UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549





FORM 10-Q





(Mark One)


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


For the quarterly period ended June 30, 2009





 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT


For the transition period from __________ to ___________





Commission File Number:  0-503777





FLATBUSH FEDERAL BANCORP, INC.(Exact name of registrant as specified in its charter)





FEDERAL
11-3700733(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)





2146 NOSTRAND AVENUE, BROOKLYN, NEW YORK  11210(Address of principal executive offices)(718) 859-6800(Registrant’s telephone number)(Former name, former address and former fiscal year, if changed since last report)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YesxNo ̈





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). YesoNo ̈





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





Large Accelerated filer o
Accelerated filer oNon-accelerated filer (Do not check if a smaller reporting company) o
Smaller reporting company x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ̈Nox





APPLICABLE ONLY TO CORPORATE ISSUERS


As of  August 14, 2009  the Registrant had outstanding 2,736,907 shares of common stock.










FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES





INDEXPageNumberPART I – FINANCIAL INFORMATIONItem 1:

Financial StatementsConsolidated Statements of Financial Condition at June 30, 2009 and December 31, 2008 (Unaudited)
1Consolidated Statements of Income for the Three months and Six months ended June 30, 2009 and 2008 (Unaudited)
2Consolidated Statements of Comprehensive Income for the Three months and Six months ended June 30, 2009 and 2008 (Unaudited)
3Consolidated Statements of Cash Flows for the Three months and Six months ended June 30, 2009 and 2008 (Unaudited)
4Notes to Consolidated Financial Statements (Unaudited)
5 – 14Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operation
15 – 21Item 3:

Quantitative and Qualitative Disclosure About Market Risk
22Item 4T:

Controls and Procedures
22PART II – OTHER INFORMATIONItem 1:

Legal Proceedings
23Item 1A:

Risk Factors
23Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds 23Item 3:

Defaults upon Senior Securities
23Item 4:

Submission of Matters to a Vote of Securities Holders 23-24Item 5:

Other Information
24Item 6:

Exhibits
24SIGNATURES
25


Index


PART I – FINANCIAL INFORMATION


ITEM 1 – FINANCIAL STATEMENTS


FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


(Unaudited)




June 30,


December 31,ASSETS

2009


2008Cash and amounts due from depository institutions

$
2,394,434


$
2,611,611Interest earning deposits in other banks


4,354,901



2,966,877Federal Funds sold


6,000,000



2,100,000Cash and cash equivalents


12,749,335



7,678,488Mortgage-backed securities held to maturity; fair value of $33,109,866  in (2009) and $33,975,054 in (2008)


31,949,753



32,926,053Loans receivable, net of allowance for loan losses of $209,421 in (2009) and $190,630 in (2008)


101,868,635



98,240,898Premises and equipment


2,530,865



2,616,747Federal Home Loan Bank of New York stock


1,359,500



1,521,600Accrued interest receivable


642,313



617,235Bank owned life insurance


4,139,735



4,060,415Other assets


2,085,562



1,989,544Total assets

$
157,325,698


$
149,650,980LIABILITIES AND STOCKHOLDERS’ EQUITYLiabilities:Deposits:Non-interest bearing

$
5,890,654


$
3,868,320Interest bearing


108,740,022



97,807,392Total Deposits


114,630,676



101,675,712Federal Home Loan Bank of New York advances


24,732,709



28,592,884Advance payments by borrowers for taxes and insurance


367,955



764,797Other liabilities


2,502,391



3,983,403Total liabilities


142,233,731



135,016,796Stockholders’ equity:Preferred stock $0.01 par value; 1,000,000 shares authorized; none issued and outstanding


---



---Common stock $0.01 par value;  authorized 9,000,000 shares; issued (2009 and 2008) 2,799,657 shares; outstanding (2009) 2,736,907 and (2008)  2,737,907 shares


27,998



27,998Paid-in capital


12,547,821



12,514,942Retained earnings


5,485,383



5,154,812Unearned employees’ stock ownership plan (ESOP) shares


(496,294
)


(513,731
)Treasury stock, 62,750, (2009) and 61,750, (2008) shares


(446,534
)


(442,984
)Accumulated other comprehensive loss


(2,026,407
)


(2,106,853
)Total stockholders’ equity


15,091,967



14,634,184Total liabilities and stockholders’ equity

$
157,325,698


$
149,650,980





See notes to consolidated financial statements.


1
 Index


FLATBUSHFEDERAL BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)




Three months ended


Six months endedJune 30,


June 30,2009


2008


2009


2008Interest IncomeLoans, including fees

$
1,576,591


$
1,543,956


$
3,122,789


$
3,116,457Mortgage-backed securities


452,353



327,459



906,907



670,701Investments


20,067



67,231



31,218



170,426Other interest earning assets


2,192



42,043



4,112



86,834Total interest income


2,051,203



1,980,689



4,065,026



4,044,418Interest ExpenseDeposits


607,410



644,417



1,206,661



1,358,647Borrowings


249,246



278,291



508,380



587,810Total interest expense


856,656



922,708



1,715,041



1,946,457Net Interest Income


1,194,547



1,057,981



2,349,985



2,097,961Provision for loan losses


21,864



66



21,864



66Net interest income after provision for loan losses


1,172,683



1,057,915



2,328,121



2,097,895Non-interest incomeFees and service charges


27,576



34,829



52,584



61,707BOLI income


39,766



40,018



79,320



79,214Other


555



3,645



1,294



4,110Total non-interest income


67,897



78,492



133,198



145,031Non-interest expensesSalaries and employee benefits


607,731



580,043



738,225



1,150,151Net occupancy expense of premises


112,006



120,333



227,564



246,870Equipment


123,151



123,784



250,928



248,264Directors’ compensation


47,154



54,872



90,608



97,445Professional fees


102,204



78,666



192,404



161,106Other insurance premiums


35,928



36,393



71,508



73,132Other


240,065



131,315



378,978



250,362Total non-interest expenses


1,268,239



1,125,406



1,950,215



2,227,330(Loss), income before income tax (benefit)


(27,659
)


11,001



511,104



15,596Income tax (benefit), expense


(34,363
)


1,945



180,533



4,411Net income

$
6,704


$
9,056


$
330,571


$
11,185Net income  per common share – Basic and diluted

$
0.003


$
0.003


$
0.12


$
0.004Weighted average number of shares outstanding – Basic and diluted


2,660,923



2,663,345



2,660,573



2,662,687





See notes to consolidated financial statements.


2
 Index


FLATBUSHFEDERAL BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(Unaudited)




Three months ended June 30,


Six months ended June 30,2009


2008


2009


2008Net Income

$
6,704


$
9,056


$
330,571


$
11,185Other comprehensive income,  net of income taxes:Benefit Plans


68,584



28,461



137,754



56,921Deferred income taxes


(28,361
)


(11,251
)


(57,308
)


(23,821
)40,223



17,210



80,446



33,100Comprehensive income

$
46,927


$
26,266


$
411,017


$
44,285





See notes to consolidated financial statements.


3
 Index


FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)




Six months ended June 30,2009


2008Cash flow from operating activities:Net income

$
330,571


$
11,185Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization of premises and equipment


92,138



91,050Net accretion of discounts, premiums and deferred loan fees and costs


(18,799
)


(52,513
)Provision for loan losses


21,864



66ESOP shares committed to be released


9,192



14,210MRP expense


20,292



20,292Stock option expense


20,832



20,832(Increase) decrease in accrued interest receivable


(25,078
)


109,157Increase in cash surrender value of BOLI


(79,320
)


(79,214
)(Increase) decrease in other assets


(153,912
)


207,604(Decrease) increase in other liabilities


(1,342,672
)


6,004Net cash (used in) provided by operating activities


(1,124,892
)


348,673Cash flow from investing activities:Proceeds from calls and maturities of investment securities held to maturity


-



4,500,000Principal repayments on mortgage-backed securities held to maturity


1,913,150



1,847,317Purchases of mortgage-backed securities held to maturity


(905,604
)


(1,136,263
)Purchases of loan participation interests


(1,426,344
)


(2,444,298
)Net (increase), decrease in loans receivable


(2,235,704
)


7,179,588Additions to premises and equipment


(6,256
)


(4,281
)Redemption of Federal Home Loan Bank of New York stock


162,100



223,500Net cash (used in) provided by investing activities


(2,498,658
)


10,165,563Cash flow from financing activities:Net increase (decrease)  in deposits


12,954,964



(1,165,973
)Repayment of advances from Federal Home Loan Bank of New York


(1,860,175
)


(4,819,571
)Net change to short-term borrowings


(2,000,000
)


-(Decrease) increase  in advance payments by borrowers for taxes and insurance


(396,842
)


44,320Purchase of treasury stock


(3,550
)


-Net cash provided by (used in) financing activities


8,694,397



(5,941,224
)Net increase in cash and cash equivalents


5,070,847



4,573,012Cash and cash equivalents – beginning


7,678,488



4,967,580Cash and cash equivalents – ending

$
12,749,335


$
9,540,592Supplemental disclosure of cash flow informationCash paid during the year for:Interest

$
1,717,427


$
1,955,366Income taxes

$
276,050


$
400





See notes to consolidated financial statements.


4
 Index


FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)





NOTE 1.  PRINCIPLES OF CONSOLIDATION





The consolidated financial statements include the accounts of Flatbush Federal Bancorp, Inc. (the “Company”),  Flatbush Federal Savings and Loan Association (the “Association”) and the Association’s subsidiary Flatbush REIT, Inc.  The Company’s business is conducted principally through
the Association.  All significant intercompany accounts and transactions have been eliminated in consolidation.





NOTE 2.  BASIS OF PRESENTATION





The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in accordance with U.S. generally accepted accounting principles.  However,
in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial statements have been included.  The results of operations for the three months and six months ended June 30, 2009, are not necessarily indicative of the results which may be expected for the entire year.





The unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2008, which are included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission.





Effective April 1, 2009, the Company adopted Statement of Financial Standards (“Statement”) No. 165, “Subsequent Events”.  Statement No. 165 establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued.  Statement
No. 165 sets forth the period after the balance sheet date during which management of the reporting entity, should evaluate events or transactions that may occur for the potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transaction occurring after the balance sheet date in its financial statements, and the disclosure that should be made about events or transactions that occur after the balance sheet date.  In preparing these
consolidated financial statements, the Company evaluated the events that occurred between July 1, 2009 through August 14, 2009, the date these consolidated financial statements were issued.





NOTE 3.  NET INCOME PER COMMON SHARE





Net income per common share was computed by dividing net income for the three months and six months ended June 30, 2009 and 2008 by the weighted average number of shares of common stock outstanding adjusted for unearned shares of the ESOP.  Stock options and restricted stock awards granted are considered common stock equivalents
and therefore considered in diluted net income per share calculations, if dilutive, using the treasury stock method. At and for the three months and six months ended June 30, 2009, there was no dilutive effect of stock options.





NOTE 4.  CRITICAL ACCOUNTING POLICIES





The Company considers accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies.  Material estimates that are particularly susceptible to significant changes relate to the
determination of the allowance for loan losses.  Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment.  Management reviews the level of the allowance on a quarterly basis, at a minimum, and establishes the provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. Management has


5
 Index


NOTE 4.  CRITICAL ACCOUNTING POLICIES (CONTINUED)





allocated the allowance among categories of loan types as well as classification status at each period-end date.  Assumptions and allocation percentages based on loan types and classification status have been consistently applied.  Management regularly evaluates various risk factors related to the loan portfolio, such
as type of loan, underlying collateral and payment status, and the corresponding allowance allocation percentages.





Although management believes that it uses the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors.  In addition, the regulatory authorities, as
an integral part of their examination process, periodically review the allowance for loan losses.  Such agencies may require management to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examinations.





NOTE 5.  MORTGAGE-BACKED SECURITIES HELD TO MATURITY




June 30, 2009Amortized
Cost


Gross
Unrealized
Gains


Gross
Unrealized
Losses


Estimated
Fair
ValueGovernment National Mortgage Association

$
2,900,773


$
81,693


$
10,292


$
2,972,174Federal National Mortgage Association


22,623,672



950,345



86



23,573,931Federal Home Loan Mortgage Corporation


6,425,308



157,895



19,442



6,563,761$
31,949,753


$
1,189,933


$
29,820


$
33,109,866

December 31, 2008Amortized
Cost


Gross
Unrealized
Gains


Gross
Unrealized
Losses


Estimated
Fair
ValueGovernment National Mortgage Association

$
3,202,284


$
89,276


$
16,043


$
3,275,517Federal National Mortgage Association


23,379,580



823,094



76



24,202,598Federal Home Loan Mortgage Corporation


6,344,189



166,039



13,289



6,496,939$
32,926,053


$
1,078,409


$
29,408


$
33,975,054




6
 Index


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





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




Less than 12 Months


12 Months or More


TotalFair
Value


Unrealized
Losses


Fair
Value


Unrealized
Losses


Fair
Value


Unrealized
LossesJune 30, 2009:Government National Mortgage Association

$
516,313


$
10,292


$
-


$
-


$
516,313


$
10,292Federal National Mortgage Association


18,061



86



-



-



18,061



86Federal Home Loan Mortgage Corporation


1,127,634



17,304



322,480



2,138



1,450,114



19,442$
1,662,008


$
27,682


$
322,480


$
2,138


$
1,984,488


$
29,820
   Less than 12 Months


12 Months or More


TotalFair
Value


Unrealized
Losses


Fair
Value


Unrealized
Losses


Fair
Value


Unrealized
LossesDecember 31, 2008:Government National Mortgage Association

$
836,673


$
16,043


$
-


$
-


$
836,673


$
16,043Federal National Mortgage Association


19,010



76



-



-



19,010



76Federal Home Loan Mortgage Corporation


659,094



11,175



325,457



2,114



984,551



13,289$
1,514,777


$
27,294


$
325,457


$
2,114


$
1,840,130


$
29,408





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


7
 Index


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





impairment of the security may be different than previously estimated, which could have a material effect on the Association’s consolidated financial statements.





At June 30, 2009, and December 31, 2008, management has concluded that the unrealized losses above (which, at June 30, 2009, related to one Government National Mortgage Association, one Federal National Mortgage Association and four Federal Home Loan Mortgage Corporation securities) are temporary in nature since they are primarily related
to market interest rates and not related to the underlying credit quality of the issuer of the securities.





The amortized cost and estimated fair value of mortgage-backed securities at June 30, 2009 and December 31, 2008 by contractual maturity, are shown below.  Actual maturities will differ from contractual maturities because borrowers generally have the right to prepay obligations.





June 30, 2009Amortized
Cost


Estimated
FairValueDue within one year

$
124,770


$
128,775Due after one year through five years


589,829



608,397Due after five years through ten years


224,665



232,163Due after ten years


31,010,489



32,140,531$
31,949,753


$
33,109,866





December 31, 2008Amortized
Cost


Estimated
Fair ValueDue within one year

$
389


$
397Due after one year through five years


897,450



901,659Due after five years through ten years


241,174



245,638Due after ten years


31,787,040



32,827,360$
32,926,053


$
33,975,054




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





Periodic pension expense was as follows:




Three months ended


Six months endedJune 30,


June 30,2009


2008


2009


2008Service Cost

$
-


$
24,151


$
18,391


$
48,302Interest Cost


78,218



82,145



155,771



164,290Expected return on assets


(86,463
)


(104,895
)


(154,589
)


(209,790
)Amortization of past service cost


-



(15,799
)


(15,799
)


(31,598
)Amortization of unrecognized net loss


62,634



36,497



141,653



72,994Curtailment Credit


-



-



(507,058
)


-Net periodic benefit cost (credit)

$
54,389


$
22,099


$
(361,631
)

$
44,198


8
 Index


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





Periodic pension expense for other plans was as follows:





Three months ended


Six months endedJune 30,


June 30,2009


2008


2009


2008Service Cost

$
4,344


$
4,191


$
8,688


$
8,382Interest Cost


17,711



20,813



35,422



41,626Amortization of unrecognized transition obligation


-



1,134



-



2,268Amortization of past service cost


5,278



5,278



10,556



10,556Amortization of unrecognized net loss


672



1,350



1,344



2,700Net periodic benefit cost

$
28,005


$
32,766


$
56,010


$
65,532







NOTE 7. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS





In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, Fair Value Measurements (“SFAS”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value
measurements.  SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements.





In December 2007, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157(“FSP 157-2”).  FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at
fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years.  FSP 157-2 was adopted for the Company’s March 31, 2009 consolidated financial statements.  The adoption of FSO 157-2 had no impact on the amounts reported in the consolidated financial statements.





SFAS 157 established a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The
three levels of the fair value hierarchy under SFAS 157 are as follows:





Level 1:  Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.





Level 2:  Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.





Level 3:  Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).





An asset’s 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.


9
 Index


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





The Company had no financial assets which are required to be measured on a recurring or non-recurring basis at June 30, 2009.





The following information should not be interpreted as an estimate of the fair value of the entire Association since a fair value calculation is only provided for a limited portion of the Association’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates,
comparisons between the Association’s disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair values of the Association’s financial instruments at June 30, 2009 and December 31, 2008:





Cash and Cash Equivalents (Carried at Cost)





The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.





Securities





The fair value of securities held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market
prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.  For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non transferability, and such adjustments are generally based on available market evidence (Level 3).  In the absence of such evidence, management’s best estimate is used.  Management’s
best estimate consists of both internal and external support on certain Level 3 investments.  Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair value of certain Level 3 investments if applicable.





Loan Receivable (Carried at Cost)





The fair value of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans.  Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.  Generally,
for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.





Federal Home Loan Bank of New York (FHLB) (Carried at Cost)





The carrying amount of restricted investment in FHLB stock approximates fair value, and considers the limited marketability of such securities.





Deposit Liabilities (Carried at Cost)





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


10
 Index


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





in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.





Short-Term Borrowings (Carried at Cost)





The carrying amounts of short-term borrowings approximate their fair values.





Long-Term Debt (Carried at Cost)





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.  These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability
were assumed by a third party.





Off-Balance Sheet Financial Instruments (Disclosed at Cost)





Fair value for the Association’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.





As of  June 30, 2009 and December 31, 2008, the fair value of commitments to extend credit were not considered to be material.





The estimated fair values of the Association’s financial instruments were as follows at June 30, 2009 and December 31, 2008.





June 30,


December 31,2009


2008Carrying
Amount


Estimated Fair Value


Carrying Amount


Estimated Fair Value(In Thousands)Financial assets:Cash and cash equivalents

$
12,749


$
12,749


$
7,678


$
7,678Mortgage-backed securities held to maturity


31,950



33,110



32,926



33,975FHLB stock


1,360



1,360



1,522



1,522Loans receivable


101,869



105,745



98,241



101,226Accrued interest receivable


642



642



617



617Financial liabilities:Deposits


114,631



116,649



101,676



102,271Advances from FHLB


24,733



25,408



28,593



29,389Off-Balance sheet instruments


-



-



-



-


11
 Index


NOTE 8.  RECENT ACCOUNTING PRONOUNCEMENTS





FSP FAS 157-4





In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly(FSP
FAS 157-4).  FASB Statement 157, Fair Value Measurements, defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP FAS 157-4 provides additional guidance on determining when the volume and level of activity for the asset or liability has
significantly decreased. The FSP also includes guidance on identifying circumstances when a transaction may not be considered orderly.





FSP FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease
in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with Statement 157.





This FSP clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances that may
indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.





This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity early adopting FSP FAS 157-4 must also early adopt FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments.  The adoption of FSP FAS 157-4 did not have an impact on its consolidated financial statements.





FSP FAS 115-2 and FAS 124-2





In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments(FSP FAS 115-2 and FAS 124-2).   FSP FAS 115-2 and FAS 124-2 clarifies the interaction of the factors that should be considered
when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security
for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.


12
 Index


NOTE 8.  RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)








In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation and amount of the
other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the
total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.





This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity early adopting FSP FAS 115-2 and FAS 124-2 must also early adopt FSP FAS 157-4,Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.  The adoption of FSP 115-2 and FAS 124-2 did not have an impact on its consolidated financial statements.





FSP FAS 107-1 and APB 28-1





In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments(FSP FAS 107-1 and APB 28-1).  FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures
about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods.





This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity early adopting FSP FAS 107-1 and APB 28-1 must also early adopt FSP FAS 157-4,Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderlyand FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments.The adoption of FSP 107-1 and APB 28-1 did not have an impact on its consolidated financial statements.





FASB Statement No. 166





In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140.This statement prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets;
the effect of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement in transferred financial assets.  Specifically, among other aspects, SFAS 166 amends Statement of Financial No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,or SFAS 140,by removing
the concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from applying FIN 46(R) to variable interest entities that are qualifying special-purpose entities.  It also modifies the financial-components approach used in SFAS 140.  SFAS 166 is


13
 Index


NOTE 8.  RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)








effective for fiscal years beginning after November 15, 2009.  We have not determined the effect that the adoption of SFAS 166 will have on our financial position or results of operations.





FASB Statement No. 167





In June 2009, the FASB issued SFAS No. 167,  Amendments to FASB Interpretation No. 46(R).This statement amends FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised December 2003) –
an interpretation of ARB No. 51,or FIN 46(R) to require an enterprise to determine whether it’s variable interest or interests give it a controlling financial interest in a variable interest entity.  The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could
potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.  SFAS 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity.  SFAS 167 is effective for fiscal years beginning after November 15, 2009.  We have not determined the effect that the adoption of SFAS 167 will have on our
financial position or results of operations.





FASB Statement No. 168





In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.  SFAS 168 replaces SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codificationas the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States.  SFAS 168 is effective for interim and annual periods ending after September 15, 2009.  We do not expect the adoption of this standard to
have an impact on our financial position or results of operations.





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, 2009 and December 31, 2008, consists of the common stock of FHLB.





Management evaluates the FHLB stock for impairment in accordance with 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, 2009.


14
 Index


ITEM2


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, 2009 and December 31, 2008





The Company’s total assets as of June 30, 2009 were $157.3 million compared to $149.7 million at December 31, 2008, an increase of $7.6 million, or 5.1%. Loans receivable increased $3.7 million, or 3.8%, to $101.9 million at June 30, 2009 from $98.2 million at December 31, 2008.  Mortgage-backed securities decreased $1.0
million,  or 3.0%, to $31.9 million at June 30, 2009 from $32.9 million as of December 31, 2008. Cash and cash equivalents increased $5.0 million, or 64.9%, to $12.7 million at June 30, 2009 from $7.7 million at December 31, 2008.





Total deposits increased $12.9 million, or 12.7%, to $114.6 million at June 30, 2009 from $101.7 million at  December 31, 2008.  As of June 30, 2009, borrowings from the Federal Home Loan Bank of New York (“FHLB”) were $24.7 million compared to $28.6 million as of December 31, 2008, a decrease of $3.9
million, or 13.6%.





Total stockholders’ equity increased $458,000 to $15.1 million at June 30, 2009 from $14.6 million at December 31, 2008.  The increase to stockholders’ equity reflects net income of $331,000, an amortization of $9,000 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 $81,000 of accumulated other comprehensive income. This was partially offset by $4,000 of repurchases of shares under the stock repurchase program.





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





Comparison of Operating Results for the Three Months Ended June 30, 2009 and June 30, 2008





General.Net income decreased by $2,000, to $7,000 for the quarter ended June 30, 2009 from $9,000 for the same quarter in 2008.  The decrease in net income for the quarter was primarily due to increases of $143,000 in non-interest expense and $22,000 in
provision for loan loss, and a decrease of $10,000 in non-interest income.  This was partially offset by an increase of $71,000 in interest income, and decreases of $37,000 in interest expense on deposits, $29,000 in interest expense on borrowings from the FHLB and $36,000 in income tax benefits.





Interest Income.Total interest income increased $71,000, or 3.5%, to $2.1 million for the quarter ended June 30, 2009 from $2.0 million for the quarter ended June 30, 2008. The increase in interest income can be primarily attributed to a higher interest earning asset base
partially offset by a lower average yield.  For the three months ended June 30, 2009, the average balance of $144.0 million in interest-earning assets earned an average yield of


15
 Index


5.70% compared to an average yield of 5.94% on an average balance of $133.5 million for the three months ended June 30, 2008.





Interest income on loans increased $33,000, or 2.1%, to $1.6 million for the quarter ended June 30, 2009 from $1.5 million for the same quarter in 2008.  The average balance of loans increased $4.0 million to $101.0 million for the quarter ended June 30, 2009 from $97.0 million for the quarter ended June 30, 2008.  The
average yield on loans decreased by 13 basis points to 6.24% for the quarter ended June 30 2009 from 6.37% for the quarter ended June 30, 2008.





Interest income on mortgage-backed securities increased $125,000, or 38.2%, to $452,000 for the quarter ended June 30, 2009 from $327,000 for the quarter ended June 30, 2008.  The average balance of mortgage-backed securities increased $7.8 million, or 31.8%, to $32.3 million for the quarter ended June 30, 2009 from $24.5 million
for the quarter ended June 30 , 2008.  The average yield increased by 25 basis points to 5.60% for the quarter ended June 30, 2009 from 5.35% for the same period in 2008.





Interest income on investment securities decreased $47,000, or 70.1%, to $20,000 for the quarter ended June 30, 2009 from $67,000 for the quarter ended June 30, 2008. The average balance of investment securities decreased by $1.9 million, or 57.6%, to $1.4 million for the quarter ended June 30, 2009 from $3.3 million for the quarter ended
June 30, 2008.  The average yield on investment securities decreased 222 basis points to 5.88%, for the quarter ended June 30, 2009 from an average yield of 8.10% for the quarter ended June 30, 2008, primarily due to a lower dividend received on FHLB stock.





Interest income on other interest-earning assets, primarily interest-earning deposits and federal funds sold, decreased $40,000, or 95.2%, to $2,000 for the quarter ended June 30, 2009 from $42,000 for the quarter ended June 30, 2008.   The average yield on other interest earning assets decreased by 185 basis points to 0.09%
for the quarter ended June 30, 2009 from 1.94% for the quarter ended June 30, 2008 primarily due to the decline in interest rates on interest-earning deposits and federal funds sold. As a partial offset, the average balance of other interest earning assets increased $601,000, or 6.9%, to $9.3 million for the quarter ended June 30, 2009 from $8.7 million for the quarter ended June 30, 2008.





Interest Expense.Total interest expense, comprised of interest expense on deposits and interest expense on FHLB borrowings, decreased $66,000, or 7.2%, to $857,000 for the quarter ended June 30, 2009 from $923,000 for the quarter ended June 30, 2008. The average
cost of interest-bearing liabilities decreased by 44 basis points to 2.59% for the quarter ended June 30, 2009 from 3.03% for the quarter ended June 30, 2008.  The average balance of interest-bearing liabilities increased $10.5 million, or 8.6% to $132.4 million for the quarter ended June 30, 2009 from $121.9 million for the quarter ended June 30, 2008.





Interest expense on deposits decreased $37,000, or 5.7%, to $607,000 for the quarter ended June 30, 2009 from $644,000 for the quarter ended June 30, 2008.  The average cost of interest-bearing deposits decreased by 38 basis points to 2.26% for the quarter ended June 30, 2009 from 2.64% for the quarter ended June 30, 2008, reflecting
the declining trend of interest rates on deposits.  As a partial offset, the average balance of interest-bearing deposits increased $9.8 million, or 10.0%, to $107.6 million for the quarter ended June 30, 2009 from $97.8 million for the quarter ended June 30, 2008.





Interest expense on FHLB borrowings decreased $29,000, or 10.4%, to $249,000 for the quarter ended June 30, 2009, from $278,000 for the quarter ended June 30, 2008.  The average balance of FHLB borrowings decreased $773,000 or 3.2%, to $24.9 million for the quarter ended June 30, 2009, from $24.1 million for the quarter ended
June 30, 2008. The average cost of FHLB borrowings decreased by 61 basis points to 4.01% for the quarter ended June 30 2009, from 4.62% for the quarter ended June 30, 2008.





Net Interest Income.Net interest income increased $137,000, or 12.9%, to $1.2 million for the quarter ended June 30, 2009 from $1.1 million for the same quarter in 2008.  The interest rate spread was 3.11% for the quarter ended June 30, 2009 compared to 2.91%
for the quarter ended June 30, 2008, an increase of 20 basis points.  Interest margin for the quarter ended June 30, 2009 was 3.32% compared to 3.17% for the quarter ended June 30, 2008, an increase of 15 basis points.  The increase in interest rate spread and interest margin can be attributed


16
 Index


primarily to the decrease in the average yield of interest-bearing deposits and FHLB borrowings, as well as the increase in the average balance of loans receivable and mortgage-backed securities.





Provision for Loan Losses.The Company establishes the provision for loan losses, which is charged to operations, at a level deemed appropriate to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements.  In
evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change.  Based
on the evaluation of these factors, a provision of $22,000 was recorded for the three months ended June 30, 2009. A provision of $66  for loan losses was recorded for the three months ended June 30, 2008.   The level of the allowance at June 30, 2009 is based on estimates, and the ultimate losses may vary from the estimates.  Non-performing loans increased to $720,000, or 0.46% of total assets as of June 30, 2009 from $494,000 or 0.35% of total assets as of June 30, 2008. As
of June 30, 2009, the non-performing loans total included four 1-4 residential loans totaling $720,000 which, at quarter-end, did not warrant a specific provision for loan loss.





Non-Interest Income.Non-interest income decreased $10,000, or 12.8%, to $68,000 for the quarter ended June 30, 2009 from $78,000 for the quarter ended June 30, 2008.  This was primarily attributable to a  decrease of $9,000 in fees and service charges.





Non-Interest Expenses.  Non-interest expenses increased $143,000, or 12.7%, to $1.3 million for the quarter ended June 30, 2009 from $1.1 million for the quarter ended June 30, 2008.  The net increase of $143,000 in non-interest expenses is primarily attributable
to increases to salaries and employee benefits, professional fees and other non-interest expenses, partially offset by decreases to net occupancy expense of premises and directors’ compensation.   Other non-interest expenses increased $109,000 to $240,000 for the three months ended June 30, 2009 from $131,000 for the three months ended June 30, 2008 primarily due to an increase of $115,000 in premiums and assessments for Federal Deposit Insurance.




Income Tax Expense.  The provision for income taxes decreased $36,000, to a net income tax benefit of $34,000 for the quarter endedJune 30, 2009 compared to an expense of $2,000 for the same quarter in 2008.





Comparison of Operating Results for the Six Months Ended June 30, 2009 and June 30, 2008





General.Net income increased by $319,000, to $331,000 for the six months ended June 30, 2009 from $11,000 for the same six months in 2008.  The increase in net income for the six months was primarily due to  increases of $21,000 in total interest
income, and decreases of $152,000 in  interest expense on deposits, $79,000 in interest expense on FHLB borrowings and $277,000 in non-interest expenses, These were partially offset by a decrease of $12,000 in non-interest income, and increases of $22,000 in provision for loan losses and $176,000 in  income taxes.





Interest Income. Interest income increased $21,000 or 0.52%, to $4.1 million for the six months ended June 30, 2009 from $4.0 million for the six months ended June 30, 2008. The increase in interest income can be primarily attributed to a lower average yield, partially
offset by a higher interest earning asset base.  For the six months ended June 30, 2009 the average balance of $142.3 million in interest-earning assets earned an average yield of 5.71% compared to an average yield of 5.99% on an average balance of $134.9 million for the six months ended June 30, 2008.





Interest income on loans increased $7,000, or 0.22%, to $3.1 million for the six months ended June 30, 2009 from $3.1 million for the same six months in 2008.  The average balance of loans increased $1.7 million to $99.7 million for the six months ended June 30, 2009 from $98.0 million for the six months ended June 30, 2008.  The
average yield on loans decreased by 9 basis points to 6.27% for the six months ended June 30, 2009 from 6.36% for the six months ended June 30, 2008.


17
 Index


Interest income on mortgage-backed securities increased $236,000, or 35.2%, to $907,000 for the six months ended June 30, 2009 from $671,000 for the six months ended June 30, 2008.  The average balance of mortgage-backed securities increased $8.1 million, or 32.8% to $32.8 million for the six months ended June 30, 2009 from $24.7
million for the six months ended June 30, 2008.  The average yield increased by 11 basis points to 5.53% for the six months ended June 30, 2009 from 5.42% for the same period in 2008.





Interest income on investment securities decreased $139,000, or 81.8%, to $31,000 for the six months ended June 30, 2009 from $170,000 for the six months ended June 30, 2008.  The average balance of investment securities decreased by $3.2 million to $1.4 million for the six months ended June 30, 2009 from $4.6 million for the
six months ended June 30, 2008.  The average yield on investment securities decreased 295 basis points to 4.53%,  for the six months ended June 30, 2009 from an average yield of 7.48% for the six months ended June 30, 2008, primarily due to a higher dividend received on FHLB stock during the six month period ending June 30, 2008.





Interest income on other interest-earning assets, primarily interest-earning deposits and federal funds sold, decreased $83,000, or 95.4%, to $4,000 for the six months ended June 30, 2009 from $87,000 for the six months ended June 30, 2008. The average yield on other interest earning assets decreased by 216 basis points to 0.10% for the
six months ended June 30, 2009 from 2.26% for the six months ended June 30, 2008. As a partial offset, the average balance of other interest earning assets increased $718,000 to $8.4 million for the six months ended June 30, 2009 from $7.7 million for the six months ended June 30, 2008.





Interest Expense.Total interest expense, comprised of interest expense on deposits and interest expense on FHLB borrowings, decreased $231,000, or 11.9%, to $1.7 million for the six months ended June 30, 2009 from $1.9 million for the six months ended June 30, 2008.
The average cost of interest-bearing liabilities decreased by 52 basis points to 2.63% for the six months ended June 30, 2009 from 3.15% for the six months ended June 30, 2008.  As a partial offset, the average balance of interest-bearing liabilities increased $7.0 million, or 5.7% to $130.6 million for the six months ended June 30, 2009 from $123.6 million for the six months ended June 30, 2008.





Interest expense on deposits decreased $152,000, or 11.2%, to $1.2 million for the six months ended June 30, 2009 from $1.4 million for the six months ended June 30, 2008.  The average cost of interest-bearing deposits decreased by 48 basis points to 2.29% for the six months ended June 30, 2009 from 2.77% for the six months ended
June 30, 2008. As a partial offset, the average balance of interest-bearing deposits increased $7.4 million, or 7.6% to $105.4 million for the six months ended June 30, 2009 from $98.0 million for the six months ended June 30, 2008.





Interest expense on FHLB borrowings decreased $79,000, or 13.4%, to $509,000 for the six months ended June 30, 2009, from $588,000 for the six months ended June 30, 2008.  The average balance of FHLB borrowings decreased $317,000 to $25.3 million for the six months ended June 30, 2009, from $25.6 million for the six months ended
June 30, 2008. The average cost of FHLB borrowings decreased by 57 basis points to 4.03% for the six months ended June 30, 2009, from 4.60% for the six months ended June 30, 2008.





Net Interest Income.Net interest income increased $252,000, or 12.0%, to $2.3 million for the six months ended June 30, 2009 from $2.1 million for the same six months in 2008.  The interest rate spread was 3.09% for the six months ended June 30, 2009 compared
to 2.84% for the six months ended June 30, 2008, an increase of 25 basis points.  Interest margin for the six months ended June 30, 2009 was 3.30% compared to 3.11% for the six months ended June 30, 2008, an increase of 19 basis points.  The increase in interest rate spread and interest margin can be attributed primarily to the increase in the average balance of interest-earning assets and the decrease in the average cost of interest-bearing liabilities.





Provision for Loan Losses.The Company establishes provisions for loan losses, which are charged to operations, at a level deemed appropriate to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements.  In
evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change.  Based
on the evaluation of these factors, a provision of $22,000 was recorded for the six months ended June 30, 2009.  For the six months ended June 30, 2008, a provision of $66 was recorded.  The provision for loan losses was established to


18
 Index


address probable and estimable losses in the loan portfolio.  The level of the allowance at June 30, 2009 is based on estimates, and the ultimate losses may vary from the estimates.  Non-performing loans increased to $720,000, or 0.46% of total assets as of June 30, 2009, from $494,000 or 0.35% of total assets as of
June 30, 2008. As of June 30, 2009, the non-performing loan total included four 1-4 residential loans of $720,000 which, at this time, did not warrant a specific provision for loan loss.





Non-Interest Income.Non-interest income decreased $12,000, to $133,000 for the six months ended June 30, 2009 from $145,000 for the six months ended June 30, 2008.  This was primarily attributable to a decrease in fees and service charges of $9,000.





Non-Interest Expenses.  Non-interest expenses decreased $277,000, or 12.4%, to $2.0 million for the six months ended June 30, 2009 from $2.2 million for the six months ended June 30, 2008.  The net decrease of $277,000 in non-interest expense is primarily attributable
to decreases to salaries and employee benefits, directors’ compensation, net occupancy expense of premises and other insurance premiums, which were partially offset by increases in equipment, professional fees and other non-interest expenses. Salaries and employee benefits decreased $412,000 to $738,000 for the six months ended June 30, 2009, from $1.2 million for the six months ended June 30, 2008, primarily due to a pre-tax curtailment credit of $416,000, net of actuarial expense resulting from the freezing
of the defined benefit plan.   Professional fees increased $31,000 to $192,000 for the six months ended June 30, 2009, from $161,000 for the six months ended June 30, 2008, primarily due to the additional fees for the compliance with the Sarbanes-Oxley Act, Section 404. Other non-interest expenses increased $129,000 to $379,000 for the six months ended June 30, 2009 from $250,000 for the six months ended June 30, 2008 primarily due to an increase of $137,000 in premiums and assessments for Federal
Deposit Insurance.





Income Tax Expense.  The provision for income taxes increased $177,000, to $181,000 for the six months ended June 30, 2009 from $4,000 for the same six months in 2008, primarily due to an increase in income before income taxes of $495,000 during 2009.




Liquidity and Capital Resources





The Association is required to maintain levels of liquid assets under the Office of Thrift Supervision (the “OTS”) regulations sufficient to ensure the Association’s safe and sound operation.  The Association’s liquidity averaged 11.16% during the month of June 2009.  The Association adjusts
its liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes from escrow accounts on mortgage loans, repayment of borrowings, when applicable, and loan funding commitments. The Association also adjusts its liquidity level as appropriate to meet its asset/liability objectives.





The Association’s primary sources of funds are deposits, borrowings, amortization and prepayments of loans and mortgage-backed securities, maturities of investment securities and funds provided from operations.  While scheduled loan and mortgage-backed securities amortization and maturing investment securities are a relatively
predictable source of funds, deposit flows and loan and mortgage-backed securities prepayments are greatly influenced by market interest rates, economic conditions and competition.





The Association’s liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities.





The primary sources of investing activity are lending and the purchase of investment securities and mortgage-backed securities.  Net loans totaled $101.9 million and $98.2 million at June 30, 2009 and December 31, 2008, respectively.  Mortgage-backed securities held to maturity totaled $31.9 million and $32.9 million
at June 30, 2009 and December 31, 2008, respectively.  In addition to funding new loans and mortgage-backed and investment securities purchases through operating and financing activities, such activities were funded by principal repayments on existing loans, mortgage-backed securities and maturities of investment securities.


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 Index


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, 2009, the Company had a borrowing limit of $71.5 million from the FHLB, of which $24.7 million was advanced. At December 31, 2008, advances from the FHLB totaled $28.6 million.





The Association anticipates that it will have sufficient funds available to meet its current loan commitments and obligations.  At June 30, 2009, the Association had outstanding commitments to originate or purchase loans of $13.1 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2009, totaled
$61.5 million.  Management believes that, based upon its experience and the Association’s deposit flow history, a significant portion of such deposits will remain with the Association.





Under OTS regulations, three separate measurements of capital adequacy (the “Capital Rule”) are required.  The Capital Rule requires each savings institution to maintain tangible capital equal to at least 1.5% and core capital equal to 4.0% of its adjusted total assets.  The Capital rule further requires
each savings institution to maintain total capital equal to at least 8.0% of its risk-weighted assets.





The following table sets forth the Association’s capital position at June 30, 2009, as compared to the minimum regulatory capital requirements:





Actual


Minimal Capital Requirements


Under Prompt Corrective Actions ProvisionsAmount


Ratio


Amount


Ratio


Amount


Ratio(Dollars in Thousands)Total Capital (to risk-weighted assets)

$
16,316



19.56
%

$
>6,675



>8.00
%

$
>8,343


>10.00%Tier 1 Capital (to risk-weighted assets)


16,115



19.32
%


>-



>-



5,006



>6.00
%>Core (Tier 1) Capital (to adjusted total assets)


16,199



10.39
%


>6,234



>4.00
%


>7,793



>5.00
%Tangible Capital (to adjusted total assets)


16,199



10.39
%


>2,338



>1.50
%


>-



>-





Management of Interest Rate Risk





The ability to maximize net interest income largely depends upon maintaining a positive interest rate spread during periods of fluctuating market interest rates.  Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature
within a given period of time.  The difference, or the interest rate repricing “gap,” provides an indication of the extent to which an institution’s interest rate spread will be affected by changes in interest rates.  A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive
assets.  Generally, during a period of rising interest rates, a negative gap within shorter maturities would adversely affect net interest income, while a positive gap within shorter maturities would result in an increase in net interest income, and during a period of falling interest rates, a negative gap within shorter maturities would result in an increase in net interest income while a positive gap within shorter maturities would result in a decrease in net interest income.





The Association’s current investment strategy is to maintain an overall securities portfolio that provides a source of liquidity and that contributes to the Association’s overall profitability and asset mix within given quality and maturity considerations.


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 Index


Net Portfolio Value





The Association’s interest rate sensitivity is monitored by management through the use of the OTS model which estimates the change in the Association’s net portfolio value (“NPV”) over a range of interest rate scenarios.  NPV is the present value of expected cash flows from assets, liabilities, and off-balance
sheet contracts.  The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The OTS produces its analysis based upon data submitted on the Association’s quarterly Thrift Financial Reports. The following table sets forth the Association’s NPV as of June 30, 2009, the most recent date the Association’s NPV was calculated by the OTS.





Net Portfolio Value


Net Portfolio Value as a Percentage of Present Value of AssetsChange inInterest Rates
(basis points)

Estimated
NPV


Amount of
Change


Percent of
Change


NPV Ratio


Change in Basis
Points(Dollars in Thousands)+300

$
12,608


$
(6,893
)


(35
%)


8.09
%


-371+200


15,398



(4,103
)


(21
%)


9.65
%


-214+100


17,915



(1,586
)


(8
%)


11.00
%


- 80+ 50


18,846



(655
)


( 3
%)


11.48
%


- 320


19,501



—



—



11.80
%


—- 50


19,896



395



2
%


11.98
%


18-100


19,968



467



2
%


11.99
%


19





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


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 Index


ITEM 3.Quantitative and Qualitative Disclosure About Market Risk





As a smaller reporting company, the Company is not required to provide the information required of this item.





ITEM 4T. FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES CONTROLS AND PROCEDURES




(a)
Evaluation of disclosure controls and procedures.





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





(b)
Changes in Internal Controls over Financial Reporting.





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





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


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 Index


PART II – OTHER INFORMATION








ITEM1. Legal Proceedings





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





ITEM 1A.Risk Factors





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





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





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





Company Purchases of Common StockPeriod

Total number of shares purchased


Average price paid per share


Total number of shares purchased as part of publicly announced plans or programs


Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programsApril 1, 2009 through April 30, 2009


-


$
-



62,750



37,250May 1, 2009 through May 31, 2009


-



-



62,750



37,250June 1, 2009 through June 30, 2009


-



-



62,750



37,250





ITEM 3. Defaults Upon Senior Securities





Not applicable.





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





At the Company’s Annual Meeting held on April 30, 2009, shareholders of the Company considered and voted on the following:





1. The election of directors:

FOR


%


WITHOLD


%Jesus R. Adia

2,396,427


96.5


85,642


3.5D. John Antoniello

2,382,383


96.0


99,686


4.0


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 Index


Directors Adia and Antoniello were elected to three year terms.  The following directors terms of office continued after the Annual meeting: Alfred S. Pantaleone,  Michael J. Lincks, Charles J. Vorbach and Patricia A. McKinley.





2.
The ratification of the appointment of Beard Miller Company LLP as independent auditors of the Company for the year ending December 31, 2009.





FOR

%


AGAINST


%


ABSTAIN


%2,468,325

99.9


3,654


0.1


10,090


0.4





ITEM5. Other Information





None





ITEM6. Exhibits





The following Exhibits are filed as part of this report.





3.1

Federal Stock Charter of Flatbush Federal Bancorp, Inc.*3.2

Bylaws of Flatbush Federal Bancorp, Inc.*4.0

Form of common stock certificate of Flatbush Federal Bancorp, Inc. *11.0

Computation of earnings per share (filed herewith)31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 (filed herewith).32.1

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).








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


24
 Index


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, 2009
By:
/s/ Jesus R. AdiaJesus R. AdiaPresident andChief Executive OfficerDate: August 14, 2009
By:
/s/ John S. LotardoJohn S. LotardoExecutive Vice President and ChiefFinancial Officer




25