ability to service indebtedness. This risk is mitigated by the Bank’s policy to limit the amount of one-to-four family residential mortgage loans to 80% of the appraised value of the property or the sale price, whichever is less. The Bank believes that its willingness to make such loans is an aspect of its commitment to be a community-oriented bank. The Bank originated $2.4 million and $0.9 million of these first mortgage loans during 2007 and 2006, respectively. The Bank did not originate any of these loans during 2005. The Bank also extended $43.0 million in home equity lines of credit during 2007 without verification of the borrower’s level of income.

The Bank’s fixed-rate residential mortgage loans typically are originated for terms of 15 and 30 years and are competitively priced based on market conditions and the Bank’s cost of funds. The Bank did not originate or purchase any 15-year fixed-rate residential mortgages in 2007. The Bank originated and purchased $0.4 million and $0.1 million of 15-year fixed-rate residential mortgage loans in 2006 and 2005, respectively. The Bank originated $0.5 million of 30-year fixed-rate mortgages in 2007. The Bank did not originate or purchase any 30-year fixed rate residential mortgages in 2006 and 2005. These loans have been retained to provide flexibility in the management of the Company’s interest rate sensitivity position. At December 31, 2007, $70.8 million, or 41.9%, of the Bank’s residential mortgage loans consisted of fixed rate loans.

The Bank offers ARM loans with adjustment periods of one, three, five, seven or ten years. Interest rates on ARM loans currently offered by the Bank are adjusted at the beginning of each adjustment period based upon a fixed spread above the average yield on United States treasury securities, adjusted to the U.S. Treasury constant maturity index as published weekly by the Federal Reserve Board. From time to time, the Bank may originate ARM loans at an initial rate lower than the U.S. Treasury constant maturity index as a result of a discount on the spread for the initial adjustment period. ARM loans generally are subject to limitations on interest rate increases of 2% per adjustment period and an aggregate adjustment of 6% over the life of the loan. The Bank originated and purchased adjustable rate residential mortgage loans totaling $36.8 million, $13.5 million and $13.1 million during 2007, 2006 and 2005, respectively. At December 31, 2007, $98.0 million, or 58.1%, of the Bank’s residential mortgage loans consisted of ARM loans.

The retention of ARM loans in the Bank’s portfolio helps reduce the Bank’s exposure to interest rate risks. However, in an environment of rapidly increasing interest rates, it is possible for the interest rate increase to exceed the

maximum aggregate adjustment on one-to-four family residential ARM loans and negatively affect the spread between the Bank’s interest income and its cost of funds.

ARM loans generally involve credit risks different from those inherent in fixed-rate loans, primarily because if interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. However, this potential risk is lessened by the Bank’s policy of originating one-to-four family residential ARM loans with annual and lifetime interest rate caps that limit the increase of a borrower’s monthly payment.

Home equity loans are included in the Bank’s portfolio of residential mortgage loans. These loans are offered as adjustable-rate “home equity lines of credit” on which interest only is due for an initial term of 10 years and thereafter principal and interest payments sufficient to liquidate the loan are required for the remaining term, not to exceed 30 years. These loans also may be offered as fully amortizing closed-end fixed-rate loans for terms up to 15 years. All home equity loans are made on one-to-four family residential and condominium units, which are owner-occupied, and one-to-four family mixed-use properties, and are subject to an 80% loan-to-value ratio computed on the basis of the aggregate of the first mortgage loan amount outstanding and the proposed home equity loan. They are generally granted in amounts from $25,000 to $300,000. The underwriting standards for home equity loans are substantially the same as those for residential mortgage loans. At December 31, 2007, home equity loans totaled $36.1 million, or 1.34%, of gross loans.

Construction Loans. The Bank’s construction loans primarily have been made to finance the construction of one-to-four family residential properties, multi-family residential properties and residential condominiums. The Bank also, to a limited extent, finances the construction of commercial real estate. The Bank’s policies provide that construction loans may be made in amounts up to 70% of the estimated value of the developed property and only if the Bank obtains a first lien position on the underlying real estate. In addition, the Bank generally requires personal guarantees on all construction loans. Construction loans are generally made with terms of two years or less. Advances are made as construction progresses and inspection warrants, subject to continued title searches to ensure that the Bank maintains a first lien position. The Bank made advances on construction loans of $54.2 million, $75.1 million and $46.4 million during 2007, 2006 and 2005, respectively. Construction loans outstanding at December 31, 2007 totaled $119.7 million, or 4.44%, of gross loans.

Construction loans involve a greater degree of risk than other loans because, among other things, the underwriting of such loans is based on an estimated value of the developed property, which can be difficult to ascertain in light of uncertainties inherent in such estimations. In addition, construction lending entails the risk that the project may not be completed due to cost overruns or changes in market conditions.

Small Business Administration Lending. These loans are extended to small businesses and are guaranteed by the SBA up to a maximum of 85% of the loan balance for loans with balances of $150,000 or less, and to a maximum of 75% of the loan balance for loans with balances greater than $150,000. The Bank also provides term loans and lines of credit up to $350,000 under the SBA Express Program, on which the SBA provides a 50% guaranty. The maximum amount the SBA can guarantee is $2,000,000. All SBA loans are underwritten in accordance with SBA Standard Operating Procedures and the Bank generally obtains personal guarantees and collateral, where applicable, from SBA borrowers. Typically, SBA loans are originated at a range of $25,000 to $2.0 million with terms ranging from three to 25 years. SBA loans are generally offered at adjustable rates tied to the prime rate (as published in the Wall Street Journal) with adjustment periods of one to three months. The Bank generally sells the guaranteed portion of certain SBA term loans in the secondary market and retains the servicing rights on these loans, collecting a servicing fee of approximately 1%. The Bank originated $12.8 million, $19.9 million, and $12.2 million of SBA loans during 2007, 2006, and 2005, respectively. At December 31, 2007, SBA loans totaled $18.9 million, representing 0.70% of gross loans.

Commercial Business and Other Lending. The Bank originates other loans for business, personal, or household purposes. Total commercial business and other loans outstanding at December 31, 2007 amounted to $110.0 million, or 4.08% of gross loans. Business loans are personally guaranteed by the owners, and may also be secured by additional collateral, including equipment and inventory. Included in commercial business loans are loans made to owners of New York City taxi medallions. These loans, which totaled $68.2 million at December 31, 2007, are secured through liens on the taxi medallions. The Bank originates taxi medallion loans up to 75% of the value of the taxi medallion. The maximum loan size for a business loan is $5,000,000, with a maximum term of 25 years. The Bank originated $92.2 million, $49.9 million, and $12.4 million of commercial business loans during 2007, 2006, and 2005 respectively. Consumer loans generally consist of passbook loans and overdraft lines of credit. Generally, unsecured consumer loans are limited to amounts of $5,000 or less for terms of up to five years. The Bank offers credit cards to its customers

through a third party financial institution and receives an origination fee and transactional fees for processing such accounts, but does not underwrite or finance any portion of the credit card receivables.

The underwriting standards employed by the Bank for consumer and other loans include a determination of the applicant’s payment history on other debts and assessment of the applicant’s ability to meet payments on all of his or her obligations. In addition to the creditworthiness of the applicant, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Unsecured loans tend to have higher risk, and therefore command a higher interest rate.

Loan Approval Procedures and Authority. The Bank’s Board of Directors-approved lending policies establish loan approval requirements for its various types of loan products. The Bank’s Residential Mortgage Lending Policy (which applies to all one-to-four family mortgage loans, including residential and mixed-use property) establishes authorized levels of approval. One-to-four family mortgage loans that do not exceed $750,000 require two signatures for approval, one of which must be from the President, Executive Vice President or a Senior Vice President (collectively, “Authorized Officers”) and the other from a Senior Underwriter, Manager, Underwriter or Junior Underwriter in the Residential Mortgage Loan Department (collectively, “Loan Officers”). For one-to-four family mortgage loans from $750,000 to $1,000,000, three signatures are required for approval, at least two of which must be from the Authorized Officers, and the other one may be a Loan Officer. The Loan Committee, the Executive Committee or the full Board of Directors also must approve one-to-four family mortgage loans in excess of $1,000,000. Pursuant to the Bank’s Commercial Real Estate Lending Policy, all loans secured by commercial real estate and multi-family residential properties, must be approved by the President or the Executive Vice President upon the recommendation of the Commercial Loan Department Officer. Such loans in excess of $1,000,000 also require Loan or Executive Committee or Board approval. In accordance with the Bank’s Business Loan Policy, all business and SBA loans up to $1,000,000, and commercial and industrial loans/professional mortgage loans up to $1,500,000 must be approved by the Business Loan Committee, and ratified by the Management Loan Committee. Business and SBA loans in excess of $1,000,000 up to $2,000,000 must be approved by the Management Loan Committee and ratified by the Loan Committee of the Bank’s Board of Directors. Commercial business and other loans require two signatures for approval, one of which must be from an Authorized Officer. The Bank’s Construction Loan Policy requires that the Loan Committee or the Board of Directors of the Bank must approve all construction loans. Any loan, regardless of type, that deviates from the Bank’s written loan policies must be approved by the Loan Committee or the Bank’s Board of Directors.

For all loans originated by the Bank, upon receipt of a completed loan application, a credit report is ordered and certain other financial information is obtained. An appraisal of the real estate intended to secure the proposed loan is required. An independent appraiser designated and approved by the Bank currently performs such appraisals. The Bank’s staff appraiser reviews the appraisals. The Bank’s Board of Directors annually approves the independent appraisers used by the Bank and approves the Bank’s appraisal policy. It is the Bank’s policy to require borrowers to obtain title insurance and hazard insurance on all real estate first mortgage loans prior to closing. Borrowers generally are required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes and, in some cases, hazard insurance premiums.

Loan Concentrations. The maximum amount of credit that the Bank can extend to any single borrower or related group of borrowers generally is limited to 15% of the Bank’s unimpaired capital and surplus. Applicable law and regulations permit an additional amount of credit to be extended, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. See “Regulation.” However, it is currently the Bank’s policy not to extend such additional credit. At December 31, 2007, the Bank had no loans in excess of the maximum dollar amount of loans to one borrower that the Bank was authorized to make. At that date, the three largest concentrations of loans to one borrower consisted of loans secured by a combination of commercial real estate and multi-family income producing properties with an aggregate principal balance of $30.4 million, $28.0 million and $23.0 million for each of the three borrowers, respectively.

Loan Servicing. At December 31, 2007, the Bank was servicing $32.0 million of mortgage loans and $17.0 million of SBA loans for others. The Bank’s policy is to retain the servicing rights to the mortgage and SBA loans that it sells in the secondary market. In order to increase revenue, management intends to continue this policy.

Asset Quality

Loan Collection. When a borrower fails to make a required payment on a loan, the Bank takes a number of steps to induce the borrower to cure the delinquency and restore the loan to current status.

In the case of mortgage loans, personal contact is made with the borrower after the loan becomes 30 days delinquent. At that time, the Bank attempts to make arrangements with the borrower to either bring the loan to current status or begin making payments according to an agreed upon schedule. For the majority of delinquent loans, the borrower is able to bring the loan current within a reasonable time. When the borrower has indicated that he/she will be unable to bring the loan current, or due to other circumstances which, in management’s opinion, indicate the borrower will be unable to bring the loan current within a reasonable time, or if the collateral value is deemed to have been impaired, the loan is classified as non-performing. All loans classified as non-performing, which includes all loans past due ninety days or more, are classified as non-accrual unless there is, in management’s opinion, compelling evidence the borrower will bring the loan current in the immediate future. At December 31, 2007, there was one loan past due 90 days or more and still accruing interest.

Each non-performing loan is reviewed on an individual basis. Upon classifying a loan as non-performing, management reviews available information and conditions that relate to the status of the loan, including the estimated value of the loan’s collateral and any legal considerations that may affect the borrower’s ability to continue to make payments to the Bank. Based upon the available information, management will consider the sale of the loan or retention of the loan. If the loan is retained, the Bank may continue to work with the borrower to collect the amounts due or start foreclosure proceedings. If a foreclosure action is initiated and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure or by the Bank as soon thereafter as practicable.

Once the decision to sell a loan is made, management determines what would be considered adequate consideration to be obtained when that loan is sold, based on the facts and circumstances related to that loan. Investors and brokers are then contacted to seek interest in purchasing the loan. The Bank has been successful in finding buyers for its non-performing loans offered for sale that are willing to pay what it considers to be adequate consideration. Terms of the sale include cash due upon closing of the sale, no contingencies or recourse to the Bank, servicing is released to the buyer and time is of the essence. These sales usually close within a reasonably short time period.

This strategy of selling non-performing loans was implemented during 2003. This has allowed the Bank to optimize its return by quickly converting its non-performing loans to cash, which can then be reinvested in earning assets. This strategy also allows the Bank to avoid lengthy and costly legal proceedings that may occur with non-performing loans. The Bank sold forty-five delinquent mortgage loans totaling $33.9 million, thirty-five delinquent mortgage loans totaling $12.2 million, and eleven delinquent mortgage loans totaling $3.1 million during the years ended December 31, 2007, 2006 and 2005, respectively. The Bank did not record any charges to the allowance for loan losses for the non-performing loans which were sold. The Bank realized gross gains of $332,000 and no gross losses on the sale of these mortgage loans for the year ended December 31, 2007. The Bank realized gross gains of $169,000 and gross losses of $14,000 on the sale of these mortgage loans for the year ended December 31, 2006. The Bank did not realize any gross gains or losses on the sale of these mortgage loans for the year ended December 31, 2005. There can be no assurances that the Bank will continue this strategy in future periods, or if continued, it will be able to find buyers to pay adequate consideration.

On mortgage loans or loan participations purchased by the Bank, for which the seller retains the servicing rights, the Bank receives monthly reports with which it monitors the loan portfolio. Based upon servicing agreements with the servicers of the loans, the Bank relies upon the servicer to contact delinquent borrowers, collect delinquent amounts and initiate foreclosure proceedings, when necessary, all in accordance with applicable laws, regulations and the terms of the servicing agreements between the Bank and its servicing agents. At December 31, 2007, the Bank held $12.2 million of loans that were serviced by others.

In the case of commercial business or other loans, the Bank generally sends the borrower a written notice of non-payment when the loan is first past due. In the event payment is not then received, additional letters and phone calls generally are made in order to encourage the borrower to meet with a representative of the Bank to discuss the delinquency. If the loan still is not brought current and it becomes necessary for the Bank to take legal action, which typically occurs after a loan is delinquent 90 days or more, the Bank may attempt to repossess personal or business property that secures an SBA loan, commercial business loan or consumer loan.

Delinquent Loans and Non-performing Assets. The Bank generally discontinues accruing interest on delinquent loans when a loan is 90 days past due or foreclosure proceedings have been commenced, whichever first occurs. At that time, previously accrued but uncollected interest is reversed from income. Loans in default 90 days or more as to their maturity date but not their payments, however, continue to accrue interest as long as the borrower continues to remit monthly payments.

The following table sets forth information regarding all non-accrual loans and loans which are past due 90 days or more and still accruing, at the dates indicated. During the years ended December 31, 2007, 2006 and 2005, the amounts of additional interest income that would have been recorded on non-accrual loans, had they been current, totaled $256,000, $144,000 and $103,000, respectively. These amounts were not included in the Bank’s interest income for the respective periods.


	At December 31,

(Dollars in thousands)	2007			2006			2005			2004			2003

Non-accrual loans:
Multi-family residential	$	2,477		$	1,957		$	861		$	—		$	—
Commercial real estate		90			349			—			—			—
One-to-four family mixed-use property		—			—			—			—			—
One-to-four family residential		2,204			608			960			659			525
Co-operative apartment		—			—			—			—			—
Construction		—			—			—			—			—

Total non-accrual mortgage loans		4,771			2,914			1,821			659			525
Other non-accrual loans		369			212			101			252			157

Total non-accrual loans		5,140			3,126			1,922			911			682
Loans 90 days or more delinquent and still accruing		753			—			530			—			—

Total non-performing loans		5,893			3,126			2,452			911			682
Foreclosed real estate		—			—			—			—			—
Investment securities		—			—			—			—			—

Total non-performing assets	$	5,893		$	3,126		$	2,452		$	911		$	682

Troubled debt restructurings	$	—		$	—		$	—		$	—		$	—


Non-performing loans to gross loans		0.22	%		0.13	%		0.13	%		0.06	%		0.05	%
Non-performing assets to total assets		0.18	%		0.11	%		0.10	%		0.04	%		0.04	%

Real Estate Owned (REO). The Bank aggressively markets any REO properties, when and if, they are acquired through foreclosure. At December 31, 2007, 2006 and 2005, the Bank did not own any such properties.

Environmental Concerns Relating to Loans. The Bank currently obtains environmental reports in connection with the underwriting of commercial real estate loans, and typically obtains environmental reports in connection with the underwriting of multi-family loans. For all other loans, the Bank obtains environmental reports only if the nature of the current or, to the extent known to the Bank, prior use of the property securing the loan indicates a potential environmental risk. However, the Bank may not be aware of such uses or risks in any particular case, and, accordingly, there is no assurance that real estate acquired by the Bank in foreclosure is free from environmental contamination or that, if any such contamination or other violation exists, the Bank will not have any liability therefor.

Allowance for Loan Losses

The Bank has established and maintains on its books an allowance for loan losses that is designed to provide a reserve against estimated losses inherent in the Bank’s overall loan portfolio. The allowance is established through a provision for loan losses based on management’s evaluation of the risk inherent in the various components of its loan portfolio and other factors, including historical loan loss experience (which is updated at least annually), changes in the composition and volume of the portfolio, collection policies and experience, trends in the volume of non-accrual loans and regional and national economic conditions. The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions and other factors. Management reviews the Bank’s loan portfolio by separate categories with similar risk and collateral characteristics. Impaired loans are segregated and reviewed separately. All non-performing loans are classified impaired. Impaired loans secured by collateral are reviewed based on their collateral and the estimated time to recover the Bank’s investment in the loan, and the estimate of the recovery anticipated. Specific reserves allocated to impaired loans were $605,000 and $316,000 at December 31, 2007 and 2006, respectively. For non-collateralized impaired loans, management estimates any recoveries that are anticipated for each loan. Specific reserves are allocated to impaired loans based on this review. In connection with the determination of the allowance, the market value of collateral ordinarily is evaluated by the Bank’s staff appraiser; however, the Bank may from time to time obtain independent appraisals for significant properties. Current year charge-offs, charge-off trends, new loan production and current balance by particular loan categories are also taken into account in determining the appropriate amount of

allowance. The Board of Directors reviews and approves the adequacy of the allowance for loan losses on a quarterly basis.

In assessing the adequacy of the allowance, management also reviews the Bank’s loan portfolio by separate categories which have similar risk and collateral characteristics; e.g. multi-family residential, commercial real estate, one-to-four family mixed-use property, one-to-four family residential, co-operative apartment, construction, SBA, commercial business, taxi medallion and consumer loans. General provisions are established against performing loans in the Bank’s portfolio in amounts deemed prudent from time to time based on the Bank’s qualitative analysis of the factors, including the historical loss experience and regional economic conditions. During the five-year period ended December 31, 2007, the Bank incurred total net charge-offs of $701,000. This reflects a significant improvement over the loss experience of the 1990s. In addition, while the regional economy had slowed by the fourth quarter of 2007, the regional economy has improved since 2001, including significant increases in real estate values. The Bank’s underwriting standards generally require a loan-to-value ratio of 75% at a time the loan is originated. Since real estate values have increased significantly since 2001, the loan-to-value ratios for loans originated in prior years have declined below the original 75% level. The rate at which mortgagors have been defaulting on their loans has declined, as the mortgagor’s equity in the property has increased. The Bank has not been affected by the recent increase in defaults of sub-prime mortgages as the Bank does not originate, or hold in portfolio, sub-prime mortgages. As a result, the Bank has not incurred losses on mortgage loans in recent years. As a result of these improvements, and despite the increase in the loan portfolio and shift to loans with greater risk, the Bank has not considered it necessary to provide a provision for loan losses during any of the years in the five-year period ended December 31, 2007. Management has concluded, and the Board of Directors has concurred, that, during this time period, the allowance was sufficient to absorb losses inherent in the loan portfolio.

The Bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS and the FDIC, which can require the establishment of additional general allowances or specific loss allowances or require charge-offs. Such authorities may require the Bank to make additional provisions to the allowance based on their judgments about information available to them at the time of their examination. An OTS policy statement provides guidance for OTS examiners in determining whether the levels of general valuation allowances for savings institutions are adequate. The policy statement requires that if a savings institution’s general valuation allowance policies and procedures are deemed to be inadequate, recommendations for correcting deficiencies, including any examiner concerns regarding the level of the allowance, should be noted in the report of examination. Additional supervisory action may also be taken based on the magnitude of the observed shortcomings in the allowance process, including the materially of any error in the reported amount of the allowance.

Management of the Bank believes that the current allowance for loan losses is adequate in light of current economic conditions, the composition of its loan portfolio and other available information and the Board of Directors concurs in this belief. Due to the acquisition of Atlantic Liberty in 2006, the allowance for loan losses was increased by Atlantic Liberty’s allowance of $753,000. The Bank however did not record any additional provision for loan losses for the years ended December 31, 2007, 2006 and 2005. At December 31, 2007, the total allowance for loan losses was $6.6 million, representing 112.57% of each of non-performing loans and non-performing assets, compared to 225.72% for both of these ratios at December 31, 2006. The Bank continues to monitor and, as necessary, modify the level of its allowance for loan losses in order to maintain the allowance at a level which management considers adequate to provide for probable loan losses based on available information.

Many factors may require additions to the allowance for loan losses in future periods beyond those currently revealed. These factors include future adverse changes in economic conditions, changes in interest rates and changes in the financial capacity of individual borrowers (any of which may affect the ability of borrowers to make repayments on loans), changes in the real estate market within the Bank’s lending area and the value of collateral, or a review and evaluation of the Bank’s loan portfolio in the future. The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraised values of collateral, national and regional economic conditions, interest rates and other factors. In addition, the Bank’s increased emphasis on multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans can be expected to increase the overall level of credit risk inherent in the Bank’s loan portfolio. The greater risk associated with these loans, as well as construction loans and business loans, could require the Bank to increase its provisions for loan losses and to maintain an allowance for loan losses as a percentage of total loans that is in excess of the allowance currently maintained by the Bank. Provisions for loan losses are charged against net income. See “—Lending Activities” and “Asset Quality.”

The following table sets forth changes in, and the balance of, the Bank’s allowance for loan losses.


	At and for the years ended December 31,

(Dollars in thousands)	2007			2006			2005			2004			2003

Balance at beginning of year	$	7,057		$	6,385		$	6,533		$	6,553		$	6,581

Acquisition of Atlantic Liberty		—			753			—			—			—

Provision for loan losses		—			—			—			—			—

Loans charged-off:
Multi-family residential		—			—			—			—			—
Commercial real estate		—			—			—			—			—
One-to-four family mixed-use property		—			—			—			—			—
One-to-four family residential		—			—			—			—			—
Co-operative apartment		—			—			—			—			—
Construction		—			—			—			—			—
SBA		(470	)		(57	)		(144	)		(28	)		(111	)
Commercial business and other loans		(2	)		(36	)		(20	)		—			(44	)

Total loans charged-off		(472	)		(93	)		(164	)		(28	)		(155	)

Recoveries:
Mortgage loans		29			2			3			3			125
SBA, commercial business and other loans		19			10			13			5			2

Total recoveries		48			12			16			8			127

Net charge-offs		(424	)		(81	)		(148	)		(20	)		(28	)

Balance at end of year	$	6,633		$	7,057		$	6,385		$	6,533		$	6,553


Ratio of net charge-offs during the year to average loans outstanding during the year		0.02	%		0.00	%		0.01	%		0.00	%		0.00	%
Ratio of allowance for loan losses to gross loans at end of the year		0.25	%		0.30	%		0.34	%		0.43	%		0.51	%
Ratio of allowance for loan losses to non-performing loans at the end of the year		112.57	%		225.72	%		260.39	%		717.29	%		960.86	%
Ratio of allowance for loan losses to non-performing assets at the end of the year		112.57	%		225.72	%		260.39	%		717.29	%		960.86	%

The following table sets forth the Bank’s allocation of its allowance for loan losses to the total amount of loans in each of the categories listed at the dates indicated. The numbers contained in the “Amount” column indicate the allowance for loan losses allocated for each particular loan category. The numbers contained in the column entitled “Percentage of Loans in Category to Total Loans” indicate the total amount of loans in each particular category as a percentage of the Bank’s loan portfolio.


	At December 31,

	2007					2006					2005					2004					2003

Loan Category	Amount		Percent of Loans in Category to Total loans			Amount		Percent of Loans in Category to Total loans			Amount		Percent of Loans in Category to Total loans			Amount		Percent of Loans in Category to Total loans			Amount		Percent of Loans in Category to Total loans

(Dollars in thousands)
Mortgage Loans:

Multi-family residential	$	1,644		35.79	%	$	1,122		37.52	%	$	1,216		41.92	%	$	1,010		42.61	%	$	1,251		42.53	%

Commercial real estate		933		23.23			668		22.38			1,272		21.23			1,715		22.00			2,740		22.79

One-to-four family mixed-use property		1,223		25.49			661		25.33			1,544		25.42			1,494		21.92			803		17.76

One-to-four family residential		251		6.01			80		6.98			524		7.17			718		10.00			684		14.01

Co-operative apartment		15		0.26			10		0.35			161		0.11			207		0.21			127		0.29

Construction		1,172		4.44			851		4.50			64		2.63			55		2.07			56		1.85

Gross mortgage loans		5,238		95.22			3,392		97.06			4,781		98.48			5,199		98.81			5,661		99.23

Small Business Administration loans		373		0.70			1,895		0.75			964		0.49			663		0.37			553		0.39

Commercial business and other loans		1,022		4.08			1,770		2.19			640		1.03			671		0.82			339		0.38

Total loans	$	6,633		100.00	%	$	7,057		100.00	%	$	6,385		100.00	%	$	6,533		100.00	%	$	6,553		100.00	%

Investment Activities

General. The investment policy of the Company, which is approved by the Board of Directors, is designed primarily to manage the interest rate sensitivity of its overall assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement the Bank’s lending activities and to provide and maintain liquidity. In establishing its investment strategies, the Company considers its business and growth strategies, the economic environment, its interest rate risk exposure, its interest rate sensitivity “gap” position, the types of securities to be held, and other factors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview—Management Strategy” in Item 7 of this Annual Report.

Federally chartered savings institutions have authority to invest in various types of assets, including U.S. government obligations, securities of various federal agencies, mortgage-backed and mortgage-related securities, certain certificates of deposit of insured banks and savings institutions, certain bankers acceptances, reverse repurchase agreements, loans of federal funds, and, subject to certain limits, corporate securities, commercial paper and mutual funds. The Company primarily invests in mortgage-backed securities, U. S. government obligations, and mutual funds which purchase these same instruments.

The Investment Committee of the Bank and the Company meets quarterly to monitor investment transactions and to establish investment strategy. The Board of Directors reviews the investment policy on an annual basis and investment activity on a monthly basis.

The Company classifies its investment securities as available for sale. Unrealized gains and losses (other than unrealized losses considered other than temporary) for available-for-sale securities are excluded from earnings and included in Accumulated Other Comprehensive Income (a separate component of equity), net of taxes. At December 31, 2007, the Company had $440.1 million in securities available for sale which represented 13.1% of total assets. These securities had an aggregate market value at December 31, 2007 that was approximately 1.9 times the amount of the Company’s equity at that date. The cumulative balance of unrealized net gains on securities available for sale was $16,000, net of taxes, at December 31, 2007. As a result of the magnitude of the Company’s holdings of securities available for sale, changes in interest rates could produce significant changes in the value of such securities and could produce significant fluctuations in the equity of the Company. See Note 4 of Notes to Consolidated Financial Statements, included in Item 8 of this Annual Report. The Company may from time to time sell securities and realize a loss if the proceeds of such sale may be reinvested in loans or other assets offering more attractive yields.

At December 31, 2007, there was one issuer’s security, excluding government agencies or government sponsored agencies, that either alone, or together with any investments in the securities of any affiliate(s) of such issuer, exceeded 10% of the Company’s equity. This security is a collateralized mortgage obligation issued by Residential Asset Securitization Trust 2006-A4IP, and is a senior fixed-rate pass-through whose credit enhancement is the securities subordinated to this security. The Company’s amortized cost of this security as of December 31, 2007 was $24.7 million, and the fair value of the security was $24.4 million. The Company does not consider this investment to be other-than-temporarily impaired as of December 31, 2007.

The table below sets forth certain information regarding the amortized cost and market values of the Company’s securities portfolio, interest bearing deposits and federal funds sold, at the dates indicated. Securities available for sale are recorded at market value. See Note 4 of Notes to Consolidated Financial Statements, included in Item 8 of this Annual Report.


	At December 31,

	2007					2006					2005

	Amortized Cost			Market Value		Amortized Cost			Market Value		Amortized Cost			Market Value

	(In thousands)
Securities available for sale
Bonds and other debt securities:
U.S. government and agencies		$	4,406	$	4,406		$	15,016	$	15,004		$	10,942	$	10,911
Corporate debentures			2,643		2,643			—		—			—		—

Total bonds and other debt securities			7,049		7,049			15,016		15,004			10,942		10,911

Mutual funds			21,752		21,752			21,224		20,645			20,296		19,767

Equity securities:
Common stock			1,838		1,838			619		619			619		619
Preferred stock			46,732		46,732			5,685		5,468			5,493		5,270

Total equity securities			48,570		48,570			6,304		6,087			6,112		5,889


Mortgage-backed securities:
FNMA			123,121		122,770			135,458		131,192			152,412		147,802
REMIC and CMO			182,609		182,730			100,165		98,652			91,369		89,561
FHLMC			45,511		45,566			53,440		51,733			57,470		55,735
GNMA			11,464		11,663			7,199		7,274			7,789		8,096

Total mortgage-backed securities			362,705		362,729			296,262		288,851			309,040		301,194

Total securities available for sale			440,076		440,100			338,806		330,587			346,390		337,761


Interest-bearing deposits and Federal funds sold			5,758		5,758			4,670		4,670			4,396		4,396


Total		$	445,834	$	445,858		$	343,476	$	335,257		$	350,786	$	342,157

Mortgage-backed securities. At December 31, 2007, the Company had $362.7 million invested in mortgage-backed securities, of which $13.5 million was invested in adjustable-rate mortgage-backed securities. The mortgage loans underlying these adjustable-rate securities generally are subject to limitations on annual and lifetime interest rate increases. The Company anticipates that investments in mortgage-backed securities may continue to be used in the future to supplement mortgage-lending activities. Mortgage-backed securities are more liquid than individual mortgage loans and may be used more easily to collateralize obligations of the Bank.

The following table sets forth the Company’s mortgage-backed securities purchases, sales and principal repayments for the years indicated:


	For the years ended December 31,

	2007			2006			2005

	(In thousands)

Balance at beginning of year	$	288,851		$	301,194		$	395,629

Acquired with Atlantic Liberty		—			30,844			—

Purchases of mortgage-backed securities		117,408			43,897			29,627

Amortization of unearned premium, net of accretion of unearned discount		(193	)		(560	)		(1,219	)

Net change in unrealized gains (losses) on mortgage-backed securities available for sale		1,695			435			(6,285	)

Net realized gains recorded on mortgage-backed securities carried at fair value		2,685			—			—

Net change in interest due on securities carried at fair value		515			—			—

Sales of mortgage-backed securities		—			(36,220	)		(28,643	)

Principal repayments received on mortgage-backed securities		(48,232	)		(50,739	)		(87,915	)


Net increase (decrease) in mortgage-backed securities		73,878			(12,343	)		(94,435	)


Balance at end of year	$	362,729		$	288,851		$	301,194

While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed and value of such securities. The Company does not own any derivative instruments that are extremely sensitive to changes in interest rates.

The table below sets forth certain information regarding the amortized cost, fair value, annualized weighted average yields and maturities of the Company’s debt and equity securities at December 31, 2007. The stratification of balances is based on stated maturities. Equity securities are shown as immediately maturing, except for preferred stocks with stated redemption dates, which are shown in the period they are scheduled to be redeemed. Assumptions for repayments and prepayments are not reflected for mortgage-backed securities. The Company carries these investments at their fair value in the consolidated financial statements.


	One year or Less					One to Five Years					Five to 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			Average Remaining Years to Maturity	Amortized Cost		Estimated Fair Value		Weighted Average Yield

	(Dollars in thousands)
Securities available for sale

Bonds and other debt securities:
U.S. government and agencies	$	—		—	%	$	—		—	%	$	4,406		4.15	%	$	—		—	%	5.16	$	4,406	$	4,406		4.15	%
Corporate debentures		—		—			—		—			2,643		5.39			—		—		4.63		2,643		2,643		5.39

Total bonds and other debt securities		—		—			—		—			7,049		4.61			—		—		4.96		7,049		7,049		4.61


Mutual funds		21,752		4.99			—		—			—		—			—		—		N/A		21,752		21,752		4.99


Equity securities:
Common stock		—		—			—		—			—		—			1,838		7.03		N/A		1,838		1,838		7.03
Preferred stock		—		—			—		—			4,753		5.78			41,979		7.18		N/A		46,732		46,732		7.04

Total equity securities		—		—			—		—			4,753		5.78			43,817		7.17		N/A		48,570		48,570		7.04


Mortgage-backed securities:
FNMA		—		—			4,114		5.01			8,318		5.33			110,689		5.08		16.38		123,121		122,770		5.09
REMIC and CMO		—		—			153		3.99			27,465		4.53			154,991		5.60		23.54		182,609		182,730		5.44
FHLMC		—		—			8,403		4.03			502		5.95			36,606		4.77		13.40		45,511		45,566		4.65
GNMA		—		—			—		—			—		—			11,464		5.81		27.55		11,464		11,663		5.81

Total mortgage-backed securities		—		—			12,670		4.35			36,285		4.73			313,750		5.33		19.96		362,705		362,729		5.23


Interest-bearing deposits		5,758		2.80			—		—			—		—			—		—		N/A		5,758		5,758		2.80


Total securities	$	27,510		4.53	%	$	12,670		4.35	%	$	48,087		4.82	%	$	357,567		5.55	%	19.68	$	445,834	$	445,858		5.38	%

Sources of Funds

General. Deposits, FHLB-NY borrowings, repurchase agreements, principal and interest payments on loans, mortgage-backed and other securities, and proceeds from sales of loans and securities are the Company’s primary sources of funds for lending, investing and other general purposes.

Deposits. The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank’s deposits principally consist of savings accounts, money market accounts, demand accounts, NOW accounts and certificates of deposit. The Bank has a relatively stable retail deposit base drawn from its market area through its fourteen full service offices. The Bank seeks to retain existing depositor relationships by offering quality service and competitive interest rates, while keeping deposit growth within reasonable limits. It is management’s intention to balance its goal to maintain competitive interest rates on deposits while seeking to manage its cost of funds to finance its strategies.

In November, 2006, the Bank launched “iGObanking.com^®”, an internet branch, offering savings accounts and certificates of deposit. This allows the Bank to compete on a national scale without the geographical constraints of physical locations. Since the number of U.S. households with accounts at Web-only banks has grown more than tenfold in the past six years, our strategy was to join the market place by creating a branch that offers clients the simplicity and flexibility of a virtual online bank, which is a division of a stable, traditional bank that was established in 1929. At December 31, 2007, total deposits for the internet branch were $133.0 million.

In 2007, the Bank formed a new wholly owned subsidiary, Flushing Commercial Bank, a New York State chartered commercial bank, for the limited purpose of accepting municipal deposits and state funds in the State of New York. The commercial bank offers a full range of deposit products to municipalities and the State of New York, similar to the products currently being offered by the Bank. To date the operations of Flushing Commercial Bank have not been material.

The Bank’s core deposits, consisting of savings accounts, NOW accounts, money market accounts, and non-interest bearing demand accounts, are typically more stable and lower costing than other sources of funding. However, the flow of deposits into a particular type of account is influenced significantly by general economic conditions, changes in prevailing money market and other interest rates, and competition. The Bank has seen an increase in its deposits in each of the past three years. While the nation’s economy continued to expand in 2006 and 2007, the economy began to show signs of slowing growth in late 2007. The Bank saw an increase in its due to depositors during 2007 of $258.6 million. The Federal Reserve’s Federal Open Market Committee (“FOMC”) began increasing short-term interest rates in the second half of 2004, and continued increasing short-term rates through June 2006. The FOMC held the short-term interest rates through September 2007, and then lowered short-term interest rates 100 basis through December 2007. The Bank responded by increasing interest rates paid on savings, money market and certificate of deposit accounts during 2005 and 2006. The Bank held rates through most of 2007, before being able to lower rates near the end of 2007. This resulted in new deposits being obtained at rates that were higher than the weighted average cost of existing deposits. The cost of deposits increased to 4.31% in the fourth quarter of 2007 from 3.97% in the fourth quarter of 2006 and 2.95% in the fourth quarter of 2005. While we are unable to predict the direction of future interest rate changes, if interest rates rise during 2008, the result could be continued increases in the Company’s cost of deposits, which could reduce the Company’s net interest margin. Similarly, if interest rates decline in 2008, the Company could see a decline in its cost of deposits, which could increase the Company’s net interest margin.

Included in deposits are certificates of deposit with a balance of $100,000 or more totaling $318.5 million, $298.9 million and $255.3 million at December 31, 2007, 2006 and 2005, respectively.

The Bank utilizes brokered deposits as an additional funding source. Brokered deposits are marketed through national brokerage firms to their customers in $1,000 increments. The Bank maintains only one account for the total deposit amount, while the detailed records of owners are maintained by the brokerage firms. The Depository Trust Company is used as the clearing house, maintaining each deposit under the name of CEDE & Co. The deposits are transferable just like a stock or bond investment and the customer can open the account with only a phone call, just like buying a stock or bond. This provides a large deposit for the Bank at a lower operating cost since the Bank only has one account to maintain versus several accounts with multiple interest and maturity checks. The Bank seeks to obtain brokered deposits primarily when the interest rate on these deposits is below the prevailing interest rate in its market.

Unlike non-brokered deposits, where the deposit amount can be withdrawn with a penalty for any reason, including increasing interest rates, a brokered deposit can only be withdrawn in the event of the death, or court declared mental incompetence, of the depositor. This allows the Bank to better manage the maturity of its deposits. Currently, the

rates offered by the Bank for brokered deposits are comparable to that offered for retail certificates of deposit of similar size and maturity.

The Bank also offers access to $50 million per customer in FDIC insurance coverage through a Certificate of Deposit Account Registry Service (“CDARS®”). CDARS® is a deposit placement service. The Bank belongs to a network which arranges for placement of funds into certificate of deposit accounts issued by other member banks of the network in increments of less than $100,000 to ensure that both principal and interest are eligible for full FDIC deposit insurance. This allows the Bank to accept deposits in excess of $100,000 from a depositor, and place the deposits through the network to other member banks to provide full FDIC deposit insurance coverage. The Bank may receive deposits from other member banks in exchange for the deposits the Bank places into the network. The Bank may also obtain deposits from other network member banks without placing deposits into the network, or place deposits with other member banks without receiving deposits from other member banks. Depositors are allowed to withdraw funds, with a penalty, from these accounts at one or more of the member banks that hold the deposits.

Brokered deposits and funds obtained through the CDARS® network are classified as brokered deposits for financial reporting purposes. At December 31, 2007, the Bank has $201.7 million classified as brokered deposits, with $16.5 million obtained through the CDARS® network and $185.2 million obtained through brokers.

The following table sets forth the distribution of the Bank’s deposit accounts at the dates indicated and the weighted average nominal interest rates on each category of deposits presented.


	At December 31,

	2007								2006								2005

	Amount		Percent of Total Deposits			Weighted Average Nominal Rate			Amount		Percent of Total Deposits			Weighted Average Nominal Rate			Amount		Percent of Total Deposits			Weighted Average Nominal Rate

	(Dollars in thousands)
Savings accounts	$	354,746		17.51	%		2.82	%	$	262,980		14.91	%		1.70	%	$	273,753		18.66	%		1.45	%
NOW accounts		70,817		3.50			2.16			47,181		2.67			0.44			42,029		2.87			0.50
Demand accounts		69,299		3.42			—			80,061		4.54			—			58,678		4.00			—
Mortgagors’ escrow deposits		22,492		1.11			0.23			19,755		1.12			0.22			19,423		1.32			0.21

Total		517,354		25.54			2.24			409,977		23.24			1.15			393,883		26.85			1.07


Money market accounts		340,694		16.82			3.18			251,197		14.24			4.06			175,247		11.94			2.47


Certificate of deposit accounts with original maturities of:
Less than 6 Months (2)		6,090		0.30			4.32			2,704		0.15			0.66			2,684		0.18			0.74
6 to less than 12 Months (3)		303,894		15.00			5.07			166,622		9.44			4.91			66,965		4.56			3.20
12 to less than 30 Months (4)		421,568		20.82			4.82			441,616		25.03			4.65			412,527		28.11			3.50
30 to less than 48 Months (5)		58,424		2.88			4.07			65,698		3.72			3.74			59,623		4.06			3.41
48 to less than 72 Months (6)		326,184		16.11			4.69			368,000		20.87			4.66			292,380		19.94			4.52
72 Months or more		51,239		2.53			4.79			58,336		3.31			4.92			63,978		4.36			4.95

Total certificate of deposit accounts		1,167,399		57.64			4.81			1,102,976		62.52			4.64			898,157		61.21			3.90


Total deposits (1)	$	2,025,447		100.00	%		3.88	%	$	1,764,150		100.00	%		3.75	%	$	1,467,287		100.00	%		2.97	%


(1)	Included in the above balances are IRA and Keogh deposits totaling $173.2 million, $177.0 million and $170.9 million at December 31, 2007, 2006 and 2005, respectively.

(2)	Includes brokered deposits of $3.0 million at December 31, 2007.

(3)	Includes brokered deposits of $3.2 million at December 31, 2007.

(4)	Includes brokered deposits of $21.7 million at December 31, 2007.

(5)	Includes brokered deposits of $69.7 million, $46.4 million and $11.5 million at December 31, 2007, 2006 and 2005, respectively.

(6)	Includes brokered deposits of $104.1 million, $98.5 million and $19.8 million at December 31, 2007, 2006 and 2005, respectively.

The following table presents by various rate categories, the amount of time deposit accounts outstanding at the dates indicated, and the years to maturity of the certificate accounts outstanding at December 31, 2007.


							At December 31, 2007
	At December 31,
							Within One Year		One to Three Years
	2007		2006		2005		Within One Year		One to Three Years		Thereafter		Total

	(In thousands)
Interest rate:
1.99% or less	$	9,931	$	49,953	$	70,762	$	8,773	$	1,158	$	—	$	9,931
2.00% to 2.99%		5,009		9,630		20,044		2,297		2,703		9		5,009
3.00% to 3.99% (1)		94,249		114,487		336,757		55,070		33,244		5,935		94,249
4.00% to 4.99% (2)		399,921		382,060		379,327		228,778		126,910		44,233		399,921
5.00% to 5.99% (3)		657,558		542,524		83,925		420,317		167,225		70,016		657,558
6.00% to 6.99% (4)		94		302		3,007		94		—		—		94
7.00% to 7.99%		637		4,020		4,335		637		—		—		637

Total	$	1,167,399	$	1,102,976	$	898,157	$	715,966	$	331,240	$	120,193	$	1,167,399


(1)	Includes brokered deposits of $0.3 million at December 31, 2007.

(2)	Includes brokered deposits of $65.0 million, $51.0 million and $31.3 million at December 31, 2007, 2006 and 2005, respectively.

(3)	Includes brokered deposits of $136.3 million and $93.9 million at December 31, 2007 and 2006, respectively.

(4)	Includes brokered deposits of $0.1 million at December 31, 2007.

The following table presents by remaining maturity categories the amount of certificate of deposit accounts with balances of $100,000 or more at December 31, 2007 and their annualized weighted average interest rates.


	Amount		Weighted Average Rate

	(Dollars in thousands)
Maturity Period:
Three months or less	$	127,668		5.07	%
Over three through six months		41,594		4.86
Over six through 12 months		72,906		4.84
Over 12 months		76,297		4.81

Total	$	318,465		4.93	%

The above table does not include brokered deposits of $201.7 million with a weighted average rate of 4.96%.

The following table presents the deposit activity, including mortgagors’ escrow deposits, of the Bank for the periods indicated.


	For the year ended December 31,

	2007		2006		2005

	(In thousands)
Net deposits	$	183,280	$	133,240	$	139,833
Acquired with Atlantic Liberty		—		106,766		—
Amortization of premiums, net		855		464		—
Interest on deposits		77,162		56,393		34,657

Net increase in deposits	$	261,297	$	296,863	$	174,490

The following table sets forth the distribution of the Bank’s average deposit accounts for the years indicated, the percentage of total deposit portfolio, and the average interest cost of each deposit category presented. Average balances for all years shown are derived from daily balances.


	For the years ended December 31,

			2007								2006								2005

	Average Balance		Percent of Total Deposits			Average Cost			Average Balance		Percent of Total Deposits			Average Cost			Average Balance		Percent of Total Deposits			Average Cost

	(Dollars in thousands)
Savings accounts	$	310,457		16.09	%		2.44	%	$	265,421		16.23	%		1.52	%	$	241,121		17.98	%		0.92	%

NOW accounts		57,915		3.00			1.58			43,052		2.63			0.47			43,133		3.22			0.50

Demand accounts		65,508		3.40			—			60,991		3.73			—			52,017		3.88			—

Mortgagors’ escrow deposits		32,403		1.68			0.23			29,275		1.79			0.22			27,337		2.04			0.21

Total		466,283		24.17			1.84			398,739		24.38			1.08			363,608		27.12			0.69

Money market accounts		294,402		15.26			4.22			235,642		14.41			3.74			228,818		17.06			2.27

Certificate of deposit accounts		1,168,620		60.57			4.88			1,001,438		61.21			4.37			748,747		55.82			3.60

Total deposits	$	1,929,305		100.00	%		4.04	%	$	1,635,819		100.00	%		3.48	%	$	1,341,173		100.00	%		2.58	%

Borrowings. Although deposits are the Bank’s primary source of funds, the Bank also uses borrowings as an alternative and cost effective source of funds for lending, investing and other general purposes. The Bank is a member of, and is eligible to obtain advances from, the FHLB-NY. Such advances generally are secured by a blanket lien against the Bank’s mortgage portfolio and the Bank’s investment in the stock of the FHLB-NY. In addition, the Bank may pledge mortgage-backed securities to obtain advances from the FHLB-NY. See “— Regulation — Federal Home Loan Bank System.” The maximum amount that the FHLB-NY will advance for purposes other than for meeting withdrawals fluctuates from time to time in accordance with the policies of the FHLB-NY. The Bank also enters into repurchase agreements with broker-dealers and the FHLB-NY. These agreements are recorded as financing transactions and the obligations to repurchase are reflected as a liability in the Company’s consolidated financial statements. In addition, the Holding Company issued junior subordinated debentures with a total par of $61.8 million in June and July 2007. These junior subordinated debentures are carried at fair value in the consolidated statement of financial position. The average cost of borrowed funds was 4.97%, 4.73% and 4.33% for the years ended December 31, 2007, 2006 and 2005, respectively. The average balances of borrowed funds were $897.8 million, $715.3 million and $683.0 million for the same years, respectively.

The following table sets forth certain information regarding the Company’s borrowed funds at or for the periods ended on the dates indicated.


	At or for the years ended December 31,

	2007			2006			2005

	(Dollars in thousands)
Securities Sold with the Agreement to Repurchase
Average balance outstanding	$	229,544		$	207,955		$	210,174
Maximum amount outstanding at any month end during the period		272,693			238,900			213,900
Balance outstanding at the end of period		222,824			223,900			178,900
Weighted average interest rate during the period		5.04	%		4.70	%		4.25	%
Weighted average interest rate at end of period		4.71			4.91			4.43

FHLB-NY Advances
Average balance outstanding	$	625,035		$	486,750		$	452,246
Maximum amount outstanding at any month end during the period		788,499		<