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EX-31.2 - EXHIBIT 31.2 - FLATBUSH FEDERAL BANCORP INCex31_2.htm
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EX-11.0 - EXHIBIT 11.0 - FLATBUSH FEDERAL BANCORP INCex11_0.htm
EX-32.1 - EXHIBIT 32.1 - FLATBUSH FEDERAL BANCORP INCex32_1.htm


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

FORM 10-Q

(Mark One)
T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2010

o 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 T  No o  

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 o  No o  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See 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 T

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

APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 13, 2010  the Registrant had outstanding 2,736,907 shares of common stock.
 


 
 

 

FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES

INDEX

     
Page
     
Number
       
PART I – FINANCIAL INFORMATION
 
       
 
Item 1:
Financial Statements
 
       
     
   
1
       
     
   
2
       
     
   
3
       
     
   
4
       
   
5 – 17
       
 
Item 2:
 
   
18 – 24
       
 
Item 3:
25
       
 
Item 4:
25
       
PART II – OTHER INFORMATION
 
       
 
Item 1:
26
       
 
Item 1A:
26
       
 
Item 2:
26
       
 
Item 3:
26
       
 
Item 4:
(Removed and Reserved)
26
       
 
Item 5:
26
       
 
Item 6:
27
       
       
28

 
 


PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

   
June 30,
   
December 31,
 
ASSETS
 
2010
   
2009
 
             
Cash and amounts due from depository institutions
  $ 1,717,097     $ 1,846,911  
Interest earning deposits in other banks
    2,008,559       1,861,116  
Federal funds sold
    4,600,000       1,750,000  
Cash and cash equivalents
    8,325,656       5,458,027  
                 
Mortgage-backed securities held to maturity; fair value of
               
$25,571,295 (2010) and $29,566,571 (2009)
    23,875,118       28,340,092  
Loans receivable, net of allowance for loan losses of $1,116,215
               
(2010) and $828,534 (2009)
    110,844,672       110,987,520  
Premises and equipment
    2,357,202       2,440,313  
Federal Home Loan Bank of New York stock
    938,600       1,274,900  
Accrued interest receivable
    597,916       657,552  
Bank owned life insurance
    4,295,156       4,219,982  
Other assets
    2,269,837       2,601,027  
Total assets
  $ 153,504,157     $ 155,979,413  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Liabilities:
               
Deposits:
               
Non-interest bearing
  $ 5,365,142     $ 5,862,496  
Interest bearing
    115,484,259       109,305,224  
Total deposits
    120,849,401       115,167,720  
Federal Home Loan Bank of New York advances
    14,948,682       22,851,481  
Advance payments by borrowers for taxes and insurance
    428,903       292,581  
Other liabilities
    1,632,779       2,434,678  
Total liabilities
    137,859,765       140,746,460  
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 2,799,657 shares; outstanding 2,736,907 shares
    27,998       27,998  
Paid-in capital
    12,616,243       12,581,519  
Retained earnings
    5,635,819       5,349,941  
Unearned employees’ stock ownership plan (ESOP) shares
    (461,420 )     (478,857 )
Treasury stock, 62,750 shares
    (446,534 )     (446,534 )
Accumulated other comprehensive loss
    (1,727,714 )     (1,801,114 )
Total stockholders’ equity
    15,644,392       15,232,953  
                 
Total liabilities and stockholders’ equity
  $ 153,504,157     $ 155,979,413  

See notes to consolidated financial statements.

 
1


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

   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Interest Income
                       
Loans, including fees
  $ 1,620,225     $ 1,576,591     $ 3,296,771     $ 3,122,789  
Mortgage-backed securities
    368,343       452,353       760,550       906,907  
Federal Home Loan Bank of New York stock
    14,100       20,067       31,382       31,218  
Other interest earning assets
    1,589       2,192       2,403       4,112  
Total interest income
    2,004,257       2,051,203       4,091,106       4,065,026  
                                 
Interest Expense
                               
Deposits
    443,531       607,410       903,434       1,206,661  
Borrowings
    87,693       249,246       184,294       508,380  
Total interest expense
    531,224       856,656       1,087,728       1,715,041  
                                 
Net Interest Income
    1,473,033       1,194,547       3,003,378       2,349,985  
Provision for loan losses
    134,106       21,864       288,578       21,864  
Net interest income after provision for loan losses
    1,338,927       1,172,683       2,714,800       2,328,121  
                                 
Non-interest income
                               
Fees and service charges
    26,904       27,576       52,292       52,584  
BOLI income
    37,869       39,766       75,174       79,320  
Other
    613       555       1,258       1,294  
Total non-interest income
    65,386       67,897       128,724       133,198  
                                 
Non-interest expenses
                               
Salaries and employee benefits
    599,543       607,731       1,203,522       738,225  
Net occupancy expense of premises
    124,743       112,006       236,735       227,564  
Equipment
    121,295       123,151       245,859       250,928  
Directors’ compensation
    51,991       47,154       97,982       90,608  
Professional fees
    87,650       102,204       194,150       192,404  
Other insurance premiums
    35,443       35,928       70,886       71,508  
Federal Deposit Insurance premiums
    57,497       117,814       115,489       143,377  
Other
    116,013       122,251       241,166       235,601  
Total non-interest expenses
    1,194,175       1,268,239       2,405,789       1,950,215  
                                 
Income (loss) before income tax (benefit)
    210,138       (27,659 )     437,735       511,104  
Income tax expense (benefit)
    64,350       (34,363 )     151,857       180,533  
Net income
  $ 145,788     $ 6,704     $ 285,878     $ 330,571  
                                 
Net income per common share – Basic and diluted
  $ 0.05     $ 0.00     $ 0.11     $ 0.12  
Weighted average number of shares outstanding – Basic and
                               
diluted
    2,666,191       2,660,923       2,665,537       2,660,573  

See notes to consolidated financial statements.

 
2


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

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net Income
  $ 145,788     $ 6,704     $ 285,878     $ 330,571  
                                 
Other comprehensive income,
                               
net of income taxes:
                               
                                 
Benefit plans
    63,112       68,584       126,224       137,754  
                                 
Deferred income taxes
    (26,412 )     (28,361 )     (52,824 )     (57,308 )
      36,700       40,223       73,400       80,446  
                                 
Comprehensive income
  $ 182,488     $ 46,927     $ 359,278     $ 411,017  

See notes to consolidated financial statements.

 
3


FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Six months ended June 30,
 
   
2010
   
2009
 
Cash flow from operating activities:
           
Net income
  $ 285,878     $ 330,571  
Adjustments to reconcile net income to net cash
               
provided by (used in) operating activities:
               
Depreciation and amortization of premises and equipment
    91,196       92,138  
Net accretion of discounts, premiums and
               
deferred loan fees and costs
    (96,078 )     (18,799 )
Provision for loan losses
    288,578       21,864  
ESOP shares committed to be released
    11,164       9,192  
MRP expense
    20,292       20,292  
Stock option expense
    20,706       20,832  
Decrease (increase) in accrued interest receivable
    59,636       (25,078 )
Increase in cash surrender value of BOLI
    (75,174 )     (79,320 )
(Increase) decrease in other assets
    278,366       (153,912 )
Decrease in other liabilities
    (675,675 )     (1,342,672 )
Net cash provided by (used in) operating activities
    208,889       (1,124,892 )
                 
Cash flow from investing activities:
               
Principal repayments on mortgage-backed securities held to maturity
    4,537,506       1,913,150  
Purchases of mortgage-backed securities held to maturity
    -       (905,604 )
Purchases of loan participation interests
    (972,466 )     (1,426,344 )
Net change in loans receivable
    850,281       (2,235,704 )
Additions to premises and equipment
    (8,085 )     (6,256 )
Redemption of Federal Home Loan Bank of New York stock
    336,300       162,100  
Net cash provided by (used in) investing activities
    4,743,536       (2,498,658 )
                 
Cash flow from financing activities:
               
Net increase in deposits
    5,681,681       12,954,964  
Repayment of advances from Federal Home Loan Bank of New York
    (902,799 )     (1,860,175 )
Net change to short-term borrowings
    (7,000,000 )     (2,000,000 )
Increase (decrease) in advance payments by borrowers
               
for taxes and insurance
    136,322       (396,842 )
Purchase of treasury stock
    -       (3,550 )
Net cash provided by (used in) financing activities
    (2,084,796 )     8,694,397  
Net increase in cash and cash equivalents
    2,867,629       5,070,847  
Cash and cash equivalents – beginning
    5,458,027       7,678,488  
                 
Cash and cash equivalents – ending
  $ 8,325,656     $ 12,749,335  
Supplemental disclosure of cash flow information
               
Cash paid during the year for:
               
Interest
  $ 1,094,196     $ 1,717,427  
Income taxes
  $ 61,000     $ 276,050  

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 six months ended June 30, 2010, 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, 2009, which are included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 855, “Subsequent Events”, the Company has evaluated events and transactions occurring subsequent to the Statement of Financial Condition date of June 30, 2010 for items that should potentially be recognized or disclosed in these consolidated financial statements.  The evaluation was conducted through 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 six months ended June 30, 2010 and 2009 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 six months ended June 30, 2010 and 2009, there was no dilutive effect for the 82,378 and 82,879, respectively, of stock options outstanding. At and for the three months and six months ended June 30, 2010 and 2009, there was no dilutive effect for the 11,398 and 15,198, respectively, of non-vested restricted stock awards.

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. A material estimate that is particularly susceptible to significant change relates 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
 
   
June 30, 2010
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
                         
Government National Mortgage Association
  $ 2,387,313     $ 185,874     $ -     $ 2,573,187  
Federal National Mortgage Association
    16,852,850       1,315,287       -       18,168,137  
Federal Home Loan Mortgage Corporation
    4,634,955       207,348       12,332       4,829,971  
                                 
Total
  $ 23,875,118     $ 1,708,509     $ 12,332     $ 25,571,295  

   
December 31, 2009
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
                         
Government National Mortgage Association
  $ 2,587,153     $ 101,800     $ 7,233     $ 2,681,720  
Federal National Mortgage Association
    20,126,402       997,964       -       21,124,366  
Federal Home Loan Mortgage Corporation
    5,626,537       151,058       17,110       5,760,485  
                                 
Total
  $ 28,340,092     $ 1,250,822     $ 24,343     $ 29,566,571  
 
All mortgage-backed securities held at June 30, 2010, and December 31, 2009, were secured by residential real estate.

 
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
 
                                     
June 30, 2010:
                                   
Federal Home Loan
                                   
Mortgage
                                   
Corporation
  $ 56,976     $ 147     $ 726,439     $ 12,185     $ 783,415     $ 12,332  
                                                 
                                                 
                                                 
Total
  $ 56,976     $ 147     $ 726,439     $ 12,185     $ 783,415     $ 12,332  
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
                                     
December 31, 2009:
                                   
                                     
Government National
                                   
Mortgage Association
  $ 359,809     $ 7,233     $ -     $ -     $ 359,809     $ 7,233  
Federal National
                                               
Mortgage
                                               
Association
    1,041,073       14,952       319,344       2,158       1,360,417       17,110  
                                                 
                                                 
Total
  $ 1,400,882     $ 22,185     $ 319,344     $ 2,158     $ 1,720,226     $ 24,343  
 
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.

At June 30, 2010, and December 31, 2009, management concluded that the unrealized losses above (which, at June 30, 2010, related to four 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.

 
7


NOTE 5.  MORTGAGE-BACKED SECURITIES HELD TO MATURITY (CONTINUED)

The amortized cost and estimated fair value of mortgage-backed securities at June 30, 2010 by contractual maturity, are shown below.  Actual maturities will differ from contractual maturities because borrowers generally have the right to prepay obligations.
 
   
June 30, 2010
 
   
Amortized
Cost
   
Estimated
Fair Value
 
Due within one year
  $ 316,344     $ 321,015  
Due after one year through five years
    -       -  
Due after five years through ten years
    207,966       217,460  
Due after ten years
    23,350,808       25,032,820  
Total
  $ 23,875,118     $ 25,571,295  

 
NOTE 6.  RETIREMENT PLANS – COMPONENTS OF  NET PERIODIC PENSION COST

Periodic pension expense was as follows:
 
   
Three months Ended
   
Six months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Service cost
  $ -     $ -     $ -     $ 18,391  
Interest cost
    76,343       78,218       152,686       155,771  
Expected return on assets
    (106,170 )     (86,463 )     (212,340 )     (154,589 )
Amortization of past service cost (credit)
    -       -       -       (15,799 )
Amortization of unrecognized net loss
    57,401       62,634       114,802       141,653  
Curtailment credit
    -       -       -       (507,058 )
Net periodic benefit cost
  $ 27,574     $ 54,389     $ 55,148     $ 361,631  
 
On February 26, 2009, the Company froze its defined benefit pension plan effective March 31, 2009. The freezing of the Plan is consistent with ongoing cost reduction strategies and shifts focus on future savings of retirement benefit expense. The changes included a discontinuation of accrual of future service cost in the defined benefit pension plan and fully preserving retirement benefits that employees will have earned as of March 31, 2009. As a result of freezing the plan, the Company   recorded a one-time pre-tax curtailment credit of approximately $416,000, net of periodic pension expense, in the first quarter of 2009.

 
8


NOTE 6.  RETIREMENT PLANS – COMPONENTS OF NET PERIODIC PENSION COST (CONTINUED)

Periodic pension expense for other plans was as follows:

   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Service cost
  $ 4,674     $ 4,344     $ 9,348     $ 8,688  
Interest cost
    16,782       17,711       33,564       35,422  
Amortization of past service cost
    5,278       5,278       10,556       10,556  
Amortization of unrecognized net loss
    433       672       866       1,344  
Net periodic benefit cost
  $ 27,167     $ 28,005     $ 54,334     $ 56,010  
 
NOTE 7. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

In September 2006, the FASB issued ASC Topic 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.

ASC Topic 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 ASC Topic 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 basis at June 30, 2010 and December 31, 2009.

 
9


NOTE 7. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS (CONT’D)

For assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy used are as follows:

         
(Level 1)
             
         
Quoted Prices
   
(Level 2)
       
         
in Active
   
Significant
   
(Level 3)
 
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
Description
 
Total
   
Assets
   
Inputs
   
Inputs
 
                         
   
(In Thousands)
 
                         
Impaired Loans:
                       
                         
June 30, 2010
  $ 1,440     $ -     $ -     $ 1,440  
                                 
December 31, 2009
  $ 992     $ -     $ -     $ 992  
 
The Company had no liabilities which are required to be measured on a recurring or non-recurring basis at June 30, 2010 and December 31, 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  financial instruments at June 30, 2010 and December 31, 2009:

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.

 
10


NOTE 7. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS (CONT’D)

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.

Impaired Loans

Impaired loans are those for which the Company has measured and recorded impairment generally      based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.  These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.  The fair value at June 30, 2010 and December 31, 2009 consists of the loan balance of $1,906,000 and $1,455,000, net of a valuation allowance $466,000 and $463,000, respectively.

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.

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 June 30, 2010 and December 31, 2009, the fair value of commitments to extend credit were not considered to be material.

 
11


NOTE 7. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS (CONT’D)

The estimated fair values of financial instruments were as follows at June 30, 2010 and December 31, 2009.

   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
Carrying
Amount
   
Estimated
Fair
Value
   
Carrying
Amount
   
Estimated
Fair
Value
 
   
(In Thousands)
 
                         
Financial assets:
                       
Cash and cash equivalents
  $ 8,326     $ 8,326     $ 5,458     $ 5,458  
Mortgage-backed securities held to
                               
maturity
    23,875       25,571       28,340       29,567  
FHLB stock
    939       939       1,275       1,275  
Loans receivable
    110,845       118,635       110,988       115,692  
Accrued interest receivable
    598       598       658       658  
                                 
Financial liabilities:
                               
Deposits
    120,849       122,713       115,168       116,709  
Advances from FHLB
    14,949       15,168       22,851       23,352  
Accrued interest payable
    35       35       49       49  
 
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.
 
In January 2010, the FASB issued Accounting Standard Update (“ASU”) 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require that a reporting entity disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs. In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:

a) For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and

b) A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

 
12


NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The adoption of this guidance did not have a material impact on the consolidated financial statements.

The FASB has issued ASU 2010-08, Technical Corrections to Various Topics, thereby amending the Codification. This ASU resulted from a review by the FASB of its standards to determine if any provisions are outdated, contain inconsistencies, or need clarifications to reflect the FASB’s original intent. The FASB believes the amendments do not fundamentally change U.S. GAAP. However, certain clarifications on embedded derivatives and hedging reflected in Topic 815, Derivatives and Hedging, may cause a change in the application of the guidance in Subtopic 815-15. Accordingly, the FASB provided special transition provisions for those amendments.

The ASU contains various effective dates. The clarifications of the guidance on embedded derivatives and hedging (Subtopic 815-15) are effective for fiscal years beginning after December 15, 2009. The amendments to the guidance on accounting for income taxes in a reorganization (Subtopic 852-740) applies to reorganizations for which the date of the reorganization is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. All other amendments are effective as of the first reporting period (including interim periods) beginning after the date this ASU was issued (February 2, 2010). The adoption of this guidance did not have a material impact on the consolidated financial statements.

The FASB issued ASU 2010-11, Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives. The FASB believes this ASU clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Specifically, only one form of embedded credit derivative qualifies for the exemption - one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature.

The amendments in the ASU are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

The FASB issued ASU 2010-13, Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. The ASU codifies the consensus reached in Emerging Issues Task Force (EITF) Issue No. 09-J. The amendments to the Codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.

The amendments in the ASU are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments are to be applied by recording a cumulative-effect adjustment to beginning retained earnings. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

 
13


NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

ASU 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, codifies the consensus reached in EITF Issue No. 09-I, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset.” The amendments to the Codification provide that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40.

ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, will help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk disclosures.

This ASU requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators.  Both new and existing disclosures must be disaggregated by portfolio segment or class.  The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure.

The amendments in this Update apply to all public and nonpublic entities with financing receivables.  Financing receivables include loans and trade accounts receivable.  However, short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments.

The effective date of ASU 2010-20 differs for public and nonpublic companies.  For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010.  The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010.  For nonpublic companies, the amendments are effective for annual reporting periods ending on or after December 15, 2011. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

 
14


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 June 30, 2010 and December 31, 2009, consists of the common stock of FHLB.

Management evaluates the FHLB stock for impairment in accordance with FASB ASC Topic 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 June 30, 2010.

NOTE 10. SUBSEQUENT EVENTS

Financial reform legislation recently enacted by Congress will, among other things, eliminate the Office of Thrift Supervision, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations.

The recently enacted Dodd-Frank Act will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies.  The Dodd-Frank Act will eliminate our current primary federal regulator, the Office of Thrift Supervision, and require Flatbush Federal Savings and Loan Association to be regulated by the Office of the Comptroller of the Currency (the primary federal regulator for national banks). The Dodd-Frank Act also authorizes the Board of Governors of the Federal Reserve System to supervise and regulate all savings and loan holding companies, including mutual holding companies, like Flatbush Federal Bancorp, Inc. and Flatbush Federal Bancorp, MHC, in addition to bank holding companies that it currently regulates.  As a result, the Federal Reserve Board’s current regulations applicable to bank holding companies, including holding company capital requirements, will apply to savings and loan holding companies like Flatbush Federal Bancorp, Inc. and Flatbush Federal Bancorp, MHC.   Moreover, Flatbush Federal Bancorp, MHC will require the approval of the Federal Reserve Board before it may waive the receipt of any dividends from Flatbush Federal Bancorp, Inc., and there is no assurance that the Federal Reserve Board will approve future dividend waivers or what conditions it may impose on such waivers. The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions.  Bank holding companies with assets of less than $500 million are exempt from these capital requirements.  Under the Dodd-Frank Act, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets.  The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

 
15


NOTE 10. SUBSEQUENT EVENTS CONTINUED

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

The legislation also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution.  The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013.  Lastly, the Dodd-Frank Act will increase stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials.  The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

It is difficult to predict at this time what impact the new legislation and implementing regulations will have on community banks, including the lending and credit practices of such banks.  Moreover, many of the provisions of the Dodd-Frank Act will not take effect for at least a year, and the legislation requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years.  Although the substance and scope of these regulations cannot be determined at this time, it is expected that the legislation and implementing regulations, particularly those provisions relating to the new Consumer Financial Protection Bureau and mutual holding company dividend waivers, will increase our operating and compliance costs and restrict our ability to pay dividends.

Flatbush Federal Savings and Loan Association to Sell Main Office Building and Surrounding Real Estate; Establish New, Nearby Branch Office.

On August 10, 2010 the Company announced the expiration of the investigation period relating to the sale of its main branch building, making the purchaser legally obligated to purchase the Bank’s main branch building. Flatbush Federal will sell its current main branch building and a portion of Flatbush Federal’s adjoining real estate to Purchaser for $9,136,000 (the “Transfer”).  Under the Agreement, Purchaser will acquire Flatbush Federal’s current main branch building located at 2146 Nostrand Avenue, Brooklyn, New York (“Property A”).  In addition thereto, the Purchaser will take title to 2158 Nostrand Avenue, Brooklyn, New York (“Property B”), and an approximately 12,305 square foot parcel (“Property C”) of a larger adjoining parking lot (“Lot 124”) abutting parts of Nostrand Avenue and Hillel Place, Brooklyn, New York (Property A, Property B, and Property C are collectively, the “Properties”).  Property B is currently leased by Flatbush Federal to a White Castle franchise.

 
16


NOTE 10. SUBSEQUENT EVENTS CONTINUED

The Agreement provided for an investigation period, that expired by its terms on August 10, 2010.  The investigation period allowed the Purchaser to conduct environmental site assessments, a structural engineering survey and other tests and investigations.  With the expiration of the investigation period, the Purchaser is legally committed to complete the Transfer pursuant to the terms of the Agreement.

The Agreement further requires Purchaser to subdivide Lot 124 (of which Property C forms a part of) into two separate tax lots or parcels (the “Subdivision”), which is currently underway.  Lot 124 consists of (i) Parcel C and (ii) a 3,100 square foot parcel which abuts Hillel Place (the “Retained Property”). Flatbush Federal will retain title to the Retained Parcel, which will become the site of a new branch building (“Branch Building”).

The Transfer is expected to close (the “Closing”) approximately seventy-five (75) days after the Subdivision has been approved and new tax lot numbers are assigned to Property C and the Retained Property.  Flatbush Federal anticipates that the Transfer will occur during the fourth quarter of 2010, although there can be no assurance that the Transfer will not be delayed beyond that date.

After the Closing, Purchaser will construct and deliver the Branch Building to Flatbush Federal for a final fit out by Flatbush Federal to utilize as a new bank branch.  The Purchaser’s delivery will consist of a fully enclosed Branch Building with an approximately 3,000 square foot ground level or branch floor, and a 300 square foot lobby and ATM area.  In connection therewith, Purchaser will install, but not distribute, heating, ventilation and air-conditioning systems.  Additionally, the Purchaser is required to install utility and power lines, power receptacles, circuit breakers and water lines, among other things.

At the Closing, Flatbush Federal will lease back Property A on an interim basis for its continued use as a temporary bank branch (the “Branch Lease”) for one ($1.00) dollar.  Flatbush Federal must relocate to the new Branch Building no later than 150 days after the Purchaser completes the construction of the Branch Building and delivers to Flatbush Federal a temporary certificate of occupancy for the Branch Building.  At that time, the Branch Lease will terminate, and Flatbush Federal will open the Branch Building for business as its new bank branch.  Flatbush Federal anticipates that the Branch Building will be opened during the third quarter of 2011, although there can be no assurance that the opening will be timely.

 
17


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 June 30, 2010 and December 31, 2009

The Company’s total assets as of June 30, 2010 were $153.5 million compared to $156.0 million at December 31, 2009, a decrease of $2.5 million or 1.6%. Loans receivable decreased $143,000, or 0.1%, to $110.8 million at June 30, 2010 from $111.0 million at December 31, 2009.  Mortgage-backed securities decreased $4.4 million, or 15.5%, to $23.9 million at June 30, 2010 from $28.3 million as of December 31, 2009. Cash and cash equivalents increased $2.8 million or 50.9%, to $8.3 million at June 30, 2010 from $5.5 million at December 31, 2009.

Total deposits increased $5.6 million, or 4.9%, to $120.8 million at June 30, 2010 from $115.2 million at  December 31, 2009.  As of June 30, 2010, advances from the Federal Home Loan Bank of New York (“FHLB”) were $14.9 million compared to $22.9 million as of December 31, 2009, a decrease of $8.0 million, or 34.9%.

Total stockholders’ equity increased $411,000, or 2.7%, to $15.6 million at June 30, 2010 from $15.2 million at December 31, 2009.  The increase to stockholders’ equity reflects net income of $286,000, an amortization of $11,000 of unearned ESOP shares, amortization of $20,000 of restricted stock awards, amortization of $21,000 of stock option awards and $73,000, net of tax, of other comprehensive income.

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 June 30, 2010, the Company did not repurchase any shares. As of June 30, 2010, under the current program, a total of 12,750 shares had been repurchased at a weighted average price of $4.44 per share.

Comparison of Operating Results for the Three Months Ended June 30, 2010 and June 30, 2009

General.   Net income increased by $139,000, to $146,000 for the quarter ended June 30, 2010 from $7,000 for the same quarter in 2009.  The increase in net income for the quarter was primarily due to decreases of $163,000 in interest expense on deposits, $161,000 in interest expense on borrowings from the FHLB and $74,000 in non-interest expense, partially offset by increases of $112,000 in provision for loan loss, $98,000 in income tax expense and decreases of $47,000 in interest income and $3,000 in non-interest income.

Interest Income.  Total interest income decreased $47,000, or 2.3%, to $2.0 million for the quarter ended June 30, 2010 from $2.1 million for the quarter ended June 30, 2009. The decrease in interest income can be primarily attributed to a lower average yield for these assets.  For the three months ended June 30, 2010, the average balance of $144.1 million in interest-earning assets earned an average yield of 5.56% compared to an average yield of 5.70% on an average balance of $144.0 million for the three months ended June 30, 2009.

 
18


Interest income on loans increased $44,000, or 2.7%, to $1.62 million for the quarter ended June 30, 2010, from $1.58 million for the same quarter in 2009.  The average balance of loans increased $10.7 million to $111.7 million for the quarter ended June 30, 2010 from $101.0 million for the quarter ended June 30, 2009.  The average yield on loans decreased by 44 basis points to 5.80% for the quarter ended June 30, 2010 from 6.24% for the quarter ended June 30, 2009.

Interest income on mortgage-backed securities decreased $84,000, or 18.6%, to $368,000 for the quarter ended June 30, 2010 from $452,000 for the quarter ended June 30, 2009.  The average balance of mortgage-backed securities decreased $7.7 million, or 23.8%, to $24.6 million for the quarter ended June 30, 2010 from $32.3 million for the quarter ended June 30, 2009.  The average yield increased by 38 basis points to 5.98% for the quarter ended June 30, 2010 from 5.60% for the same period in 2009.

Interest income on FHLB stock decreased $6,000, or 29.7%, to $14,000 for the quarter ended June 30, 2010 from $20,000 for the quarter ended June 30, 2009.   The average yield on FHLB stock decreased 43 basis points to 5.45%, for the quarter ended June 30, 2010 from an average yield of 5.88% for the quarter ended June 30, 2009.

Interest Expense.   Total interest expense, comprised of interest expense on deposits and FHLB borrowings, decreased $326,000, or 38.0%, to $531,000 for the quarter ended June 30, 2010 from $857,000 for the quarter ended June 30, 2009. The average cost of interest-bearing liabilities decreased by 97 basis points to 1.62% for the quarter ended June 30, 2010 from 2.59% for the quarter ended June 30, 2009.  The average balance of interest-bearing liabilities decreased $959,000, or 0.7% to $131.5 million for the quarter ended June 30, 2010 from $132.4 million for the quarter ended June 30, 2009.

Interest expense on deposits decreased $163,000, or 26.9%, to $444,000 for the quarter ended June 30, 2010, from $607,000 for the quarter ended June 30, 2009.  The average cost of interest-bearing deposits decreased by 71 basis points to 1.55% for the quarter ended June 30, 2010 from 2.26% for the quarter ended June 30, 2009, reflecting the declining trend of interest rates on deposits.  As a partial offset, the average balance of interest-bearing deposits increased $6.8 million, or 6.3%, to $114.4 million for the quarter ended June 30, 2010 from $107.6 million for the quarter ended June 30, 2009.

Interest expense on FHLB borrowings decreased $161,000, or 64.7%, to $88,000 for the quarter ended June 30, 2010, from $249,000 for the quarter ended June 30, 2009.  The average balance of FHLB borrowings decreased $7.8 million or 31.3%, to $17.1 million for the quarter ended June 30, 2010, from $24.9 million for the quarter ended June 30, 2009. The average cost of FHLB borrowings decreased by 196 basis points to 2.05% for the quarter ended June 30, 2010, from 4.01% for the quarter ended June 30, 2009.

Net Interest Income.  Net interest income increased $278,000, or 23.3%, to $1.5 million for the quarter ended June 30, 2010 from $1.2 million for the same quarter in 2009.  The interest rate spread was 3.94% for the quarter ended June 30, 2010 compared to 3.11% for the quarter ended June 30, 2009, an increase of 83 basis points.  Interest margin for the quarter ended June 30, 2010 was 4.09% compared to 3.32% for the quarter ended June 30, 2009, an increase of 77 basis points.  The increase in interest rate spread and interest margin can be attributed primarily to the decrease in the average cost 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 loss, 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 $134,000 was recorded for the three months ended June 30, 2010. A provision of $22,000 was recorded for the three months ended June 30, 2009.   The level of the allowance at June 30, 2010 is based on estimates, and the ultimate losses may vary from the estimates.  Non-performing loans increased to $6.5 million, or 4.2% of total assets as of June 30, 2010 from $720,000 or 0.46% of total assets as of June 30, 2009. As of June 30, 2010, the non-performing loans included eight 1-4 family residential mortgage loans

 
19


totaling $2.5 million, three non-residential mortgage loans of $2.6 million and a construction loan of $1.4 million which, at quarter-end, maintained aggregate specific allowances for loan loss of $466,000.

Non-Interest Income.  Non-interest income decreased $3,000, or 4.4%, to $65,000 for the quarter ended June 30, 2010 from $68,000 for the quarter ended June 30, 2009.  This was primarily attributable to the decrease of $2,000 in BOLI investment income to $38,000 for quarter ended June 30, 2010 from $40,000 for the same period ended in 2009.

Non-Interest Expenses.  Non-interest expenses decreased $74,000, or 5.8%, to $1.2 million for the quarter ended June 30, 2010 from $1.3 million for the quarter ended June 31, 2009.  The net decrease of $74,000 in non-interest expenses is primarily attributable to decreases to salaries and employee benefits, professional fees, Federal insurance premiums, equipment and other non-interest expenses, partially offset by increases to net occupancy expense of premises and directors compensation. Federal Deposit Insurance Corporation Premiums decreased $61,000 to $57,000 for the three months ended June 30, 2010 from $118,000 for the three months ended June 30, 2009 due to a special assessment of $71,000 during the three months ended June 30, 2009.

Income Tax Expense.  The provision for income taxes increased $98,000, to $64,000 for the quarter ended June 30, 2010 compared to a tax benefit of $34,000 for the same quarter in 2009 primarily due to an increase in income before income taxes of $238,000.

Comparison of Operating Results for the Six Months Ended June 30, 2010 and June 30, 2009

General.   Net income decreased by $45,000, or 13.6% to $286,000 for the six months ended June 30, 2010 from $331,000 for the same period in 2009.  The decrease in net income for this period was primarily due to increases of $267,000 in provision for loan loss and $456,000 in non-interest expense and a decrease of $4,000 in non-interest income, partially offset by decreases of $303,000 in interest expense on deposits, $324,000 in interest expense on borrowings from the FHLB and $29,000 in income tax expense and an increase of $26,000 in interest income.

Interest Income.  Total interest income increased $26,000, or 0.6%, to $4.09 million for the six months ended June 30, 2010 from $4.07 million for the six months ended June 30, 2009.  For the six months ended June 30, 2010, the average balance of $144.6 million in interest-earning assets earned an average yield of 5.66% compared to an average yield of 5.71% on an average balance of $142.3 million for the six months ended June 30, 2009.

Interest income on loans increased $174,000 or 5.6%, to $3.3 million for the six months ended June 30, 2010, from $3.1 million for the same six months in 2009.  The average balance of loans increased $12.6 million to $112.3 million for the six months ended June 30, 2010 from $99.7 million for the six months ended June 30, 2009.  The average yield on loans decreased by 40 basis points to 5.87% for the six months ended June 30, 2010 from 6.27% for the six months ended June 30, 2009.

Interest income on mortgage-backed securities decreased $146,000, or 16.1%, to $761,000 for the six months ended June 30, 2010 from $907,000 for the six months ended June 30, 2009.  The average balance of mortgage-backed securities decreased $6.9 million, or 21.0%, to $25.9 million for the six months ended June 30, 2010 from $32.8 million for the six months ended June 30, 2009.  The average yield increased by 35 basis points to 5.88% for the six months ended June 30, 2010 from 5.53% for the same period in 2009.

Interest income on FHLB stock was little changed at $31,000 for both the six months ended June 30, 2010 and 2009.   The average yield on FHLB stock increased 85 basis points to 5.38%, for the six months ended June 30, 2010 from an average yield of 4.53% for the six months ended June 30, 2009. The increased yield was offset by a decrease in the average balance.

Interest Expense.   Total interest expense, comprised of interest expense on deposits and FHLB borrowings, decreased $627,000, or 36.6%, to $1.1 million, for the six months ended June 30, 2010 from $1.7 million for the six months ended June 30, 2009. The average cost of interest-bearing liabilities decreased by 98 basis points to 1.65% for the six months ended June 30, 2010 from 2.63% for the six months ended June 30, 2009.  The

 
20


average balance of interest-bearing liabilities increased $1.6 million, or 1.2% to $132.2 million for the six months  ended June 30, 2010 from $130.6 million for the six months ended June 30, 2009.

Interest expense on deposits decreased $303,000, or 25.1%, to $903,000 for the six months ended June 30, 2010, from $1.2 million for the six months ended June 30, 2009.  The average cost of interest-bearing deposits decreased by 68 basis points to 1.61% for the six months ended June 30, 2010 from 2.29% for the six months ended June 30, 2009, reflecting the declining trend of interest rates on deposits.  As a partial offset, the average balance of interest-bearing deposits increased $6.6 million, or 6.3%, to $112.0 million for the six months ended June 30, 2010 from $105.4 million for the six months ended June 30, 2009.

Interest expense on FHLB borrowings decreased $324,000, or 63.8%, to $184,000 for the six months  ended June 30, 2010, from $508,000 for the six months ended June 30, 2009.  The average balance of FHLB borrowings decreased $5.1 million or 20.2%, to $20.2 million for the six months ended June 30, 2010, from $25.3 million for the six months ended June 30, 2009. The average cost of FHLB borrowings decreased by 221 basis points to 1.82% for the six months ended June 30, 2010, from 4.03% for the six months ended June 30, 2009.

Net Interest Income.  Net interest income increased $653,000, or 27.8%, to $3.0 million for the six months  ended June 30, 2010 from $2.3 million for the same six months in 2009.  The interest rate spread was 4.01% for the six months ended June 30, 2010 compared to 3.09% for the six months ended June 30, 2009, an increase of 92 basis points.  Interest margin for the six months ended June 30, 2010 was 4.15% compared to 3.30% for the six months  ended June 30, 2009, an increase of 85 basis points.  The increase in interest rate spread and interest margin can be attributed primarily to the decrease in the average cost 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 loss, 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 $289,000 was recorded for the six months ended June 30, 2010. A provision of $22,000 was recorded for the six months ended June 30, 2009.   The level of the allowance at June 30, 2010 is based on estimates, and the ultimate losses may vary from the estimates.

Non-Interest Income.  Non-interest income decreased $4,000, or 3.0%, to $129,000 for the six months  ended June 30, 2010 from $133,000 for the six months ended June 30, 2009.  This was primarily attributable to the decrease of $4,000 in BOLI investment income to $75,000 for six months ended June 30, 2010 from $79,000 for the same period ended in 2009.

Non-Interest Expenses.   Non-interest expenses increased $456,000, or 23.4%, to $2.4 million for the six months ended June 30, 2010 from $2.0 million for the six months ended June 31, 2009.  The net increase of $456,000 in non-interest expenses is primarily attributable to increases to salaries and employee benefits, net occupancy expense of premises, director’s compensation, professional fees, and other non-interest expenses, partially offset by decreases to Federal insurance premiums and equipment. Salaries and employee benefits increased $465,000 to $1.2 million for the six months ended June 30, 2010 from $738,000 for the six months ended June 30, 2009 primarily due to the one-time pre-tax curtailment credit of $416,000, net of periodic pension expense, resulting from the freezing of the defined benefit pension plan during the six months ended June 30, 2009. Excluding the curtailment credit, salaries and employee benefits increased $50,000, or 4.3% primarily due to defined benefit pension expenses and employee compensation expenses. All other categories of non-interest expenses, in the aggregate, decreased $10,000, or 0.8%, to $1.20 million for the six months ended June 30, 2010, from $1.21 million for the prior six month period.

 
21


Income Tax Expense.  The provision for income taxes decreased $29,000, to $152,000 for the six months  ended June 30, 2010 compared to a tax expense of $181,000 for the same six months in 2009 primarily due to a decrease in income before income taxes of $73,000.

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, calculated by a ratio of short-term assets to short-term liabilities, averaged 8.49% during the month of June 2010.  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 $110.8 million and $111.0 million at June 30, 2010 and December 31, 2009, respectively.  Mortgage-backed securities held to maturity totaled $23.9 million and $28.3 million at June 30, 2010 and December 31, 2009, 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.

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 June 30, 2010, the Company had a borrowing limit of $68.2 million from the FHLB, of which $14.9 million was advanced. At December 31, 2009, advances from the FHLB totaled $22.9 million.

The Association anticipates that it will have sufficient funds available to meet its current loan commitments and obligations.  At June 30, 2010, the Association had outstanding commitments to originate or purchase loans of $845,000 and outstanding loans in process of $2.1 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2010, totaled $62.2 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.

 
22


The following tables set forth the Association’s capital position at June 30, 2010 and December 31, 2009, as compared to the minimum regulatory capital requirements:

   
Actual
   
Minimal Capital
Requirements
   
Under Prompt
Corrective Actions
Provisions
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
June 30, 2010:
       
(Dollars in Thousands)
             
Total Capital
  $ 17,053       19.36 %   $ >7,046       >8.00 %   $ >8,808       >10.00 %
(to risk-weighted assets)
                                               
                                                 
Tier 1 Capital
    16,403       18.62 %     >-       >-       >5,285       >6.00 %
(to risk-weighted assets)
                                               
                                                 
Core (Tier 1) Capital
    16,487       10.82 %     >6,095       >4.00 %     >7,619       >5.00 %
(to adjusted total assets)
                                               
                                                 
Tangible Capital
    16,487       10.82 %     >2,286       >1.50 %     >-       >-  
(to adjusted total assets)
                                               

   
Actual
   
Minimal Capital
Requirements
   
Under Prompt
Corrective Actions
Provisions
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
December 31, 2009:
       
(Dollars in Thousands)
             
Total Capital
  $ 16,408       18.66 %   $ >7,036       >8.00 %   $ >8,795       >10.00 %
(to risk-weighted assets)
                                               
                                                 
Tier 1 Capital
    16,044       18.24 %     >-       >-       >5,277       >6.00 %
(to risk-weighted assets)
                                               
                                                 
Core (Tier 1) Capital
    16,128       10.42 %     >6,192       >4.00 %     >7,739       >5.00 %
(to adjusted total assets)
                                               
                                                 
Tangible Capital
    16,128       10.42 %     >2,322       >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.

 
23


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.

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 June 30, 2010, the most recent date the Association’s NPV was calculated by the OTS.

Change in
Interest Rates
(basis points)
   
Net Portfolio Value
   
Net Portfolio Value as a
Percentage of Present Value of
Assets
 
   
Estimated
NPV
   
Amount of
Change
   
Percent of
Change
   
NPV Ratio
   
Change in Basis
Points
 
                 
(Dollars in Thousands)
             
                                 
+300     $ 14,916     $ (8,480 )     (36 %)     9.72 %     (450 )
+200       18,560       (4,837 )     (21 %)     11.76 %     (247 )
+100       21,581       (1,816 )     (8 %)     13.34 %     (88 )
+ 50       22,658       (738 )     ( 3 %)     13.88 %     (35 )
     0       23,397                   14.23 %      
- 50       23,834       438       2 %     14.42 %     19  
-100       24,084       687       3 %     14.53 %     30  

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.

 
24


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 4. 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 June 30, 2010 (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.

 
25


PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

As of June 30, 2010, the Company was not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which, in the aggregate, involve amounts that  management believes are immaterial to the Company’s consolidated financial condition, results of operations and cash flows.

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 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 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 June 30, 2010, 12,750 total shares have been repurchased by the Company under this repurchase program. During the quarter ended June 30, 2010, 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
 
April 1, 2010 through April 30, 2010
    -     $ -       12,750       37,250  
May 1, 2010 through May 31, 2010
    -       -       12,750       37,250  
June 1, 2010 through June 30, 2010
    -       -       12,750       37,250  
 
ITEM 3. Defaults Upon Senior Securities

Not applicable.

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. *
 
Computation of earnings per share.
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 (filed herewith).
 
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: August 16, 2010
 
By:
/s/
Jesus R. Adia
 
       
Jesus R. Adia
       
President and
       
Chief Executive Officer
           
           
Date: August 16, 2010
 
By:
/s/
John S. Lotardo
 
       
John S. Lotardo
       
Executive Vice President and Chief
       
Financial Officer
 
 
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