UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012

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

For the transition period from ______________ to ______________

Commission File Number: 0-503777

FLATBUSH FEDERAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

2146 NOSTRAND AVENUE, BROOKLYN, NEW YORK 11210

(Address of principal executive offices)

(718) 859-6800

(Registrant’s telephone number)

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

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

Yes S No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes S No £

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

Large Accelerated filer £		Accelerated filer £

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

As of August 14, 2012 the Registrant had outstanding 2,736,907 shares of common stock.

FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES

INDEX

		Page Number
PART I – FINANCIAL INFORMATION

Item 1:	Financial Statements

	Consolidated Statements of Financial Condition at June 30, 2012 and December 31, 2011 (Unaudited)	1

	Consolidated Statements of Operations for the Three and Six months ended June 30, 2012 and 2011 (Unaudited)	2

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six months ended June 30, 2012 and 2011 (Unaudited)	3

	Consolidated Statements of Cash Flows for the Six months ended June 30, 2012 and 2011 (Unaudited)	4

	Notes to Consolidated Financial Statements (Unaudited)	5– 29

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operation	30-36

Item 3:	Quantitative and Qualitative Disclosure About Market Risk	37

Item 4:	Controls and Procedures	37

PART II – OTHER INFORMATION

Item 1:	Legal Proceedings	38

Item 1A:	Risk Factors	38

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	38-39

Item 3:	Defaults upon Senior Securities	39

Item 4:	Mine Safety Disclosures	39

Item 5:	Other Information	39

Item 6:	Exhibits	39- 40

SIGNATURES		41

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	June 30,			December 31,
ASSETS	2012			2011

Cash and amounts due from depository institutions	$	2,068,445		$	1,871,605
Interest earning deposits in other banks		3,786,020			1,179,582
Federal funds sold		5,700,000			5,750,000
Cash and cash equivalents		11,554,465			8,801,187

Securities held to maturity; fair value of $29,658,260 (2012) and $27,402,087 (2011)		27,916,534			25,748,582
Loans receivable, net of allowance for loan losses of $1,076,808 (2012) and $2,247,171 (2011)		87,355,682			95,161,715
Real estate owned		1,123,300			743,830
Premises and equipment		5,190,709			2,377,057
Federal Home Loan Bank of New York stock		472,400			698,200
Accrued interest receivable		482,930			554,307
Bank owned life insurance		4,600,037			4,523,252
Other assets		4,615,107			4,106,279
Total assets	$	143,311,164		$	142,714,409

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	5,547,491		$	5,197,945
Interest bearing		111,982,784			109,724,623
Total deposits		117,530,275			114,922,568
Federal Home Loan Bank of New York advances		5,392,887			10,081,574
Advance payments by borrowers for taxes and insurance		200,062			190,155
Other liabilities		1,347,640			2,960,087
Total liabilities		124,470,864			128,154,384
Stockholders’ equity:
Preferred stock $0.01 par value; 1,000,000 shares authorized; none issued and outstanding		—			—
Common stock $0.01 par value; authorized 9,000,000 shares; issued 2,799,657 shares; outstanding 2,736,907 shares		27,998			27,998
Paid-in capital		12,762,421			12,725,312
Retained earnings		9,255,975			5,152,987
Unearned employees’ stock ownership plan (ESOP) shares		(391,672	)		(409,108	)
Treasury stock, 62,750 shares		(446,534	)		(446,534	)
Accumulated other comprehensive loss		(2,367,888	)		(2,490,630	)
Total stockholders’ equity		18,840,300			14,560,025

Total liabilities and stockholders’ equity	$	143,311,164		$	142,714,409

See notes to consolidated financial statements.

Table of Contents

FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012		2011
Interest Income
Loans, including fees	$	1,192,558		$	1,429,739		$	2,452,892	$	2,904,891
Mortgage-backed securities		250,832			263,965			507,808		537,629
Investment securities		33,358			16,832			70,151		28,925
Other interest earning assets		460			1,223			945		3,115
Total interest income		1,477,208			1,711,759			3,031,796		3,474,560

Interest Expense
Deposits		343,370			358,347			693,173		730,555
Borrowings		10,846			29,697			25,997		67,905
Total interest expense		354,216			388,044			719,170		798,460

Net Interest Income		1,122,992			1,323,715			2,312,626		2,676,100
Provision for loan losses		66,585			1,563,617			265,011		1,703,410
Net interest income (loss) after provision for loan losses		1,056,407			(239,902	)		2,047,615		972,690

Non-interest income
Fees and service charges		23,059			38,339			38,494		63,262
Gain on sale of property		—			—			9,072,771		—
BOLI income		38,593			37,698			76,785		74,826
Other		929			20,180			5,293		20,933
Total non-interest income		62,581			96,217			9,193,343		159,021

Non-interest expenses
Salaries and employee benefits		611,952			619,899			1,244,287		1,224,922
Net occupancy expense of premises		193,071			124,549			376,478		257,578
Equipment		135,621			117,926			259,681		295,955
Directors’ compensation		60,229			50,206			121,758		95,597
Professional fees		140,138			89,945			252,891		179,795
Other insurance premiums		60,051			36,232			116,781		72,593
Federal deposit insurance premiums		41,000			47,561			63,000		95,894
Merger related expense		195,112			—			585,759		—
Regulatory compliance consulting		520,146			—			555,051		—
Other		103,216			115,201			215,444		230,533
Total non-interest expenses		2,060,536			1,201,519			3,791,130		2,452,867

Income (loss) before income tax expense (benefit)		(941,548	)		(1,345,204	)		7,449,828		(1,321,156	)
Income tax expense (benefit)		(450,648	)		(548,396	)		3,346,840		(560,362	)

Net income (loss)	$	(490,900	)	$	(796,808	)	$	4,102,988	$	(760,794	)

Net income (loss) per common share – Basic and diluted	$	(0.18	)	$	(0.30	)	$	1.53	$	(0.29	)

Weighted average number of shares outstanding – Basic and diluted		2,676,727			2,671,459			2,676,069		2,670,805

See notes to consolidated financial statements.

Table of Contents

FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three months ended June 30,						Six months ended June 30,

		2012			2011			2012			2011

Net income (loss)	$	(490,900	)	$	(796,808	)	$	4,102,988		$	(760,794	)

Other comprehensive income, net of income taxes:

Benefit plans		105,538			66,661			211,076			133,322
Deferred income taxes		(44,167	)		(27,897	)		(88,334	)		(55,794	)
		61,371			38,764			122,742			77,528

Comprehensive (loss) income	$	(429,529	)	$	(758,044	)	$	4,225,730		$	(683,266	)

See notes to consolidated financial statements.

Table of Contents

FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended June 30,
	2012			2011
Cash flow from operating activities:
Net income (loss)	$	4,102,988		$	(760,794	)
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Depreciation and amortization of premises and equipment		58,419			65,689
Net accretion, amortization of discounts, premiums and deferred loan fees and costs		3,287			(57,561	)
Deferred income tax		801,809			(1,605,150	)
Provision for loan losses		265,011			1,703,410
Gain on Sale of premises and equipment		(9,072,771	)		—
ESOP shares committed to be released		13,548			14,373
MRP expense		20,292			20,292
Stock option expense		20,706			20,706
Provision for loss on real estate owned		71,730			—
Decrease in accrued interest receivable		71,377			40,016
Increase in cash surrender value of BOLI		(76,785	)		(74,826	)
(Increase) decrease in other assets		(1,398,971	)		573,703
(Decrease) in other liabilities		(1,401,372	)		(26,686	)
Net cash (used) by operating activities		(6,520,732	)		(86,828	)

Cash flow from investing activities:
Principal repayments on securities held to maturity		2,210,683			2,956,943
Purchases of securities held to maturity		(4,392,239	)		(4,753,746	)
Purchases of loan participation interests		—			(135,379	)
Net change in loans receivable		7,100,141			3,979,392
Proceeds from sale of premises and equipment		6,215,924			—
Additions to premises and equipment		(15,225	)		(101,742	)
Redemption of Federal Home Loan Bank of New York stock, net		225,800			123,100
Net cash provided by investing activities		11,345,084			2,068,568

Cash flow from financing activities:
Net increase (decrease) in deposits		2,607,707			(3,886,764	)
Repayment of advances from Federal Home Loan Bank of New York		(688,687	)		(2,758,890	)
Net change in short-term borrowings from Federal Home Loan Bank of NY		(4,000,000	)		500,000
Increase (decrease) in advance payments by borrowers for taxes and insurance		9,906			(134,022	)
Net cash used in financing activities		(2,071,074	)		(6,279,676	)
Net increase (decrease) in cash and cash equivalents		2,753,278			(4,297,936	)
Cash and cash equivalents – beginning		8,801,187			8,184,340

Cash and cash equivalents – ending	$	11,554,465		$	3,886,404
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	721,986		$	808,216
Income taxes	$	4,000,585		$	402,470
Acquisition of real estate owned in settlement of loans receivable	$	451,200		$	608,000

See notes to consolidated financial statements.

Table of Contents

FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. PRINCIPLES OF CONSOLIDATION

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

NOTE 2. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in accordance with U.S. generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three and six months ended June 30, 2012, are not necessarily indicative of the results which may be expected for the entire year.

The unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2011, which are included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 855, “Subsequent Events”, the Company has evaluated events and transactions occurring subsequent to the Statement of Financial Condition date of June 30, 2012 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

NOTE 3. NET INCOME (LOSS) PER COMMON SHARE

Net income (loss) per common share was computed by dividing net income (loss) for the three and six months ended June 30, 2012 and 2011 by the weighted average number of shares of common stock outstanding adjusted for unearned shares of the ESOP. Stock options and restricted stock awards granted are considered common stock equivalents and therefore considered in diluted net income per share calculations, if dilutive, using the treasury stock method. At and for the three and six months ended June 30, 2012 and 2011, there was no dilutive effect for the 82,378 and 82,378, respectively, of stock options outstanding. At and for the three and six months ended June 30, 2012 and 2011, there was no dilutive effect for the 3,798 and 7,598, respectively, of non-vested restricted stock awards.

NOTE 4. CRITICAL ACCOUNTING POLICIES

The Company considers accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Management reviews the level of the allowance on a quarterly basis, at a minimum, and

Table of Contents

NOTE 4. CRITICAL ACCOUNTING POLICIES (CONTINUED)

establishes the provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectability of the loan portfolio. Management has allocated the allowance among categories of loan types as well as classification status at each period-end date. Assumptions and allocation percentages based on loan types and classification status have been consistently applied. Management regularly evaluates various risk factors related to the loan portfolio, such as type of loan, underlying collateral and payment status, and the corresponding allowance allocation percentages.

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

NOTE 5. SECURITIES HELD TO MATURITY

	June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

Government National Mortgage Association	$	4,846,375	$	385,323	$	—	$	5,231,698
Federal National Mortgage Association		12,580,186		1,021,319				13,601,505
Federal Home Loan Mortgage Corporation		6,150,688		182,507		30,409		6,302,786

Total Mortgage-Backed Securities		23,577,249		1,589,148		30,409		25,135,988
Corporate Debt		4,339,285		192,725		9,738		4,522,272
	$	27,916,534	$	1,781,873	$	40,147	$	29,658,260

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

Government National Mortgage Association	$	5,342,679	$	322,917	$	—	$	5,665,596
Federal National Mortgage Association		12,778,385		1,068,213		—		13,846,598
Federal Home Loan Mortgage Corporation		3,280,117		175,596		19,303		3,436,410

Total Mortgage-Backed Securities		21,401,181		1,566,727		19,303		22,948,604
Corporate Debt		4,347,401		135,320		29,238		4,453,483
	$	25,748,582	$	1,702,046	$	48,561	$	27,402,087

Table of Contents

NOTE 5. SECURITIES HELD TO MATURITY (CONTINUED)

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

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

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

June 30, 2012:
Federal Home Loan Mortgage Corporation	$	1,578,529	$	10,903	$	709,331	$	19,506	$	2,287,861	$	30,409
Corporate debt		—		—		454,981		9,738		454,981		9,738

Total	$	1,578,529	$	10,903	$	1,164,312	$	29,244	$	2,742,842	$	40,147

	Less than 12 Months				12 Months or More				Total

	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

December 31, 2011:
Federal Home Loan Mortgage Corporation		$581,132		$17,427	$	119,298	$	1,876		$700,430		$19,303
Coporate debt		888,807		29,238		—		—		888,807		29,238

Total	$	1,469,939	$	46,665	$	119,298	$	1,876	$	1,589,237	$	48,541

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.

Table of Contents

NOTE 5. SECURITIES HELD TO MATURITY (CONTINUED)

At June 30, 2012, and December 31, 2011, management concluded that the unrealized losses above (which, at June 30, 2012, related to two corporate debt securities and four Federal Home Loan Mortgage Corporation mortgage-backed securities) are temporary in nature since they are primarily related to market interest rates and not related to the underlying credit quality of the issuer of the securities.

The amortized cost and estimated fair value of mortgage-backed securities at June 30, 2012 by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers generally have the right to prepay obligations.

	June 30, 2012
	Amortized Cost		Estimated Fair Value
Due within one year	$	—	$	—
Due after one year through five years		2,886,735		2,943,007
Due after five years through ten years		5,926,822		6,064,307
Due after ten years		19,102,977		20,650,946
Total	$	27,916,534	$	29,658,260

NOTE 6. LOANS RECEIVABLE

Loans receivable, net, consists of the following:

	June 30, 2012			December 31, 2011
	(in thousands)

Gross loans	$	88,547		$	97,610
Loans in process		—			(105	)
Deferred loan fees, net		(114	)		(97	)
Allowance for loan loss		(1,077	)		(2,247	)
	$	87,356		$	95,162

Table of Contents

NOTE 6. LOANS RECEIVABLE (CONTINUED)

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

	Construction, Land and Unsecured Business Loan			Commercial Real Estate			Residential Multifamily Real Estate		Residential One-to four- Family Real Estate			Credit Card			Home Equity		Other		Total
	(Dollars in thousands)

Allowance for loan losses:

Three months ended June 30, 2012:

Beginning Balances	$	46		$	666		$	36	$	324		$	2		$	—	$	—	$	1,074

Charge-offs		—			—			—		(148	)		(1	)		—		—		(149	)

Recovery		85			—			—		—			—			—		—		85

Provision		(83	)		(403	)		14		535			3			—		1		67

Ending Balance	$	48		$	263		$	50	$	711		$	4		$	—	$	1	$	1,077

Six months ended June 30, 2012
Beginning Balances	$	495		$	1,279		$	35	$	436		$	2		$	—	$	—	$	2,247
Charge-offs		(408	)		(756	)		—		(351	)		(5	)		—		—		(1,520	)
Recovery		85			—			—		—			—							85

Provision		(124	)		(260	)		15		626			7			—		1		265

Ending Balance	$	48		$	263		$	50	$	711		$	4		$	—	$	1	$	1,077

Table of Contents

NOTE 6. LOANS RECEIVABLE (CONTINUED)

		Construction, Land and Unsecured Business Loan		Commercial Real Estate			Residential Multifamily Real Estate		Residential One-to four- Family Real Estate			Credit Card			Home Equity		Passbook Loans		Total
		(Dollars in thousands)
Allowance for loan losses:

Three months ended June 30, 2011:

Beginning Balances	$	916	$	606		$	36	$	215		$	11		$	—	$	—	$	1,784

Charge-offs		—		(248	)		—		—			(8	)		—		—		(256	)

Provision		580		856			—		128			—			—		—		1,564

Ending Balance	$	1,496	$	1,214		$	36	$	343		$	3		$	—	$	—	$	3,092

Six months ended June 30, 2011
Beginning Balances	$	810	$	583		$	36	$	214		$	6		$	—	$	—	$	1,649
Charge-offs		—		(247	)		—		(5	)		(8	)		—		—		(260	)
Provision		686		878			—		134			5			—		—		1,703

Ending Balance	$	1,496	$	1,214		$	36	$	343		$	3		$	—	$	—	$	3,092

Table of Contents

NOTE 6. LOANS RECEIVABLE (CONTINUED)

	Construction, Land and Unsecured Business Loan		Commercial Real Estate		Residential Multifamily Real Estate		Residential One-to four-family Real Estate		Credit Card		Home Equity		Other		Total
	(in thousands)

At June 30, 2012: Allowance for loan loss:

Ending balance: individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance: collectively evaluated for impairment	$	48	$	263	$	50	$	711	$	4	$	—	$	1	$	1,077

Loan receivable:

Ending balance	$	424	$	19,011	$	5,852	$	63,121	$	30	$	74	$	36	$	88,547
Ending balance: individually evaluated for impairment	$	—	$	744	$	—	$	7,458	$	—	$		$	—	$	8,202

Ending balance: collectively evaluated for impairment	$	424	$	18,267	$	5,852	$	55,663	$	30	$	74	$	36	$	80,345

Table of Contents

NOTE 6. LOANS RECEIVABLE (CONTINUED)

	Construction, Land and Unsecured Business Loan		Commercial Real Estate		Residential Multifamily Real Estate		Residential One-to four-family Real Estate		Credit Card		Home Equity		Other		Total
	(in thousands)

December 31, 2011:
Allowance for loan losses:

Ending Balance:	$	495	$	1,279	$	35	$	436	$	2	$	—	$	—	$	2,247

Ending balance: individually evaluated for impairment	$	407	$	623	$	—	$	260	$	—	$	—	$	—	$	1,290
Ending balance: collectively evaluated for impairment	$	88	$	656	$	35	$	176	$	2	$	—	$	—	$	957

Loan receivable:

Ending balance	$	3,118	$	21,901	$	5,749	$	66,681	$	37	$	87	$	37	$	97,610
Ending balance: individually evaluated for impairment	$	2,176	$	2,325	$	—	$	5,143	$	—	$	—	$	—	$	9,644

Ending balance: collectively evaluated for impairment	$	942	$	19,575	$	5,749	$	61,538	$	37	$	87	$	37	$	87,965

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

Table of Contents

NOTE 6. LOANS RECEIVABLE (CONTINUED)

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

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

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

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

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

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

Table of Contents

NOTE 6. LOANS RECEIVABLE (CONTINUED)

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

	Impaired Loans With Specific Allowances				Impaired Loans With No Specific Allowances		Total Impaired Loans
	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance
	(in thousands)
June 30, 2012:
Commercial Real Estate	$	—	$	—	$	744	$	744	$	1,013
Residential one-to four-family real estate		—		—		7,458		7,458		7,808
Total impaired loans	$	—	$	—	$	8,202	$	8,202	$	8,821

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

	Impaired Loans With Specific Allowances				Impaired Loans With No Specific Allowances		Total Impaired Loans
	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance
	(in thousands)
December 31, 2011:
Construction and land	$	2,176	$	407	$	—		$ 2, 176	$	2,176
Commercial Real Estate		2,297		623		29		2,325		2,325
Residential one-to four-family real estate		2,239		260		2,904		5,143		5,143
Credit Card		—		—		3		3		3
Total impaired loans	$	6,712	$	1,290	$	2,936	$	9,648	$	9,648

Table of Contents

NOTE 6. LOANS RECEIVABLE (CONTINUED)

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

	Three months ended June 30, 2012				Six months ended June 30, 2012
	Average Recorded Investment		Interest Income Recorded		Average Recorded Investment		Interest Income Recorded
	(in thousands)				(in thousands)

Construction and land	$	198	$	—	$	531	$	—

Commercial Real Estate		744		9		1,119		9

Residential one-to four-family Real Estate		6,661		24		5,873		35

Total	$	7,603	$	33	$	7,523	$	44

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

	Three months ended June 30, 2011				Six months ended June 30, 2011
	Average Recorded Investment		Interest Income Recorded		Average Recorded Investment		Interest Income Recorded
	(in thousands)				(in thousands)

Construction and land	$	3,958	$	—	$	2,953	$	—

Commercial Real Estate		2,604		9		2,874		18

Residential one-to four-family Real Estate		4,020		—		3,936		8

Total	$	10,582	$	9	$	9,763	$	26

Table of Contents

NOTE 6. LOANS RECEIVABLE (CONTINUED)

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

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

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

	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
June 30, 2012:
Construction and land	$	—	$	—	$	384	$	—	$	384
Commercial real estate		17,215		519		1,277		—		19,011
Residential mortgage multifamily real estate		5,436		416		—		—		5,852
Residential mortgage one-to four-family real estate		52,809		1,464		8,848		—		63,121
Unsecured business loan		40		—		—		—		40
Credit card		30		—		—		—		30
Home equity		74		—		—		—		74
Passbook loan		36		—		—		—		36
Total	$	75,639	$	2,400	$	10,508	$	—	$	88,547

Table of Contents

NOTE 6. LOANS RECEIVABLE (CONTINUED)

	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
December 31, 2011:
Construction and land	$	—	$	515	$	2,563	$	—	$	3,079
Commercial real estate		19,575		—		2,325		—		21,901
Residential mortgage multifamily real estate		5,749		—		—		—		5,749
Residential mortgage one-to four-family real estate		60,732		1,720		4,230		—		66,681
Unsecured business loan		40		—		—		—		40
Credit card		37		—		—		—		37
Home equity		87		—		—		—		87
Passbook loan		37		—		—		—		37
Total	$	86,257	$	2,235	$	9,118	$	—	$	97,610

Table of Contents

NOTE 6. LOANS RECEIVABLE (CONTINUED)

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

	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Loans Receivable		Non- Accrual
	(in thousands)
June 30, 2012:
Construction and land	$	384	$	—	$	—	$	—	$	—	$	384	$	—
Commercial real estate		18,080		186		—		744		931		19,011		744
Unsecured Business Loan		40		—		—		—		—		40		—
Residential Multi family Real Estate		5,361		491		—		—		491		5,852		—
Residential One-to four-family Real Estate		55,455		495		1,322		5,849		7,665		63,121		7,458
Credit Card		30		—		—		—		—		30		—
Home Equity		74		—		—		—		—		74		—
Passbook Loan		36		—		—		—		—		36		—
Total	$	79,460	$	1,172	$	1,322	$	6,594	$	9,087	$	88,547	$	8,202

Table of Contents

NOTE 6. LOANS RECEIVABLE (CONTINUED)

	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Loans Receivable		Non- Accrual
	(in thousands)
December 31, 2011:
Construction and land	$	387	$	515	$	—	$	2,176	$	2,692	$	3,079	$	2,176
Commercial real estate		20,122		—		—		1,779		1,779		21,901		1,779
Unsecured Business Loan		40		—		—		—		—		40		—
Residential Multi family Real Estate		5,749		—		—		—		—		5,749		—
Residential One-to four-family Real Estate		60,438		2,014				4,230		6,244		66,681		4,230
Credit Card		33		—		3		—		3		37		—
Home Equity		87		—		—		—		—		87		—
Passbook Loan		37		—		—		—		—		37		—
Total	$	86,893	$	2,529	$	3	$	8,185	$	10,717	$	97,610	$	8,185

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

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

Table of Contents

NOTE 6. LOANS RECEIVABLE (CONTINUED)

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

	Number of Contracts	Pre- Modification Outstanding Recorded Investments		Post- Modification Outstanding Recorded Investments
June 30, 2012:

Troubled debt restructurings
Residential mortgage	2	$	805,935	$	805,935

	Number of Contracts	Pre- Modification Outstanding Recorded Investments		Post- Modification Outstanding Recorded Investments
December 31, 2011:

Troubled debt restructurings:
Residential mortgage	3	$	819,085	$	777,229

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

June 30, 2012:	Contracts	Balance at June 30, 2012

Troubled debt restructurings which subsequently defaulted Residential mortgage	2	$	536,169

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

Table of Contents

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

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

	Three months Ended						Six months Ended
	June 30,						June 30,
	2012			2011			2012			2011

Service cost	$	—		$	—		$	—		$	—
Interest cost		67,901			76,216			135,802			152,432
Expected return on assets		(130,754	)		(123,220	)		(242,508	)		(246,440	)
Amortization of unrecognized net loss		95,554			60,678			191,108			121,356
Net periodic benefit cost	$	32,701		$	13,674		$	84,402		$	27,348

Periodic pension expense for other unfunded plans was as follows:

	Three months ended				Six months ended
	June 30,				June 30,
	2012		2011		2012		2011

Service cost	$	7,492	$	5,499	$	14,984	$	10,998
Interest cost		13,876		15,525		27,752		31,050
Amortization of past service cost		4,706		5,278		9,412		10,556
Amortization of unrecognized net loss		5,278		705		10,556		1,410
Net periodic benefit cost	$	31,352	$	27,007	$	62,704	$	54,014

NOTE 8. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

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

Table of Contents

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

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

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

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

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

December 31, 2011
Impaired Loans	$	5,422	$	—	$	—	$	5,422

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

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

The following information should not be interpreted as an estimate of the fair value of the entire Association since a fair value calculation is only provided for a limited portion of the Association’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Association’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of financial instruments at June 30, 2012 and December 31, 2011:

Cash and Cash Equivalents, Interest Receivable and Interest Payable

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

Securities

The fair value of securities held to maturity (carried at amortized cost) are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt

Table of Contents

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

securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

Loans Receivable

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

Impaired Loans

Impaired loans are those for which the Company has measured and recorded impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Federal Home Loan Bank of New York (FHLB) Stock

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

Deposit Liabilities

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

Advances from FHLB

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

Off-Balance Sheet Financial Instruments

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

Table of Contents

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

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

	June 30, 2012
	Carrying Amount		Estimated Fair Value		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	11,554	$	11,554	$	11,554	$	—	$	—
Securities held to maturity		27,917		29,658		—		29,658		—
FHLB stock		472		472		—		472		—
Loans receivable		87,356		90,778		—		—		90,778
Accrued interest receivable		483		483		483		—		—

Financial liabilities:
Deposits		117,530		117,857		39,439		78,418		—
Advances from FHLB		5,393		5,396		—		5,396		—
Accrued interest payable		2		2		2		—		—

Table of Contents

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

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

	December 31,
	2011
	Carrying Amount		Estimated Fair Value

	(In Thousands)
Financial assets:
Cash and cash equivalents	$	8,801	$	8,801
Securities held to maturity		25,749		27,402
FHLB stock		698		698
Loans receivable		95,162		101,557
Accrued interest receivable		554		554

Financial liabilities:
Deposits		114,923		116,442
Advances from FHLB		10,082		10,113
Accrued interest payable		5		5

NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

Table of Contents

NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

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

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

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

NOTE 10. FEDERAL HOME LOAN BANK OF NEW YORK STOCK

Federal Home Loan Bank of New York (“FHLB”) stock, which represents required investment in the common stock of a correspondent bank, is carried at cost and as of June 30, 2012 and December 31, 2011, consists of the common stock of FHLB.

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

Management believes no impairment charge is necessary related to the FHLB stock as of June 30, 2012.

Table of Contents

NOTE 11. PROPERTY SALE

During 2010, the Company entered into an agreement (the “Agreement”) to sell its current main branch building and a portion of Flatbush Federal’s adjoining real estate to a third party (the “Purchaser”) (the “Transfer”). Under the Agreement, Purchaser would acquire Flatbush Federal’s current main branch building located at 2146 Nostrand Avenue, Brooklyn, New York (“Property A”). In addition thereto, the Purchaser would take title to 2158 Nostrand Avenue, Brooklyn, New York (“Property B”), and an approximately 12,305 square foot parcel (“Property C”) of a larger adjoining parking lot (“Lot 124”) abutting parts of Nostrand Avenue and Hillel Place, Brooklyn, New York (Property A, Property B, and Property C are collectively, the “Properties”).

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

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

	2.	The Transfer must close (the “Closing”) five (5) days after the date the Subdivision has been approved and new tax lot numbers are assigned to Property C and the Retained Property.

	3.	The Purchaser is obligated to complete construction of and deliver to the Company a building containing a 3,000 square foot ground floor bank branch, a cellar, and three (3) additional floors of office space. In consideration of constructing the three (3) additional floors of office space, the Purchaser shall receive a credit at the Closing.

	4.	One of the principals of the Purchaser will personally guarantee the Purchaser’s obligation to deliver the bank branch and office building to Flatbush Federal.

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

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

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

Table of Contents

NOTE 12. MERGER AGREEMENT

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

NOTE 13. REGULATORY CONSENT ORDER

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

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

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

Table of Contents

NOTE 13. REGULATORY CONSENT ORDER (CONTINUED)

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

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

Table of Contents

ITEM 2

FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES

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

Forward-Looking Statements

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

Comparison of Financial Condition at June 30, 2012 and December 31, 2011

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

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

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

On August 30, 2007, the Company approved a stock repurchase program and authorized the repurchase of up to 50,000 shares of the Company’s outstanding shares of common stock. As of June 30, 2012, under the current program, a total of 12,750 shares had been repurchased at a weighted average price of $4.44 per share.

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

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

Table of Contents

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

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

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

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

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

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

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

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

Table of Contents

Provision for Loan Losses. The Company establishes the provision for loan loss, which is charged to operations, at a level deemed appropriate to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. Based on the evaluation of these factors, a provision of $67,000 was recorded for the three months ended June 30, 2012. This evaluation considered the evaluation of $7.5 million of non-performing 1-4 family residential mortgages that were determined to have sufficient value at June 30, 2012. A provision of $1.6 million was recorded for the three months ended June 30, 2011. The level of the allowance at June 30, 2012 is based on estimates, and the ultimate losses may vary from the estimates. Non-performing loans totaled $8.2 million, or 5.7% of total assets as of June 30, 2012 compared to $8.2 million or 5.7% of total assets as of December 31, 2011 and $10.0 million or 7.1% of total assets as of June 30, 2011. As of June 30, 2012 the non-performing loans included twenty-three 1-4 family residential mortgage loans totaling $7.5 million and two non-residential mortgage loans of $744,000. Of the $7.5 million twenty-three non-performing 1-4 family residential loans, five loans totaling $1.6 million are TDR that are under 90 days past due but not accruing. The allowance for loan losses totaled $1.1 million at June 30, 2012, and was comprised of $1.1 million of general allowance. The allowance for loan losses totaled $2.2 million at December 31, 2011, and was comprised of $1.3 million of specific allowance and $957,000 of general allowance. During the three months ended June 30, 2012 and 2011, loans charged off totaled $149,000 and $256,000, respectively and recoveries of previously charged-off loans totaled $85,000 and none, respectively.

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

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

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

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

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

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

Table of Contents

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

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

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

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

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

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

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

Table of Contents

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

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

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

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

Liquidity and Capital Resources

The Association is required to maintain levels of liquid assets under the Federal banking regulations sufficient to ensure the Association’s safe and sound operation. The Association’s liquidity, calculated by a ratio of short-term assets to short-term liabilities, averaged 11.53% during the month of June 2012. The Association adjusts its liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes from escrow accounts on mortgage loans, repayment of borrowings, when applicable, and loan funding commitments. The Association also adjusts its liquidity level as appropriate to meet its asset/liability objectives.

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

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

The primary sources of investing activity are lending and the purchase of securities. Net loans totaled $87.4 million and $95.2 million at June 30, 2012 and December 31, 2011, respectively. Securities held to maturity totaled $27.9 million and $25.7 million at June 30, 2012 and December 31, 2011, respectively. In addition to funding new loans and securities purchases through operating and financing activities, such activities were funded by principal repayments on existing loans and securities.

Table of Contents

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as federal funds and interest-bearing deposits. If the Association requires funds beyond its ability to generate them internally, borrowing agreements exist with the FHLB which provides an additional source of funds. At June 30, 2012, the Company had a borrowing limit of $45.8 million from the FHLB, of which $5.4 million was advanced. At December 31, 2011 advances from the FHLB totaled $10.1 million.

The Association anticipates that it will have sufficient funds available to meet its current loan commitments and obligations. At June 30, 2012, the Association had outstanding commitments to originate or purchase loans of $550,000. Certificates of deposit scheduled to mature in one year or less at June 30, 2012, totaled $61.2 million. Management believes that, based upon its experience and the Association’s deposit flow history, a significant portion of such deposits will remain with the Association.

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

The following tables set forth the Association’s capital position at June 30, 2012 and December 31, 2011, as compared to the minimum regulatory capital requirements:

Actual

Minimal Capital Requirements

Under Prompt Corrective Actions Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

June 30, 2012:

(Dollars in Thousands)

Total Capital

21,560

24.90

> $6,926

> 8.00

> $8,657

> 10.00

(to risk-weighted assets)

Tier 1 Capital

20,483

23.66

> —

> 5,194

> 6.00

(to risk-weighted assets)

Core (Tier 1) Capital

20,483

14.46

> 5,666

> 4.00

> 7,083

> 5.00

(to adjusted total assets)

Tangible Capital

20,483

14.46

> 2,125

> 1.50

> —

(to adjusted total assets)

Actual

Minimal Capital Requirements

Under Prompt Corrective Actions Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

December 31, 2011:

(Dollars in Thousands)

Total Capital

17,137

19.88

> $6,895

> 8.00

> $8,619

> 10.00

(to risk-weighted assets)

Tier 1 Capital

16,179

18.77

> —

> 5,171

> 6.00

(to risk-weighted assets)

Core (Tier 1) Capital

16,263

11.52

> 5,645

> 4.00

> 7,056

> 5.00

(to adjusted total assets)

Tangible Capital

16,263

11.52

> 2,117

> 1.50

> —

(to adjusted total assets)

Table of Contents

Management of Interest Rate Risk

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

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

Economic Value of Equity

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

	Economic Value of Equity								Economic Value of Equity as a Percentage of Present Value of Assets
Change in Interest Rates (basis points)	Estimated EVE		Amount of Change			Percent of Change			EVE Ratio		Change in Basis Points
	(Dollars in Thousands)
+300	$	13,825	$	(9,121	)		(39.75	%)		10.32%		(513	)
+200		17,736		(5,210	)		(22.71	%)		12.70%		(275	)
+100		21,062		(1,884	)		(8.21	%)		14.56%		(89	)
0		22,946		—			—			15.45%		—
-100		24,273		1,327			5.78	%		16.07%		62

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

Table of Contents

ITEM 3. Quantitative and Qualitative Disclosure About Market Risk

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

ITEM 4. Flatbush Federal Bancorp, Inc. and Subsidiaries Controls and Procedures

(a)

Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2012 (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them in a timely manner to material information relating to us (or our consolidated subsidiary) required to be included in our periodic SEC filings.

(b)

Changes in Internal Controls over Financial Reporting.

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

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

Table of Contents

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

As of June 30, 2012, the Company was not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which, in the aggregate, involve amounts that management believes are immaterial to the Company’s consolidated financial condition, results of operations and cash flows, except as described below:

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

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

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

ITEM 1A. Risk Factors

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

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

On August 30, 2007, the Company approved a stock repurchase program and authorized the repurchase of up to 50,000 shares of the Company’s outstanding shares of common stock. Stock repurchases will be made from time to time and may be effected through open market purchases, block trades and in privately negotiated transactions. Repurchased stock will be held as treasury stock and will be available for general corporate purposes. As of June 30, 2012, 12,750 total shares have been repurchased by the Company under this repurchase program. During the quarter ended June 30, 2012, no shares were repurchased. These total repurchased shares do not include the stock dividend shares of 1,340 which, along with the repurchased shares, are held as treasury stock.

Table of Contents

Company Purchases of Common Stock
Period	Total number of shares purchased	Average price paid per share	Total number of shares purchased as part of publicly announced plans or programs	Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs
April 1, 2012 through April 30, 2012	—	$ —	—	37,250
May 1, 2012 through May 31, 2012	—	—	—	37,250
June 1, 2012 through June 30, 2012	—	—	—	37,250

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None

ITEM 6. Exhibits

The following Exhibits are filed as part of this report.

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

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

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

Table of Contents

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

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

Table of Contents

SIGNATURES

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

FLATBUSH FEDERAL BANCORP, INC.

Date: August 14, 2012	By:	/s/ Jesus R. Adia
	Jesus R. Adia
	President and
	Chief Executive Officer

Date: August 14, 2012	By:	/s/ John S. Lotardo
	John S. Lotardo
	Executive Vice President and Chief Financial Officer

FLATBUSH FEDERAL BANCORP INC 10-Q