UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM
10-Q



(Mark One)

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

For the quarterly period
ended June 30, 2012



£
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 SNo £ | 
|--------- | 



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 SNo £ | 
|--------- | 



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  £                                             |  | Accelerated filer  £        
|---------------------------------------------------------------------- |  | ----------------------------
|                                                                       |  |                             
|Non-accelerated filer (Do not check if a smaller reporting company)  £ |  | Smaller reporting company  S



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



APPLICABLE ONLY TO CORPORATE ISSUERS

As of August 14, 2012 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                                                                                                         |    |                
|                               |                                                                                                                              |    |                
|                               | Consolidated Statements of Financial Condition at June 30, 2012 and December 31, 2011 (Unaudited)                            |    | 1              
|                               |                                                                                                                              |    |                
|                               | Consolidated Statements of Operations for the Three and Six months ended June 30, 2012 and 2011 (Unaudited)                  |    | 2              
|                               |                                                                                                                              |    |                
|                               | Consolidated Statements of Comprehensive Income (Loss) for the Three and Six months ended June 30, 2012 and 2011 (Unaudited) |    | 3              
|                               |                                                                                                                              |    |                
|                               | Consolidated Statements of Cash Flows for the Six months ended June 30, 2012 and 2011 (Unaudited)                            |    | 4              
|                               |                                                                                                                              |    |                
|                               | Notes to Consolidated Financial Statements (Unaudited)                                                                       |    | 5– 29          
|                               |                                                                                                                              |    |                
|Item 2:                        | Management’s Discussion and Analysis of Financial Condition and Results of Operation                                         |    | 30-36          
|                               |                                                                                                                              |    |                
|Item 3:                        | Quantitative and Qualitative Disclosure About Market Risk                                                                    |    | 37             
|                               |                                                                                                                              |    |                
|Item 4:                        | Controls and Procedures                                                                                                      |    | 37             
|                               |                                                                                                                              |    |                
|PART II – OTHER INFORMATION    |                                                                                                                              |   
|                               |                                                                                                                              |    |                
|Item 1:                        | Legal Proceedings                                                                                                            |    | 38             
|                               |                                                                                                                              |    |                
|Item 1A:                       | Risk Factors                                                                                                                 |    | 38             
|                               |                                                                                                                              |    |                
|Item 2:                        | Unregistered Sales of Equity Securities and Use of Proceeds                                                                  |    | 38-39          
|                               |                                                                                                                              |    |                
|Item 3:                        | Defaults upon Senior Securities                                                                                              |    | 39             
|                               |                                                                                                                              |    |                
|Item 4:                        | Mine Safety Disclosures                                                                                                      |    | 39             
|                               |                                                                                                                              |    |                
|Item 5:                        | Other Information                                                                                                            |    | 39             
|                               |                                                                                                                              |    |                
|Item 6:                        | Exhibits                                                                                                                     |    | 39- 40         
|                               |                                                                                                                              |    |                
|SIGNATURES                     |                                                                                                                              | 41






Table of Contents




PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)



|                                                                                                                 |  | June30, |             |   | December 31, |  
|---------------------------------------------------------------------------------------------------------------- |  | ------- | ----------- | - | ------------ | -
|ASSETS                                                                                                           |  | 2012    |             |   | 2011         |  
|                                                                                                                 |  |         |             |   |              |  
|Cash and amounts due from depository institutions                                                                |  | $       | 2,068,445   |   |              | $
|Interest earning deposits in other banks                                                                         |  |         | 3,786,020   |   |              |  
|Federal funds sold                                                                                               |  |         | 5,700,000   |   |              |  
|Cash and cash equivalents                                                                                        |  |         | 11,554,465  |   |              |  
|                                                                                                                 |  |         |             |   |              |  
|Securities held to maturity; fair value of $29,658,260 (2012) and $27,402,087 (2011)                             |  |         | 27,916,534  |   |              |  
|Loans receivable, net of allowance for loan losses of $1,076,808 (2012) and $2,247,171 (2011)                    |  |         | 87,355,682  |   |              |  
|Real estate owned                                                                                                |  |         | 1,123,300   |   |              |  
|Premises and equipment                                                                                           |  |         | 5,190,709   |   |              |  
|Federal Home Loan Bank of New York stock                                                                         |  |         | 472,400     |   |              |  
|Accrued interest receivable                                                                                      |  |         | 482,930     |   |              |  
|Bank owned life insurance                                                                                        |  |         | 4,600,037   |   |              |  
|Other assets                                                                                                     |  |         | 4,615,107   |   |              |  
|Total assets                                                                                                     |  | $       | 143,311,164 |   |              | $
|                                                                                                                 |  |         |             |   |              |  
|LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                             |  |         |             |   |              |  
|Liabilities:                                                                                                     |  |         |             |   |              |  
|Deposits:                                                                                                        |  |         |             |   |              |  
|Non-interest bearing                                                                                             |  | $       | 5,547,491   |   |              | $
|Interest bearing                                                                                                 |  |         | 111,982,784 |   |              |  
|Total deposits                                                                                                   |  |         | 117,530,275 |   |              |  
|Federal Home Loan Bank of New York advances                                                                      |  |         | 5,392,887   |   |              |  
|Advance payments by borrowers for taxes and insurance                                                            |  |         | 200,062     |   |              |  
|Other liabilities                                                                                                |  |         | 1,347,640   |   |              |  
|Total liabilities                                                                                                |  |         | 124,470,864 |   |              |  
|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      |   |              |  
|Paid-in capital                                                                                                  |  |         | 12,762,421  |   |              |  
|Retained earnings                                                                                                |  |         | 9,255,975   |   |              |  
|Unearned employees’ stock ownership plan (ESOP) shares                                                           |  |         | (391,672    | ) |              |  
|Treasury stock, 62,750 shares                                                                                    |  |         | (446,534    | ) |              |  
|Accumulated other comprehensive loss                                                                             |  |         | (2,367,888  | ) |              |  
|Total stockholders’ equity                                                                                       |  |         | 18,840,300  |   |              |  
|                                                                                                                 |  |         |             |   |              |  
|Total liabilities and stockholders’ equity                                                                       |  | $       | 143,311,164 |   |              | $



See notes to consolidated financial statements.



1


Table of Contents




FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



|                                                                  |  | Three months ended |           |   | Six months ended |  
|----------------------------------------------------------------- |  | ------------------ | --------- | - | ---------------- | -
|                                                                  |  | June 30,           |           |   | June 30,         |  
|                                                                  |  | 2012               |           |   | 2011             |  
|Interest Income                                                   |  |                    |           |   |                  |  
|Loans, including fees                                             |  | $                  | 1,192,558 |   |                  | $
|Mortgage-backed securities                                        |  |                    | 250,832   |   |                  |  
|Investment securities                                             |  |                    | 33,358    |   |                  |  
|Other interest earning assets                                     |  |                    | 460       |   |                  |  
|Total interest income                                             |  |                    | 1,477,208 |   |                  |  
|                                                                  |  |                    |           |   |                  |  
|Interest Expense                                                  |  |                    |           |   |                  |  
|Deposits                                                          |  |                    | 343,370   |   |                  |  
|Borrowings                                                        |  |                    | 10,846    |   |                  |  
|Total interest expense                                            |  |                    | 354,216   |   |                  |  
|                                                                  |  |                    |           |   |                  |  
|Net Interest Income                                               |  |                    | 1,122,992 |   |                  |  
|Provision for loan losses                                         |  |                    | 66,585    |   |                  |  
|Net interest income (loss) after provision for loan losses        |  |                    | 1,056,407 |   |                  |  
|                                                                  |  |                    |           |   |                  |  
|Non-interest income                                               |  |                    |           |   |                  |  
|Fees and service charges                                          |  |                    | 23,059    |   |                  |  
|Gain on sale of property                                          |  |                    | —         |   |                  |  
|BOLI income                                                       |  |                    | 38,593    |   |                  |  
|Other                                                             |  |                    | 929       |   |                  |  
|Total non-interest income                                         |  |                    | 62,581    |   |                  |  
|                                                                  |  |                    |           |   |                  |  
|Non-interest expenses                                             |  |                    |           |   |                  |  
|Salaries and employee benefits                                    |  |                    | 611,952   |   |                  |  
|Net occupancy expense of premises                                 |  |                    | 193,071   |   |                  |  
|Equipment                                                         |  |                    | 135,621   |   |                  |  
|Directors’ compensation                                           |  |                    | 60,229    |   |                  |  
|Professional fees                                                 |  |                    | 140,138   |   |                  |  
|Other insurance premiums                                          |  |                    | 60,051    |   |                  |  
|Federal deposit insurance premiums                                |  |                    | 41,000    |   |                  |  
|Merger related expense                                            |  |                    | 195,112   |   |                  |  
|Regulatory compliance consulting                                  |  |                    | 520,146   |   |                  |  
|Other                                                             |  |                    | 103,216   |   |                  |  
|Total non-interest expenses                                       |  |                    | 2,060,536 |   |                  |  
|                                                                  |  |                    |           |   |                  |  
|Income (loss) before income tax expense (benefit)                 |  |                    | (941,548  | ) |                  |  
|Income tax expense (benefit)                                      |  |                    | (450,648  | ) |                  |  
|                                                                  |  |                    |           |   |                  |  
|Net income (loss)                                                 |  | $                  | (490,900  | ) |                  | $
|                                                                  |  |                    |           |   |                  |  
|Net income (loss) per common share – Basic and diluted            |  | $                  | (0.18     | ) |                  | $
|                                                                  |  |                    |           |   |                  |  
|Weighted average number of shares outstanding – Basic and diluted |  |                    | 2,676,727 |   |                  |  



See notes to consolidated financial statements.



2


Table of Contents




FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)

(Unaudited)



|                                                  |  | Three months ended June 30, |          |   | Six months ended June 30, |  
|------------------------------------------------- |  | --------------------------- | -------- | - | ------------------------- | -
|                                                  |  |                             |          |   |                           |  
|                                                  |  |                             | 2012     |   |                           |  
|                                                  |  |                             |          |   |                           |  
|Net income (loss)                                 |  | $                           | (490,900 | ) |                           | $
|                                                  |  |                             |          |   |                           |  
|Other comprehensive  income, net of income taxes: |  |                             |          |   |                           |  
|                                                  |  |                             |          |   |                           |  
|Benefit plans                                     |  |                             | 105,538  |   |                           |  
|Deferred income taxes                             |  |                             | (44,167  | ) |                           |  
|                                                  |  |                             | 61,371   |   |                           |  
|                                                  |  |                             |          |   |                           |  
|Comprehensive (loss) income                       |  | $                           | (429,529 | ) |                           | $



See notes to consolidated financial statements.



3


Table of Contents




FLATBUSH FEDERAL BANCORP,
INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                     |  | Six months ended June 30, |           
|------------------------------------------------------------------------------------ |  | ------------------------- | ----------
|                                                                                     |  | 2012                      |           
|Cash flow from operating activities:                                                 |  |                           |           
|Net income (loss)                                                                    |  | $                         | 4,102,988 
|Adjustments to reconcile net income (loss) to net cash used by operating activities: |  |                           |           
|Depreciation and amortization of premises and equipment                              |  |                           | 58,419    
|Net accretion, amortization of discounts, premiums and deferred loan fees and costs  |  |                           | 3,287     
|Deferred income tax                                                                  |  |                           | 801,809   
|Provision for loan losses                                                            |  |                           | 265,011   
|Gain on Sale of premises and equipment                                               |  |                           | (9,072,771
|ESOP shares committed to be released                                                 |  |                           | 13,548    
|MRP expense                                                                          |  |                           | 20,292    
|Stock option expense                                                                 |  |                           | 20,706    
|Provision for loss on real estate owned                                              |  |                           | 71,730    
|Decrease in accrued interest receivable                                              |  |                           | 71,377    
|Increase in cash surrender value of BOLI                                             |  |                           | (76,785   
|(Increase) decrease in other assets                                                  |  |                           | (1,398,971
|(Decrease) in other liabilities                                                      |  |                           | (1,401,372
|Net cash (used) by operating activities                                              |  |                           | (6,520,732
|                                                                                     |  |                           |           
|Cash flow from investing activities:                                                 |  |                           |           
|Principal repayments on securities held to maturity                                  |  |                           | 2,210,683 
|Purchases of securities held to maturity                                             |  |                           | (4,392,239
|Purchases of loan participation interests                                            |  |                           | —         
|Net change in loans receivable                                                       |  |                           | 7,100,141 
|Proceeds from sale of premises and equipment                                         |  |                           | 6,215,924 
|Additions to premises and equipment                                                  |  |                           | (15,225   
|Redemption of Federal Home Loan Bank of New York stock, net                          |  |                           | 225,800   
|Net cash provided by investing activities                                            |  |                           | 11,345,084
|                                                                                     |  |                           |           
|Cash flow from financing activities:                                                 |  |                           |           
|Net increase (decrease) in deposits                                                  |  |                           | 2,607,707 
|Repayment of advances from Federal Home Loan Bank of New York                        |  |                           | (688,687  
|Net change in short-term borrowings from Federal Home Loan Bank of NY                |  |                           | (4,000,000
|Increase (decrease) in advance payments by borrowers for taxes and insurance         |  |                           | 9,906     
|Net cash used in financing activities                                                |  |                           | (2,071,074
|Net increase (decrease) in cash and cash equivalents                                 |  |                           | 2,753,278 
|Cash and cash equivalents – beginning                                                |  |                           | 8,801,187 
|                                                                                     |  |                           |           
|Cash and cash equivalents – ending                                                   |  | $                         | 11,554,465
|Supplemental disclosure of cash flow information:                                    |  |                           |           
|Cash paid during the year for:                                                       |  |                           |           
|Interest                                                                             |  | $                         | 721,986   
|Income taxes                                                                         |  | $                         | 4,000,585 
|Acquisition of real estate owned in settlement of loans receivable                   |  | $                         | 451,200   



See notes to consolidated financial statements.



4


Table of Contents




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 and six months ended June 30, 2012, 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, 2011, 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,
2012 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 (LOSS) PER COMMON
SHARE



Net income (loss) per common share was
computed by dividing net income (loss) for the three and six months ended June 30, 2012 and 2011 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 and six months ended June 30, 2012 and 2011,
there was no dilutive effect for the 82,378 and 82,378, respectively, of stock options outstanding. At and for the three and
six months ended June 30, 2012 and 2011, there was no dilutive effect for the 3,798 and 7,598, 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



5


Table of Contents




NOTE 4. CRITICAL ACCOUNTING POLICIES
(CONTINUED)



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 collectability of the loan portfolio. Management has 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. SECURITIES HELD TO MATURITY



|                                         |  | June 30, 2012  |           
|---------------------------------------- |  | -------------- | ----------
|                                         |  | Amortized Cost |           
|                                         |  |                |           
|Government National Mortgage Association |  | $              | 4,846,375 
|Federal National Mortgage Association    |  |                | 12,580,186
|Federal Home Loan Mortgage Corporation   |  |                | 6,150,688 
|                                         |  |                |           
|Total Mortgage-Backed Securities         |  |                | 23,577,249
|Corporate Debt                           |  |                | 4,339,285 
|                                         |  | $              | 27,916,534



|                                         |  | December 31, 2011 |           
|---------------------------------------- |  | ----------------- | ----------
|                                         |  | Amortized Cost    |           
|                                         |  |                   |           
|Government National Mortgage Association |  | $                 | 5,342,679 
|Federal National Mortgage Association    |  |                   | 12,778,385
|Federal Home Loan Mortgage Corporation   |  |                   | 3,280,117 
|                                         |  |                   |           
|Total Mortgage-Backed Securities         |  |                   | 21,401,181
|Corporate Debt                           |  |                   | 4,347,401 
|                                         |  | $                 | 25,748,582



6


Table of Contents




NOTE 5. SECURITIES HELD TO MATURITY
(CONTINUED)



All mortgage-backed securities
held at June 30, 2012, and December 31, 2011, were secured by residential real estate.



The age of unrealized losses and
fair value of related securities held to maturity are as follows:



|                                       |  | Less than 12 Months |           |  | 12 Months or More |   |        | Total      | 
|-------------------------------------- |  | ------------------- | --------- |  | ----------------- | - | ------ | ---------- | 
|                                       |  | Fair Value          |           |  | Unrealized Losses |   |        | Fair Value | 
|                                       |  |                     |           |  |                   |   |        |            | 
|June 30, 2012:                         |  |                     |           |  |                   |   |        |            | 
|Federal Home Loan Mortgage Corporation |  | $                   | 1,578,529 |  |                   | $ | 10,903 |            | 
|Corporate debt                         |  |                     | —         |  |                   |   | —      |            | 
|                                       |  |                     |           |  |                   |   |        |            | 
|Total                                  |  | $                   | 1,578,529 |  |                   | $ | 10,903 |            | 



|                                       |  | Less than 12 Months |           |  | 12 Months or More |   |         | Total      | 
|-------------------------------------- |  | ------------------- | --------- |  | ----------------- | - | ------- | ---------- | 
|                                       |  |                     |           |  |                   |   |         |            | 
|                                       |  | Fair Value          |           |  | Unrealized Losses |   |         | Fair Value | 
|                                       |  |                     |           |  |                   |   |         |            | 
|December 31, 2011:                     |  |                     |           |  |                   |   |         |            | 
|Federal Home Loan Mortgage Corporation |  |                     | $581,132  |  |                   |   | $17,427 |            | 
|Coporate debt                          |  |                     | 888,807   |  |                   |   | 29,238  |            | 
|                                       |  |                     |           |  |                   |   |         |            | 
|Total                                  |  | $                   | 1,469,939 |  |                   | $ | 46,665  |            | 



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.



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NOTE 5. SECURITIES HELD TO MATURITY
(CONTINUED)



At June 30, 2012, and December
31, 2011, management concluded that the unrealized losses above (which, at June 30, 2012, related to two corporate debt securities
and four Federal Home Loan Mortgage Corporation mortgage-backed 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 June 30, 2012 by contractual maturity, are shown below. Actual maturities will differ
from contractual maturities because borrowers generally have the right to prepay obligations.



|                                       |  | June 30, 2012  |           
|-------------------------------------- |  | -------------- | ----------
|                                       |  | Amortized
Cost |           
|Due within one year                    |  | $              | —         
|Due after one year through five years  |  |                | 2,886,735 
|Due after five years through ten years |  |                | 5,926,822 
|Due after ten years                    |  |                | 19,102,977
|Total                                  |  | $              | 27,916,534



NOTE 6. LOANS RECEIVABLE



Loans receivable, net, consists
of the following:



|                        |  | June 30, 2012  |        |   | December 31, 2011 |  
|----------------------- |  | -------------- | ------ | - | ----------------- | -
|                        |  | (in thousands)
|                        |  |                |        |   |                   |  
|Gross loans             |  | $              | 88,547 |   |                   | $
|Loans in process        |  |                | —      |   |                   |  
|Deferred loan fees, net |  |                | (114   | ) |                   |  
|Allowance for loan loss |  |                | (1,077 | ) |                   |  
|                        |  | $              | 87,356 |   |                   | $



8


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NOTE 6. LOANS RECEIVABLE (CONTINUED)



The following table summarizes
the primary segments of the allowance for loan losses (“ALLL”) and activity therein, segregated into the amounts required
for loans individually evaluated for impairment and the amounts required for loans collectively evaluated for impairment as of
June 30, 2012 and December 31, 2011 and for the three and six months ended June 30, 2012 and June 30, 2011.





|                                  |  | Construction, Land and Unsecured Business Loan |      |   | Commercial Real Estate |   |       | Residential Multifamily Real Estate |  |   | Residential One-to four- Family Real Estate |  |  | Credit Card |      |   | Home Equity |   |    | Other |  |   | Total | 
|--------------------------------- |  | ---------------------------------------------- | ---- | - | ---------------------- | - | ----- | ----------------------------------- |  | - | ------------------------------------------- |  |  | ----------- | ---- | - | ----------- | - | -- | ----- |  | - | ----- | 
|                                  |  | (Dollars in thousands)                         |     
|                                  |  |                                                |      |   |                        |   |       |                                     |  |   |                                             |  |  |             |      |   |             |   |    |       |  |   |       | 
|Allowance for loan losses:        |  |                                                |      |   |                        |   |       |                                     |  |   |                                             |  |  |             |      |   |             |   |    |       |  |   |       | 
|                                  |  |                                                |      |   |                        |   |       |                                     |  |   |                                             |  |  |             |      |   |             |   |    |       |  |   |       | 
|Three months ended June 30, 2012: |  |                                                |      |   |                        |   |       |                                     |  |   |                                             |  |  |             |      |  
|                                  |  |                                                |      |   |                        |   |       |                                     |  |   |                                             |  |  |             |      |   |             |   |    |       |  |   |       | 
|Beginning Balances                |  | $                                              | 46   |   |                        | $ | 666   |                                     |  | $ | 36                                          |  |  | $           | 324  |   |             | $ | 2  |       |  | $ | —     | 
|                                  |  |                                                |      |   |                        |   |       |                                     |  |   |                                             |  |  |             |      |   |             |   |    |       |  |   |       | 
|Charge-offs                       |  |                                                | —    |   |                        |   | —     |                                     |  |   | —                                           |  |  |             | (148 | ) |             |   | (1 | )     |  |   | —     | 
|                                  |  |                                                |      |   |                        |   |       |                                     |  |   |                                             |  |  |             |      |   |             |   |    |       |  |   |       | 
|Recovery                          |  |                                                | 85   |   |                        |   | —     |                                     |  |   | —                                           |  |  |             | —    |   |             |   | —  |       |  |   | —     | 
|                                  |  |                                                |      |   |                        |   |       |                                     |  |   |                                             |  |  |             |      |   |             |   |    |       |  |   |       | 
|Provision                         |  |                                                | (83  | ) |                        |   | (403  | )                                   |  |   | 14                                          |  |  |             | 535  |   |             |   | 3  |       |  |   | —     | 
|                                  |  |                                                |      |   |                        |   |       |                                     |  |   |                                             |  |  |             |      |   |             |   |    |       |  |   |       | 
|Ending Balance                    |  | $                                              | 48   |   |                        | $ | 263   |                                     |  | $ | 50                                          |  |  | $           | 711  |   |             | $ | 4  |       |  | $ | —     | 
|                                  |  |                                                |      |   |                        |   |       |                                     |  |   |                                             |  |  |             |      |   |             |   |    |       |  |   |       | 
|Six months ended June 30, 2012    |  |                                                |      |   |                        |   |       |                                     |  |   |                                             |  |  |             |      |   |             |   |    |       |  |   |       | 
|Beginning Balances                |  | $                                              | 495  |   |                        | $ | 1,279 |                                     |  | $ | 35                                          |  |  | $           | 436  |   |             | $ | 2  |       |  | $ | —     | 
|Charge-offs                       |  |                                                | (408 | ) |                        |   | (756  | )                                   |  |   | —                                           |  |  |             | (351 | ) |             |   | (5 | )     |  |   | —     | 
|Recovery                          |  |                                                | 85   |   |                        |   | —     |                                     |  |   | —                                           |  |  |             | —    |   |             |   | —  |       |  |   |       | 
|                                  |  |                                                |      |   |                        |   |       |                                     |  |   |                                             |  |  |             |      |   |             |   |    |       |  |   |       | 
|Provision                         |  |                                                | (124 | ) |                        |   | (260  | )                                   |  |   | 15                                          |  |  |             | 626  |   |             |   | 7  |       |  |   | —     | 
|                                  |  |                                                |      |   |                        |   |       |                                     |  |   |                                             |  |  |             |      |   |             |   |    |       |  |   |       | 
|Ending Balance                    |  | $                                              | 48   |   |                        | $ | 263   |                                     |  | $ | 50                                          |  |  | $           | 711  |   |             | $ | 4  |       |  | $ | —     | 



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NOTE 6. LOANS RECEIVABLE (CONTINUED)





|                                  |  |   | Construction, Land and Unsecured Business Loan |  |  |   | Commercial Real Estate |   |  |   | Residential Multifamily Real Estate |  |  |   | Residential One-to four- Family Real Estate |   |  |   | Credit Card |   |  |   | Home Equity |  |  |   | Passbook Loans |  |  |   | Total |  
|--------------------------------- |  | - | ---------------------------------------------- |  |  | - | ---------------------- | - |  | - | ----------------------------------- |  |  | - | ------------------------------------------- | - |  | - | ----------- | - |  | - | ----------- |  |  | - | -------------- |  |  | - | ----- | -
|                                  |  |   | (Dollars in thousands)                         | 
|Allowance for loan losses:        |  |   |                                                |  |  |   |                        |   |  |   |                                     |  |  |   |                                             |   |  |   |             |   |  |   |             |  |  |   |                |  |  |   |       |  
|                                  |  |   |                                                |  |  |   |                        |   |  |   |                                     |  |  |   |                                             |   |  |   |             |   |  |   |             |  |  |   |                |  |  |   |       |  
|Three months ended June 30, 2011: |  |   |                                                |  |  |   |                        |   |  |   |                                     |  |  |   |                                             |   |  |   |             |   | 
|                                  |  |   |                                                |  |  |   |                        |   |  |   |                                     |  |  |   |                                             |   |  |   |             |   |  |   |             |  |  |   |                |  |  |   |       |  
|Beginning Balances                |  | $ | 916                                            |  |  | $ | 606                    |   |  | $ | 36                                  |  |  | $ | 215                                         |   |  | $ | 11          |   |  | $ | —           |  |  | $ | —              |  |  | $ | 1,784 |  
|                                  |  |   |                                                |  |  |   |                        |   |  |   |                                     |  |  |   |                                             |   |  |   |             |   |  |   |             |  |  |   |                |  |  |   |       |  
|Charge-offs                       |  |   | —                                              |  |  |   | (248                   | ) |  |   | —                                   |  |  |   | —                                           |   |  |   | (8          | ) |  |   | —           |  |  |   | —              |  |  |   | (256  | )
|                                  |  |   |                                                |  |  |   |                        |   |  |   |                                     |  |  |   |                                             |   |  |   |             |   |  |   |             |  |  |   |                |  |  |   |       |  
|Provision                         |  |   | 580                                            |  |  |   | 856                    |   |  |   | —                                   |  |  |   | 128                                         |   |  |   | —           |   |  |   | —           |  |  |   | —              |  |  |   | 1,564 |  
|                                  |  |   |                                                |  |  |   |                        |   |  |   |                                     |  |  |   |                                             |   |  |   |             |   |  |   |             |  |  |   |                | 
|Ending Balance                    |  | $ | 1,496                                          |  |  | $ | 1,214                  |   |  | $ | 36                                  |  |  | $ | 343                                         |   |  | $ | 3           |   |  | $ | —           |  |  | $ | —              |  |  | $ | 3,092 |  
|                                  |  |   |                                                |  |  |   |                        |   |  |   |                                     |  |  |   |                                             |   |  |   |             |   |  |   |             |  |  |   |                |  |  |   |       |  
|Six months ended June 30, 2011    |  |   |                                                |  |  |   |                        |   |  |   |                                     |  |  |   |                                             |   |  |   |             |   |  |   |             |  | 
|Beginning Balances                |  | $ | 810                                            |  |  | $ | 583                    |   |  | $ | 36                                  |  |  | $ | 214                                         |   |  | $ | 6           |   |  | $ | —           |  |  | $ | —              |  |  | $ | 1,649 |  
|Charge-offs                       |  |   | —                                              |  |  |   | (247                   | ) |  |   | —                                   |  |  |   | (5                                          | ) |  |   | (8          | ) |  |   | —           |  |  |   | —              |  |  |   | (260  | )
|Provision                         |  |   | 686                                            |  |  |   | 878                    |   |  |   | —                                   |  |  |   | 134                                         |   |  |   | 5           |   |  |   | —           |  |  |   | —              |  |  |   | 1,703 |  
|                                  |  |   |                                                |  |  |   |                        |   |  |   |                                     |  |  |   |                                             |   |  |   |             |   |  |   |             |  |  |   |                |  |  |   |       |  
|Ending Balance                    |  | $ | 1,496                                          |  |  | $ | 1,214                  |   |  | $ | 36                                  |  |  | $ | 343                                         |   |  | $ | 3           |   |  | $ | —           |  |  | $ | —              |  |  | $ | 3,092 |  





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NOTE 6. LOANS RECEIVABLE (CONTINUED)





|                                                      |  | Construction, Land and Unsecured Business Loan |     |  | Commercial Real Estate |   |        | Residential Multifamily Real Estate |  |   | Residential One-to four-family Real Estate |  |  | Credit Card |        |  | Home Equity |   |    | Other |  |   | Total | 
|----------------------------------------------------- |  | ---------------------------------------------- | --- |  | ---------------------- | - | ------ | ----------------------------------- |  | - | ------------------------------------------ |  |  | ----------- | ------ |  | ----------- | - | -- | ----- |  | - | ----- | 
|                                                      |  | (in thousands)                                 |    
|                                                      |  |                                                |    
|At June 30, 2012: 
Allowance for loan loss:           |  |                                                |     |  |                        |   |        |                                     |  |   |                                            |  |  |             |        |  |             |   |   
|                                                      |  |                                                |     |  |                        |   |        |                                     |  |   |                                            |  |  |             |        |  |             |   |    |       |  |   |       | 
|Ending balance: individually evaluated for impairment |  | $                                              | —   |  |                        | $ | —      |                                     |  | $ | —                                          |  |  | $           | —      |  |             | $ | —  |       |  | $ | —     | 
|Ending balance: collectively evaluated for impairment |  | $                                              | 48  |  |                        | $ | 263    |                                     |  | $ | 50                                         |  |  | $           | 711    |  |             | $ | 4  |       |  | $ | —     | 
|                                                      |  |                                                |     |  |                        |   |        |                                     |  |   |                                            |  |  |             |        |  |             |   |    |       |  |   |       | 
|Loan receivable:                                      |  |                                                |     |  |                        |   |        |                                     |  |   |                                            |  |  |             |        |  |             |   |    |       |  |   |       | 
|                                                      |  |                                                |     |  |                        |   |        |                                     |  |   |                                            |  |  |             |        |  |             |   |    |       |  |   |       | 
|Ending balance                                        |  | $                                              | 424 |  |                        | $ | 19,011 |                                     |  | $ | 5,852                                      |  |  | $           | 63,121 |  |             | $ | 30 |       |  | $ | 74    | 
|Ending balance: individually evaluated for impairment |  | $                                              | —   |  |                        | $ | 744    |                                     |  | $ | —                                          |  |  | $           | 7,458  |  |             | $ | —  |       |  | $ |       | 
|                                                      |  |                                                |     |  |                        |   |        |                                     |  |   |                                            |  |  |             |        |  |             |   |    |       |  |   |       | 
|Ending balance: collectively evaluated for impairment |  | $                                              | 424 |  |                        | $ | 18,267 |                                     |  | $ | 5,852                                      |  |  | $           | 55,663 |  |             | $ | 30 |       |  | $ | 74    | 



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NOTE 6. LOANS RECEIVABLE (CONTINUED)





|                                                      |  | Construction, Land and Unsecured Business Loan |       |  | Commercial Real Estate |   |        | Residential Multifamily Real Estate |  |   | Residential One-to four-family Real Estate |  |  | Credit Card |        |  | Home Equity |   |    | Other |  |   | Total | 
|----------------------------------------------------- |  | ---------------------------------------------- | ----- |  | ---------------------- | - | ------ | ----------------------------------- |  | - | ------------------------------------------ |  |  | ----------- | ------ |  | ----------- | - | -- | ----- |  | - | ----- | 
|                                                      |  | (in thousands)                                 |      
|                                                      |  |                                                |       |  |                        |   |        |                                     |  |   |                                            |  |  |             |        |  |             |   |    |       |  |   |       | 
|December 31, 2011:                                    |  |                                                |       |  |                        |   |        |                                     |  |   |                                            |  |  |             |        |  |             |   |   
|Allowance for loan losses:                            |  |                                                |       |  |                        |   |        |                                     |  |   |                                            |  |  |             |        |  |             |   |    |       |  |   |       | 
|                                                      |  |                                                |       |  |                        |   |        |                                     |  |   |                                            |  |  |             |        |  |             |   |    |       |  |   |       | 
|Ending Balance:                                       |  | $                                              | 495   |  |                        | $ | 1,279  |                                     |  | $ | 35                                         |  |  | $           | 436    |  |             | $ | 2  |       |  | $ | —     | 
|                                                      |  |                                                |       |  |                        |   |        |                                     |  |   |                                            |  |  |             |        |  |             |   |    |       |  |   |       | 
|Ending balance: individually evaluated for impairment |  | $                                              | 407   |  |                        | $ | 623    |                                     |  | $ | —                                          |  |  | $           | 260    |  |             | $ | —  |       |  | $ | —     | 
|Ending balance: collectively evaluated for impairment |  | $                                              | 88    |  |                        | $ | 656    |                                     |  | $ | 35                                         |  |  | $           | 176    |  |             | $ | 2  |       |  | $ | —     | 
|                                                      |  |                                                |       |  |                        |   |        |                                     |  |   |                                            |  |  |             |        |  |             |   |    |       |  |   |       | 
|Loan receivable:                                      |  |                                                |       |  |                        |   |        |                                     |  |   |                                            |  |  |             |        |  |             |   |    |       |  |   |       | 
|                                                      |  |                                                |       |  |                        |   |        |                                     |  |   |                                            |  |  |             |        |  |             |   |    |       |  |   |       | 
|Ending balance                                        |  | $                                              | 3,118 |  |                        | $ | 21,901 |                                     |  | $ | 5,749                                      |  |  | $           | 66,681 |  |             | $ | 37 |       |  | $ | 87    | 
|Ending balance: individually evaluated for impairment |  | $                                              | 2,176 |  |                        | $ | 2,325  |                                     |  | $ | —                                          |  |  | $           | 5,143  |  |             | $ | —  |       |  | $ | —     | 
|                                                      |  |                                                |       |  |                        |   |        |                                     |  |   |                                            |  |  |             |        |  |             |   |    |       |  |   |       | 
|Ending balance: collectively evaluated for impairment |  | $                                              | 942   |  |                        | $ | 19,575 |                                     |  | $ | 5,749                                      |  |  | $           | 61,538 |  |             | $ | 37 |       |  | $ | 87    | 



A loan is considered impaired when,
based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value and the probability of collecting scheduled principal





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NOTE 6. LOANS RECEIVABLE (CONTINUED)



and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s
prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on
a loan by loan basis for commercial real estate loans and commercial construction loans by either the present value of expected
future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral
dependent.



An allowance for loan losses is
established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially
all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.



For loans secured by real estate,
estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired,
a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on
various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal
and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral,
which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.



Large groups of smaller balance
homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual smaller
balance residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are
the subject of a troubled debt restructuring agreement.



Loans whose terms are modified
are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers
are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction
in interest rate or an extension of a loan’s stated maturity date. Troubled debt restructurings are restored to accrual status
if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans
classified as troubled debt restructurings also are designated as impaired.



The Company adopted Accounting Standards Update
(“ASU”) No. 2011-02 on July 1, 2011. ASU No. 2011-02 provides additional guidance to creditors for evaluating
whether a modification or restructuring of a receivable is a troubled debt restructuring. In evaluating whether a restructuring
constitutes a troubled debt restructuring, ASU No. 2011-02 requires that a creditor must separately conclude that the restructuring
constitutes a concession and the borrower is experiencing financial difficulties.



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NOTE 6. LOANS RECEIVABLE (CONTINUED)



The following table presents impaired
loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not
necessary as of June 30, 2012.





|                                           |  | Impaired Loans With Specific Allowances |   |  | Impaired Loans With No Specific Allowances |   |   | Total Impaired Loans | 
|------------------------------------------ |  | --------------------------------------- | - |  | ------------------------------------------ | - | - | -------------------- | 
|                                           |  | Recorded Investment                     |   |  | Related Allowance                          |   |   | Recorded Investment  | 
|                                           |  | (in thousands)                          |  
|June 30, 2012:                             |  |                                         |   |  |                                            |   |   |                      | 
|Commercial Real Estate                     |  | $                                       | — |  |                                            | $ | — |                      | 
|Residential one-to four-family real estate |  |                                         | — |  |                                            |   | — |                      | 
|Total impaired loans                       |  | $                                       | — |  |                                            | $ | — |                      | 









The following table presents impaired
loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not
necessary as of December 31, 2011.



|                                           |  | Impaired Loans With Specific Allowances |       |  | Impaired Loans With No Specific Allowances |   |       | Total Impaired Loans | 
|------------------------------------------ |  | --------------------------------------- | ----- |  | ------------------------------------------ | - | ----- | -------------------- | 
|                                           |  | Recorded Investment                     |       |  | Related Allowance                          |   |       | Recorded Investment  | 
|                                           |  | (in thousands)                          |      
|December 31, 2011:                         |  |                                         |       |  |                                            |   |       |                      | 
|Construction and land                      |  | $                                       | 2,176 |  |                                            | $ | 407   |                      | 
|Commercial Real Estate                     |  |                                         | 2,297 |  |                                            |   | 623   |                      | 
|Residential one-to four-family real estate |  |                                         | 2,239 |  |                                            |   | 260   |                      | 
|Credit Card                                |  |                                         | —     |  |                                            |   | —     |                      | 
|Total impaired loans                       |  | $                                       | 6,712 |  |                                            | $ | 1,290 |                      | 



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NOTE 6. LOANS RECEIVABLE (CONTINUED)



The following table presents the
average recorded investment and interest income recognized on impaired loans during the three and six months ended June 30, 2012.



|                                           |  | Three months ended June 30, 2012 |       |  | Six months ended June 30, 2012 |  
|------------------------------------------ |  | -------------------------------- | ----- |  | ------------------------------ | -
|                                           |  | Average Recorded Investment      |       |  | Interest Income Recorded       |  
|                                           |  | (in thousands)                   |       |  | (in thousands)                 |  
|                                           |  |                                  |       |  |                                |  
|Construction and land                      |  | $                                | 198   |  |                                | $
|                                           |  |                                  |       |  |                                |  
|Commercial Real Estate                     |  |                                  | 744   |  |                                |  
|                                           |  |                                  |       |  |                                |  
|Residential one-to four-family Real Estate |  |                                  | 6,661 |  |                                |  
|                                           |  |                                  |       |  |                                |  
|Total                                      |  | $                                | 7,603 |  |                                | $



The following table presents the
average recorded investment and interest income recognized on impaired loans during the three and six months ended June 30, 2011.



|                                           |  | Three months ended June 30, 2011 |        |  | Six months ended June 30, 2011 |  
|------------------------------------------ |  | -------------------------------- | ------ |  | ------------------------------ | -
|                                           |  | Average Recorded Investment      |        |  | Interest Income Recorded       |  
|                                           |  | (in thousands)                   |        |  | (in thousands)                 |  
|                                           |  |                                  |        |  |                                |  
|Construction and land                      |  | $                                | 3,958  |  |                                | $
|                                           |  |                                  |        |  |                                |  
|Commercial Real Estate                     |  |                                  | 2,604  |  |                                |  
|                                           |  |                                  |        |  |                                |  
|Residential one-to four-family Real Estate |  |                                  | 4,020  |  |                                |  
|                                           |  |                                  |        |  |                                |  
|Total                                      |  | $                                | 10,582 |  |                                | $





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NOTE 6. LOANS RECEIVABLE (CONTINUED)



The allowance calculation methodology
includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment
sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies
arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications
of substandard, doubtful, loss and special mention. An asset is considered substandard if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those
characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic
that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values,
highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that
their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently
expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated special mention. If uncorrected, the potential weaknesses may result in deterioration
of the repayment prospects. Loans which are not classified as noted above are rated “pass”.



In addition, Federal regulatory
agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and
may require the Company to recognize additions to the allowance based on their judgments about information available to them at
the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis
of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.



The following table presents the
classes of the loan portfolio summarized by the pass category and the criticized categories of special mention, substandard and
doubtful within the internal risk rating system as of June 30, 2012 and December 31, 2011.



|                                                    |  | Pass           |        |  | Special Mention |   |       | Substandard |  |   | Doubtful |  |  | Total |  
|--------------------------------------------------- |  | -------------- | ------ |  | --------------- | - | ----- | ----------- |  | - | -------- |  |  | ----- | -
|                                                    |  | (in thousands) |       
|June 30, 2012:                                      |  |                |        |  |                 |   |       |             |  |   |          |  |  |       |  
|Construction and land                               |  | $              | —      |  |                 | $ | —     |             |  | $ | 384      |  |  | $     | —
|Commercial real estate                              |  |                | 17,215 |  |                 |   | 519   |             |  |   | 1,277    |  |  |       | —
|Residential mortgage multifamily real estate        |  |                | 5,436  |  |                 |   | 416   |             |  |   | —        |  |  |       | —
|Residential mortgage one-to four-family real estate |  |                | 52,809 |  |                 |   | 1,464 |             |  |   | 8,848    |  |  |       | —
|Unsecured business loan                             |  |                | 40     |  |                 |   | —     |             |  |   | —        |  |  |       | —
|Credit card                                         |  |                | 30     |  |                 |   | —     |             |  |   | —        |  |  |       | —
|Home equity                                         |  |                | 74     |  |                 |   | —     |             |  |   | —        |  |  |       | —
|Passbook loan                                       |  |                | 36     |  |                 |   | —     |             |  |   | —        |  |  |       | —
|Total                                               |  | $              | 75,639 |  |                 | $ | 2,400 |             |  | $ | 10,508   |  |  | $     | —



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NOTE 6. LOANS RECEIVABLE (CONTINUED)



|                                                    |  | Pass           |        |  | Special Mention |   |       | Substandard |  |   | Doubtful |  |  | Total |  
|--------------------------------------------------- |  | -------------- | ------ |  | --------------- | - | ----- | ----------- |  | - | -------- |  |  | ----- | -
|                                                    |  | (in thousands) |       
|December 31, 2011:                                  |  |                |        |  |                 |   |       |             |  |   |          |  |  |       |  
|Construction and land                               |  | $              | —      |  |                 | $ | 515   |             |  | $ | 2,563    |  |  | $     | —
|Commercial real estate                              |  |                | 19,575 |  |                 |   | —     |             |  |   | 2,325    |  |  |       | —
|Residential mortgage multifamily real estate        |  |                | 5,749  |  |                 |   | —     |             |  |   | —        |  |  |       | —
|Residential mortgage one-to four-family real estate |  |                | 60,732 |  |                 |   | 1,720 |             |  |   | 4,230    |  |  |       | —
|Unsecured business loan                             |  |                | 40     |  |                 |   | —     |             |  |   | —        |  |  |       | —
|Credit card                                         |  |                | 37     |  |                 |   | —     |             |  |   | —        |  |  |       | —
|Home equity                                         |  |                | 87     |  |                 |   | —     |             |  |   | —        |  |  |       | —
|Passbook loan                                       |  |                | 37     |  |                 |   | —     |             |  |   | —        |  |  |       | —
|Total                                               |  | $              | 86,257 |  |                 | $ | 2,235 |             |  | $ | 9,118    |  |  | $     | —



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NOTE 6. LOANS RECEIVABLE (CONTINUED)



Management further monitors the
performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time
a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories
of performing loans and nonaccrual loans as of June 30, 2012 and December 31, 2011:



|                                           |  | Current        |        |  | 30-59 Days Past Due |   |       | 60-89 Days Past Due |  |   | 90 Days or More Past Due |  |  | Total Past Due |       |  | Total Loans Receivable |   |       | Non- Accrual | 
|------------------------------------------ |  | -------------- | ------ |  | ------------------- | - | ----- | ------------------- |  | - | ------------------------ |  |  | -------------- | ----- |  | ---------------------- | - | ----- | ------------ | 
|                                           |  | (in thousands) |       
|June 30, 2012:                             |  |                |        |  |                     |   |       |                     |  |   |                          |  |  |                |       |  |                        |   |       |              | 
|Construction and land                      |  | $              | 384    |  |                     | $ | —     |                     |  | $ | —                        |  |  | $              | —     |  |                        | $ | —     |              | 
|Commercial real estate                     |  |                | 18,080 |  |                     |   | 186   |                     |  |   | —                        |  |  |                | 744   |  |                        |   | 931   |              | 
|Unsecured Business Loan                    |  |                | 40     |  |                     |   | —     |                     |  |   | —                        |  |  |                | —     |  |                        |   | —     |              | 
|Residential Multi family Real Estate       |  |                | 5,361  |  |                     |   | 491   |                     |  |   | —                        |  |  |                | —     |  |                        |   | 491   |              | 
|Residential One-to four-family Real Estate |  |                | 55,455 |  |                     |   | 495   |                     |  |   | 1,322                    |  |  |                | 5,849 |  |                        |   | 7,665 |              | 
|Credit Card                                |  |                | 30     |  |                     |   | —     |                     |  |   | —                        |  |  |                | —     |  |                        |   | —     |              | 
|Home Equity                                |  |                | 74     |  |                     |   | —     |                     |  |   | —                        |  |  |                | —     |  |                        |   | —     |              | 
|Passbook Loan                              |  |                | 36     |  |                     |   | —     |                     |  |   | —                        |  |  |                | —     |  |                        |   | —     |              | 
|Total                                      |  | $              | 79,460 |  |                     | $ | 1,172 |                     |  | $ | 1,322                    |  |  | $              | 6,594 |  |                        | $ | 9,087 |              | 



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NOTE 6. LOANS RECEIVABLE (CONTINUED)



|                                           |  | Current        |        |  | 30-59 Days Past Due |   |       | 60-89 Days Past Due |  |   | 90 Days or More Past Due |  |  | Total Past Due |       |  | Total Loans Receivable |   |        | Non- Accrual | 
|------------------------------------------ |  | -------------- | ------ |  | ------------------- | - | ----- | ------------------- |  | - | ------------------------ |  |  | -------------- | ----- |  | ---------------------- | - | ------ | ------------ | 
|                                           |  | (in thousands) |       
|December 31, 2011:                         |  |                |        |  |                     |   |       |                     |  |   |                          |  |  |                |       |  |                        |   |        |              | 
|Construction and land                      |  | $              | 387    |  |                     | $ | 515   |                     |  | $ | —                        |  |  | $              | 2,176 |  |                        | $ | 2,692  |              | 
|Commercial real estate                     |  |                | 20,122 |  |                     |   | —     |                     |  |   | —                        |  |  |                | 1,779 |  |                        |   | 1,779  |              | 
|Unsecured Business Loan                    |  |                | 40     |  |                     |   | —     |                     |  |   | —                        |  |  |                | —     |  |                        |   | —      |              | 
|Residential Multi family Real Estate       |  |                | 5,749  |  |                     |   | —     |                     |  |   | —                        |  |  |                | —     |  |                        |   | —      |              | 
|Residential One-to four-family Real Estate |  |                | 60,438 |  |                     |   | 2,014 |                     |  |   |                          |  |  |                | 4,230 |  |                        |   | 6,244  |              | 
|Credit Card                                |  |                | 33     |  |                     |   | —     |                     |  |   | 3                        |  |  |                | —     |  |                        |   | 3      |              | 
|Home Equity                                |  |                | 87     |  |                     |   | —     |                     |  |   | —                        |  |  |                | —     |  |                        |   | —      |              | 
|Passbook Loan                              |  |                | 37     |  |                     |   | —     |                     |  |   | —                        |  |  |                | —     |  |                        |   | —      |              | 
|Total                                      |  | $              | 86,893 |  |                     | $ | 2,529 |                     |  | $ | 3                        |  |  | $              | 8,185 |  |                        | $ | 10,717 |              | 



The Association may grant a concession or modification
for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider resulting
in a modified loan which is then identified as a troubled debt restructuring (TDR). The Association may modify loans through rate
reductions, extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due
under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize
the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of
calculation the Company’s allowance for loan losses.



The Association identifies loans for potential
restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements,
revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider
the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the
near future.



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NOTE 6. LOANS RECEIVABLE (CONTINUED)



The following table reflects information regarding
troubled debt restructurings for the three and six months ended June 30, 2012 and year ended December 31, 2011:





|                             |  |  | Number of Contracts |  |  | Pre- Modification Outstanding Recorded Investments |         |  | Post- Modification Outstanding Recorded Investments |  
|---------------------------- |  |  | ------------------- |  |  | -------------------------------------------------- | ------- |  | --------------------------------------------------- | -
|June 30, 2012:               |  |  |                     |  |  |                                                    |         |  |                                                     |  
|                             |  |  |                     |  |  |                                                    |         |  |                                                     |  
|Troubled debt restructurings |  |  |                     |  |  |                                                    |         |  |                                                     |  
|Residential mortgage         |  |  | 2                   |  |  | $                                                  | 805,935 |  |                                                     | $



|                              |  |  | Number of Contracts |  |  | Pre- Modification Outstanding Recorded Investments |         |  | Post- Modification Outstanding Recorded Investments |  
|----------------------------- |  |  | ------------------- |  |  | -------------------------------------------------- | ------- |  | --------------------------------------------------- | -
|December 31, 2011:            |  |  |                     |  |  |                                                    |         |  |                                                     |  
|                              |  |  |                     |  |  |                                                    |         |  |                                                     |  
|Troubled debt restructurings: |  |  |                     |  |  |                                                    |         |  |                                                     |  
|Residential mortgage          |  |  | 3                   |  |  | $                                                  | 819,085 |  |                                                     | $



There were two troubled debt restructuring which subsequently defaulted
during the three and six months ended June 30, 2012.



|June 30, 2012:                                                                     |  |  | Contracts |  |  | Balance at June
    30, 2012 |        
|---------------------------------------------------------------------------------- |  |  | --------- |  |  | ---------------------------- | -------
|                                                                                   |  |  |           |  |  |                              |        
|Troubled debt restructurings which
    subsequently defaulted Residential mortgage |  |  | 2         |  |  | $                            | 536,169



Loans whose terms are modified are classified
as troubled debt restructurings if the Association grants such borrowers concessions and it is deemed that those borrowers are
experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction
in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored
to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.
Loans classified as troubled debt restructurings are designated as impaired.



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NOTE 7. RETIREMENT PLANS –
COMPONENTS OF NET PERIODIC PENSION COST



Periodic pension expense for the funded
employee pension plan was as follows:



|                                      |  | Three months Ended |          |   | Six months Ended |  
|------------------------------------- |  | ------------------ | -------- | - | ---------------- | -
|                                      |  | June30,            |          |   | June 30,         |  
|                                      |  | 2012               |          |   | 2011             |  
|                                      |  |                    |          |   |                  |  
|Service cost                          |  | $                  | —        |   |                  | $
|Interest cost                         |  |                    | 67,901   |   |                  |  
|Expected return on assets             |  |                    | (130,754 | ) |                  |  
|Amortization of unrecognized net loss |  |                    | 95,554   |   |                  |  
|Net periodic benefit cost             |  | $                  | 32,701   |   |                  | $



Periodic pension expense for other unfunded
plans was as follows:



|                                      |  | Three months ended |        |  | Six months ended |  
|------------------------------------- |  | ------------------ | ------ |  | ---------------- | -
|                                      |  | June30,            |        |  | June 30,         |  
|                                      |  | 2012               |        |  | 2011             |  
|                                      |  |                    |        |  |                  |  
|Service cost                          |  | $                  | 7,492  |  |                  | $
|Interest cost                         |  |                    | 13,876 |  |                  |  
|Amortization of past service cost     |  |                    | 4,706  |  |                  |  
|Amortization of unrecognized net loss |  |                    | 5,278  |  |                  |  
|Net periodic benefit cost             |  | $                  | 31,352 |  |                  | $



NOTE
8. 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 accountingpronouncements
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 marketsfor 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 measurementdate 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).



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



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 at fair value on a recurring basis at June 30, 2012 and December 31, 2011.



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:





|Description       |  | Total          |       |  | (Level 1) Quoted Prices in Active Markets for Identical Assets |   |   | (Level 2) Significant Other Observable Inputs |  |   | (Level 3) Significant Unobservable Inputs | 
|----------------- |  | -------------- | ----- |  | -------------------------------------------------------------- | - | - | --------------------------------------------- |  | - | ----------------------------------------- | 
|                  |  | (In Thousands)
|June 30, 2012:    |  |                |       |  |                                                                |   |   |                                               |  |   |                                           | 
|Impaired Loans    |  | $              | 2,713 |  |                                                                | $ | — |                                               |  | $ | —                                         | 
|Real Estate Owned |  | $              | 672   |  |                                                                | $ | — |                                               |  | $ | —                                         | 
|                  |  |                |       |  |                                                                |   |   |                                               |  |   |                                           | 
|December 31, 2011 |  |                |       |  |                                                                |   |   |                                               |  |   |                                           | 
|Impaired Loans    |  | $              | 5,422 |  |                                                                | $ | — |                                               |  | $ | —                                         | 



Level 3 assets at June 30, 2012,
consisted of six impaired loans and two real estate owned properties valued based on appraisals adjusted by level 3 measurements
to discount appraisals based on age and to estimate selling costs. The aggregate level 3 measurements reduced the appraised values
by 15% to 25% (weighted average 20%).



The Company had no liabilities
which are required to be measured at fair value on a recurring or non-recurring basis at June 30, 2012 and December 31, 2011.



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, 2012 and December 31, 2011:



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 matrix pricing (Level 2), which is a mathematical technique used
widely in the industry to value debt



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



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.



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.



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.



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



As of June 30, 2012 and December
31, 2011, the fair value of commitments to extend credit were not considered to be material.



|                            |  | June 30, 2012   |        
|--------------------------- |  | --------------- | -------
|                            |  | Carrying Amount |        
|                            |  | (In Thousands)  |        
|Financial assets:           |  |                 |        
|Cash and cash equivalents   |  | $               | 11,554 
|Securities held to maturity |  |                 | 27,917 
|FHLB stock                  |  |                 | 472    
|Loans receivable            |  |                 | 87,356 
|Accrued interest receivable |  |                 | 483    
|                            |  |                 |        
|Financial liabilities:      |  |                 |        
|Deposits                    |  |                 | 117,530
|Advances from FHLB          |  |                 | 5,393  
|Accrued interest payable    |  |                 | 2      





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



The estimated fair values of financial
instruments were as follows at December 31, 2011.



|                            |  | December 31,    |        
|--------------------------- |  | --------------- | -------
|                            |  | 2011            |        
|                            |  | Carrying Amount |        
|                            |  |                 |        
|                            |  | (In Thousands)  |        
|Financial assets:           |  |                 |        
|Cash and cash equivalents   |  | $               | 8,801  
|Securities held to maturity |  |                 | 25,749 
|FHLB stock                  |  |                 | 698    
|Loans receivable            |  |                 | 95,162 
|Accrued interest receivable |  |                 | 554    
|                            |  |                 |        
|Financial liabilities:      |  |                 |        
|Deposits                    |  |                 | 114,923
|Advances from FHLB          |  |                 | 10,082 
|Accrued interest payable    |  |                 | 5      



NOTE 9. 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.



The Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income
- Presentation of Comprehensive Income”. The provisions of this ASU amend FASB Accounting Standards Codification (“ASC”)
Topic 220, “Comprehensive Income,” to facilitate the continued alignment of U.S. GAAP with International Accounting
Standards. The ASU prohibits the presentation of the components of comprehensive income in the statement of stockholder’s
equity. Reporting entities are allowed to present either: a statement of comprehensive income, which reports both net income and
other comprehensive income; or separate, but consecutive, statements of net income and other comprehensive income. Under previous
GAAP, all 3 presentations were acceptable. Regardless of the presentation selected, the Reporting Entity is required to present
all reclassifications between other comprehensive and net income on the face of the new statement or statements.



The FASB subsequently issued ASU 2011-12, which
defers the presentation of all reclassification adjustments while the FASB considers the operational concerns raised with regard
to this presentation, as



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NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
(CONTINUED)



well as whether or not this presentation meets
the needs of financial statement users. Until the FASB has reached a decision, reporting entities should continue to present reclassifications
out of accumulated other comprehensive income consistent with pre-existing requirements.



The provision to prepare either a combined
statement of comprehensive income or separate, but consecutive, statements of net income and other comprehensive income remains
in effect for fiscal years and interim periods beginning after December 15, 2011 for public companies, and for fiscal years
ending after December 15, 2012 for nonpublic companies. The adoption of this pronouncement did not have a material impact
on consolidated operations or financial position.



The FASB issued ASU 2011-04 to amend FASB ASC
Topic 820, Fair Value Measurements, to bring U.S. GAAP for fair value measurements in line with International Accounting Standards.
The ASU clarifies existing guidance for items such as: the application of the highest and best use concept to non-financial assets
and liabilities; the application of fair value measurement to financial instruments classified in a reporting entity’s stockholder’s
equity; and disclosure requirements regarding quantitative information about unobservable inputs used in the fair value measurements
of level 3 assets. The ASU also creates an exception to Topic 820 for entities which carry financial instruments within a portfolio
or group, under which the entity is now permitted to base the price used for fair valuation upon a price that would be received
to sell the net asset position or transfer a net liability position in an orderly transaction. The ASU also allows for the application
of premiums and discounts in a fair value measurement if the financial instrument is categorized in level 2 or 3 of the fair value
hierarchy. Lastly, the ASU contains new disclosure requirements regarding fair value amounts categorized as level 3 in the fair
value hierarchy such as: disclosure of the valuation process used; effects of and relationships between unobservable inputs; usage
of nonfinancial assets for purposes other than their highest and best use when that is the basis of the disclosed fair value; and
categorization by level of items disclosed at fair value, but not measured at fair value for financial statement purposes. For
public entities, this ASU is effective for interim and annual periods beginning after December 15, 2011. The adoption of this pronouncement
did not have a material impact on consolidated operations or financial position.



NOTE 10. 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,
2012 and December 31, 2011, 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, 2012.





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NOTE 11. PROPERTY SALE



During 2010, the Company entered into
an agreement (the “Agreement”) to sell its current main branch building and a portion of Flatbush Federal’s adjoining
real estate to a third party (the “Purchaser”) (the “Transfer”). Under the Agreement, Purchaser would acquire
Flatbush Federal’s current main branch building located at 2146 Nostrand Avenue, Brooklyn, New York (“Property A”).
In addition thereto, the Purchaser would 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”).



On March 24, 2011, the Company and the
Purchaser entered into an amendment to the Agreement. The significant terms of the Agreement, as amended, are as follows:



| | 1. | The Purchaser was required to subdivide Lot 124 (of which Property C forms a part of) into two separate tax lots or parcels (the “Subdivision”). 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”).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | 2. | The Transfer must close (the “Closing”) five (5) days after the date the Subdivision has been approved and new tax lot numbers are assigned to Property C and the Retained Property.                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | 3. | The Purchaser is obligated to complete construction of and deliver to the Company a building containing a 3,000 square foot ground floor bank branch, a cellar, and three (3) additional floors of office space. In consideration of constructing the three (3) additional floors of office space, the Purchaser shall receive a credit at the Closing.                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | 4. | One of the principals of the Purchaser will personally guarantee the Purchaser’s obligation to deliver the bank branch and office building to Flatbush Federal.                                                                                                                                                                                                                                              



The Company plans to use the additional
three (3) floors of office space (consisting of approximately 7,125 of additional square feet) for its executive and administrative
offices.



The transfer closed on January 13, 2012;
at that date the Company received $6,340,000 in cash and a building valued at $3,176,000 and recorded a pre-tax gain of $9,073,000.



Upon the closing, Flatbush Federal began
leasing back Property A on an interim basis for its continued use as a temporary bank branch (the “Branch Lease”) for
one ($1.00) dollar per year. Flatbush Federal must relocate to the new Branch Building no later than 45 days after the Purchaser
completes the construction of the Branch Building and if applicable, the Purchaser’s contractor has completed construction
of the interior build-out and delivers to Flatbush Federal a temporary certificate of occupancy for the Branch Building, Bank branch
expansion and interior build-out. At that time, the Branch Lease will terminate, and Flatbush Federal will open the Branch Building
for business as its new bank branch. Estimated construction completion is first quarter of 2013.





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NOTE 12. MERGER AGREEMENT



On March 13, 2012, the Company entered into
an Agreement and Plan of Merger (the “Merger Agreement”) by and between (i) Northfield Bank, Northfield Bancorp, Inc.
(“Northfield Bancorp”), and Northfield Bancorp, MHC, and (ii) the Company, the Association and Flatbush Federal Bancorp,
MHC.  The Merger Agreement provides, among other things, that as a result of the merger of the Company into Northfield
Bancorp (the “Mid-Tier Merger”), each outstanding share of the Company’s common stock will be converted
into the right to receive 0.4748 shares of Northfield Bancorp common stock. The Merger Agreement contains a number of customary
representations and warranties by the parties regarding certain aspects of their respective businesses, financial condition, structure
and other facts pertinent to the Merger that are customary for a transaction of this kind. The obligation of the parties to complete
the Merger is subject to various customary conditions. If the Merger is terminated under specified situations in the Merger Agreement
(because the Company accepts a proposal to be acquired that is superior to the one contained in the Merger Agreement, enters into
an agreement related to such a proposal and terminates the Merger Agreement, or fails to make, withdraws, modifies or qualifies
its recommendation regarding the Merger Agreement), the Company may be required to pay a termination fee to Northfield Bancorp
of approximately $700,000.  The foregoing description of the Merger Agreement does not purport to be complete and is
qualified in its entirety by reference to the full text of the Merger Agreement, which was included in a Form 8-K filed with the
Securities and Exchange Commission on March 15, 2012.



NOTE 13. REGULATORY CONSENT ORDER



Effective April 12, 2012, the Association entered
into an agreement with the Comptroller of the Currency (the “OCC”). The Agreement provides, among other things, that
within specified time frames:



- the Association must conduct a review and assess the qualifications of its senior executive
officers and board members, and shall give notice to the OCC prior to appointing any new senior executive officer or director;
- the Association must submit for review and non-objection by the OCC a three-year written
capital plan;
- the Association must submit for review and non-objection by the OCC a three-year business
plan, including a projection of major balance sheet and income statement items;
- the Association must establish credit risk management practices that ensure effective
credit administration, portfolio management and monitoring, and risk mitigation;
- the Association must review the adequacy of its allowance for loan and lease losses
and establish a program for the maintenance of an adequate allowance;
- the Association may not invest in corporate securities without first developing an implementing
OCC-approved policies and procedures to monitor and control such activity;
- the Association must adopt, implement and comply with a written consumer compliance
program; and
- the Association will not be permitted to enter into, renew, extend or revise any contractual
arrangement relating to compensation or benefits for any senior executive officers or directors, unless it provides prior written
notice of the proposed transaction to the OCC.

The foregoing description of the Agreement
is qualified in its entirety by reference to the Agreement between the Association and the OCC, which is included in a Form 8-k
filed with the Securities and Exchange Commission on April 12, 2012.





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NOTE 13. REGULATORY CONSENT ORDER (CONTINUED)



The existence and terms of the Order has and
will influence the Association’s ongoing operations. Management is unable to determine the effects, if any, that the Association
would experience if it is unable to comply with the Order.



Management believes that the Association is in material compliance
with the Order as of June 30, 2012.



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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, 2012 and December
31, 2011



The Company’s total
assets at June 30, 2012 were $143.3 million compared to $142.7 million at December 31, 2011, an increase of $597,000 or 0.4%. Loans
receivable decreased $7.8 million, or 8.2%, to $87.4 million at June 30, 2012 from $95.2 million at December 31, 2011. Mortgage-backed
securities increased $2.2 million, or 10.3%, to $23.6 million at June 30, 2012 from $21.4 million as of December 31, 2011. Investment
securities totaled $4.3 million at June 30, 2012 and December 31, 2011. Cash and cash equivalents increased $2.8 million, primarily
due to proceeds of the building sale and loan payoffs, or 31.3%, to $11.6 million at June 30, 2012 from $8.8 million at December
31, 2011. Real estate owned increased $379,000 to $1.1 million at June 30, 2012, from $744,000 at December 31, 2012. Non-performing
assets, which include real estate owned totaled $9.3 million, or 6.51% of total assets as of June 30, 2012 compared to $8.9 million,
or 6.26% as of December 31, 2011.



Total deposits increased
$2.6 million, or 2.3%, to $117.5 million at June 30, 2012 from $114.9 million at December 31, 2011. As of June 30, 2012, advances
from the Federal Home Loan Bank of New York (“FHLB”) were $5.4 million compared to $10.1 million as of December 31,
2011, a decrease of $4.7 million, or 46.5%. Advances were paid down as total deposits increased and loans receivable decreased.



Total stockholders’
equity increased $4.3 million, or 29.7%, to $18.8 million at June 30, 2012 from $14.6 million at December 31, 2011. The increase
to stockholders’ equity reflects net income of $4.1 million, amortization of $14,000 of unearned ESOP shares, amortization
of $20,000 of restricted stock awards for the Company’s Stock-Based Incentive Program, amortization of $21,000 of stock option
awards and a decrease of $123,000 of accumulated other comprehensive loss during the six months ended June 30, 2012.



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. As of June 30, 2012, 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, 2012 and June 30, 2011



General.During
the quarter ending June 30, 2012, the Company experienced a net loss of $491,000. The principal factors leading to this loss were
the significant increases in non-interest expense for legal and investment advisory fees related to the pending merger and consulting
fees related to the Company’s efforts to comply with the OCC’s enforcement agreement as well as the absence of growth
in the Bank’s loan portfolio which adversely affected interest income. The net loss of $491,000 was a decrease from the loss
of $791,000 for the comparable period in 2011. Specifically,net loss decreased by $306,000, to $491,000 for the quarter
ended June 30, 2012 from a net loss of $797,000 for the same quarter in 2011. Other items affecting the loss were decreases of
$15,000 in interest expense on deposits and $19,000 in interest expense on borrowings from FHLB. The level of non-performing loans
of $8.2 million was lower than the $10.0 million in non-performing loans for the comparable period in 2011. As a result the Company
recorded a relatively small, $67,000 addition to loan loss provision for the quarter. Decreases of $235,000 in interest income,
$34,000 in other non-interest income and an increase of $859,000 in non-interest expense and a decrease of $98,000 in income tax
benefit also contributed to the loss.



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Interest Income.Loan
demand significantly affected interest income for the period.Total interest income decreased $235,000, or 13.7%, to $1.5
million for the quarter ended June 30, 2012 from $1.7 million for the quarter ended June 30, 2011 as lower demand, lower average
balances and yields for these assets all contributed to the decline in interest income. For the three months ended June 30, 2012,
the average balance of $127.3 million in interest-earning assets earned an average yield of 4.64% compared to an average yield
of 5.30% on an average balance of $129.3 million for the three months ended June 30, 2011. The decline in the average balance was
primarily due to loan payoffs and slowing loan demand.



Interest income on loans
decreased $237,000, or 16.6%, to $1.19 million for the quarter ended June 30, 2012, from $1.43 million for the same quarter in
2011. The average balance of loans decreased $13.0 million to $89.2 million for the quarter ended June 30, 2012 from $102.2 million
for the quarter ended June 30, 2011. The average yield on loans also decreased by 25 basis points to 5.35% for the quarter ended
June 30, 2012 from 5.60% for the quarter ended June 30, 2011.



Interest income on mortgage-backed
securities decreased $13,000, or 4.9%, to $251,000 for the quarter ended June 30, 2012 from $264,000 for the quarter ended June
30, 2011. The average balance of mortgage-backed securities increased $3.6 million, or 17.6%, to $24.0 million for the quarter
ended June 30, 2012 from $20.4 million for the quarter ended June 30, 2011. The average yield decreased by 100 basis points to
4.18% for the quarter ended June 30, 2012 from 5.18% for the same period in 2011 primarily due to lower market rates.



Interest income on investment
securities increased $16,000, or 94.1%, to $33,000 for the quarter ended June 30, 2012 from $17,000 for the quarter ended June
30, 2011. The average balance of investment securities increased $2.1 million to $4.8 million for the quarter ended June 30, 2012
from $2.7 million for the quarter ended June 30, 2011.The average yield on investment securities increased 32 basis points to 2.77%,
for the quarter ended June 30, 2012 from an average yield of 2.45% for the quarter ended June 30, 2011.



Interest Expense.Total
interest expense, comprised of interest expense on deposits and FHLB borrowings, decreased $34,000, or 8.8%, to $354,000 for the
quarter ended June 30, 2012 from $388,000 for the quarter ended June 30, 2011. The average cost of interest-bearing liabilities
decreased by 10 basis points to 1.20% for the quarter ended June 30, 2012 from 1.30% for the quarter ended June 30, 2011. The average
balance of interest-bearing liabilities decreased $940,000, or 0.8% to $118.4 million for the quarter ended June 30, 2012 from
$119.4 million for the quarter ended June 30, 2011.



Interest expense on deposits
decreased $15,000, or 4.2%, to $343,000 for the quarter ended June 30, 2012, from $358,000 for the quarter ended June 30, 2011.
The average cost of interest-bearing deposits decreased by 9 basis points to 1.22% for the quarter ended June 30, 2012 from 1.31%
for the quarter ended June 30, 2011, reflecting the trend of declining interest rates on deposits. The average balance of interest-bearing
deposits increased $3.4 million, or 3.1%, to $112.9 million for the quarter ended June 30, 2012 from $109.5 million for the quarter
ended June 30, 2011.



Interest expense on FHLB
borrowings decreased $19,000, or 63.3%, to $11,000 for the quarter ended June 30, 2012, from $30,000 for the quarter ended June
30, 2011. The average balance of FHLB borrowings decreased $4.4 million or 44.4%, to $5.5 million for the quarter ended June 30,
2012, from $9.9 million for the quarter ended June 30, 2011. The average cost of FHLB borrowings decreased by 41 basis points to
0.79% for the quarter ended June 30, 2012, from 1.20% for the quarter ended June 30, 2011.



Net Interest Income.Net interest income decreased $201,000, or 15.2%, to $1.12 million for the quarter ended June 30, 2012 from $1.32 million for
the same quarter in 2011. The interest rate spread was 3.45% for the quarter ended June 30, 2012 compared to 4.00% for the quarter
ended June 30, 2011, a decrease of 55 basis points. Interest margin for the quarter ended June 30, 2012 was 3.53% compared to 4.10%
for the quarter ended June 30, 2011, a decrease of 57 basis points. The decrease in interest rate spread and interest margin can
be attributed primarily to the decrease in the yield of interest-earning assets.





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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 $67,000 was recorded for the three months
ended June 30, 2012. This evaluation considered the evaluation of $7.5 million of non-performing 1-4 family residential
mortgages that were determined to have sufficient value at June 30, 2012. A provision of $1.6 million was recorded for the
three months ended June 30, 2011. The level of the allowance at June 30, 2012 is based on estimates, and the ultimate losses
may vary from the estimates. Non-performing loans totaled $8.2 million, or 5.7% of total assets as of June 30, 2012 compared
to $8.2 million or 5.7% of total assets as of December 31, 2011 and $10.0 million or 7.1% of total assets as of June 30,
2011. As of June 30, 2012 the non-performing loans included twenty-three 1-4 family residential mortgage loans totaling $7.5
million and two non-residential mortgage loans of $744,000. Of the $7.5 million
twenty-three non-performing 1-4 family residential loans, five  loans totaling $1.6 million are TDR that are under 90
days past due but not accruing. The allowance for loan losses totaled $1.1 million at June 30, 2012, and was comprised
of $1.1 million of general allowance.The allowance for loan losses totaled $2.2 million
at December 31, 2011, and was comprised of $1.3 million of specific allowance and $957,000 of general allowance. During
the three months ended June 30, 2012 and 2011, loans charged off totaled $149,000 and $256,000, respectively and recoveries
of previously charged-off loans totaled $85,000 and none, respectively.

Non-Interest
Income.Non-interest income decreased $33,000 to $63,000 for the quarter ended June 30, 2012 from $96,000 for the quarter ended
June 30, 2011 primarily due to prepayment penalty fee during the quarter ended June 30, 2011.

Non-Interest
Expenses. Non-interest expenses increased
$859,000, or 71.5%, to $2.06 million for the quarter ended June 30, 2012 from $1.20
million for the quarter ended June 30, 2011. The net increase of $859,000 in
non-interest expenses is primarily attributable to increases expenses related to the merger and the cost of achieving
compliance with the formal enforcement order of the OCC, partially offset by decreases to salaries and employee benefits and
Federal deposit insurance premium. Net occupancy expense of premises increased $69,000 to $193,000 for the quarter ended June
30, 2012, from $125,000 for the quarter ended June 30, 2011 primarily due to with new leasing terms for an existing branch
location. Professional fees increased $50,000 to $140,000 for the quarter ended June 30, 2012 from $90,000 for the quarter
ended June 30, 2011, primarily due to increased legal expenses related to the sale of the main office properties. Merger
related expense totaled $195,000 for the quarter ended June 30, 2012. Regulatory  compliance consulting expense related to
the enforcement order of the OCC totaled $520,000 for the quarter ended June 30, 2012.

Income Tax Expense.The provision for income taxes decreased $98,000 to a benefit of $451,000 for the quarter ended June
30, 2012 compared to a benefit of $548,000 for the same quarter in 2011. The decrease was attributable to decreased pre-tax loss.



Comparison of Operating Results for the Six Months Ended June
30, 2012 and June 30, 2011



General.Net income
increased by $4.9 million, to net income of $4.1 million for the six months ended June 30, 2012 from a net loss of $761,000 for
the same period in 2011. The increase for the current period was primarily due to a one-time pre-tax gain on sale of property of
$9.1 million and decreases of $37,000 in interest expense on deposits, $42,000 in interest expense on borrowings from FHLB and
$1.4 million in the provision for loan loss, partially offset by decreases of $443,000 in interest income and $38,000 in other
non-interest income, and increases of $1.3 million in non-interest expense, and $3.9 million in income tax expense.



Interest Income.Total
interest income decreased $443,000, or 12.7%, to $3.0 million for the six months ended June 30, 2012 from $3.5 million for the
six months ended June 30, 2011. The decrease in interest income can be primarily attributed to lower average balances and yields
for these assets. For the six months ended June 30, 2012, the average balance of $129.2 million in interest-earning assets earned
an average yield of 4.69% compared to an average yield of 5.28% on an average balance of $131.7 million for the six months ended
June 30, 2011. The decline in the average balance was primarily due to loan payoffs and slowing loan demand.





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Interest income on loans
decreased $452,000, or 15.6%, to $2.45 million for the six months ended June 30, 2012, from $2.90 million for the same period in
2011. The average balance of loans decreased $12.6 million to $91.0 million for the six months ended June 30, 2012 from $103.6
million for the six months ended June 30, 2011. The average yield on loans decreased by 22 basis points to 5.39% for the six months
ended June 30, 2012 from 5.61% for the six months ended June 30, 2011.



Interest income on mortgage-backed
securities decreased $30,000, or 5.6%, to $508,000 for the six months ended June 30, 2012 from $538,000 for the six months ended
June 30, 2011. The average balance of mortgage-backed securities increased $1.5 million, or 7.1%, to $22.5 million for the six
months ended June 30, 2012 from $21.0 million for the six months ended June 30, 2011. The average yield decreased by 60 basis points
to 4.52% for the six months ended June 30, 2012 from 5.12% for the same period in 2011.



Interest income on investment
securities increased $41,000, or 141.4%, to $70,000 for the six months ended June 30, 2012 from $29,000 for the six months ended
June 30, 2011. The average balance of investment securities increased $3.1 million to $4.8 million for the six months ended June
30, 2012 from $1.7 million for the six months ended June 30, 2011.The average yield on investment securities decreased 41 basis
points to 2.90%, for the six months ended June 30, 2012 from an average yield of 3.31% for the six months ended June 30, 2011 primarily
due to lower average yields on $4.3 million in corporate debt and lower dividend received on FHLB of NY stock.



Interest Expense.Total
interest expense, comprised of interest expense on deposits and FHLB borrowings, decreased $79,000, or 9.9%, to $719,000 for the
six months ended June 30, 2012 from $798,000 for the six months ended June 30, 2011. The average cost of interest-bearing liabilities
decreased by 11 basis points to 1.21% for the six months ended June 30, 2012 from 1.32% for the six months ended June 30, 2011.
The average balance of interest-bearing liabilities decreased $1.9 million, or 1.6% to $118.7 million for the six months ended
June 30, 2012 from $120.6 million for the six months ended June 30, 2011.



Interest expense on deposits
decreased $38,000, or 5.5%, to $693,000 for the six months ended June 30, 2012, from $731,000 for the six months ended June 30,
2011. The average cost of interest-bearing deposits decreased by 9 basis points to 1.23% for the six months ended June 30, 2012
from 1.32% for the six months ended June 30, 2011, reflecting the trend of declining interest rates on deposits. The average balance
of interest-bearing deposits increased $2.2 million, or 2.0%, to $112.5 million for the six months ended June 30, 2012 from $110.3
million for the six months ended June 30, 2011.



Interest expense on FHLB
borrowings decreased $42,000, or 61.8%, to $26,000 for the six months ended June 30, 2012, from $68,000 for the six months ended
June 30, 2011. The average balance of FHLB borrowings decreased $4.1 million or 39.8%, to $6.2 million for the six months ended
June 30, 2012, from $10.3 million for the six months ended June 30, 2011. The average cost of FHLB borrowings decreased by 47 basis
points to 0.84% for the six months ended June 30, 2012, from 1.31% for the six months ended June 30, 2011.



Net Interest Income.Net interest income decreased $363,000, or 13.6%, to $2.31 million for the six months ended June 30, 2012 from $2.68 million
for the same period in 2011. The interest rate spread was 3.48% for the six months ended June 30, 2012 compared to 3.95% for the
six months ended June 30, 2011, a decrease of 47 basis points. Interest margin for the six months ended June 30, 2012 was 3.58%
compared to 4.06% for the six months ended June 30, 2011, a decrease of 48 basis points. The decrease in interest rate spread and
interest margin can be attributed primarily to the decrease in the yield of interest-earning assets.



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 $265,000 was recorded for the six months ended June 30, 2012. A provision of $1.7 million was
recorded for the six months ended June 30, 2011. The level of the allowance at June 30, 2012 is based on estimates, and the ultimate
losses may vary from the estimates. Non-performing loans decreased to $8.2 million, or 5.7% of total assets as of June 30, 2012
from $8.2 million or 5.7% of total assets as of December 31, 2011 and $10.0 million or 7.1% of total assets as of June 30, 2011.
As of June 30, 2012 the non-





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performing loans included twenty three 1-4 family residential mortgage loans totaling $7.5 million
and two non-residential mortgage loans of $744,000. The allowance for loan losses totaled $1.1 million at June 30, 2012, and was
comprised of $1.1 million of general allowance. The allowance for loan losses totaled $2.2 million at December 31, 2011, and was
comprised of $1.3 million of specific allowance and $957,000 of general allowance. During the six months ended June 30, 2012 and
2011, loans charged off totaled $1.5 million and $260,000, respectively, and recoveries of previously charged off loans totaled
$85,000 and none, respectively.



Non-Interest Income.Non-interest income increased $9.03 million to $9.19 million for the six months ended June 30, 2012 from $159,000 for the six
months ended June 30, 2011 primarily due to the $9.07 million pre-tax gain on sale of property previously discussed in note 11
regarding property sale.



Non-Interest
Expenses. Non-interest expenses increased $1.3
million, or 52.0%, to $3.79 million for the six months ended June30, 2012 from $2.45
million for the six months ended June30, 2011. The net increase of $1.3 million in
non-interest expenses is primarily attributable to expenses related to the merger and the cost of achieving compliance with
the formal enforcement order of the OCC, increases to net occupancy expense of premises and professional fees. Net occupancy
expense of premises increased $119,000 to $376,000 for the six months ended June 30, 2012, from $258,000 for the six months
ended June 30, 2011 primarily due to the loss of rental income from an expired property lease that was not renewed due to the
sale of the property, along with new leasing terms for an existing branch location. Professional fees increased $73,000 to
$253,000 for the six months ended June 30, 2012 from $180,000 for the six months ended June 30, 2011, primarily due to
increased legal expenses related to sale of the main office properties. Merger related expenses were $586,000 in the 2012
period as compared to none in the 2011 period. Regulatory  compliance consulting expense related to
the enforcement order of the OCC totaled $555,000 for the six months
ended June 30, 2012.

Income Tax Expense.The provision for income taxes increased $3.9 million, to an expense of $3.3 million for the six months ended June
30, 2012 compared to a benefit of $560,000 for the same period in 2011. The increase was attributable to increased pre-tax income
primarily due to the property sale gain.



Liquidity and Capital Resources



The Association is required
to maintain levels of liquid assets under the Federal banking 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
11.53% during the month of June 2012. 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 securities. Net loans totaled $87.4 million and $95.2 million at June 30, 2012
and December 31, 2011, respectively. Securities held to maturity totaled $27.9 million and $25.7 million at June 30, 2012 and December
31, 2011, respectively. In addition to funding new loans and securities purchases through operating and financing activities, such
activities were funded by principal repayments on existing loans and 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 June 30, 2012, the Company had a borrowing
limit of $45.8 million from the FHLB, of which $5.4 million was advanced. At December 31, 2011 advances from the FHLB totaled $10.1
million.



The Association anticipates
that it will have sufficient funds available to meet its current loan commitments and obligations. At June 30, 2012, the Association
had outstanding commitments to originate or purchase loans of $550,000. Certificates of deposit scheduled to mature in one year
or less at June 30, 2012, totaled $61.2 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 Federal banking 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 tables
set forth the Association’s capital position at June 30, 2012 and December 31, 2011, as compared to the minimum regulatory
capital requirements:



|                           |  | Actual                 |        |  |  | Minimal Capital Requirements |       | Under Prompt Corrective Actions Provisions | 
|-------------------------- |  | ---------------------- | ------ |  |  | ---------------------------- | ----- | ------------------------------------------ | 
|                           |  | Amount                 |        |  |  | Ratio                        |       |                                            | 
|June 30, 2012:             |  | (Dollars in Thousands) |       
|Total Capital              |  | $                      | 21,560 |  |  |                              | 24.90 | %                                          | 
|(to risk-weighted assets)  |  |                        |        |  |  |                              |       |                                            | 
|                           |  |                        |        |  |  |                              |       |                                            | 
|Tier 1 Capital             |  |                        | 20,483 |  |  |                              | 23.66 | %                                          | 
|(to risk-weighted assets)  |  |                        |        |  |  |                              |       |                                            | 
|                           |  |                        |        |  |  |                              |       |                                            | 
|Core (Tier 1) Capital      |  |                        | 20,483 |  |  |                              | 14.46 | %                                          | 
|(to adjusted total assets) |  |                        |        |  |  |                              |       |                                            | 
|                           |  |                        |        |  |  |                              |       |                                            | 
|Tangible Capital           |  |                        | 20,483 |  |  |                              | 14.46 | %                                          | 
|(to adjusted total assets) |  |                        |        |  |  |                              |       |                                            | 





|                           |  | Actual                 |        |  |  | Minimal Capital Requirements |       | Under Prompt Corrective Actions Provisions | 
|-------------------------- |  | ---------------------- | ------ |  |  | ---------------------------- | ----- | ------------------------------------------ | 
|                           |  | Amount                 |        |  |  | Ratio                        |       |                                            | 
|December 31, 2011:         |  | (Dollars in Thousands) |       
|Total Capital              |  | $                      | 17,137 |  |  |                              | 19.88 | %                                          | 
|(to risk-weighted assets)  |  |                        |        |  |  |                              |       |                                            | 
|                           |  |                        |        |  |  |                              |       |                                            | 
|Tier 1 Capital             |  |                        | 16,179 |  |  |                              | 18.77 | %                                          | 
|(to risk-weighted assets)  |  |                        |        |  |  |                              |       |                                            | 
|                           |  |                        |        |  |  |                              |       |                                            | 
|Core (Tier 1) Capital      |  |                        | 16,263 |  |  |                              | 11.52 | %                                          | 
|(to adjusted total assets) |  |                        |        |  |  |                              |       |                                            | 
|                           |  |                        |        |  |  |                              |       |                                            | 
|Tangible Capital           |  |                        | 16,263 |  |  |                              | 11.52 | %                                          | 
|(to adjusted total assets) |  |                        |        |  |  |                              |       |                                            | 





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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.



Economic Value of Equity



The Association’s
interest rate sensitivity is monitored by management through the use of an independent third party Asset/Liability vendor which
estimates the change in the Association’s economic value of equity (“EVE”) over a range of interest rate scenarios.
EVE is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The EVE ratio, under
any interest rate scenario, is defined as the EVE in that scenario divided by the market value of assets in the same scenario.
The Asset/Liability model produces its analysis based upon data submitted by the Association’s quarter-end financial data.
The following table sets forth the Association’s EVE as of June 30, 2012, the most recent date the Association’s EVE
was calculated.



|                                        |  | Economic Value of Equity |        |  | Economic Value of Equity as a Percentage of Present Value of Assets |  
|--------------------------------------- |  | ------------------------ | ------ |  | ------------------------------------------------------------------- | -
|Change in Interest Rates (basis points) |  | Estimated EVE            |        |  | Amount of   Change                                                  |  
|                                        |  | (Dollars in Thousands)   |       
|+300                                    |  | $                        | 13,825 |  |                                                                     | $
|+200                                    |  |                          | 17,736 |  |                                                                     |  
|+100                                    |  |                          | 21,062 |  |                                                                     |  
|0                                       |  |                          | 22,946 |  |                                                                     |  
|-100                                    |  |                          | 24,273 |  |                                                                     |  



Certain shortcomings are
inherent in the methodology used in the above interest rate risk measurement. Modeling changes in economic value of equity 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 economic value of equity 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 economic value of equity 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 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, 2012 (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



As of June 30, 2012, 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, except as described below:



On March 26, 2012, Robert H. Elburn,
individually and on behalf of all others similarly situated (“Plaintiff'), filed a lawsuit against D. John Antoniello, Patricia
A. McKinley Scanlan, Alfred S. Pantaleone, Charles J. Vorbach, Michael J. Lincks and Jesus R. Adia (the “Individual Defendants”),
as well as Flatbush Federal Bancorp, Inc., Flatbush Federal Bancorp, MHC (collectively “Flatbush Federal”), Northfield
Bancorp, Inc. and Northfield Bancorp, MHC (collectively “Northfield”) in the Supreme Court of the State of New York
(the “Complaint”). Plaintiff purports to bring this action on his own behalf, as well as on behalf of all owners of
Flatbush Federal common stock, except the Individual Defendants (the “Class”).



The allegations in the Complaint
focus on the contemplated transaction in which Northfield will acquire all of the outstanding shares of Flatbush Federal (the “Transaction”).
The Complaint alleges that the Individual Defendants breached their fiduciary duties to Flatbush Federal's shareholders by failing
to take steps to maximize the value of Flatbush Federal by avoiding competitive bidding, failing to appropriately value Flatbush
Federal and by ignoring numerous alleged conflicts of interest of Flatbush Federal's Board of Directors. The Complaint alleges
that Flatbush Federal and Northfield aided and abetted the alleged breaches of fiduciary duty by the Individual Defendants.



As of June 28, 2012, all of the Defendants
have been served by the Plaintiffs.  Upon service and after consultation with counsel, the Company and the other Defendants
will review and respond to the Complaint.  Based on information about the Complaint, which is currently available to the Company,
it is the Company’s opinion that the Complaint is without merit.



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, 2012, 12,750 total shares have been repurchased by the Company under this repurchase program. During the
quarter ended June 30, 2012, 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.





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|Company Purchases of Common Stock    
|-------------------------------------
|Period                               
|April 1, 2012 through  April 30, 2012
|May 1, 2012 through May 31, 2012     
|June 1, 2012 through June 30, 2012   



ITEM 3. Defaults Upon Senior Securities



Not applicable.



ITEM 4. Mine Safety Disclosures



Not applicable.



ITEM 5. Other Information



None



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.                                                                                                                                                             
| | 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).



The following Exhibits are being furnished ** as part
of this report:



| | 101.INS |  | XBRL Instance Document. **                               
| | ------- |  | ---------------------------------------------------------
| | 101.SCH |  | XBRL Taxonomy Extension Schema Document.**               
| | 101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document.** 
| | 101.LAB |  | XBRL Taxonomy Extension Label Linkbase Document.**       
| | 101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document.**
| | 101.DEF |  | XBRL Taxonomy Extension Definitions Linkbase Document.** 





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*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.



**These interactive data files are being furnished as part of this
Quarterly Report, and, in accordance with Rule 402 of Regulation S-T, shall not be deemed filed for purposes of Section 11 or
12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject
to liability under those sections.

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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 14, 2012         
|                              
|                              
|                              
|                              
|Date: August 14, 2012         
|                              
|                              



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