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EX-11 - EXHIBIT 11 - FLATBUSH FEDERAL BANCORP INCex11.htm
EX-31.2 - EXHIBIT 31.2 - FLATBUSH FEDERAL BANCORP INCex31_2.htm
EX-32.1 - EXHIBIT 32.1 - FLATBUSH FEDERAL BANCORP INCex32_1.htm
EX-31.1 - EXHIBIT 31.1 - FLATBUSH FEDERAL BANCORP INCex31_1.htm
 

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

FORM 10-Q

 
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2009

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
                  For the transition period from __________ to ___________

Commission File Number:  0-503777

FLATBUSH FEDERAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
   
FEDERAL
11-3700733
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
   
2146 NOSTRAND AVENUE, BROOKLYN, NEW YORK  11210
(Address of principal executive offices)
   
(718) 859-6800
(Registrant’s telephone number)
   
   
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [ X]  No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [  ]  No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer o
Accelerated filer o
Non-accelerated filer (Do not check if a smaller reporting company) o
Smaller reporting company x

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

 
APPLICABLE ONLY TO CORPORATE ISSUERS
As of  November 13, 2009  the Registrant had outstanding 2,736,907 shares of common stock.


 
 

 

FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES

INDEX
     
Page
     
Number
 
       
   
       
   
1
       
   
2
       
    3
       
   
4
       
   
5 – 13
       
 
14 – 20
       
 
21
       
 
21
       
 
       
 
22
       
 
22
       
 
Unregistered Sales of Equity Securities and Use of Proceeds                                      
22
       
 
22
       
 
Submission of Matters to a Vote of Securities Holders                                               
22
       
 
22
       
 
23
       
24


 
 


PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
             
   
September 30,
   
December 31,
 
ASSETS
 
2009
   
2008
 
             
   Cash and amounts due from depository institutions
  $ 2,045,803     $ 2,611,611  
   Interest earning deposits in other banks
    422,,235       2,966,877  
   Federal Funds sold
    4,400,000       2,100,000  
Cash and cash equivalents
    6,868,038       7,678,488  
                 
   Mortgage-backed securities held to maturity; fair value of
   $30,740,668  in (2009) and $33,975,054 in (2008)
    29,355,971       32,926,053  
   Loans receivable, net of allowance for loan losses of $252,797
   (2009) and $190,630 (2008)
    109,615,674       98,240,898  
   Premises and equipment
    2,484,923       2,616,747  
   Federal Home Loan Bank of New York stock
    1,249,800       1,521,600  
   Accrued interest receivable
    669,520       617,235  
   Bank owned life insurance
    4,180,100       4,060,415  
   Other assets
    2,064,564       1,989,544  
Total assets
  $ 156,488,590     $ 149,650,980  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Liabilities:
               
   Deposits:
               
    Non-interest bearing
  $ 5,276,280     $ 3,868,320  
    Interest bearing
    110,315,893       97,807,392  
    Total Deposits
    115,592,173       101,675,712  
  Federal Home Loan Bank of New York advances
    22,294,759       28,592,884  
  Advance payments by borrowers for taxes and insurance
    546,951       764,797  
  Other liabilities
    2,812,508       3,983,403  
Total liabilities
    141,246,391       135,016,796  
  Stockholders’ equity:
               
  Preferred stock $0.01 par value; 1,000,000 shares authorized;
     none issued and outstanding
     ---        ---  
  Common stock $0.01 par value;  authorized 9,000,000 shares;
   issued (2009 and 2008) 2,799,657 shares;
   outstanding (2009) 2,736,907 and (2008)  2,737,907 shares
     27,998         27,998  
  Paid-in capital
    12,564,657       12,514,942  
  Retained earnings
    5,569,839       5,154,812  
  Unearned employees’ stock ownership plan (ESOP) shares
    (487,576 )     (513,731 )
  Treasury stock, 62,750, (2009) and 61,750, (2008) shares
    (446,534 )     (442,984 )
  Accumulated other comprehensive loss
    (1,986,185 )     (2,106,853 )
Total stockholders’ equity
    15,242,199       14,634,184  
                 
Total liabilities and stockholders’ equity
  $ 156,488,590     $ 149,650,980  
See notes to consolidated financial statements.

 
1


FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                         
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Interest Income
                       
   Loans, including fees
  $ 1,644,169     $ 1,505,304     $ 4,766,958     $ 4,621,761  
   Mortgage-backed securities
    466,835       366,021       1,373,742       1,036,722  
   Investments
    19,068       50,128       50,286       220,554  
   Other interest earning assets
    2,001       22,008       6,112       108,843  
          Total interest income
    2,132,073       1,943,461       6,197,098       5,987,880  
                                 
Interest Expense
                               
   Deposits
    599,518       576,485       1,806,179       1,935,132  
   Borrowings
    240,597       264,606       748,977       852,417  
          Total interest expense
    840,115       841,091       2,555,156       2,787,549  
                                 
         Net Interest Income
    1,291,958       1,102,370       3,641,942       3,200,331  
Provision for loan losses
    51,910       -       73,774       66  
          Net interest income after provision for loan losses
    1,240,048       1,102,370       3,568,168       3,200,265  
                                 
Non-interest income
                               
   Fees and service charges
    25,646       28,755       78,231       90,462  
   BOLI income
    40,365       40,675       119,685       119,889  
   Other
    750       43,307       2,045       47,417  
          Total non-interest income
    66,761       112,737       199,961       257,768  
                                 
Non-interest expenses
                               
   Salaries and employee benefits
    599,494       579,256       1,337,719       1,729,407  
   Net occupancy expense of premises
    118,823       120,047       346,387       366,917  
   Equipment
    122,145       122,419       373,072       370,683  
   Directors’ compensation
    46,154       43,572       136,763       141,017  
   Professional fees
    89,000       73,600       281,404       234,706  
   Other insurance premiums
    36,002       36,192       107,510       109,323  
   Federal Deposit Insurance premiums
    41,680       4,474       185,057       10,945  
   Other
    122,624       121,273       358,225       365,165  
        Total non-interest expenses
    1,175,922       1,100,833       3,126,137       3,328,163  
                                 
  Income before income tax
    130,887       114,274       641,992       129,870  
   Income tax expense
    46,431       36,731       226,964       41,142  
 
Net income
  $ 84,456     $ 77,543     $ 415,027     $ 88,728  
                                 
Net income  per common share – Basic and diluted
  $ 0.03     $ 0.03     $ 0.16     $ 0.03  
Weighted average number of shares outstanding – Basic and diluted
    2,662,236       2,664,658       2,661,133       2,663,349  

 
See notes to consolidated financial statements.

 
2


FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)


   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net Income
  $ 84,456     $ 77,543     $ 415,027     $ 88,728  
                                 
Other comprehensive income,
                               
 net of income taxes:
                               
Benefit Plans
    68,584       28,460       206,338       85,381  
Deferred income taxes
    (28,362 )     (11,910 )     (85,670 )     (35,731 )
      40,222       16,550       120,668       49,650  
                                 
Comprehensive income
  $ 124,678     $ 94,093     $ 535,695     $ 138,378  












See notes to consolidated financial statements.

 
3





 FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Nine months ended September 30,
 
   
2009
   
2008
 
Cash flow from operating activities:
           
  Net income
  $ 415,027     $ 88,728  
  Adjustments to reconcile net income to net cash
  (used in) provided by operating activities:
               
     Depreciation and amortization of premises and equipment
    138,080       136,677  
     Net accretion of discounts, premiums and
        deferred loan fees and costs
    (66,321 )     44,468  
     Provision for loan losses
    73,774       66  
     ESOP shares committed to be released
    14,184       21,019  
     MRP expense
    30,438       30,438  
     Stock option expense
    31,248       31,248  
     (Increase) decrease in accrued interest receivable
    (52,285 )     114,101  
     Increase in cash surrender value of BOLI
    (119,685 )     (119,889 )
     (Increase) decrease in other assets
    (160,690 )     204,300  
     (Decrease) increase in other liabilities
    (964,557 )     112,311  
        Net cash  (used in) provided by operating activities
    (660,787 )     663,467  
                 
Cash flow from investing activities:
               
     Proceeds from calls and maturities of investment securities held to maturity
    -       4,500,000  
     Principal repayments on mortgage-backed securities held to maturity
    4,568,797       2,560,885  
     Purchases of mortgage-backed securities held to maturity
    (905,604 )     (6,010,458 )
     Purchases of loan participation interests
    (2,016,503 )     (4,615,108 )
     Net (increase), decrease in loans receivable
    (9,458,837 )     10,347,036  
     Additions to premises and equipment
    (6,256 )     (12,123 )
     Redemption of Federal Home Loan Bank of New York stock
    271,800       62,300  
        Net cash (used in) provided by investing activities
    (7,546,603 )     6,832,532  
                 
Cash flow from financing activities:
               
     Net increase (decrease)  in deposits
    13,916,461       (5,135,088 )
     Advances from Federal Home Loan Bank of New York
    -       2,000,000  
     Repayment of advances from Federal Home Loan Bank of New York
    (4,298,125 )     (5,236,848 )
     Net change to short-term borrowings
    (2,000,000 )     2,000,000  
     (Decrease) increase  in advance payments by borrowers
         for taxes and insurance
    (217,846 )     160,831  
     Purchase of treasury stock
    (3,550 )     -  
        Net cash provided by (used in) financing activities
    7,396,940       (6,211,105 )
Net (decrease) increase in cash and cash equivalents
    (810,450 )     1,284,894  
Cash and cash equivalents – beginning
    7,678,488       4,967,580  
                 
Cash and cash equivalents – ending
  $ 6,868,038     $ 6,252,474  
Supplemental disclosure of cash flow information
               
  Cash paid during the year for:
               
     Interest
  $ 2,294,155     $ 2,795,379  
     Income taxes
  $ 276,050     $ 8,769  

See notes to consolidated financial statements.

 
4



FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)
 
NOTE 1.  PRINCIPLES OF CONSOLIDATION
 
The consolidated financial statements include the accounts of Flatbush Federal Bancorp, Inc. (the “Company”),  Flatbush Federal Savings and Loan Association (the “Association”) and the Association’s subsidiary Flatbush REIT, Inc.  The Company’s business is conducted principally through the Association.  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
NOTE 2.  BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in accordance with U.S. generally accepted accounting principles.  However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial statements have been included.  The results of operations for the three months and nine months ended September 30, 2009, are not necessarily indicative of the results which may be expected for the entire year.
 
The unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2008, which are included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
 
In accordance with FASB ASC Topic 855, “Subsequent Events”, the Company has evaluated events and transactions occurring subsequent to the Statement of Financial Condition date of September 30, 2009 for items that should potentially be recognized or disclosed in these consolidated financial statements.  The evaluation was conducted through November 16, 2009, the date these consolidated financial statements were issued.
 
NOTE 3.  NET INCOME PER COMMON SHARE
 
Net income per common share was computed by dividing net income for the three months and nine months ended September 30, 2009 and 2008 by the weighted average number of shares of common stock outstanding adjusted for unearned shares of the ESOP.  Stock options and restricted stock awards granted are considered common stock equivalents and therefore considered in diluted net income per share calculations, if dilutive, using the treasury stock method. At and for the three months and nine months ended September 30, 2009, there was no dilutive effect of stock options.
 
NOTE 4.  CRITICAL ACCOUNTING POLICIES
 
The Company considers accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies.  Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses.  Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment.  Management reviews the level of the allowance on a quarterly basis, at a minimum, and establishes the provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. Management has
 

 

 
5


NOTE 4.  CRITICAL ACCOUNTING POLICIES (CONTINUED)
 
allocated the allowance among categories of loan types as well as classification status at each period-end date.  Assumptions and allocation percentages based on loan types and classification status have been consistently applied.  Management regularly evaluates various risk factors related to the loan portfolio, such as type of loan, underlying collateral and payment status, and the corresponding allowance allocation percentages.
 
Although management believes that it uses the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors.  In addition, the regulatory authorities, as an integral part of their examination process, periodically review the allowance for loan losses.  Such agencies may require management to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examinations.
 
NOTE 5.  MORTGAGE-BACKED SECURITIES HELD TO MATURITY
 


   
September 30, 2009
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
Government National Mortgage Association
  $ 2,746,979     $ 114,007     $ 8,992     $ 2,851,994  
Federal National Mortgage Association
    20,678,774       1,110,904       -       21,789,678  
Federal Home Loan Mortgage Corporation
    5,930,218       182,040       13,262       6,098,996  
                                 
    $ 29,355,971     $ 1,406,951     $ 22,254     $ 30,740,668  

   
December 31, 2008
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
Government National Mortgage Association
  $ 3,202,284     $ 89,276     $ 16,043     $ 3,275,517  
Federal National Mortgage Association
    23,379,580       823,094       76       24,202,598  
Federal Home Loan Mortgage Corporation
    6,344,189       166,039       13,289       6,496,939  
                                 
    $ 32,926,053     $ 1,078,409     $ 29,408     $ 33,975,054  

 

 

 
6



 

 
NOTE 5.  MORTGAGE-BACKED SECURITIES HELD TO MATURITY (CONTINUED)
 
The age of unrealized losses and fair value of related mortgage-backed securities held to maturity are as follows:
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
September 30, 2009:
                                   
  Government National 
    Mortgage Association
  $ 449,337     $ 8,992     $ -     $ -     $ 449,337     $ 8,992  
      Federal Home Loan
        Mortgage
       Corporation
    649,185       11,071       320,960       2,191       970,145       13,262  
                                                 
    $ 1,098,522     $ 20,063     $ 320,960     $ 2,191     $ 1,419,482     $ 22,254  

 
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
December 31, 2008:
                                   
  Government National
     Mortgage Association
  $ 836,673     $ 16,043     $ -     $ -     $ 836,673     $ 16,043  
      Federal National
         Mortgage
        Association
    19,010       76       -       -       19,010       76  
      Federal Home Loan
        Mortgage
       Corporation
    659,094       11,175       325,457       2,114       984,551       13,289  
                                                 
    $ 1,514,777     $ 27,294     $ 325,457     $ 2,114     $ 1,840,130     $ 29,408  

 
When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair value is below amortized cost, additional analysis is performed to determine whether an other-than-temporary impairment condition exits. Securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) whether the Association has the intent to sell its securities prior to recovery and/or maturity and (ii) whether it is more likely than not that the Association will have to sell its securities prior to recovery and/or maturity.  Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment.  If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the Association’s consolidated financial statements.
 

 
7


NOTE 5.  MORTGAGE-BACKED SECURITIES HELD TO MATURITY (CONTINUED)
 
At September 30, 2009, and December 31, 2008, management has concluded that the unrealized losses above (which, at September 30, 2009, related to one Government National Mortgage Association, and three Federal Home Loan Mortgage Corporation securities) are temporary in nature since they are primarily related to market interest rates and not related to the underlying credit quality of the issuer of the securities.
 
The amortized cost and estimated fair value of mortgage-backed securities at September 30, 2009 and December 31, 2008 by contractual maturity, are shown below.  Actual maturities will differ from contractual maturities because borrowers generally have the right to prepay obligations.
 
   
September 30, 2009
 
   
Amortized
Cost
   
Estimated
Fair Value
 
Due within one year
  $ 440,768     $ 453,907  
Due after one year through five years
    160,992       164,178  
Due after five years through ten years
    220,683       227,815  
Due after ten years
    28,533,528       29,894,768  
    $ 29,355,971     $ 30,740,668  

 
   
December 31, 2008
 
   
Amortized
Cost
   
Estimated
Fair Value
 
Due within one year
  $ 389     $ 397  
Due after one year through five years
    897,450       901,659  
Due after five years through ten years
    241,174       245,638  
Due after ten years
    31,787,040       32,827,360  
    $ 32,926,053     $ 33,975,054  

 
NOTE 6.  RETIREMENT PLANS – COMPONENTS OF  NET PERIODIC PENSION COST
 
Periodic pension expense was as follows:
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Service Cost
  $ -     $ 24,151     $ 18,391     $ 72,453  
Interest Cost
    78,218       82,145       233,989       246,435  
Expected return on assets
    (86,463 )     (104,895 )     (241,052 )     (314,685 )
Amortization of past service cost (credit)
    -       (15,799 )     (15,799 )     (47,397 )
Amortization of unrecognized net loss
    62,634       36,497       204,287       109,491  
Curtailment Credit
    -       -       (507,058 )     -  
     Net periodic benefit cost (credit)
  $ 54,389     $ 22,099     $ (307,242 )   $ 66,297  

 

 
8


NOTE 6.  RETIREMENT PLANS – COMPONENTS OF  NET PERIODIC PENSION COST (CONTINUED)
 
Periodic pension expense for other plans was as follows:
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Service Cost
  $ 4,344     $ 4,191     $ 13,032     $ 12,573  
Interest Cost
    17,711       20,813       53,133       62,439  
Amortization of unrecognized transition obligation
    -       1,134       -       3,402  
Amortization of past service cost
    5,278       5,278       15,834       15,835  
Amortization of unrecognized net loss
    672       1,350       2,016       4,050  
     Net periodic benefit cost
  $ 28,005     $ 32,766     $ 84,015     $ 98,299  


 
NOTE 7. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB ASC 820 “Fair Value Measurement and Disclosure,” which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the United States of America (“GAAP”), and expands disclosures about fair value measurements. FASB ASC 820 applies to other accounting pronouncements that require or permit fair value measurements.
 
FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are as follows:
 
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
 
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).
 
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 
The Company had no financial assets which are required to be measured on a recurring or non-recurring basis at September 30, 2009.
 
The following information should not be interpreted as an estimate of the fair value of the entire Association since a fair value calculation is only provided for a limited portion of the Association’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Association’s disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair values of the Association’s financial instruments at September 30, 2009 and December 31, 2008:
 

 
9


NOTE 7. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS (CONT’D)
 
Cash and Cash Equivalents, Interest Receivable and Interest Payable
 
The carrying amounts for cash and cash equivalents, interest receivable and interest payable  approximate fair value because they mature in three months or less.
 
Securities
 
The fair value of securities held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.  For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non transferability, and such adjustments are generally based on available market evidence (Level 3).  In the absence of such evidence, management’s best estimate is used.  Management’s best estimate consists of both internal and external support on certain Level 3 investments.  Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair value of certain Level 3 investments if applicable.
 
Loans Receivable
 
The fair value of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans.  Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.  Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
 
Federal Home Loan Bank of New York (FHLB) Stock
 
The carrying amount of restricted investment in FHLB stock approximates fair value, and considers the limited marketability of such securities.
 
Deposit Liabilities
 
The fair value disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
 
Advances from FHLB
 
Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity.
 

 
10



 
 
NOTE 7. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS (CONT’D)
 
Off-Balance Sheet Financial Instruments
 
Fair value for the Association’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.
 
As of September 30, 2009 and December 31, 2008, the fair value of commitments to extend credit were not considered to be material.
 
The estimated fair values of the Association’s financial instruments were as follows at September 30, 2009 and December 31, 2008.
 

   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
Carrying
Amount
   
Estimated
Fair
Value
   
Carrying
Amount
   
Estimated
Fair
Value
 
   
(In Thousands)
 
Financial assets:
                       
Cash and cash equivalents
  $ 6,868     $ 6,868     $ 7,678     $ 7,678  
Mortgage-backed securities held to
              maturity
    29,356       30,741       32,926       33,975  
      FHLB stock
    1,250       1,250       1,522       1,522  
Loans receivable
    109,616       115,212       98,241       101,226  
Accrued interest receivable
    670       670       617       617  
                                 
Financial liabilities:
                               
Deposits
    115,592       117,434       101,676       102,271  
Advances from FHLB
    22,295       22,972       28,593       29,389  
       Off-Balance sheet instruments
    -       -       -       -  

 

NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS
 
The following is a summary of recently issued authoritative pronouncements that could have an impact on the accounting, reporting, and/or disclosure of the consolidated financial information of the Company.

On July 1, 2009, the FASB’s GAAP Codification became effective as the sole authoritative source of U.S. GAAP.  This codification reorganizes current GAAP for non-governmental entities into a topical index to facilitate accounting research and to provide users with additional assurance that they have referenced all related literature pertaining to a given topic.  Existing GAAP prior to the codification was not altered in compilation of the GAAP Codification, instead it takes thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, displaying them in a consistent structure.  Accounting literature included in the codification is referenced by Topic, Subtopic, Section, and Paragraph. The Paragraph level is the only level that contains

 
11



NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
 
substantive content.  Citing particular content in the codification involves specifying the unique numeric path to the content through the Topic, Subtopic, Section, and Paragraph structure.  FASB suggests that all citations begin with “FASB ASC,” where the ASC stands for Accounting Standards Codification.  Changes to the ASC subsequent to June 30, 2009 are referred to as Accounting Standards Updates (“ASU”).  The GAAP Codification encompasses all FASB Statements of Financial Accounting Standards (SFAS), Emerging Issues Task Force (EITF) statements, FASB Staff Positions (FSP), FASB Interpretations (FIN), FASB Derivative Implementation Guides (DIG), American Institute of Certified Public Accountants (AICPA) Statements of Position (SOP), Accounting Principles Board (APB) Opinions and Accounting Research Bulletins (ARB’s), along with the remaining body of GAAP effective as of June 30, 2009.  Financial Statements issued for all interim and annual periods ending after September 15, 2009 will need to reference accounting guidance embodied in the codification as opposed to referencing the previously authoritative pronouncements.  The codification was in response to the June 2009 FASB issuance of SFAS No. 168, which replaces SFAS No. 162. Under the GAAP Codification, SFAS No. 168 translates to FASB ASC 105.

In conjunction with the issuance of FASB ASC 105, the FASB issued its first Accounting Standards Update (“ASU”) No. 2009-1, “Topic 105—Generally Accepted Accounting Principles—amendments based on—Statement of Financial Accounting Standards No. 168—The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles,” which includes SFAS 168 in its entirety as a transition to the ASC.  ASU 2009-1 is effective for interim and annual periods ending after September 15, 2009.  The adoption of this Update did not have an effect on the amounts reported in the Company’s consolidated financial statements.

In August 2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and Disclosures (Topic 820)—Measuring Liabilities at Fair Value.”  The Update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as assets, or that is consistent with the principles of Topic 820.  The amendments in the Update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  Additionally, the amendments in the Update clarify that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price are required are level 1 fair value measurements.

The guidance provided by the Update is effective for the first reporting period (including interim periods) beginning after the issuance.  The adoption of this Update is not expected to have an effect on the amounts reported in the Company’s consolidated financial statements.

Other accounting Updates that have been issued or proposed by the FASB or other standard-setting bodies are not expected to have a material effect on amounts reported in the Company’s consolidated financial statements.



 
12



 
NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
 

Newly Issued But Not Yet Effective Accounting Standards

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”).  Under FASB’s Codification at ASC 105-10-65-1-d, SFAS 167 will remain authoritative until integrated into the FASB Codification.  SFAS 167 amends Interpretation 46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest give it a controlling financial interest in the variable interest entity.  SFAS 167 is effective for all interim and annual periods beginning after November 15, 2009.  The adoption of this standard is not expected to have an effect on the amounts reported in the Company’s consolidated financial statements.

In June 2009 the FASB issued SFAS No. 166, “Accounting for the Transfer of Financial Assets an Amendment of FASB Statement No. 140.”  Under FASB’s Codification at ASC 105-10-65-1-d, SFAS 166 will remain authoritative until integrated into the FASB Codification.  SFAS 166 removes the concept of a special purpose entity (SPE) from Statement 140 and removes the exception of applying FASB Interpretation 46 “Variable Interest Entities,” to Variable Interest Entities that are SPE’s.  It limits the circumstances in which a transferor derecognizes a financial asset.  SFAS 166 amends the requirements for the transfer of a financial asset to meet the requirements for “sale” accounting.  The statement is effective for all interim and annual periods beginning after November 15, 2009.  The adoption of this standard is not expected to have an effect on the amounts reported in the Company’s consolidated financial statements.

NOTE 9. FEDERAL HOME LOAN BANK OF NEW YORK STOCK
 
Federal Home Loan Bank of New York (“FHLB”) stock, which represents required investment in the common stock of a correspondent bank, is carried at cost and as of September 30, 2009 and December 31, 2008, consists of the common stock of FHLB.
 
Management evaluates the FHLB stock for impairment in accordance with FASB ASC 942-325-35 (Prior authoritative literature: Statement of Position (SOP) 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others).  Management’s determination of whether this investment is impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.
 
Management believes no impairment charge is necessary related to the FHLB stock as of September 30, 2009.
 

 

 
13



 
ITEM 2
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Forward-Looking Statements
 
This Form 10-Q may include certain forward-looking statements based on current management expectations.  The Company’s actual results could differ materially from those management expectations.  Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of loan and investment portfolios of the Company, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and prices.
 
Comparison of Financial Condition at September 30, 2009 and December 31, 2008
 
The Company’s total assets as of September 30, 2009 were $156.5 million compared to $149.7 million at December 31, 2008, an increase of $6.8 million, or 4.5%. Loans receivable increased $11.4 million, or 11.6%, to $109.6 million at September 30, 2009 from $98.2 million at December 31, 2008.  Mortgage-backed securities decreased $3.5 million,  or 10.6%, to $29.4 million at September 30, 2009 from $32.9 million as of December 31, 2008. Cash and cash equivalents decreased $810,000 or 10.5%, to $6.9 million at September 30, 2009 from $7.7 million at December 31, 2008.

           Total deposits increased $13.9 million, or 13.7%, to $115.6 million at September 30, 2009 from $101.7 million at  December 31, 2008.  As of September 30, 2009, advances from the Federal Home Loan Bank of New York (“FHLB”) were $22.3 million compared to $28.6 million as of December 31, 2008, a decrease of $6.3 million, or 22.0%.

Total stockholders’ equity increased $608,000 to $15.2 million at September 30, 2009 from $14.6 million at December 31, 2008.  The increase to stockholders’ equity reflects net income of $415,000, an amortization of $14,000 of unearned ESOP shares, amortization of $31,000 of restricted stock awards for the Company’s Stock-Based Incentive Program, amortization of $31,000 of stock option awards and $121,000 of accumulated other comprehensive income. This was partially offset by $4,000 of repurchases of shares under the stock repurchase program.

On August 30, 2007, the Company approved a stock repurchase program and authorized  the repurchase of up to 50,000 shares of the Company’s outstanding shares of common stock. Stock repurchases are made from time to time and may be effected through open market purchases, block trades and in privately negotiated transactions.  Repurchased stock will be held as treasury stock and will be available for general corporate purposes.  During the quarter ended September 30, 2009, the Company did not repurchase any shares. As of September 30, 2009, under the current program, 12,750 shares were repurchased at a weighted average price of $4.44 per share.

Comparison of Operating Results for the Three Months Ended September 30, 2009 and September 30, 2008
 
General.   Net income increased by $6,000, to $84,000 for the quarter ended September 30, 2009 from $78,000 for the same quarter in 2008.  The increase in net income for the quarter was primarily due to an increase of $189,000 in interest income, and a decrease of $24,000 in interest expense on borrowings from the FHLB. This was partially offset by increases of $23,000 in interest expense on deposits, $52,000 in provision for loan loss, $75,000 in   non-interest expense and, $10,000 in income tax expense, and a decrease of $46,000 in non-interest income.

Interest Income.  Total interest income increased $189,000, or 9.7%, to $2.1 million for the quarter ended September 30, 2009 from $1.9 million for the quarter ended September  30, 2008. The increase in interest income can be primarily attributed to a higher interest earning asset base partially offset by a lower average yield for these assets.  For the three months ended September 30, 2009, the average balance of $147.0 million in interest-earning
 

 
14


assets earned an average yield of 5.80% compared to an average yield of 5.91% on an average balance of $131.6 million for the three months ended September 30, 2008.
 
Interest income on loans increased $139,000, or 9.2%, to $1.6 million for the quarter ended September 30, 2009 from $1.5 million for the same quarter in 2008.  The average balance of loans increased $12.1 million to $108.0 million for the quarter ended September 30, 2009 from $95.9 million for the quarter ended September 30, 2008.  The average yield on loans decreased by 19 basis points to 6.09% for the quarter ended September 30 2009 from 6.28% for the quarter ended September 30, 2008.
 
Interest income on mortgage-backed securities increased $101,000, or 27.6%, to $467,000 for the quarter ended September 30, 2009 from $366,000 for the quarter ended September 30, 2008.  The average balance of mortgage-backed securities increased $2.6 million, or 9.4%, to $30.3 million for the quarter ended September 30, 2009 from $27.7 million for the quarter ended September 30, 2008.  The average yield increased by 87 basis points to 6.16% for the quarter ended September 30, 2009 from 5.29% for the same period in 2008.
 
Interest income on investment securities decreased $31,000, or 62.0%, to $19,000 for the quarter ended September 30, 2009 from $50,000 for the quarter ended September 30, 2008. The average balance of investment securities decreased by $2.0 million, or 60.6%, to $1.3 million for the quarter ended September 30, 2009 from $3.3 million for the quarter ended September 30, 2008.  The average yield on investment securities decreased 22 basis points to 5.79%, for the quarter ended September 30, 2009 from an average yield of 6.01% for the quarter ended September 30, 2008, primarily due to a lower dividend received on FHLB stock.
 
Interest income on other interest-earning assets, primarily interest-earning deposits and federal funds sold, decreased $20,000, or 90.9%, to $2,000 for the quarter ended September 30, 2009 from $22,000 for the quarter ended September 30, 2008.   The average yield on other interest earning assets decreased by 177 basis points to 0.11% for the quarter ended September 30, 2009 from 1.88% for the quarter ended September 30, 2008 primarily due to the decline in interest rates on interest-earning deposits and federal funds sold. As a partial offset, the average balance of other interest earning assets increased $2.7 million, or 57.4%, to $7.4 million for the quarter ended September 30, 2009 from $4.7 million for the quarter ended September 30, 2008.
 
Interest Expense.   Total interest expense, comprised of interest expense on deposits and interest expense on FHLB borrowings, decreased $1,000, or 0.1%, to $840,000 for the quarter ended September 30, 2009 from $841,000 for the quarter ended September 30, 2008. The average cost of interest-bearing liabilities decreased by 29 basis points to 2.51% for the quarter ended September 30, 2009 from 2.80% for the quarter ended September 30, 2008.  The average balance of interest-bearing liabilities increased $13.8 million, or 11.5% to $133.9 million for the quarter ended September 30, 2009 from $120.1 million for the quarter ended September 30, 2008.
 
Interest expense on deposits increased $23,000, or 4.0%, to $599,000 for the quarter ended September 30, 2009 from $576,000 for the quarter ended September 30, 2008.  The average cost of interest-bearing deposits decreased by 23 basis points to 2.18% for the quarter ended September 30, 2009 from 2.41% for the quarter ended September 30, 2008, reflecting the declining trend of interest rates on deposits.  As a partial offset, the average balance of interest-bearing deposits increased $14.5 million, or 15.2%, to $110.1 million for the quarter ended September 30, 2009 from $95.6 million for the quarter ended September 30, 2008.
 
Interest expense on FHLB borrowings decreased $24,000, or 9.1%, to $241,000 for the quarter ended September 30, 2009, from $265,000 for the quarter ended September 30, 2008.  The average balance of FHLB borrowings decreased $714,000 or 2.9%, to $23.8 million for the quarter ended September 30, 2009, from $24.5 million for the quarter ended September 30, 2008. The average cost of FHLB borrowings decreased by 27 basis points to 4.05% for the quarter ended September 30 2009, from 4.32% for the quarter ended September 30, 2008.
 
Net Interest Income.  Net interest income increased $190,000, or 17.2%, to $1.3 million for the quarter ended September 30, 2009 from $1.1 million for the same quarter in 2008.  The interest rate spread was 3.29% for the quarter ended September 30, 2009 compared to 3.10% for the quarter ended September 30, 2008, an increase of 19 basis points.  Interest margin for the quarter ended September 30, 2009 was 3.51% compared to 3.35% for the quarter ended September 30, 2008, an increase of 16 basis points.  The increase in interest rate spread and interest
 

 
15


margin can be attributed primarily to the decrease in the average yield of interest-bearing deposits and FHLB borrowings, as well as the increase in the average balance of loans receivable.
 
Provision for Loan Losses.  The Company establishes the provision for loan losses, which is charged to operations, at a level deemed appropriate to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements.  In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change.  Based on the evaluation of these factors, a provision of $52,000 was recorded for the three months ended September 30, 2009. No provision for loan losses was recorded for the three months ended September 30, 2008.   The level of the allowance at September 30, 2009 is based on estimates, and the ultimate losses may vary from the estimates.  Non-performing loans increased to $2.7 million, or 1.74% of total assets as of September 30, 2009 from $737,000 or 0.52% of total assets as of September 30, 2008. As of September 30, 2009, the non-performing loans total included three 1-4 residential loans totaling $1.3 million, and a construction loan of $1.4 million which, at quarter-end, did not warrant a specific provision for loan loss.
 
Non-Interest Income.  Non-interest income decreased $46,000, or 40.7%, to $67,000 for the quarter ended September 30, 2009 from $113,000 for the quarter ended September 30, 2008.  This was primarily attributable to the  one-time legal settlement proceeds of $41,000 during the quarter ended September 30, 2008.
 
Non-Interest Expenses.   Non-interest expenses increased $75,000, or 6.8%, to $1.2 million for the quarter ended September 30, 2009 from $1.1 million for the quarter ended September 30, 2008.  The net increase of $75,000 in non-interest expenses is primarily attributable to increases to salaries and employee benefits, professional fees and other non-interest expenses, partially offset by decreases to net occupancy expense of premises.  Federal Deposit Insurance Corporation Premiums increased $38,000 to $42,000 for the three months ended September 30, 2009 from $4,000 for the three months ended September 30, 2008 primarily due to higher premiums and assessments.

Income Tax Expense.  The provision for income taxes increased $10,000, to $46,000 for the quarter ended September 30, 2009 compared to an expense of $36,000 for the same quarter in 2008.
 
 Comparison of Operating Results for the Nine Months Ended September 30, 2009 and September 30, 2008
 
General.   Net income increased by $326,000, to $415,000 for the nine months ended September 30, 2009 from $89,000 for the same nine months in 2008.  The increase in net income for the nine months was primarily due an increase of $209,000 in total interest income, and decreases of $129,000 in interest expense on deposits, $103,000 in interest expense on FHLB borrowings and $202,000 in non-interest expenses, which were partially offset by a decrease of $57,000 in non-interest income, and increases of $74,000 in provision for loan losses and $186,000 in income taxes.

Interest Income.   Interest income increased $209,000 or 3.5%, to $6.2 million for the nine months ended September 30, 2009 from $6.0 million for the nine months ended September 30, 2008. The increase in interest income can be primarily attributed to a higher interest earning asset base, partially offset by a lower average yield.  For the nine months ended September 30, 2009 the average balance of $143.9 million in interest-earning assets earned an average yield of 5.74% compared to an average yield of 5.97% on an average balance of $133.8 million for the nine months ended September 30, 2008.
 
Interest income on loans increased $145,000, or 3.1%, to $4.8 million for the nine months ended September 30, 2009 from $4.6 million for the same nine months in 2008.  The average balance of loans increased $5.1 million to $102.4 million for the nine months ended September 30, 2009 from $97.3 million for the nine months ended September 30, 2008.  The average yield on loans decreased by 14 basis points to 6.20% for the nine months ended September 30, 2009 from 6.34% for the nine months ended September 30, 2008.
 
Interest income on mortgage-backed securities increased $337,000, or 32.5%, to $1.4 million for the nine months ended September 30, 2009 from $1.0 million for the nine months ended September 30, 2008.  The average
 

 
16


balance of mortgage-backed securities increased $6.3 million, or 24.5% to $32.0 million for the nine months ended September 30, 2009 from $25.7 million for the nine months ended September 30, 2008.  The average yield increased by 36 basis points to 5.73% for the nine months ended September 30, 2009 from 5.37% for the same period in 2008.
 
Interest income on investment securities decreased $171,000, or 77.4%, to $50,000 for the nine months ended September 30, 2009 from $221,000 for the nine months ended September 30, 2008.  The average balance of investment securities decreased by $2.7 million to $1.4 million for the nine months ended September 30, 2009 from $4.1 million for the nine months ended September 30, 2008.  The average yield on investment securities decreased 215 basis points to 4.94%, for the nine months ended September 30, 2009 from an average yield of 7.09% for the nine months ended September 30, 2008, primarily due to a higher dividend received on FHLB stock during the nine month period ending September 30, 2008.
 
Interest income on other interest-earning assets, primarily interest-earning deposits and federal funds sold, decreased $103,000, or 94.5%, to $6,000 for the nine months ended September 30, 2009 from $109,000 for the nine months ended September 30, 2008. The average yield on other interest earning assets decreased by 207 basis points to 0.10% for the nine months ended September 30, 2009 from 2.17% for the nine months ended September 30, 2008. As a partial offset, the average balance of other interest earning assets increased $1.4 million to $8.1 million for the nine months ended September 30, 2009 from $6.7 million for the nine months ended September 30, 2008.
 
Interest Expense.   Total interest expense, comprised of interest expense on deposits and interest expense on FHLB borrowings, decreased $232,000, or 8.3%, to $2.6 million for the nine months ended September 30, 2009 from $2.8 million for the nine months ended September 30, 2008. The average cost of interest-bearing liabilities decreased by 45 basis points to 2.59% for the nine months ended September 30, 2009 from 3.04% for the nine months ended September 30, 2008.  As a partial offset, the average balance of interest-bearing liabilities increased $9.3 million, or 7.6% to $131.7 million for the nine months ended September 30, 2009 from $122.4 million for the nine months ended September 30, 2008.
 
Interest expense on deposits decreased $129,000, or 6.7%, to $1.8 million for the nine months ended September 30, 2009 from $1.9 million for the nine months ended September 30, 2008.  The average cost of interest-bearing deposits decreased by 40 basis points to 2.25% for the nine months ended September 30, 2009 from 2.65% for the nine months ended September 30, 2008. As a partial offset, the average balance of interest-bearing deposits increased $9.8 million, or 10.1% to $107.0 million for the nine months ended September 30, 2009 from $97.2 million for the nine months ended September 30, 2008.
 
Interest expense on FHLB borrowings decreased $103,000, or 12.1%, to $749,000 for the nine months ended September 30, 2009, from $852,000 for the nine months ended September 30, 2008.  The average balance of FHLB borrowings decreased $449,000 to $24.8 million for the nine months ended September 30, 2009, from $25.2 million for the nine months ended September 30, 2008. The average cost of FHLB borrowings decreased by 48 basis points to 4.03% for the nine months ended September 30, 2009, from 4.51% for the nine months ended September 30, 2008.
 
Net Interest Income.  Net interest income increased $442,000, or 13.8%, to $3.6 million for the nine months ended September 30, 2009 from $3.2 million for the same nine months in 2008.  The interest rate spread was 3.16% for the nine months ended September 30, 2009 compared to 2.93% for the nine months ended September 30, 2008, an increase of 23 basis points.  Interest margin for the nine months ended September 30, 2009 was 3.38% compared to 3.19% for the nine months ended September 30, 2008, an increase of 19 basis points.  The increase in interest rate spread and interest margin can be attributed primarily to the increase in the average balance of interest-earning assets and the decrease in the average cost of interest-bearing liabilities.
 
Provision for Loan Losses.  The Company establishes provisions for loan losses, which are charged to operations, at a level deemed appropriate to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements.  In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change.  Based on the
 

 
17


evaluation of these factors, a provision of $74,000 was recorded for the nine months ended September 30, 2009.  For the nine months ended September 30, 2008, a provision of $66 was recorded.  The provision for loan losses was established to address probable and estimable losses in the loan portfolio.  The level of the allowance at September 30, 2009 is based on estimates, and the ultimate losses may vary from the estimates.  Non-performing loans increased to $2.7 million, or 1.74% of total assets as of September 30, 2009, from $737,000 or 0.52% of total assets as of September 30, 2008. As of September 30, 2009, the non-performing loan total included three 1-4 residential loans totaling $1.3 million, and a construction loan of $1.4 million which, at this time, did not warrant a specific provision for loan loss.
 
Non-Interest Income.  Non-interest income decreased $58,000, to $200,000 for the nine months ended September 30, 2009 from $258,000 for the nine months ended September 30, 2008.  This was primarily attributable to the one-time legal settlement proceeds of $41,000 during the nine months ended September 30, 2008, as well as a decrease in fees and service charges of $12,000.
 
Non-Interest Expenses.   Non-interest expenses decreased $202,000, or 6.1%, to $3.1 million for the nine months ended September 30, 2009 from $3.3 million for the nine months ended September 30, 2008.  The net decrease of $202,000 in non-interest expense is primarily attributable to decreases to salaries and employee benefits, directors’ compensation, net occupancy expense of premises and other insurance premiums, which were partially offset by increases in equipment and other non-interest expenses. Salaries and employee benefits decreased $392,000 to $1.3 million for the nine months ended September 30, 2009, from $1.7 million for the nine months ended September 30, 2008, primarily due to a pre-tax curtailment credit of $416,000, net of actuarial expense resulting from the freezing of the defined benefit plan.   Federal Deposit Insurance Premiums increased $174,000 to $185,000 for the nine months ended September 30, 2009 from $11,000 for the nine months ended September 30, 2008 primarily due to an increase in premiums assessments and a one-time assessment for Federal Deposit Insurance.
 
Income Tax Expense.  The provision for income taxes increased $186,000, to $227,000 for the nine months ended September 30, 2009 from $41,000 for the same nine months in 2008, primarily due to an increase in income before income taxes of $512,000 during 2009.
 
Liquidity and Capital Resources
 
The Association is required to maintain levels of liquid assets under the Office of Thrift Supervision (the “OTS”) regulations sufficient to ensure the Association’s safe and sound operation.  The Association’s liquidity averaged 5.65% during the month of September 2009.  The Association adjusts its liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes from escrow accounts on mortgage loans, repayment of borrowings, when applicable, and loan funding commitments. The Association also adjusts its liquidity level as appropriate to meet its asset/liability objectives.
 
The Association’s primary sources of funds are deposits, borrowings, amortization and prepayments of loans and mortgage-backed securities, maturities of investment securities and funds provided from operations.  While scheduled loan and mortgage-backed securities amortization and maturing investment securities are a relatively predictable source of funds, deposit flows and loan and mortgage-backed securities prepayments are greatly influenced by market interest rates, economic conditions and competition.
 
The Association’s liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities.
 
The primary sources of investing activity are lending and the purchase of investment securities and mortgage-backed securities.  Net loans totaled $109.6 million and $98.2 million at September 30, 2009 and December 31, 2008, respectively.  Mortgage-backed securities held to maturity totaled $29.4 million and $32.9 million at September 30, 2009 and December 31, 2008, respectively.  In addition to funding new loans and mortgage-backed and investment securities purchases through operating and financing activities, such activities were funded by principal repayments on existing loans, mortgage-backed securities and maturities of investment securities.
 

 
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Liquidity management is both a daily and long-term function of business management.  Excess liquidity is generally invested in short-term investments, such as federal funds and interest-bearing deposits.  If the Association requires funds beyond its ability to generate them internally, borrowing agreements exist with the FHLB which provides an additional source of funds.  At September 30, 2009, the Company had a borrowing limit of $73.2 million from the FHLB, of which $22.3 million was advanced. At December 31, 2008, advances from the FHLB totaled $28.6 million.
 
The Association anticipates that it will have sufficient funds available to meet its current loan commitments and obligations.  At September 30, 2009, the Association had outstanding commitments to originate or purchase loans of $13.1 million. Certificates of deposit scheduled to mature in one year or less at September 30, 2009, totaled $62.9 million.  Management believes that, based upon its experience and the Association’s deposit flow history, a significant portion of such deposits will remain with the Association.
 
Under OTS regulations, three separate measurements of capital adequacy (the “Capital Rule”) are required.  The Capital Rule requires each savings institution to maintain tangible capital equal to at least 1.5% and core capital equal to 4.0% of its adjusted total assets.  The Capital rule further requires each savings institution to maintain total capital equal to at least 8.0% of its risk-weighted assets.
 
The following table sets forth the Association’s capital position at September 30, 2009, as compared to the minimum regulatory capital requirements:
 
 
Actual
 
Minimal Capital
Requirements
 
Under Prompt
Corrective Actions
Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
     
(Dollars in Thousands)
       
Total Capital
$16,483
 
18.91%
 
>$6,974
 
>8.00%
 
>$8,718
 
>10.00%
(to risk-weighted assets)
                     
                       
Tier 1 Capital
 16,230
 
18.62%
 
> -       
 
> -        
 
>5,231
 
>  6.00%
(to risk-weighted assets)
                     
                       
Core (Tier 1) Capital
 16,314
 
10.52%
 
> 6,200
 
>4.00%
 
 >7,750
 
>  5.00%
(to adjusted total assets)
                     
                       
Tangible Capital
 16,314
 
10.52%
 
> 2,325
 
>1.50%
 
>-      
 
>-           
(to adjusted total assets)
                     

Management of Interest Rate Risk
 
The ability to maximize net interest income largely depends upon maintaining a positive interest rate spread during periods of fluctuating market interest rates.  Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time.  The difference, or the interest rate repricing “gap,” provides an indication of the extent to which an institution’s interest rate spread will be affected by changes in interest rates.  A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets.  Generally, during a period of rising interest rates, a negative gap within shorter maturities would adversely affect net interest income, while a positive gap within shorter maturities would result in an increase in net interest income, and during a period of falling interest rates, a negative gap within shorter maturities would result in an increase in net interest income while a positive gap within shorter maturities would result in a decrease in net interest income.
 
The Association’s current investment strategy is to maintain an overall securities portfolio that provides a source of liquidity and that contributes to the Association’s overall profitability and asset mix within given quality and maturity considerations.
 

 
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Net Portfolio Value
 
The Association’s interest rate sensitivity is monitored by management through the use of the OTS model which estimates the change in the Association’s net portfolio value (“NPV”) over a range of interest rate scenarios.  NPV is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts.  The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The OTS produces its analysis based upon data submitted on the Association’s quarterly Thrift Financial Reports. The following table sets forth the Association’s NPV as of September 30, 2009, the most recent date the Association’s NPV was calculated by the OTS.
 
Change in
   
Net Portfolio Value
 
Net Portfolio Value as a
Percentage of Present Value of
Assets
Interest Rates
(basis points)
   
Estimated
NPV
 
Amount of
Change
 
Percent of
Change
 
NPV Ratio
 
Change in Basis
Points
     
(Dollars in Thousands)
 
                                 
 + 300     $ 14,961     $ (7,309 )     (33 %)     9.52 %     -384  
 + 200       18,157       (4,114 )     (18 %)     11.27 %     -209  
 + 100       20,778       (1,492 )     (7 %)     12.64 %     - 73  
 +  50       21,676       (594 )     ( 3 %)     13.08 %     - 28  
  0       22,270                   13.36 %      
 - 50       22,565       295       1 %     13.49 %     12  
 - 100       22,656       386       2 %     13.51 %     14  

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement.  Modeling changes in net portfolio value require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates.  In this regard, the net portfolio value table presented assumes that the composition of interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured, and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities.  Accordingly, although the net portfolio value table provides an indication of the Association’s interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on its net interest income and will differ from actual results.
 

 

 

 

 
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ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
 
As a smaller reporting company, the Company is not required to provide the information required of this item.
 
ITEM 4T. FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES CONTROLS AND PROCEDURES
 

 
(a)
Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2009 (the “Evaluation Date”).  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them in a timely manner to material information relating to us (or our consolidated subsidiary) required to be included in our periodic SEC filings.

 
(b)
Changes in Internal Controls over Financial Reporting.

There were no significant changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

See the Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
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PART II – OTHER INFORMATION


ITEM 1. Legal Proceedings

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which involve amounts in the aggregate believed by management to be immaterial to the financial condition of the Company and the Association.

ITEM 1A.Risk Factors

A smaller reporting company is not required to provide the information required of this item.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

On June 30, 2005, the Board of Directors approved a stock repurchase program and authorized the repurchase of up to 50,000 shares of the Company's outstanding shares of common stock. On August 30, 2007, the Company approved a second stock repurchase program and authorized  the repurchase of up to 50,000 shares of the Company’s outstanding shares of common stock.  Stock repurchases will be made from time to time and may be effected through open market purchases, block trades and in privately negotiated transactions. Repurchased stock will be held as treasury stock and will be available for general corporate purposes. As of September 30, 2009, 62,750 total shares have been repurchased by the Company. During the quarter ended September 30, 2009, no shares were repurchased. These total repurchased shares do not include the stock dividend shares of 1,340 which, along with the repurchased shares, are held as treasury stock.

Company Purchases of Common Stock
Period
Total
number of
shares
purchased
Average price
paid per share
Total number of
shares
purchased as
part of publicly
announced
plans or
programs
Maximum
number (or
approximate
dollar value) of
shares that may
yet be purchased
under the plans or
programs
July 1, 2009 through July 31, 2009
-
$         -
62,750
      37,250
August 1, 2009 through August 31, 2009
-
           -
62,750
      37,250
September 1, 2009 through September 30, 2009
-
           -
62,750
      37,250

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 4. Submission of Matters to a Vote of Security Holders

None

ITEM 5. Other Information
 
None



 
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ITEM 6. Exhibits

The following Exhibits are filed as part of this report.

 
3.1
Federal Stock Charter of Flatbush Federal Bancorp, Inc.*
 
3.2
Bylaws of Flatbush Federal Bancorp, Inc.*
 
4.0
Form of common stock certificate of Flatbush Federal Bancorp, Inc. *
 
11.0
Computation of earnings per share (filed herewith)
 
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 (filed herewith).
 
32.1
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).





*Incorporated by reference to the Registration Statement on Form SB-2 of Flatbush Federal Bancorp, Inc. (file no. 333-106557), originally filed with the Securities and Exchange Commission on June 27, 2003.

 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


         
     
FLATBUSH FEDERAL BANCORP, INC.
         
         
Date:
November 16, 2009
 
By:
/s/ Jesus R. Adia
      Jesus R. Adia
      President and
      Chief Executive Officer
         
         
         
Date:
November 16, 2009
 
By:
/s/  John S. Lotardo
      John S. Lotardo
      Executive Vice President and Chief
      Financial Officer
 
       



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