UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549





FORM 10-Q





(Mark One)


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


For the quarterly period ended September 30, 2010





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


For the transition period from ______ to _______





Commission File Number:  0-503777





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





FEDERAL

11-3700733(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)





2146 NOSTRAND AVENUE, BROOKLYN, NEW YORK  11210(Address of principal executive offices)





(718) 859-6800(Registrant’s telephone number)





(Former name, former address and former fiscal year, if changed since last report)





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





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). YesoNoo





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).  YesoNox




APPLICABLE ONLY TO CORPORATE ISSUERS


As of November 12, 2010 the Registrant had outstanding 2,736,907 shares of common stock.












FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES





INDEX




PageNumberPART I – FINANCIAL INFORMATIONItem 1:
Financial StatementsConsolidated Statements of Financial Conditionat September 30, 2010 and December 31, 2009 (Unaudited)

1Consolidated Statements of Income for the Three monthsand Nine months ended September 30, 2010 and 2009 (Unaudited)

2Consolidated Statements of Comprehensive Income for theThree and Nine months ended September 30, 2010 and 2009 (Unaudited)

3Consolidated Statements of Cash Flows for the Nine monthsended September 30, 2010 and 2009 (Unaudited)

4Notes to Consolidated Financial Statements (Unaudited)

5 – 15Item 2:
Management’s Discussion and Analysis of Financial Condition andResults of Operation

16 – 22Item 3:
Quantitative and Qualitative Disclosure About Market Risk

23Item 4:
Controls and Procedures

23PART II – OTHER INFORMATIONItem 1:
Legal Proceedings

24Item 1A:
Risk Factors

24Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds

24Item 3:
Defaults upon Senior Securities

24Item 4:
(Removed and Reserved)

24Item 5:
Other Information

24Item 6:
Exhibits

25SIGNATURES

26




Index


PART I – FINANCIAL INFORMATION


ITEM 1 – FINANCIAL STATEMENTS


FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


(Unaudited)





September 30,


December 31,ASSETS

2010


2009Cash and amounts due from depository institutions

$
1,887,304


$
1,846,911Interest earning deposits in other banks


1,001,309



1,861,116Federal funds sold


4,800,000



1,750,000Cash and cash equivalents


7,688,613



5,458,027Mortgage-backed securities held to maturity; fair value of$23,173,268 (2010) and $29,566,571 (2009)


21,774,217



28,340,092Loans receivable, net of allowance for loan losses of $1,216,285(2010) and $828,534 (2009)


109,874,361



110,987,520Premises and equipment


2,318,392



2,440,313Federal Home Loan Bank of New York stock


850,500



1,274,900Accrued interest receivable


603,273



657,552Bank owned life insurance


4,333,396



4,219,982Other assets


2,353,346



2,601,027Total assets

$
149,796,098


$
155,979,413LIABILITIES AND STOCKHOLDERS’ EQUITYLiabilities:Deposits:Non-interest bearing

$
5,192,031


$
5,862,496Interest bearing


113,425,739



109,305,224Total deposits


118,617,770



115,167,720Federal Home Loan Bank of New York advances


12,989,030



22,851,481Advance payments by borrowers for taxes and insurance


525,177



292,581Other liabilities


1,706,325



2,434,678Total liabilities


133,838,302



140,746,460Stockholders’ equity:Preferred stock $0.01 par value; 1,000,000 shares authorized;none issued and outstanding


---



---Common stock $0.01 par value;  authorized 9,000,000 shares;issued 2,799,657 shares; outstanding 2,736,907 shares


27,998



27,998Paid-in capital


12,634,468



12,581,519Retained earnings


5,885,579



5,349,941Unearned employees’ stock ownership plan (ESOP) shares


(452,701
)


(478,857
)Treasury stock, 62,750 shares


(446,534
)


(446,534
)Accumulated other comprehensive loss


(1,691,014
)


(1,801,114
)Total stockholders’ equity


15,957,796



15,232,953Total liabilities and stockholders’ equity

$
149,796,098


$
155,979,413





See notes to consolidated financial statements.


1
 Index


FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)





Three months ended


Nine months endedSeptember 30,


September 30,2010


2009


2010


2009Interest IncomeLoans, including fees

$
1,650,044


$
1,644,169


$
4,946,815


$
4,766,958Mortgage-backed securities


324,023



466,835



1,084,572



1,373,742Federal Home Loan Bank of New York stock


12,362



19,068



43,745



50,286Other interest earning assets


1,627



2,001



4,031



6,112Total interest income


1,988,056



2,132,073



6,079,163



6,197,098Interest ExpenseDeposits


423,167



599,518



1,326,601



1,806,179Borrowings


75,841



240,597



260,135



748,977Total interest expense


499,008



840,115



1,586,736



2,555,156Net Interest Income


1,489,048



1,291,958



4,492,427



3,641,942Provision for loan losses


100,000



51,910



388,578



73,774Net interest income after provision for loan losses


1,389,048



1,240,048



4,103,849



3,568,168Non-interest incomeFees and service charges


25,105



25,646



77,397



78,231BOLI income


38,240



40,365



113,414



119,685Other


763



750



2,020



2,045Total non-interest income


64,108



66,761



192,831



199,961Non-interest expensesSalaries and employee benefits


606,816



599,494



1,810,339



1,337,719Net occupancy expense of premises


132,664



118,823



369,398



346,387Equipment


113,470



122,145



359,329



373,072Directors’ compensation


41,991



46,154



139,974



136,763Professional fees


75,000



89,000



269,150



281,404Other insurance premiums


32,912



36,002



103,798



107,510Federal deposit insurance premiums


48,681



41,680



164,170



185,057Other


120,130



122,624



361,295



358,225Total non-interest expenses


1,171,664



1,175,922



3,577,453



3,126,137Income before income tax


281,492



130,887



719,227



641,992Income tax expense


31,732



46,431



183,589



226,964Net income

$
249,760


$
84,456


$
535,638


$
415,027Net income per common share – Basic and diluted

$
0.09


$
0.03


$
0.20


$
0.16Weighted average number of shares outstanding – Basic and

diluted


2,667,504



2,662,236



2,666,200



2,661,133





See notes to consolidated financial statements.


2
 Index


FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(Unaudited)





Three months ended

September 30,


Nine months ended

September 30,2010


2009


2010


2009Net Income

$
249,760


$
84,456


$
535,638


$
415,027Other comprehensive income,net of income taxes:Benefit plans


63,112



68,584



189,336



206,338Deferred income taxes


(26,412
)


(28,362
)


(79,236
)


(85,670
)36,700



40,222



110,100



120,668Comprehensive income

$
286,460


$
124,678


$
645,738


$
535,695





See notes to consolidated financial statements.


3
 Index


FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)




Nine months ended September 30,2010


2009Cash flow from operating activities:Net income

$
535,638


$
415,027Adjustments to reconcile net income to net cashprovided by (used in) operating activities:Depreciation and amortization of premises and equipment


131,803



138,080Net accretion of discounts, premiums anddeferred loan fees and costs


(125,428
)


(66,321
)Provision for loan losses


388,578



73,774ESOP shares committed to be released


17,608



14,184MRP expense


30,438



30,438Stock option expense


31,059



31,248Decrease (increase) in accrued interest receivable


54,279



(52,285
)Increase in cash surrender value of BOLI


(113,414
)


(119,685
)Decrease (increase) in other assets


168,455



(160,690
)Decrease in other liabilities


(539,018
)


(964,557
)Net cash provided by (used in) operating activities


579,988



(660,787
)Cash flow from investing activities:Principal repayments on mortgage-backed securities held to maturity


6,663,434



4,568,797Purchases of mortgage-backed securities held to maturity


-



(905,604
)Purchases of loan participation interests


(1,589,496
)


(2,016,503
)Net change in loans receivable


2,341,947



(9,458,837
)Additions to premises and equipment


(9,882
)


(6,256
)Redemption of Federal Home Loan Bank of New York stock


424,400



271,800Net cash provided by (used in) investing activities


7,830,403



(7,546,603
)Cash flow from financing activities:Net increase in deposits


3,450,050



13,916,461Repayment of advances from Federal Home Loan Bank of New York


(9,362,451
)


(4,298,125
)Net change to short-term borrowings


(500,000
)


(2,000,000
)Increase (decrease) in advance payments by borrowersfor taxes and insurance


232,596



(217,846
)Purchase of treasury stock


-



(3,550
)Net cash (used in) provided by financing activities


(6,179,805
)


7,396,940Net increase (decrease) in cash and cash equivalents


2,230,586



(810,450
)Cash and cash equivalents – beginning


5,458,027



7,678,488Cash and cash equivalents – ending

$
7,688,613


$
6,868,038Supplemental disclosure of cash flow informationCash paid during the year for:Interest

$
1,523,997


$
2,294,155Income taxes

$
61,000


$
276,050





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 nine months ended September 30, 2010, are not necessarily indicative of the results which may be expected for the entire year.





The unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2009, which are included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission.





In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 855, “Subsequent Events”, the Company has evaluated events and transactions occurring subsequent to the Statement of Financial Condition date of September 30, 2010 for items that should potentially be recognized or disclosed in these consolidated financial statements.  The evaluation was conducted through the date these consolidated financial statements were issued.





NOTE 3.  NET INCOME PER COMMON SHARE





Net income per common share was computed by dividing net income for the three months and nine months ended September 30, 2010 and 2009 by the weighted average number of shares of common stock outstanding adjusted for unearned shares of the ESOP.  Stock options and restricted stock awards granted are considered common stock equivalents and therefore considered in diluted net income per share calculations, if dilutive, using the treasury stock method. At and for the three months and nine months ended September 30, 2010 and 2009, there was no dilutive effect for the 82,378 and 82,378, respectively, of stock options outstanding. At and for the three months and nine months ended September 30, 2010 and 2009, there was no dilutive effect for the 11,398 and 15,198, respectively, of non-vested restricted stock awards.





NOTE 4.  CRITICAL ACCOUNTING POLICIES





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


5
 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






September 30, 2010Amortized Cost


Gross

Unrealized

Gains


Gross

Unrealized

Losses


Estimated Fair

ValueGovernment National Mortgage Association

$
2,096,499


$
153,576


$
-


$
2,250,075Federal National Mortgage Association


15,505,560



1,074,413



-



16,579,973Federal Home Loan Mortgage Corporation


4,172,158



181,223



10,161



4,343,220Total

$
21,774,217


$
1,409,212


$
10,161


$
23,173,268





December 31, 2009Amortized Cost


Gross

Unrealized

Gains


Gross

Unrealized

Losses


Estimated Fair

ValueGovernment National Mortgage Association

$
2,587,153


$
101,800


$
7,233


$
2,681,720Federal National Mortgage Association


20,126,402



997,964



-



21,124,366Federal Home Loan Mortgage Corporation


5,626,537



151,058



17,110



5,760,485Total

$
28,340,092


$
1,250,822


$
24,343


$
29,566,571





All mortgage-backed securities held at September 30, 2010, and December 31, 2009, were secured by residential real estate.


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 LossesSeptember 30, 2010:Federal Home LoanMortgageCorporation

$
55,569


$
141


$
555,991


$
10,020


$
611,560


$
10,161Total

$
55,569


$
141


$
555,991


$
10,020


$
611,560


$
10,161





Less than 12 Months


12 Months or More


TotalFair

Value


Unrealized Losses


Fair

Value


Unrealized Losses


Fair

Value


Unrealized LossesDecember 31, 2009:Government NationalMortgage Association

$
359,809


$
7,233


$
-


$
-


$
359,809


$
7,233Federal NationalMortgageAssociation


1,041,073



14,952



319,344



2,158



1,360,417



17,110Total

$
1,400,882


$
22,185


$
319,344


$
2,158


$
1,720,226


$
24,343





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





At September 30, 2010, and December 31, 2009, management concluded that the unrealized losses above (which, at September 30, 2010, related to four Federal Home Loan Mortgage Corporation securities) are temporary in nature since they are primarily related to market interest rates and not related to the underlying credit quality of the issuer of the securities.


7
 Index


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





The amortized cost and estimated fair value of mortgage-backed securities at September 30, 2010 by contractual maturity, are shown below.  Actual maturities will differ from contractual maturities because borrowers generally have the right to prepay obligations.





September 30, 2010Amortized

Cost


Estimated

Fair ValueDue within one year

$
97,511


$
99,332Due after one year through five years


31,512



32,778Due after five years through ten years


171,639



180,303Due after ten years


21,473,555



22,860,855Total

$
21,774,217


$
23,173,268








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





Periodic pension expense was as follows:





Three months Ended


Nine months EndedSeptember 30,


September 30,2010


2009


2010


2009Service cost

$
-


$
-


$
-


$
18,391Interest cost


76,343



78,218



229,029



233,989Expected return on assets


(106,170
)


(86,463
)


(318,510
)


(241,052
)Amortization of past service cost (credit)


-



-



-



(15,799
)Amortization of unrecognized net loss


57,401



62,634



172,203



204,287Curtailment credit


-



-



-



(507,058
)Net periodic benefit cost

$
27,574


$
54,389


$
82,722


$
(307,242
)





On February 26, 2009, the Company froze its defined benefit pension plan effective March 31, 2009. The freezing of the Plan is consistent with ongoing cost reduction strategies and shifts focus on future savings of retirement benefit expense. The changes included a discontinuation of accrual of future service cost in the defined benefit pension plan and fully preserving retirement benefits that employees will have earned as of March 31, 2009. As a result of freezing the plan, the Company   recorded a one-time pre-tax curtailment credit of approximately $416,000, net of periodic pension expense, in the first quarter of 2009.


8
 Index


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





Periodic pension expense for other plans was as follows:





Three months ended


Nine months endedSeptember 30,


September 30,2010


2009


2010


2009Service cost

$
4,674


$
4,344


$
14,022


$
13,032Interest cost


16,782



17,711



50,346



53,133Amortization of past service cost


5,278



5,278



15,834



15,834Amortization of unrecognized net loss


433



672



1,299



2,016Net periodic benefit cost

$
27,167


$
28,005


$
81,501


$
84,015







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





In September 2006, the FASB issued ASC Topic 820 “Fair Value Measurement and Disclosure,” which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the United States of America (“GAAP”), and expands disclosures about fair value measurements. FASB ASC 820 applies to other accounting pronouncements that require or permit fair value measurements.





ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC Topic 820 are as follows:





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





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





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





An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.





The Company had no financial assets which are required to be measured on a recurring basis at September 30, 2010 and December 31, 2009.


9
 Index


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





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





(Level 1)Quoted Prices


(Level 2)in Active


Significant


(Level 3)Markets for


Other


SignificantIdentical


Observable


UnobservableDescription

Total


Assets


Inputs


Inputs(In Thousands)Impaired Loans:September 30, 2010

$
1,440


$
-


$
-


$
1,440December 31, 2009

$
992


$
-


$
-


$
992





The Company had no liabilities which are required to be measured on a recurring or non-recurring basis at September 30, 2010 and December 31, 2009.





The following information should not be interpreted as an estimate of the fair value of the entire Association since a fair value calculation is only provided for a limited portion of the Association’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Association’s disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair values of  financial instruments at September 30, 2010 and December 31, 2009:





Cash and Cash Equivalents, Interest Receivable and Interest Payable





The carrying amounts for cash and cash equivalents, interest receivable and interest payable  approximate fair value because they mature in three months or less.





Securities





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


10
 Index


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





Loans Receivable





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





Impaired Loans





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





Federal Home Loan Bank of New York (FHLB) Stock





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





Deposit Liabilities





The fair value disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.





Advances from FHLB





Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity.





Off-Balance Sheet Financial Instruments





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





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


11
 Index


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





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





September 30,


December 31,2010


2009Carrying

Amount


Estimated

Fair

Value


Carrying

Amount


Estimated

Fair

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

$
7,689


$
7,689


$
5,458


$
5,458Mortgage-backed securities held tomaturity


21,774



23,173



28,340



29,567FHLB stock


851



851



1,275



1,275Loans receivable


109,874



116,440



110,988



115,692Accrued interest receivable


603



603



658



658Financial liabilities:Deposits


118,618



120,439



115,168



116,709Advances from FHLB


12,989



13,208



22,851



23,352Accrued interest payable


34



34



49



49





NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS





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








In January 2010, the FASB issued Accounting Standard Update (“ASU”) 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require that a reporting entity disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs. In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:





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





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


12
 Index


NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)





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





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





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





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





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





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





ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early


13
 Index


NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)





application is permitted. Upon initial adoption of ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. The adoption of this guidance did not have a material impact on the consolidated financial statements.





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





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





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





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





NOTE 9. FEDERAL HOME LOAN BANK OF NEW YORK STOCK





Federal Home Loan Bank of New York (“FHLB”) stock, which represents required investment in the common stock of a correspondent bank, is carried at cost and as of September 30, 2010 and December 31, 2009, consists of the common stock of FHLB.





Management evaluates the FHLB stock for impairment in accordance with FASB ASC Topic 942-325-35 (Prior authoritative literature: Statement of Position (SOP) 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others).Management’s determination of whether this investment is impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.





Management believes no impairment charge is necessary related to the FHLB stock as of September 30, 2010.


14
 Index


NOTE 10. PROPERTY SALE





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





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





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





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





The Transfer is expected to close (the “Closing”) approximately seventy-five (75) days after the Subdivision has been approved and new tax lot numbers are assigned to Property C and the Retained Property (collectively , the “Municipal Approvals”).  Flatbush Federal anticipates that the Transfer will occur during the second quarter of 2011, although there can be no assurance that the Transfer will not be extended beyond that date, as a result of unexpected delays in obtaining Municipal Approvals.





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





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




15
 Index


ITEM 2


FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION





Forward-Looking Statements





This Form 10-Q may include certain forward-looking statements based on current management expectations.  The Company’s actual results could differ materially from those management expectations.  Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of loan and investment portfolios of the Company, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and prices.





Comparison of Financial Condition at September 30, 2010 and December 31, 2009





The Company’s total assets as of September 30, 2010 were $149.8 million compared to $156.0 million at December 31, 2009, a decrease of $6.2 million or 4.0%. Loans receivable decreased $1.1 million, or 1.0%, to $109.9 million at September 30, 2010 from $111.0 million at December 31, 2009.  Mortgage-backed securities decreased $6.5 million, or 23.0%, to $21.8 million at September 30, 2010 from $28.3 million as of December 31, 2009 primarily due to prepayments and amortization. Cash and cash equivalents increased $2.2 million or 40.0%, to $7.7 million at September 30, 2010 from $5.5 million at December 31, 2009.





Total deposits increased $3.4 million, or 3.0%, to $118.6 million at September 30, 2010 from $115.2 million at December 31, 2009.  As of September 30, 2010, advances from the Federal Home Loan Bank of New York (“FHLB”) were $13.0 million compared to $22.9 million as of December 31, 2009, a decrease of $9.9 million, or 43.2%.





Total stockholders’ equity increased $725,000, or 4.8%, to $16.0 million at September 30, 2010 from $15.2 million at December 31, 2009.  The increase to stockholders’ equity reflects net income of $536,000,  amortization of $18,000 of unearned ESOP shares, amortization of $30,000 of restricted stock awards, amortization of $31,000 of stock option awards and $110,000, net of tax, of other comprehensive income.





On August 30, 2007, the Company approved a stock repurchase program and authorized the repurchase of up to 50,000 shares of the Company’s outstanding shares of common stock. Stock repurchases are made from time to time and may be effected through open market purchases, block trades and in privately negotiated transactions.  Repurchased stock will be held as treasury stock and will be available for general corporate purposes.  During the quarter ended September 30, 2010, the Company did not repurchase any shares. As of September 30, 2010, under the current program, a total of 12,750 shares had been repurchased at a weighted average price of $4.44 per share.





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





General.Net income increased by $165,000, to $250,000 for the quarter ended September 30, 2010 from $84,000 for the same quarter in 2009.  The increase in net income for the quarter was primarily due to decreases of $176,000 in interest expense on deposits, $165,000 in interest expense on borrowings from the FHLB, $4,000 in non-interest expense and $15,000 in income tax expense, partially offset by an increase of $48,000 in provision for loan loss, and decreases of $144,000 in interest income and $3,000 in non-interest income.





Interest Income.Total interest income decreased $144,000, or 6.8%, to $2.0 million for the quarter ended September 30, 2010 from $2.1 million for the quarter ended September 30, 2009. The decrease in interest income can be primarily attributed to  lower average balances and yield for these assets.  For the three months ended September 30, 2010, the average balance of $139.8 million in interest-earning assets earned an average yield of 5.69% compared to an average yield of 5.80% on an average balance of $147.0 million for the three months ended September 30, 2009.


16
 Index


Interest income on loans increased $6,000, or 0.4%, to $1.65 million for the quarter ended September 30, 2010, from $1.64 million for the same quarter in 2009.  The average balance of loans increased $2.5 million to $110.5 million for the quarter ended September 30, 2010 from $108.0 million for the quarter ended September 30, 2009.  The average yield on loans decreased by 12 basis points to 5.97% for the quarter ended September 30, 2010 from 6.09% for the quarter ended September 30, 2009.





Interest income on mortgage-backed securities decreased $143,000, or 30.6%, to $324,000 for the quarter ended September 30, 2010 from $467,000 for the quarter ended September 30, 2009.  The average balance of mortgage-backed securities decreased $7.8 million, or 25.7%, to $22.5 million for the quarter ended September 30, 2010 from $30.3 million for the quarter ended September 30, 2009.  The average yield decreased by 41 basis points to 5.75% for the quarter ended September, 2010 from 6.16% for the same period in 2009.





Interest income on FHLB stock decreased $7,000, or 36.8%, to $12,000 for the quarter ended September 30, 2010 from $19,000 for the quarter ended September 30, 2009.   The average yield on FHLB stock decreased 22 basis points to 5.57%, for the quarter ended September 30, 2010 from an average yield of 5.79% for the quarter ended September 30, 2009.





Interest Expense.Total interest expense, comprised of interest expense on deposits and FHLB borrowings, decreased $341,000, or 40.6%, to $499,000 for the quarter ended September 30, 2010 from $840,000 for the quarter ended September 30, 2009. The average cost of interest-bearing liabilities decreased by 95 basis points to 1.56% for the quarter ended September 30, 2010 from 2.51% for the quarter ended September 30, 2009.  The average balance of interest-bearing liabilities decreased $6.2 million, or 4.6% to $127.7 million for the quarter ended September 30, 2010 from $133.9 million for the quarter ended September 30, 2009.





Interest expense on deposits decreased $176,000, or 29.4%, to $423,000 for the quarter ended September 30, 2010, from $599,000 for the quarter ended September 30, 2009.  The average cost of interest-bearing deposits decreased by 69 basis points to 1.49% for the quarter ended September 30, 2010 from 2.18% for the quarter ended September 30, 2009, reflecting the declining trend of interest rates on deposits.  As a partial offset, the average balance of interest-bearing deposits increased $3.8 million, or 3.5%, to $113.9 million for the quarter ended September 30, 2010 from $110.1 million for the quarter ended September 30, 2009.





Interest expense on FHLB borrowings decreased $165,000, or 68.5%, to $76,000 for the quarter ended September 30, 2010, from $241,000 for the quarter ended September 30, 2009.  The average balance of FHLB borrowings decreased $10.0 million or 42.0%, to $13.8 million for the quarter ended September 30, 2010, from $23.8 million for the quarter ended September 30, 2009. The average cost of FHLB borrowings decreased by 185 basis points to 2.20% for the quarter ended September 30, 2010, from 4.05% for the quarter ended September 30, 2009.





Net Interest Income.Net interest income increased $197,000, or 15.2%, to $1.5 million for the quarter ended September 30, 2010 from $1.3 million for the same quarter in 2009.  The interest rate spread was 4.13% for the quarter ended September 30, 2010 compared to 3.29% for the quarter ended September 30, 2009, an increase of 84 basis points.  Interest margin for the quarter ended September 30, 2010 was 4.26% compared to 3.51% for the quarter ended September 30, 2009, an increase of 75 basis points.  The increase in interest rate spread and interest margin can be attributed primarily to the decrease in the average cost of interest-bearing deposits and FHLB borrowings, as well as the increase in the average balance of loans receivable.





Provision for Loan Losses.The Company establishes the provision for loan loss, which is charged to operations, at a level deemed appropriate to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements.  In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change.  Based on the evaluation of these factors, a provision of $100,000 was recorded for the three months ended September 30, 2010. A provision of $52,000 was recorded for the three months ended September 30, 2009.   The level of the allowance at September 30, 2010 is based on estimates, and the ultimate losses may vary from the estimates.  Non-performing


17
 Index


loans increased to $6.4 million, or 4.3% of total assets as of September 30, 2010 from $2.7 million or 1.74% of total assets as of September 30, 2009. As of September 30, 2010, the non-performing loans included eight 1-4 family residential mortgage loans totaling $2.4 million, three non-residential mortgage loans of $2.6 million and a construction loan of $1.4 million which, at quarter-end, maintained aggregate specific allowances for loan loss of $466,000. Allowance for loan loss totaled $1.2 million which was comprised of $466,000 of specific allowance and $750,000 of general allowance.





Non-Interest Income.Non-interest income decreased $3,000, or 4.5%, to $64,000 for the quarter ended September 30, 2010 from $67,000 for the quarter ended September 30, 2009.  This was primarily attributable to the decrease of $2,000 in BOLI investment income to $38,000 for the quarter ended  September 30, 2010 from $40,000 for the same period ended in 2009.





Non-Interest Expenses.Non-interest expenses decreased $4,000, or 0.3%, to $1.2 million for the quarter ended September 30, 2010 from $1.2 million for the quarter ended September 30, 2009.  The net decrease of $4,000 in non-interest expenses is primarily attributable to decreases to professional fees, equipment, directors compensation and other insurance premiums, partially offset by increases to salaries and employee benefits, net occupancy expense of premises and Federal deposit insurance premiums.





Income Tax Expense.  The provision for income taxes decreased $15,000, to $32,000 for the quarter endedSeptember 30, 2010 compared to $46,000 for the same quarter in 2009.  Income tax expense for the quarter ended September 30, 2010, was beneficially affected by amendments to the New York State and New York City’s tax law and ordinance conforming the bad debt deduction to the deduction allowed under the Federal income tax law.  The amendment was effective during the quarter ended September 30, 2010.





Comparison of Operating Results for the Nine Months Ended September 30, 2010 and September 30, 2009





General.Net income increased by $121,000, or 29.2% to $536,000 for the nine months ended September 30, 2010 from $415,000 for the same period in 2009.  The increase in net income for this period was primarily due to decreases of $480,000 in interest expense on deposits, $489,000 in interest expense on borrowings from the FHLB and $43,000 in income tax expense, partially offset by decreases of $118,000  in interest income and $7,000 in non-interest income and increases of $315,000 in provision for loan loss and $451,000 in non-interest expense.





Interest Income.Total interest income decreased $118,000, or 1.9%, to $6.1 million for the nine months ended September 30, 2010 from $6.2 million for the nine months ended September 30, 2009.  For the nine months ended September 30, 2010, the average balance of $143.0 million in interest-earning assets earned an average yield of 5.67% compared to an average yield of 5.74% on an average balance of $143.9 million for the nine months ended September 30, 2009.





Interest income on loans increased $180,000 or 3.8%, to $4.9 million for the nine months ended September 30, 2010, from $4.8 million for the same period months in 2009.  The average balance of loans increased $9.3 million to $111.7 million for the nine months ended September 30, 2010 from $102.4 million for the nine months ended September 30, 2009.  The average yield on loans decreased by 29 basis points to 5.91% for the nine months ended September 30, 2010 from 6.20% for the nine months ended September 30, 2009.





Interest income on mortgage-backed securities decreased $289,000, or 21.0%, to $1.1 million for the nine months ended September 30, 2010 from $1.4 million for the nine months ended September 30, 2009.  The average balance of mortgage-backed securities decreased $7.2 million, or 22.5%, to $24.8 million for the nine months ended September 30, 2010 from $32.0 million for the nine months ended September 30, 2009 primarily due to prepayments and amortizations.  The average yield increased by 11 basis points to 5.84% for the nine months ended September 30, 2009 from 5.73% for the same period in 2009.





Interest income on FHLB stock decreased $6,000, or 12.0%, to $44,000 for the nine months ended September 30, 2010 from $50,000 for the nine months ended September 30, 2009.   The average yield on FHLB stock increased 49 basis points to 5.43% for the nine months ended September 30, 2010 from an average yield of 4.94% for the nine months ended September 30, 2009. The increased yield was offset by a decrease in the average


18
 Index


balance of $283,000 to $1.1 million for the nine months ended September 30, 2010 from $1.4 million for the nine months ended September 30, 2009.





Interest Expense.Total interest expense, comprised of interest expense on deposits and FHLB borrowings, decreased $968,000, or 37.9%, to $1.6 million, for the nine months ended September 30, 2010 from $2.6 million for the nine months ended September 30, 2009. The average cost of interest-bearing liabilities decreased by 97 basis points to 1.62% for the nine months ended September 30, 2010 from 2.59% for the nine months ended September 30, 2009.  The average balance of interest-bearing liabilities decreased $1.0 million, or 0.8% to $130.7 million for the nine months ended September 30, 2010 from $131.7 million for the nine months ended September 30, 2009.





Interest expense on deposits decreased $480,000, or 26.6%, to $1.3 million for the nine months ended September 30, 2010, from $1.8 million for the nine months ended September 30, 2009.  The average cost of interest-bearing deposits decreased by 68 basis points to 1.57% for the nine months ended September 30, 2010 from 2.25% for the nine months ended September 30, 2009, reflecting the declining trend of interest rates on deposits.  As a partial offset, the average balance of interest-bearing deposits increased $5.6 million, or 5.2%, to $112.6 million for the nine months ended September 30, 2010 from $107.0 million for the nine months ended September 30, 2009.





Interest expense on FHLB borrowings decreased $489,000, or 65.3%, to $260,000 for the nine months  ended September 30, 2010, from $749,000 for the nine months ended September 30, 2009.  The average balance of FHLB borrowings decreased $6.7 million or 27.0%, to $18.1 million for the nine months ended September 30, 2010, from $24.8 million for the nine months ended September 30, 2009. The average cost of FHLB borrowings decreased by 211 basis points to 1.92% for the nine months ended September 30, 2010, from 4.03% for the nine months ended September 30, 2009.





Net Interest Income.Net interest income increased $850,000, or 23.3%, to $4.5 million for the nine months ended September 30, 2010 from $3.6 million for the same nine months in 2009.  The interest rate spread was 4.05% for the nine months ended September 30, 2010 compared to 3.16% for the nine months ended September 30, 2009, an increase of 89 basis points.  Interest margin for the nine months ended September 30, 2010 was 4.19% compared to 3.38% for the nine months ended September 30, 2009, an increase of 81 basis points.  The increase in interest rate spread and interest margin can be attributed primarily to the decrease in the average cost of interest-bearing deposits and FHLB borrowings, as well as the increase in the average balance of loans receivable.





Provision for Loan Losses.The Company establishes the provision for loan loss, which is charged to operations, at a level deemed appropriate to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements.  In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change.  Based on the evaluation of these factors, a provision of $389,000 was recorded for the nine months ended September 30, 2010. A provision of $74,000 was recorded for the nine months ended September 30, 2009.   The level of the allowance at September 30, 2010 is based on estimates, and the ultimate losses may vary from the estimates.





Non-Interest Income.Non-interest income decreased $7,000, or 3.5%, to $193,000 for the nine months  ended September 30, 2010 from $200,000 for the nine months ended September 30, 2009.  This was primarily attributable to the decrease of $6,000 in BOLI investment income to $113,000 for nine months ended September 30, 2010 from $119,000 for the same period ended in 2009.





Non-Interest Expenses.  Non-interest expenses increased $451,000, or 14.4%, to $3.6 million for the nine months ended September 30, 2010 from $3.1 million for the nine months ended September 30, 2009.  The net increase of $451,000 in non-interest expenses is primarily attributable to increases to salaries and employee benefits and net occupancy expense of premises, partially offset by decreases to professional fees, Federal deposit insurance premiums and equipment. Salaries and employee benefits increased $473,000 to $1.8 million for the nine months ended September 30, 2010 from $1.3 million for the nine months ended September 30, 2009 primarily due to the one-time pre-tax curtailment credit of $416,000, net of periodic pension expense, resulting from the freezing of the


19
 Index


defined benefit pension plan during the nine months ended September 30, 2009. Excluding the curtailment credit, salaries and employee benefits increased $57,000, or 3.2%. All other categories of non-interest expenses, in the aggregate, decreased $21,000, or 1.2%, to $1.77 million for the nine months ended September 30, 2010, from $1.79 million for the prior nine month period.





Income Tax Expense.The provision for income taxes decreased $43,000, to $184,000 for the nine months  ended September 30, 2010 compared to a tax expense of $227,000 for the same nine months in 2009.Income tax expense for the nine months ended September 30, 2010, was beneficially affected by amendments to the New York State and New York City’s tax law and ordinance conforming the bad debt deduction to the deduction allowed under the Federal income tax law.  The amendment was effective during the quarter ended September 30, 2010.





Liquidity and Capital Resources





The Association is required to maintain levels of liquid assets under the Office of Thrift Supervision (the “OTS”) regulations sufficient to ensure the Association’s safe and sound operation.  The Association’s liquidity, calculated by a ratio of short-term assets to short-term liabilities, averaged 7.46% during the month of September 2010.  The Association adjusts its liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes from escrow accounts on mortgage loans, repayment of borrowings, when applicable, and loan funding commitments. The Association also adjusts its liquidity level as appropriate to meet its asset/liability objectives.





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





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





The primary sources of investing activity are lending and the purchase of investment securities and mortgage-backed securities.  Net loans totaled $109.9 million and $111.0 million at September 30, 2010 and December 31, 2009, respectively.  Mortgage-backed securities held to maturity totaled $21.8 million and $28.3 million at September 30, 2010 and December 31, 2009, respectively.  In addition to funding new loans and mortgage-backed and investment securities purchases through operating and financing activities, such activities were funded by principal repayments on existing loans, mortgage-backed securities and maturities of investment securities.





Liquidity management is both a daily and long-term function of business management.  Excess liquidity is generally invested in short-term investments, such as federal funds and interest-bearing deposits.  If the Association requires funds beyond its ability to generate them internally, borrowing agreements exist with the FHLB which provides an additional source of funds.  At September 30, 2010, the Company had a borrowing limit of $65.9 million from the FHLB, of which $13.0 million was advanced. At December 31, 2009, advances from the FHLB totaled $22.9 million.





The Association anticipates that it will have sufficient funds available to meet its current loan commitments and obligations.  At September 30, 2010, the Association had outstanding commitments to originate or purchase loans of $2.3 million and outstanding loans in process of $1.4 million. Certificates of deposit scheduled to mature in one year or less at September 30, 2010, totaled $62.4 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.


20
 Index


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




Actual

Minimal Capital

Requirements
Under Prompt

Corrective Actions

ProvisionsAmount


Ratio

Amount
Ratio
Amount
RatioSeptember 30, 2010:



(Dollars in Thousands)Total Capital

$
17,439



20.00
%
>$6,975
>8.00%
>$8,718
>10.00%(to risk-weighted assets)Tier 1 Capital


16,690



19.14
%
> -
> -
>5,231
>  6.00%(to risk-weighted assets)Core (Tier 1) Capital


16,774



11.28
%
> 5,949
>4.00%
>7,436
>  5.00%(to adjusted total assets)Tangible Capital


16,774



11.28
%
> 2,231
>1.50%
>-
>-(to adjusted total assets)








Actual

Minimal Capital

Requirements
Under Prompt

Corrective Actions

ProvisionsAmount


Ratio

Amount
Ratio
Amount
RatioDecember 31, 2009:



(Dollars in Thousands)Total Capital

$
16,408



18.66
%
>$7,036
>8.00%
>$8,795
>10.00%(to risk-weighted assets)Tier 1 Capital


16,044



18.24
%
> -
> -
>5,277
>  6.00%(to risk-weighted assets)Core (Tier 1) Capital


16,128



10.42
%
> 6,192
>4.00%
>7,739
>  5.00%(to adjusted total assets)Tangible Capital


16,128



10.42
%
> 2,322
>1.50%
>-
>-(to adjusted total assets)





Management of Interest Rate Risk





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


21
 Index


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





Net Portfolio Value





The Association’s interest rate sensitivity is monitored by management through the use of the OTS model which estimates the change in the Association’s net portfolio value (“NPV”) over a range of interest rate scenarios.  NPV is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts.  The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The OTS produces its analysis based upon data submitted on the Association’s quarterly Thrift Financial Reports. The following table sets forth the Association’s NPV as of September 30, 2010, the most recent date the Association’s NPV was calculated by the OTS.




Change in


Net Portfolio Value


Net Portfolio Value as a Percentage of Present Value of AssetsInterest Rates

(basis points)


Estimated

NPV


Amount of

Change


Percent of Change


NPV Ratio


Change in Basis Points(Dollars in Thousands)+300


$
13,795


$
(8,980
)


(39
%)


9.28
%


(497
)+200



17,517



(5,258
)


(23
%)


11.44
%


(281
)+100



20,692



(2,083
)


( 9
%)


13.18
%


(107
)+ 50



21,895



(880
)


( 4
%)


13.81
%


(44
)0



22,775



—



—



14.25
%


—- 50



23,430



655



3
%


14.57
%


32-100



23,664



889



4
%


14.68
%


43


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.


22
 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 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 September 30, 2010 (the “Evaluation Date”).  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them in a timely manner to material information relating to us (or our consolidated subsidiary) required to be included in our periodic SEC filings.





(b)
Changes in Internal Controls over Financial Reporting.





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





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


23
 Index


PART II – OTHER INFORMATION





ITEM 1. Legal Proceedings





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





ITEM 1A.Risk Factors





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





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





On August 30, 2007, the Company approved a stock repurchase program and authorized the repurchase of up to 50,000 shares of the Company’s outstanding shares of common stock.  Stock repurchases will be made from time to time and may be effected through open market purchases, block trades and in privately negotiated transactions. Repurchased stock will be held as treasury stock and will be available for general corporate purposes. As of September 30, 2010, 12,750 total shares have been repurchased by the Company under this repurchase program. During the quarter ended September 30, 2010, no shares were repurchased. These total repurchased shares do not include the stock dividend shares of 1,340 which, along with the repurchased shares, are held as treasury stock.





Company Purchases of Common 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 programsJuly 1, 2010 through July 31, 2010


-


$
-



12,750



37,250August 1, 2010 through August 31, 2010


-



-



12,750



37,250September 1, 2010 through September 30, 2010


-



-



12,750



37,250





ITEM 3. Defaults Upon Senior Securities





Not applicable.





ITEM5. Other Information





None


24
 Index


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 Actof 2002 (filed herewith).31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Actof 2002 (filed herewith).32.1
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of2002 (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.


25
 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:
November 15, 2010

By:
/s/Jesus R. AdiaJesus R. AdiaPresident andChief Executive OfficerDate:
November 15, 2010

By:
/s/  John S. LotardoJohn S. LotardoExecutive Vice President and ChiefFinancial Officer




26