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, 2008

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 incorporation or organization)	(I.R.S. Employer Identification No.)

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. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 30, 2008, 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 $389,340,000. 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 $18.95.

The number of shares of the registrant’s Common Stock outstanding as of February 28, 2009 was 21,715,809 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 19, 2009 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		3
		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		32
	Transactions with Affiliates		32
	Restrictions on Dividends and Capital Distributions		33
	Federal Home Loan Bank System		33
	Assessments		33
	Branching		34
	Community Reinvestment		34
	Brokered Deposits		34
	Capital Requirements		34
		General	34
		Tangible Capital Requirement	34
		Leverage and Core Capital Requirement	35
		Risk-Based Requirement	35
	Federal Reserve System		35
	Financial Reporting		35
	Standards for Safety and Soundness		36
	Gramm-Leach-Bliley Act		36
	USA Patriot Act		36
	Prompt Corrective Action		37
	Emergency Economic Stabilization Act of 2008		37
	The American Recovery and Reinvestment Act of 2009		39
	Federal Securities Laws		39
	Available Information		39
Item 1A.	Risk Factors		40
	Changes in Interest Rates May Significantly Impact Our Financial Condition and Results of Operations		40
	Our Lending Activities Involve Risks that May Be Exacerbated Depending on the Mix of Loan Types		40
	The Markets in Which We Operate Are Highly Competitive		41
	Our Results of Operations May Be Adversely Affected by Changes in National and/or Local Economic Conditions		41
	Changes in Laws and Regulations Could Adversely Affect Our Business		41
	Certain Anti-Takeover Provisions May Increase the Costs to or Discourage an Acquiror		42
	We May Not Be Able To Successfully Implement Our New Commercial Business Banking Initiative		42
	The U.S. Government’s Plan To Purchase Large Amounts Of Illiquid, Mortgage-Backed And Other Securities From Financial Institutions May Not Be Effective And/Or It May Not Be Available To Us		42
	We May Not Pay Dividends On Your Common Stock		43
	Our Participation In The U.S. Treasury’s Capital Purchase Program Restricts Our Ability To Declare Or Pay Dividends And Repurchase Shares and Access The Capital Markets.		43
	Our Participation In The U.S. Treasury’s Capital Purchase Program Places Restrictions On Executive Compensation		43


	There Can Be No Assurance That The Emergency Economic Stabilization Act of 2008 And Other Recently Enacted Government Programs Will Help Stabilize the U.S. Financial System	43
Item 1B.	Unresolved Staff Comments	44
Item 2.	Properties	44
Item 3.	Legal Proceedings	44
Item 4.	Submission of Matters to a Vote of Security Holders	44

PART II

Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	45
Item 6.	Selected Financial Data	47
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49
	General	49
	Overview	50
	Interest Rate Sensitivity Analysis	54
	Interests Rate Risk	56
	Analysis of Net Interest Income	56
	Rate/Volume Analysis	58
	Comparison of Operating Results for the Years Ended December 31, 2008 and 2007	58
	Comparison of Operating Results for the Years Ended December 31, 2007 and 2006	60
	Liquidity, Regulatory Capital and Capital Resources	62
	Participation in the U.S. Treasury’s Troubled Asset Relief Program	63
	Critical Accounting Policies	64
	Contractual Obligations	65
	Impact of New Accounting Standards	66
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	69
Item 8.	Financial Statements and Supplementary Data	70
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	117
Item 9A.	Controls and Procedures	117
Item 9B.	Other Information	117

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	118
Item 11.	Executive Compensation	118
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	118
Item 13.	Certain Relationships and Related Transactions, and Director Independence	119
Item 14.	Principal Accounting Fees and Services	119

PART IV

Item 15.	Exhibits, Financial Statement Schedules	119
	(a) 1. Financial Statements	119
	(a) 2. Financial Statement Schedules	119
	(a) 3. Exhibits Required by Securities and Exchange Commission Regulation S-K	120

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. We have no obligation to update these forward-looking statements.

PART I

As used in this Annual Report on Form 10-K, the words “we,” “us,” “our” and the “Company” are used to refer to Flushing Financial Corporation and our consolidated subsidiaries, including Flushing Savings Bank, FSB (the “Savings Bank”) and Flushing Commercial Bank (the “Commercial Bank”), collectively, the “Banks.”

Item 1. Business.

GENERAL

Overview

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

Flushing Financial Corporation 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 a total of $60.0 million of capital securities and $1.9 million of common securities (which are the only voting securities). Flushing Financial Corporation owns 100% of the common securities of the Trusts. The Trusts used the proceeds from the issuance of these securities to purchase junior subordinated debentures from Flushing Financial Corporation. In accordance with the requirements of FASB Interpretation No. 46R, the Trusts are not included in our consolidated financial statements. Flushing Financial Corporation previously owned Flushing Financial Capital Trust I (the “Trust I”), 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.

Unless otherwise disclosed, the information presented in this Annual Report reflects the financial condition and results of operations of Flushing Financial Corporation, the Savings Bank and the Savings Bank’s subsidiaries on a consolidated basis (collectively, the “Company”). At December 31, 2008, the Company had total assets of $3.9 billion, deposits of $2.5 billion and stockholders’ equity of $301.5 million.

Our 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 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. We also originate certain other consumer loans. Our revenues are derived principally from interest on our mortgage and other loans and mortgage-backed securities portfolio, and interest and dividends on other investments in our securities portfolio. Our 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 Savings Bank’s primary regulator is the Office of Thrift Supervision (“OTS”). Deposits are insured to the maximum allowable amount by the Federal Deposit Insurance Corporation (“FDIC”). Additionally, the Banks are members of the Federal Home Loan Bank (“FHLB”) system.

We also hold a note evidencing a loan that we made to an employee benefit trust we established for the purpose of holding shares for allocation or distribution under certain employee benefit plans of the Company (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, we 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, we issued 1.6 million shares of common stock, the value of which was determined based on the closing price of our common stock on the announcement date of December 21, 2005, and two days prior to and after the announcement date. We acquired $186.9 million in assets, $116.2 million in net loans and assumed $106.8 million in deposits. This acquisition provided us with presences on Montague Street and on Avenue J in Brooklyn, two highly attractive markets.

During 2006, the Savings Bank established a business banking unit. Our 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 Savings Bank launched an internet branch, iGObanking.com®, as a new division which provides us access to markets outside our geographic locations. Accounts can be opened online at www.iGObanking.com or by mail.

During 2007, the Savings Bank formed a wholly owned subsidiary, Flushing Commercial Bank, a New York State chartered commercial bank, for the limited purpose of providing banking services to public entities including counties, cities, towns, villages, school districts, libraries, fire districts and the various courts throughout the New York metropolitan area. The Commercial Bank was formed in response to New York State law, which requires that municipal deposits and state funds must be deposited into a bank or trust company as defined in New York State law. The Savings Bank is not considered an eligible bank or trust company for this purpose.

On December 19, 2008 we entered into a Letter Agreement (including the Securities Purchase Agreement – Standard Terms incorporated by reference therein, the “Purchase Agreement”) with the U.S. Treasury pursuant to which we issued and sold to the U.S. Treasury (i) 70,000 shares of the our Fixed Rate Cumulative Perpetual Preferred Stock Series B having a liquidation preference of $1,000 per share (the “Series B Preferred Stock”), and (ii) a ten-year warrant (the “Warrant”) to purchase up to 751,611 shares of the our common stock, par value $0.01 per share, at an initial price of $13.97 per share, for an aggregate purchase price of $70.0 million in cash. The Series B Preferred Stock qualifies as Tier I capital under the risk-based capital guidelines of the OTS (“Tier 1 Capital”) and will pay cumulative dividends at a rate of 5% per annum for the first five years following issuance, and 9% per annum thereafter. Dividends are payable on the Series B Preferred Stock quarterly and are payable on February 15, May 15, August 15 and November 15 of each year. If we fail to pay a total of six dividend payments on the Series B Preferred Stock, whether or not consecutive, holders of the Series B Preferred Stock will have the right to elect two directors to our board of directors until we have paid all such dividends that we had failed to pay. The Series B Preferred Stock has no maturity date and ranks senior to the Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation and winding up of the Company. The Warrant expires ten years from the issuance date and is immediately exercisable and transferable. The Purchase Agreement contains limitations on the payment of dividends on and the repurchase of the

Common Stock and certain preferred stock. The Purchase Agreement also requires that, until such time as the U.S. Treasury ceases to own any securities acquired from us thereunder, we will take all necessary action to ensure that benefit plans with respect to senior executive officers comply with Section 111(b) of EESA as implemented by any guidance or regulation under Section 111(b) of EESA that has been issued and is in effect as of the date of issuance of the Series B Preferred Stock and the Warrant and not adopt any benefit plans with respect to, or which cover, senior executive officers that do not comply with EESA. Our senior executive officers have consented to the foregoing.

Market Area and Competition

We are a community oriented savings institution offering a wide variety of financial services to meet the needs of the communities we serve. Our main office is in Flushing, New York, located in the Borough of Queens. At December 31, 2008, the Savings Bank operated out of 14 full-service offices, located in the New York City Boroughs of Queens, Brooklyn, and Manhattan, and in Nassau County, New York, and the Commercial Bank operated out of one office in Nassau County, New York, an office its shares with the Savings Bank. In January 2009, the Savings Bank opened its fifteenth full-service office, which is located in Nassau County, a branch office that is shared with the Commercial Bank. In addition, the Commercial Bank began operating a branch in Brooklyn in January 2009 in a location that is shared with an existing branch of the Savings Bank. We also operate an internet branch, iGObanking.com^®. We maintain our executive offices in Lake Success in Nassau County, New York. Substantially all of our mortgage loans are secured by properties located in the New York City metropolitan area.

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

For a discussion of our 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. Our 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, we also offer SBA loans, other small business loans and consumer loans. Substantially all of our mortgage loans are secured by properties located within our market area. At December 31, 2008, we had gross loans outstanding of $2,954.6 million (before the allowance for loan losses and net deferred costs).

In recent years, we have focused on 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 we collect if the loans pay in full prior to the contractual maturity. We expect to continue this emphasis through marketing and by maintaining competitive interest rates and origination fees. Our marketing efforts include frequent contacts with mortgage brokers and other professionals who serve as referral sources. From time-to-time, we may purchase loans from mortgage bankers and other financial institutions. Loans purchased comply with our 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. Our 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 our 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 us to increase our provisions for loan losses and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance we currently maintain. We continually review the composition of our mortgage loan portfolio to manage the risk in the portfolio. To date, we have not experienced significant losses in our multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loan portfolios.

Our mortgage loan portfolio consists of adjustable rate mortgage (“ARM”) loans and fixed-rate mortgage loans. Interest rates we charge on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rate offered by our 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 state and local governments.

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, we 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 we originated, volume and adjustment periods are affected by the interest rates and other market factors as discussed above as well as consumer preferences. We have not in the past, nor do we currently, originate ARM loans that provide for negative amortization.

In recent years, we have grown our construction loan portfolio. During 2007, we began to deemphasize construction loans, as originations of new construction loans declined. This continued in 2008 as we further reduced originations and reduced the balance in the construction loan portfolio. We obtain a first lien position on the underlying collateral, and generally obtain 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 us to increase our provision for loan losses, and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance we currently maintain. To date, we have not incurred significant losses in our construction loan portfolio.

The business banking unit was formed in 2006 to focus on loans to businesses located within our 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 us a higher rate of return, also present a higher level of risk. The greater risk associated with business loans could require us to increase our provision for loan losses, and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance we currently maintain. To date, we have not incurred significant losses in our business loan portfolio.

Our lending activities are subject to federal and state laws and regulations. See “— Regulation.”

The following table sets forth the composition of our loan portfolio at the dates indicated.


	At December 31,

	2008						2007						2006						2005						2004

	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	$	999,185			33.81	%	$	964,455			35.79	%	$	870,912			37.52	%	$	788,071			41.92	%	$	646,922			42.61	%
Commercial real estate		752,120			25.46			625,843			23.23			519,552			22.38			399,081			21.23			334,048			22.00
One-to-four family -mixed-use property		751,952			25.45			686,921			25.49			588,092			25.33			477,775			25.42			332,805			21.92
One-to-four family -residential (1)		238,711			8.08			161,666			6.01			161,889			6.98			134,641			7.17			151,737			10.00
Co-operative apartment (2)		6,566			0.22			7,070			0.26			8,059			0.35			2,161			0.11			3,132			0.21
Construction		103,626			3.51			119,745			4.44			104,488			4.50			49,522			2.63			31,460			2.07

Gross mortgage loans		2,852,160			96.53			2,565,700			95.22			2,252,992			97.06			1,851,251			98.48			1,500,104			98.81

Small Business Administration loans		19,671			0.67			18,922			0.70			17,521			0.75			9,239			0.49			5,633			0.37

Commercial business and other loans		82,738			2.80			110,046			4.08			50,899			2.19			19,362			1.03			12,505			0.82

Gross loans		2,954,569			100.00	%		2,694,668			100.00	%		2,321,412			100.00	%		1,879,852			100.00	%		1,518,242			100.00	%

Unearned loan fees and deferred costs, net		17,121						14,083						10,393						8,409						4,798

Less: Allowance for loan losses		(11,028	)					(6,633	)					(7,057	)					(6,385	)					(6,533	)

Loans, net	$	2,960,662					$	2,702,118					$	2,324,748					$	1,881,876					$	1,516,507


(1)	One-to-four family residential mortgage loans also include home equity and condominium loans. At December 31, 2008, gross home equity loans totaled $66.0 million and condominium loans totaled $10.3 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 our loan originations (including the net effect of refinancing) and the changes in our portfolio of loans, including purchases, sales and principal reductions for the years indicated:


	For the years ended December 31,

(In thousands)	2008		2007		2006

Mortgage Loans

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

Mortgage loans originated:
Multi-family residential		153,023		222,625		166,744
Commercial real estate		179,857		165,440		150,804
One-to-four family mixed-use property		118,270		159,331		154,456
One-to-four family residential		57,292		36,397		13,786
Co-operative apartment		800		828		125
Construction		30,673		54,151		73,107

Total mortgage loans originated		539,915		638,772		559,022

Mortgage loans purchased:
Multi-family residential		—		8,717		—
Commercial real estate		2,500		2,902		3,087
One-to-four family residential		62,330		—		—
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		64,830		11,619		134,092

Less:
Principal reductions		304,049		284,608		270,416
Mortgage loan sales		13,641		53,075		20,957
Charge-offs		470		—		—
Mortgage loan foreclosures		125		—		—

At end of year	$	2,852,160	$	2,565,700	$	2,252,992

SBA, Commercial Business & Other Loans

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

Loans originated:
SBA loans		9,880		12,840		19,914
Commercial business loans (1)		49,934		92,240		49,909
Other loans		2,618		1,953		1,671

Total other loans originated		62,432		107,033		71,494


SBA, Commercial Business & Other Loans purchased:
SBA loans		423		—		—

Less:
Sales of SBA loans		2,988		4,925		7,477
Repayments (1)		85,644		41,090		24,116
Charge-offs		782		470		82

At end of year	$	102,409	$	128,968	$	68,420

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 our commercial mortgage loan, construction loan and non-mortgage loan portfolios at December 31, 2008. 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	$	86,938	$	91,629	$	4,203	$	53,258	$	236,028

Amounts due after one year:
One to two years		64,730		11,997		3,068		12,182		91,977
Two to three years		63,869		—		3,035		7,382		74,286
Three to five years		129,080		—		4,519		7,121		140,720
Over five years		407,503		—		4,846		2,795		415,144

Total due after one year		665,182		11,997		15,468		29,480		722,127

Total amounts due	$	752,120	$	103,626	$	19,671	$	82,738	$	958,155


Sensitivity of loans to changes in interest rates - loans due after one year:
Fixed rate loans	$	112,753	$	473	$	—	$	17,133	$	130,359
Adjustable rate loans		552,429		11,524		15,468		12,347		591,768

Total loans due after one year	$	665,182	$	11,997	$	15,468	$	29,480	$	722,127

Multi-Family Residential Lending. Loans secured by multi-family residential properties were $999.2 million, or 33.81% of gross loans, at December 31, 2008. Our multi-family residential mortgage loans had an average principal balance of $479,000 at December 31, 2008, and the largest multi-family residential mortgage loan held in our portfolio had a principal balance of $7.0 million. We offer both fixed-rate and adjustable- rate multi-family residential mortgage loans, with maturities of up to 30 years.

In underwriting multi-family residential mortgage loans, we review 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. We typically require debt service coverage of at least 125% of the monthly loan payment. During 2008, we increased the required debt service coverage ratio for multi-family residential loans with ten units or less. We generally originate 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, its Loan Committee or its Executive Committee as an exception to policy. We generally rely 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. We typically order an environmental report on our multi-family 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. We seek to protect against this risk through obtaining an environmental report. See “—Asset Quality — Environmental Concerns Relating to Loans.”

Our fixed-rate multi-family mortgage loans are generally originated for terms up to 15 years and are competitively priced based on market conditions and our cost of funds. We originated and purchased $36.6 million, $72.1 million and $47.0 million of fixed-rate multi-family mortgage loans in 2008, 2007 and 2006, respectively. At December 31, 2008, $219.5 million, or 22.0%, of our multi-family mortgage loans consisted of fixed rate loans.

We offer 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 us 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, we 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. We originated and purchased multi-family ARM loans totaling $116.4 million, $159.3 million and $119.8 million during 2008, 2007 and 2006, respectively. At December 31, 2008, $779.7 million, or 78.0%, of our multi-family mortgage loans consisted of ARM loans.

Commercial Real Estate Lending. Loans secured by commercial real estate were $752.1 million, or 25.46% of the Bank’s gross loans, at December 31, 2008. Our 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, 2008, our commercial real estate mortgage loans had an average principal balance of $791,000, and the largest of such loans, which was secured by a multi-tenant shopping center, had a principal balance of $11.4 million. Commercial real estate mortgage loans are generally originated in a range of $100,000 to $6.0 million.

In underwriting commercial real estate mortgage loans, we employ 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.

Our fixed-rate commercial mortgage loans are generally originated for terms up to 20 years and are competitively priced based on market conditions and our cost of funds. We originated and purchased $57.3 million, $28.4 million and $20.5 million of fixed-rate commercial mortgage loans in 2008, 2007 and 2006, respectively. At December 31, 2008, $144.7 million, or 19.24%, of our commercial mortgage loans consisted of fixed- rate loans.

We offer ARM loans with adjustment periods of one to five years and generally for terms of up to 15 years. Interest rates on ARM loans currently offered by us 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, we 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. We originated and purchased commercial ARM loans totaling $125.1 million, $140.0 million and $133.4 million during 2008, 2007 and 2006, respectively. At December 31, 2008, $607.4 million, or 80.76%, of our commercial mortgage loans consisted of ARM loans.

One-to-Four Family Mortgage Lending – Mixed-Use Properties. We offer mortgage loans secured by one-to-four family mixed-use properties. These properties contain up to four residential dwelling units and a commercial unit. We offer 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 our marketing efforts and referrals. One-to-four family mixed-use property mortgage loans were $752.0 million, or 25.45% of gross loans, at December 31, 2008.

During the three-year period ended December 31, 2008, we focused our 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, 2008, one-to-four family mixed-use property mortgage loans amounted to $752.0 million, as compared to $686.9 million at December 31, 2007, $588.1 million at December 31, 2006, and $477.8 million at December 31, 2005, representing an increase of $274.2 million during the three-year period.

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

Our 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. We originated and purchased $21.7 million, $33.7 million and $30.8 million of fixed-rate one-to-four family mixed-use property mortgage loans in 2008, 2007 and 2006, respectively. At December 31, 2008, $175.0 million, or 23.27%, of our one-to-four family mixed-use property mortgage loans consisted of fixed- rate loans.

We offer 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, we 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. We originated and purchased one-to-four family mixed-use property ARM loans totaling $96.6 million, $125.7 million and $123.7 million during 2008, 2007 and 2006, respectively. At December 31, 2008, $576.9 million, or 76.73%, of our one-to-four family mixed-use property mortgage loans consisted of ARM loans.

One-to-Four Family Mortgage Lending – Residential Properties. We offer 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.” We offer both fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 years and a general maximum loan amount of $1,000,000. Loan originations generally result from applications received from mortgage brokers and mortgage bankers, existing or past customers, and referrals. Residential mortgage loans were $245.3 million, or 8.30% of gross loans, at December 31, 2008.

We generally originate residential mortgage loans in amounts up to 80% of the appraised value or the sale price, whichever is less. We 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.

In addition to income verified loans, we originate residential mortgage loans to self-employed individuals within our local community based on stated income and verifiable assets that allows us to assess repayment ability, 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 our 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 our 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. We believe that our willingness to make such loans is an aspect of our commitment to be a community-oriented bank. We originated and purchased $9.8 million, $2.4 million and $0.9 million of these first mortgage loans during 2008, 2007 and 2006, respectively. We also extended $34.4 million and $43.0 million in home equity lines of credit during 2008 and 2007, respectively with various levels of income verification.

Our fixed-rate residential mortgage loans typically are originated for terms of 15 and 30 years and are competitively priced based on market conditions and our cost of funds. We originated and purchased $12.4 million and $0.4 million in 15-year fixed-rate residential mortgages in 2008 and 2006, respectively. We did not originate or purchase any 15-year fixed-rate residential mortgage loans in 2007. We originated and purchased $50.0 million and $0.5 million of 30-year fixed-rate mortgages in 2008 and 2007, respectively. We did not originate or purchase any 30-year fixed rate residential mortgages in 2006. At December 31, 2008, $114.2 million, or 46.54%, of our residential mortgage loans consisted of fixed- rate loans.

We offer ARM loans with adjustment periods of three, five, seven or ten years. Interest rates on ARM loans currently offered by us 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, we 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. We originated and purchased adjustable rate residential mortgage loans totaling $58.1 million, $36.8 million and $13.5 million during 2008, 2007 and 2006, respectively. At December 31, 2008, $131.1 million, or 53.46%, of our residential mortgage loans consisted of ARM loans.

The retention of ARM loans in our portfolio helps us reduce our 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 our interest income and our 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 our 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 our 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 adjustable “home equity lines of credit” may include a “floor” and/or a “ceiling” on the interest rate that we charge for these loans. 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 have substantially been the same as those for residential mortgage loans. During 2008, the underwriting standards for home equity loans were modified to focus on the repayment ability of the borrower and the current declining housing market. At December 31, 2008, home equity loans totaled $66.0 million, or 2.23%, of gross loans.

Construction Loans. Our construction loans primarily have been made to finance the construction of one-to-four family residential properties, multi-family residential properties and residential condominiums. We also, to a limited extent, finance the construction of commercial real estate. Our policies provide that construction loans may be made in amounts up to 70% of the estimated value of the developed property and only if we obtain a first lien position on the underlying real estate. However, we generally limit construction loans to 60% of the estimated value of the developed property. In addition, we generally require 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 we maintain a first lien position. We made advances on construction loans of $30.7 million, $54.2 million and $75.1 million during 2008, 2007 and 2006, respectively. Construction loans outstanding at December 31, 2008 totaled $103.6 million, or 3.51%, 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. We also provide 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 loan size under the SBA guarantee program is $2,000,000, with a maximum loan guarantee of $1,500,000. All SBA loans are underwritten in accordance with SBA Standard Operating Procedures and we generally obtain 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. We generally sell the guaranteed portion of certain SBA term loans in the secondary market, realizing a gain at the time of sale, and retain the servicing rights on these loans, collecting a servicing fee of approximately 1%. We originated and purchased $10.3 million, $12.8 million, and $19.9 million of SBA loans during 2008, 2007, and 2006, respectively. At December 31, 2008, SBA loans totaled $19.7 million, representing 0.67% of gross loans.

Commercial Business and Other Lending. We originate other loans for business, personal, or household purposes. Total commercial business and other loans outstanding at December 31, 2008 amounted to $82.7 million, or 2.80% 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 $13.0 million at December 31, 2008, are secured through liens on the taxi medallions. We originate taxi medallion loans up to 80% 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. We originated $49.9 million, $92.2 million, and $49.9 million of commercial business loans during 2008, 2007, and 2006 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. We offer credit cards to our customers through a third-party financial institution and receive an origination fee and transactional fees for processing such accounts, but do not underwrite or finance any portion of the credit card receivables.

The underwriting standards employed by us 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. Our Board of Directors approved lending policies establish loan approval requirements for our various types of loan products. Our 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 either 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 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 our 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 appropriate Senior Vice President. Such loans in excess of $1,000,000 also require Loan or Executive Committee or Board approval. In accordance with our 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, and commercial and industrial loans/professional mortgage loans in excess of $1,500,000 up to $2,500,000, must be approved by the Management Loan Committee and ratified by the Loan Committee of the Savings Bank’s Board of Directors. Commercial business and other loans require two signatures for approval, one of which must be from an Authorized Officer. Our Construction Loan Policy requires that the Loan Committee or the Board of Directors of the Savings Bank must approve all construction loans. Any loan, regardless of type, that deviates from our written loan policies must be approved by the Loan Committee or the Savings Bank’s Board of Directors.

For all loans originated by us, 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 us currently performs such appraisals. Our staff appraiser reviews all appraisals for properties of $1,500,000 or greater. The Savings Bank’s Board of Directors annually approves the independent appraisers used by the Savings Bank and approves the Savings Bank’s appraisal policy. It is our 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 we make disbursements for items such as real estate taxes and, in some cases, hazard insurance premiums.

Loan Concentrations. The maximum amount of credit that the Savings Bank can extend to any single borrower or related group of borrowers generally is limited to 15% of the Savings Bank’s unimpaired capital and surplus. Applicable laws 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 our policy not to extend such additional credit. At December 31, 2008, there were no loans in excess of the maximum dollar amount of loans to one borrower that the Savings 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 $34.0 million, $22.9 million and $22.6 million for each of the three borrowers, respectively.

Loan Servicing. At December 31, 2008, we were servicing $20.0 million of mortgage loans and $17.1 million of SBA loans for others. Our policy is to retain the servicing rights to the mortgage and SBA loans that we sell 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, we take 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. We take a proactive approach to managing delinquent loans, including conducting site examinations and encouraging borrowers to meet with one of our representatives. When deemed appropriate, short-term payment plans have been developed that enable borrowers to bring their loans current, generally within six to nine months. When the borrower has indicated that he/she will be unable to bring the loan current, or due to other circumstances which, in our 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 our opinion, compelling evidence the borrower will bring the loan current in the immediate future. At December 31, 2008, there were seven loans, which total $1.3 million, 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, we review 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. Based upon the available information, we will consider the sale of the loan or retention of the loan. If the loan is retained, we 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 is sold at foreclosure or by us as soon thereafter as practicable.

Once the decision to sell a loan is made, we determine what we would consider 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. We have been successful in finding buyers for some of our non-performing loans offered for sale that are willing to pay what we consider to be adequate consideration. Terms of the sale include cash due upon closing of the sale, no contingencies or recourse to us, 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 us to optimize our return by quickly converting our non-performing loans to cash, which can then be reinvested in earning assets. This strategy also allows us to avoid lengthy and costly legal proceedings that may occur with non-performing loans. We sold 32 delinquent mortgage loans totaling $13.6 million, 45 delinquent mortgage loans totaling $33.9 million, and 35 delinquent mortgage loans totaling $12.2 million during the years ended December 31, 2008, 2007 and 2006, respectively. We did not record any charges to the allowance for loan losses for the non-performing loans that were sold. We realized gross gains of $74,000 and gross losses of $224,000 on the sale of these mortgage loans for the year ended December 31, 2008. We realized gross gains of $332,000 and no gross losses on the sale of these mortgage loans for the year ended December 31, 2007. We 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. There can be no assurances that we will continue this strategy in future periods, or if continued, we will be able to find buyers to pay adequate consideration.

On mortgage loans or loan participations purchased by us for which the seller retains the servicing rights, we receive monthly reports with which we monitor the loan portfolio. Based upon servicing agreements with the servicers of the loans, we rely 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 us and our servicing agents. The servicers are required to submit monthly reports on their collection efforts on delinquent loans. At December 31, 2008, we held $66.0 million of loans that were serviced by others.

In the case of commercial business or other loans, we generally send 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 one of our representatives to discuss the delinquency. If the loan still is not brought current and it becomes necessary for us to take legal action, which typically occurs after a loan is delinquent 90 days or more, we 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. We generally discontinue 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, 2008, 2007 and 2006, the amounts of additional interest income that would have been recorded on non-accrual loans, had they been current, totaled $1.6 million, $0.3 million and $0.1 million, respectively. These amounts were not included in our interest income for the respective periods.


	At December 31,

(Dollars in thousands)	2008			2007			2006			2005			2004


Non-accrual loans:
Multi-family residential	$	12,011		$	2,477		$	1,957		$	861		$	—
Commercial real estate		7,409			90			349			—			—
One-to-four family mixed-use property		10,639			—			—			—			—
One-to-four family residential		1,121			2,204			608			960			659
Construction		4,457			—			—			—			—

Total non-accrual mortgage loans		35,637			4,771			2,914			1,821			659
Other non-accrual loans		3,021			369			212			101			252

Total non-accrual loans		38,658			5,140			3,126			1,922			911
Loans 90 days or more delinquent and still accruing		1,314			753			—			530			—

Total non-performing loans		39,972			5,893			3,126			2,452			911
Foreclosed real estate		125			—			—			—			—
Investment securities		607			—			—			—			—

Total non-performing assets	$	40,704		$	5,893		$	3,126		$	2,452		$	911

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

Non-performing loans to gross loans		1.35	%		0.22	%		0.13	%		0.13	%		0.06	%
Non-performing assets to total assets		1.03	%		0.18	%		0.11	%		0.10	%		0.04	%

Real Estate Owned (REO). We aggressively market any REO properties, when and if, they are acquired through foreclosure. At December 31, 2008, we owned one property with a carrying value of $125,000. At December 31, 2007 and 2006, we did not own any such properties.

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

Allowance for Loan Losses

We have established and maintain on our books an allowance for loan losses that is designed to provide a reserve against estimated losses inherent in our 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 the 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. We review our loan portfolio by separate categories with similar risk and collateral characteristics. Impaired loans are segregated and reviewed separately. All non-accrual loans are classified impaired. Impaired loans secured by collateral are reviewed based on their collateral and the estimated time to recover our investment in the loan, and the estimate of the recovery anticipated. Specific reserves allocated to impaired loans were $5.6 million and $0.6 million at December 31, 2008 and 2007, 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 our staff appraiser; however, we 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, we also review our 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 our portfolio in amounts deemed prudent based on our qualitative analysis of the factors, including the historical loss experience and regional economic conditions. During the five-year period ended December 31, 2008, we incurred total net charge-offs of $1.9 million. The national and regional economy has generally been considered to be in a recession since December 2007, with the national and regional economy deteriorating further throughout 2008. This has resulted in increased unemployment and declining property values, although the property value declines in the New York metropolitan area have not been as great as many other areas of the country. This deterioration in the economy resulted in an increase in our non-performing loans during 2008, with non-performing loans totaling $40.0 million at December 31, 2008 compared to non-performing loans totaling $5.9 million at December 31, 2007. Our underwriting standards generally require a loan-to-value ratio of 75% at a time the loan is originated. The average current outstanding principal balance of our non-performing loans is less than 60% of the appraised value of the supporting collateral at the time of the loans’ origination. We have not been affected by the recent increase in defaults of sub-prime mortgages as we do not originate, or hold in portfolio, sub-prime mortgages. While we have not incurred significant losses on mortgage loans in recent years, we recorded a provision of $5.6 million during 2008 for possible loan losses primarily due to the increase in non-performing loans. We had not recorded a provision for loan losses in the previous four years. Management has concluded, and the Board of Directors has concurred, that at December 31, 2008, the allowance was sufficient to absorb losses inherent in our loan portfolio.

Our determination as to the classification of our assets and the amount of our valuation allowance 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 us 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 materiality of any error in the reported amount of the allowance.

Management believes that our current allowance for loan losses is adequate in light of current economic conditions, the composition of our loan portfolio and other available information and the Board of Directors concurs in this belief. In 2006, due to the acquisition of Atlantic Liberty, the allowance for loan losses was increased by Atlantic Liberty’s allowance of $753,000. We recorded a provision for loan losses of $5.6 million for the year ended December 31, 2008. We did not record any additional provision for loan losses for the years ended December 31, 2007 and 2006. At December 31, 2008, the total allowance for loan losses was $11.0 million, representing 27.59% of non-performing loans and 27.09% of non-performing assets, compared to 112.57% for both of these ratios at December 31, 2007. We continue to monitor and, as necessary, modify the level of our allowance for loan losses in order to maintain the allowance at a level which we consider 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 further 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 our lending area and the value of collateral, or a review and evaluation of our 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, our 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 our loan portfolio. The greater risk associated with these loans, as well as construction loans and business loans, could require us to increase our 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 we currently maintain. 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, our allowance for loan losses.


	At and for the years ended December 31,

(Dollars in thousands)	2008			2007			2006			2005			2004

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

Acquisition of Atlantic Liberty		—			—			753			—			—

Provision for loan losses		5,600			—			—			—			—

Loans charged-off:
Multi-family residential		(496	)		—			—			—			—
Commercial real estate		—			—			—			—			—
One-to-four family mixed-use property		—			—			—			—			—
One-to-four family residential		—			—			—			—			—
Co-operative apartment		—			—			—			—			—
Construction		—			—			—			—			—
SBA		(759	)		(470	)		(57	)		(144	)		(28	)
Commercial business and other loans		(36	)		(2	)		(36	)		(20	)		—

Total loans charged-off		(1,291	)		(472	)		(93	)		(164	)		(28	)

Recoveries:
Mortgage loans		—			29			2			3			3
SBA, commercial business and other loans		86			19			10			13			5

Total recoveries		86			48			12			16			8

Net charge-offs		(1,205	)		(424	)		(81	)		(148	)		(20	)

Balance at end of year	$	11,028		$	6,633		$	7,057		$	6,385		$	6,533


Ratio of net charge-offs during the year to average loans outstanding during the year		0.04	%		0.02	%		0.00	%		0.01	%		0.00	%
Ratio of allowance for loan losses to gross loans at end of the year		0.37	%		0.25	%		0.30	%		0.34	%		0.43	%
Ratio of allowance for loan losses to non-performing loans at the end of the year		27.59	%		112.57	%		225.72	%		260.39	%		717.29	%
Ratio of allowance for loan losses to non-performing assets at the end of the year		27.09	%		112.57	%		225.72	%		260.39	%		717.29	%

The following table sets forth our allocation of the 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 our loan portfolio.


	At December 31,

	2008					2007					2006					2005					2004

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	$	3,233		33.81	%	$	1,644		35.79	%	$	1,122		37.52	%	$	1,216		41.92	%	$	1,010		42.61	%
Commercial real estate		1,360		25.46			933		23.23			668		22.38			1,272		21.23			1,715		22.00
One-to-four family mixed-use property		2,904		25.45			1,223		25.49			661		25.33			1,544		25.42			1,494		21.92
One-to-four family residential		393		8.08			251		6.01			80		6.98			524		7.17			718		10.00
Co-operative apartment		9		0.22			15		0.26			10		0.35			161		0.11			207		0.21
Construction		910		3.51			1,172		4.44			851		4.50			64		2.63			55		2.07

Gross mortgage loans		8,809		96.53			5,238		95.22			3,392		97.06			4,781		98.48			5,199		98.81
Small Business Administration loans		464		0.67			373		0.70			1,895		0.75			964		0.49			663		0.37
Commercial business and other loans		1,755		2.80			1,022		4.08			1,770		2.19			640		1.03			671		0.82

Total loans	$	11,028		100.00	%	$	6,633		100.00	%	$	7,057		100.00	%	$	6,385		100.00	%	$	6,533		100.00	%

Investment Activities

General. Our investment policy, which is approved by the Board of Directors, is designed primarily to manage the interest rate sensitivity of our overall assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities and to provide and maintain liquidity. In establishing our investment strategies, we consider our business and growth strategies, the economic environment, our interest rate risk exposure, our 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. We primarily invest in mortgage-backed securities, U. S. government obligations, and mutual funds that purchase these same instruments.

Our Investment Committee 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.

We classify our investment securities as available for sale. We carry some of our investments under the fair value option of Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB No.115.” Unrealized gains and losses for investments carried under the fair value option of SFAS No. 159 are included in our Consolidated Statements of Income. Unrealized gains and losses on the remaining investment portfolio, other than unrealized losses considered other than temporary, are excluded from earnings and included in Accumulated Other Comprehensive Income (a separate component of equity), net of taxes. At December 31, 2008, we had $747.3 million in securities available for sale, which represented 18.92% of total assets. These securities had an aggregate market value at December 31, 2008 that was approximately 2.5 times the amount of our equity at that date. At December 31, 2008, the balance of unrealized net losses on securities available for sale was $15.2 million, net of taxes. This impairment was deemed to be temporary based on the direct relationship of the decline in fair value to: (1) movements in interest rates; (2) widening of credit spreads; and (3) the effect of illiquid markets. Based on our intent and ability to hold these securities until they recover their unrealized loss, which may not be until maturity, we deemed these declines in market value to be temporary. During 2008, we recorded other-than-temporary impairment charges of $27.6 million on our investments in preferred shares of Fannie Mae and Freddie Mac. We concluded that these securities were other-than-temporarily impaired based on the significant decline in their fair value subsequent to their being placed in conservatorship. As a result of the magnitude of our 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 our operating results and equity. See Notes 4 and 15 of Notes to Consolidated Financial Statements, included in Item 8 of this Annual Report.

The table below sets forth certain information regarding the amortized cost and market values of our securities portfolio, interest bearing deposits and federal funds sold, at the dates indicated. Securities available for sale are recorded at market value. See Notes 4 and 15 of Notes to Consolidated Financial Statements, included in Item 8 of this Annual Report.


	At December 31,

	2008				2007				2006

	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	$	12,616	$	12,658	$	4,406	$	4,406	$	15,016	$	15,004
Municipal securities		17,652		17,811		—		—		—		—
Corporate debentures		2,268		2,268		2,643		2,643		—		—

Total bonds and other debt securities		32,536		32,737		7,049		7,049		15,016		15,004

Mutual funds		19,114		19,114		21,752		21,752		21,224		20,645

Equity securities:
Common stock		994		994		1,838		1,838		619		619
Preferred stock		25,709		19,652		46,732		46,732		5,685		5,468

Total equity securities		26,703		20,646		48,570		48,570		6,304		6,087

Mortgage-backed securities:
FNMA		165,375		167,592		123,121		122,770		135,458		131,192
REMIC and CMO		330,767		304,511		182,609		182,730		100,165		98,652
FHLMC		47,815		48,108		45,511		45,566		53,440		51,733
GNMA		152,350		154,553		11,464		11,663		7,199		7,274

Total mortgage-backed securities		696,307		674,764		362,705		362,729		296,262		288,851

Total securities available for sale		774,660		747,261		440,076		440,100		338,806		330,587


Interest-earning deposits and Federal funds sold		21,901		21,901		5,758		5,758		4,670		4,670


Total	$	796,561	$	769,162	$	445,834	$	445,858	$	343,476	$	335,257

Mortgage-backed securities. At December 31, 2008, we had $674.8 million invested in mortgage-backed securities, of which $41.4 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. We anticipate 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 our obligations, including collateralizing of our governmental deposits of the Commercial Bank. However, during 2008, the market for privately issued mortgage-backed securities became somewhat illiquid. As a result, we may not be able to use privately issued mortgage-backed securities to collateralize our obligations.

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


	For the years ended December 31,

	2008			2007			2006

	(In thousands)

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

Acquired with Atlantic Liberty		—			—			30,844

Purchases of mortgage-backed securities		473,891			117,408			43,897

Amortization of unearned premium, net of accretion of unearned discount		(86	)		(193	)		(560	)

Net change in unrealized gains (losses) on mortgage-backed securities available for sale		(21,567	)		1,695			435

Net realized gains recorded on mortgage-backed securities carried at fair value		339			2,685			—

Net change in interest due on securities carried at fair value		(69	)		515			—

Sales of mortgage-backed securities		(87,461	)		—			(36,220	)

Principal repayments received on mortgage-backed securities		(53,012	)		(48,232	)		(50,739	)


Net increase (decrease) in mortgage-backed securities		312,035			73,878			(12,343	)


Balance at end of year	$	674,764		$	362,729		$	288,851

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. We do 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 our investment in debt and equity securities at December 31, 2008. 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. We carry these investments at their estimated 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	$	—	—	%	$	3,962	4.15	%	$	8,654	6.49	%	$	—	—	%	8.05	$	12,616	$	12,658	5.76	%
Municipal securities		17,652	2.64			—	—			—	—						0.56		17,652		17,811	2.64
Corporate debentures		—	—			2,268	6.44			—	—			—	—		3.62		2,268		2,268	6.44

Total bonds and other debt securities		17,652	2.64			6,230	4.98			8,654	6.49			—	—		3.68		32,536		32,737	4.11


Mutual funds		19,114	4.66			—	—			—	—			—	—		N/A		19,114		19,114	4.66


Equity securities:
Common stock		—	—			—	—			—	—			994	13.17		N/A		994		994	13.17
Preferred stock		—	—			4,990	3.28			—	—			20,719	7.72		N/A		25,709		19,652	6.86

Total equity securities		—	—			4,990	3.28			—	—			21,713	7.97		N/A		26,703		20,646	7.08


Mortgage-backed securities:
FNMA		415	5.00			2,709	5.09			32,688	4.59			129,563	5.09		19.44		165,375		167,592	4.99
REMIC and CMO		—	—			—	—			17,280	4.07			313,487	5.26		23.57		330,767		304,511	5.20
FHLMC		—	—			9,414	4.16			—	—			38,401	5.19		18.58		47,815		48,108	4.99
GNMA		—	—			—	—			—	—			152,350	5.57		22.82		152,350		154,553	5.57

Total mortgage-backed securities		415	5.00			12,123	4.37			49,968	4.41			633,801	5.30		22.08		696,307		674,764	5.22


Interest-bearing deposits		21,901	0.21			—	—			—	—			—	—		N/A		21,901		21,901	0.21

Total securities	$	59,082	2.41	%	$	23,343	4.30	%	$	58,622	4.72	%	$	655,514	5.38	%	21.26	$	796,561	$	769,162	5.08	%

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 our primary sources of funds for lending, investing and other general purposes.

Deposits. We offer a variety of deposit accounts having a range of interest rates and terms. Our deposits principally consist of savings accounts, money market accounts, demand accounts, NOW accounts and certificates of deposit. We have a relatively stable retail deposit base drawn from its market area through our 15 full service offices. We seek 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, we launched “iGObanking.com^®”, an internet branch, which currently offers savings, money market and checking accounts, and certificates of deposit. This allows us 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, 2008, total deposits for the internet branch were $217.7 million.

In 2007, the Savings Bank formed a new wholly owned subsidiary, Flushing Commercial Bank, a New York State chartered commercial bank, for the limited purpose of providing banking services to public entities including counties, cities, towns, villages, school districts, libraries, fire districts, and the various courts throughout the New York metropolitan area. The Commercial Bank offers a full range of deposit products to these entities similar to the products currently being offered by the Savings Bank. At December 31, 2008, total deposits for the Commercial Bank were $211.8 million.

Our 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. We saw an increase in our deposits in each of the past three years, including an increase in due to depositors during 2008 of $434.7 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 to a range of 0.25% to 0.00% at December 31, 2008. We responded by increasing interest rates paid on savings, money market and certificate of deposit accounts during 2005 and 2006. We held rates through most of 2007, before being able to lower rates near the end of 2007 and throughout 2008. This resulted in our cost of funds declining in 2008 after increasing in 2007. The cost of deposits decreased to 3.41% in the fourth quarter of 2008 from 4.31% in the fourth quarter of 2007, after increasing from 3.97% in the fourth quarter of 2006. While we are unable to predict the direction of future interest rate changes, if interest rates rise during 2009, the result could be an increase in our cost of deposits, which could reduce our net interest margin. Similarly, if interest rates remain at their current level or decline in 2009, we could see a decline in our cost of deposits, which could increase our net interest margin.

Included in deposits are certificates of deposit with a balance of $100,000 or more totaling $413.7 million, $318.5 million and $298.9 million at December 31, 2008, 2007 and 2006, respectively.

We utilize brokered deposits as an additional funding source. Brokered deposits are marketed through national brokerage firms to their customers in $1,000 increments. We maintain 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 us at a lower operating cost since we only have one account to maintain versus several accounts with multiple interest and maturity checks. We seek to obtain brokered deposits primarily when the interest rate on these deposits is below the prevailing interest rate in its market, or when obtaining them allows us to extend the maturities of our deposits at favorable rates.

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 us to better manage the maturity of its deposits. Currently, the rates offered by us for brokered deposits are comparable to that offered for retail certificates of deposit of similar size and maturity.

We also offer 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. We belong 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 us 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. We may receive deposits from other member banks in exchange for the deposits we place into the network. We 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. The Emergency Economic Stabilization Act of 2008 increased the deposit insurance limit to $250,000 through December 31, 2009. As a result, the placement of funds through CDARS® can be made for each depositor in an amount up to $250,000 for maturities on or before December 31, 2009.

Brokered deposits and funds obtained through the CDARS® network are classified as brokered deposits for financial reporting purposes. At December 31, 2008, we had $384.9 million classified as brokered deposits, with $251.6 million obtained through brokers and $133.3 million obtained through the CDARS® network.

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