XNAS:FFIC Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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

FORM 10-Q

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

For the quarterly period ended March 31, 2012

Commission file number 001-33013

FLUSHING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

11-3209278
(I.R.S. Employer Identification No.)

1979 Marcus Avenue, Suite E140, Lake Success, New York 11042
(Address of principal executive offices)

(718) 961-5400
(Registrant's telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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.       X  Yes           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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      X   Yes           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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer __
Non-accelerated filer   __
Accelerated filer     X  
Smaller reporting company  __

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

The number of shares of the registrant’s Common Stock outstanding as of April 30, 2012 was 30,920,676.

 
 

 
TABLE OF CONTENTS

 
PAGE
 
 
 

 
 
 
i

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Financial Condition
(Unaudited)
Item 1.   Financial Statements
 
(Dollars in thousands, except per share data)
 
March 31,
2012
   
December 31,
2011
 
ASSETS
           
Cash and due from banks
  $ 35,390     $ 55,721  
Securities available for sale:
               
Mortgage-backed securities ($34,629 and $37,787 at fair value pursuant to the fair value option at March 31, 2012 and December 31, 2011, respectively)
    733,873       747,288  
Other securities ($31,247 and $30,942 at fair value pursuant to the fair value option at March 31, 2012 and December 31, 2011 respectively)
    163,760       65,242  
Loans:
               
Multi-family residential
    1,418,254       1,391,221  
Commercial real estate
    557,688       580,783  
One-to-four family ― mixed-use property
    681,389       693,932  
One-to-four family ― residential
    214,163       220,431  
Co-operative apartments
    5,409       5,505  
Construction
    42,655       47,140  
Small Business Administration
    13,665       14,039  
Taxi medallion
    49,391       54,328  
Commercial business and other
    231,674       206,614  
Net unamortized premiums and unearned loan fees
    14,410       14,888  
Allowance for loan losses
    (30,618 )     (30,344 )
Net loans
    3,198,080       3,198,537  
Interest and dividends receivable
    18,434       17,965  
Bank premises and equipment, net
    24,053       24,417  
Federal Home Loan Bank of New York stock
    32,221       30,245  
Bank owned life insurance
    84,150       83,454  
Goodwill
    16,127       16,127  
Core deposit intangible
    820       937  
Other assets
    51,049       48,016  
Total assets
  $ 4,357,957     $ 4,287,949  
                 
LIABILITIES
               
Due to depositors:
               
Non-interest bearing
  $ 131,428     $ 118,507  
Interest-bearing:
               
Certificate of deposit accounts
    1,461,651       1,529,110  
Savings accounts
    331,242       349,630  
Money market accounts
    193,569       200,183  
NOW accounts
    1,011,001       919,029  
Total interest-bearing deposits
    2,997,463       2,997,952  
Mortgagors' escrow deposits
    41,243       29,786  
Borrowed funds ($26,136 and $26,311 at fair value pursuant to the fair value option at March 31, 2012 and December 31, 2011, respectively)
    543,861       499,839  
Securities sold under agreements to repurchase
    185,300       185,300  
Other liabilities
    35,706       39,654  
Total liabilities
    3,935,001       3,871,038  
                 
STOCKHOLDERS' EQUITY
               
Preferred stock ($0.01 par value; 5,000,000 shares authorized; None issued)
    -       -  
Common stock ($0.01 par value; 100,000,000 shares authorized; 31,530,595 shares issued at March 31, 2012 and December 31, 2011; 30,919,551 shares and 30,904,177 shares outstanding at March 31, 2012 and December 31, 2011, respectively)
    315       315  
Additional paid-in capital
    197,325       195,628  
Treasury stock, at average cost (611,044 shares and 626,418 shares at March 31, 2012 and December 31, 2011, respectively)
    (7,410 )     (7,355 )
Retained earnings
    226,553       223,510  
Accumulated other comprehensive income, net of taxes
    6,173       4,813  
Total stockholders' equity
    422,956       416,911  
                 
Total liabilities and stockholders' equity
  $ 4,357,957     $ 4,287,949  

The accompanying notes are an integral part of these consolidated financial statements
 
 
- 1 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
 
   
For the three months
ended March 31,
 
(Dollars in thousands, except per share data)
 
2012
   
2011
 
             
Interest and dividend income
           
Interest and fees on loans
  $ 46,560     $ 48,690  
Interest and dividends on securities:
               
   Interest
    7,631       8,107  
   Dividends
    207       202  
Other interest income
    17       27  
      Total interest and dividend income
    54,415       57,026  
                 
Interest expense
               
Deposits
    10,910       12,334  
Other interest expense
    6,160       7,537  
      Total interest expense
    17,070       19,871  
                 
Net interest income
    37,345       37,155  
Provision for loan losses
    6,000       5,000  
Net interest income after provision for loan losses
    31,345       32,155  
                 
Non-interest income
               
Other-than-temporary impairment ("OTTI") charge
    -       (3,616 )
Less: Non-credit portion of OTTI charge recorded in Other Comprehensive Income, before taxes
    -       2,690  
Net OTTI charge recognized in earnings
    -       (926 )
Loan fee income
    466       434  
Banking services fee income
    455       461  
Net loss from fair value adjustments
    (448 )     (655 )
Federal Home Loan Bank of New York stock dividends
    385       500  
Bank owned life insurance
    696       667  
Other income
    324       390  
      Total non-interest income
    1,878       871  
                 
Non-interest expense
               
Salaries and employee benefits
    11,041       10,027  
Occupancy and equipment
    1,930       1,867  
Professional services
    1,722       1,599  
FDIC deposit insurance
    1,017       1,428  
Data processing
    976       1,005  
Depreciation and amortization
    834       766  
Other real estate owned/foreclosure expense
    712       337  
Other operating expenses
    3,304       2,986  
      Total non-interest expense
    21,536       20,015  
                 
Income before income taxes
    11,687       13,011  
                 
Provision for income taxes
               
Federal
    3,624       3,912  
State and local
    934       1,146  
      Total taxes
    4,558       5,058  
                 
Net income
  $ 7,129     $ 7,953  
                 
                 
Basic earnings per common share
  $ 0.23     $ 0.26  
Diluted earnings per common share
  $ 0.23     $ 0.26  
Dividends per common share
  $ 0.13     $ 0.13  
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
- 2 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
 
   
For the three months ended
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
             
             
Comprehensive Income
           
Net income
  $ 7,129     $ 7,953  
   Amortization of actuarial losses
    149       77  
   Amortization of prior service credits
    (6 )     (6 )
   OTTI charges included in income
    -       518  
   Unrealized gains (losses) on securities, net
    1,217       (3,490 )
Comprehensive income
  $ 8,489     $ 5,052  

The accompanying notes are an integral part of these consolidated financial statements.

 
- 3 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
   
For the three months ended
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 7,129     $ 7,953  
Adjustments to reconcile net income to net cash provided by operating activities:
               
   Provision for loan losses
    6,000       5,000  
   Depreciation and amortization of bank premises and equipment
    834       766  
   Amortization of premium, net of accretion of discount
    1,561       1,423  
   Net loss from fair value adjustments
    448       655  
   OTTI charge recognized in earnings
    -       926  
   Income from bank owned life insurance
    (696 )     (667 )
   Stock-based compensation expense
    1,418       1,167  
   Deferred compensation
    (306 )     103  
   Amortization of core deposit intangibles
    117       117  
   Excess tax benefit from stock-based payment arrangements
    (106 )     (80 )
   Deferred income tax provision
    713       125  
Decrease in prepaid FDIC assesment
    946       1,337  
Decrease in other liabilities
    (1,676 )     (3,562 )
Decrease (Increase) in other assets
    540       (2,408 )
        Net cash provided by operating activities
    16,922       12,855  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of bank premises and equipment
    (470 )     (754 )
Net (purchase) redemptions of Federal Home Loan Bank of New York shares
    (1,976 )     1,683  
Purchases of securities available for sale
    (122,512 )     (34,657 )
Proceeds from maturities and prepayments of securities available for sale
    39,035       38,108  
Net (originations) and repayment of loans
    (19,871 )     5,396  
Purchases of loans
    (3,456 )     (12,555 )
Proceeds from sale of real estate owned
    624       154  
Proceeds from sale of delinquent loans
    9,091       3,158  
        Net cash (used in) provided by investing activities
    (99,535 )     533  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase in non-interest bearing deposits
    12,921       8,374  
Net (decrease) increase in interest-bearing deposits
    (743 )     19,648  
Net increase in mortgagors' escrow deposits
    11,457       12,512  
Net proceeds from short-term borrowed funds
    58,500       -  
Proceeds from long-term borrowings
    47,414       -  
Repayment of long-term borrowings
    (62,000 )     (47,423 )
Purchases of treasury stock
    (1,652 )     (209 )
Excess tax benefit from stock-based payment arrangements
    106       80  
Proceeds from issuance of common stock upon exercise of stock options
    244       525  
Cash dividends paid
    (3,965 )     (3,995 )
        Net cash provided by (used in) financing activities
    62,282       (10,488 )
                 
Net (decrease) increase in cash and cash equivalents
    (20,331 )     2,900  
Cash and cash equivalents, beginning of period
    55,721       47,789  
        Cash and cash equivalents, end of period
  $ 35,390     $ 50,689  
                 
SUPPLEMENTAL CASH  FLOW DISCLOSURE
               
Interest paid
  $ 16,995     $ 19,743  
Income taxes paid
    5,218       2,366  
Taxes paid if excess tax benefits were not tax deductible
    5,324       2,446  
Non-cash activities:
               
  Loans transferred to real estate owned
    1,293       980  
  Loans provided for the sale of real estate owned
    221       244  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
- 4 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
 
   
For the three months ended
March 31,
 
(Dollars in thousands, except per share data)
 
2012
   
2011
 
             
Common Stock
           
Balance, beginning of period
  $ 315     $ 313  
Issuance upon exercise of stock options (26,907 common shares for the three months ended March 31, 2011)
    -       -  
Shares issued upon vesting of restricted stock unit awards (67,886 commons shares for the three months ended March 31, 2011)
    -       1  
Balance, end of period
  $ 315     $ 314  
Additional Paid-In Capital
               
Balance, beginning of period
  $ 195,628     $ 189,348  
Award of common shares released from Employee Benefit Trust (146,735 and 131,799 common shares for the three months ended March 31, 2012 and 2011, respectively)
    1,363       1,429  
Shares issued upon vesting of restricted stock unit awards (85,163 and 67,886 common shares for the three months ended March 31, 2012 and 2011, respectively)
    151       724  
Issuance upon exercise of stock options (56,850 and 41,825 common shares for the three months ended March 31, 2012 and 2011, respectively)
    73       348  
Stock-based compensation activity, net
    4       405  
Stock-based income tax benefit
    106       80  
Balance, end of period
  $ 197,325     $ 192,334  
Treasury Stock
               
Balance, beginning of period
  $ (7,355 )   $ -  
Purchases of outstanding shares (97,200 common shares for the three months ended March 31, 2012)
    (1,282 )     -  
Shares issued upon vesting of restricted stock unit awards (113,993 common shares for the three months ended March 31, 2012)
    1,343       -  
Issuance upon exercise of stock options (67,330 and 14,378 common shares for the three months ended March 31, 2012 and 2011, respectively)
    802       209  
Purchases of shares to fund options exercised (40,866 common shares for the three months ended March 31, 2012)
    (548 )     -  
Repurchase of shares to satisfy tax obligations (27,883 and 14,378 common shares for the three months ended March 31, 2012 and 2011, respectively)
    (370 )     (209 )
Balance, end of period
  $ (7,410 )   $ -  
Retained Earnings
               
Balance, beginning of period
  $ 223,510     $ 204,128  
Net income
    7,129       7,953  
Cash dividends declared and paid on common shares ($0.13 per common share for the three months ended March 31, 2012 and 2011)
    (3,965 )     (3,995 )
Issuance upon exercise of stock options (10,480 and 41,825 common shares for the three months ended March 31, 2012 and 2011, respectively)
    (24 )     (32 )
Shares issued upon vesting of restricted stock unit awards (28,830 common shares for the three months ended March 31, 2012)
    (97 )     -  
Balance, end of period
  $ 226,553     $ 208,054  
Accumulated Other Comprehensive Income (Loss)
               
Balance, beginning of period
  $ 4,813     $ (3,744 )
Change in net unrealized gains (losses) on securities available for sale, net of taxes of approximately ($962) and $2,756 for the three months ended March 31, 2012 and 2011, respectively
    1,217       (3,490 )
Amortization of actuarial losses, net of taxes of approximately ($117) and ($61) for the three months ended March 31, 2012 and 2011, respectively
    149       77  
Amortization of prior service credits, net of taxes of approximately $5 for the three months ended March 31, 2012 and 2011
    (6 )     (6 )
OTTI charges included in income, net of taxes of approximately ($408) for the three months ended March 31, 2011
    -       518  
Balance, end of period
  $ 6,173     $ (6,645 )
                 
Total Stockholders' Equity
  $ 422,956     $ 394,057  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
- 5 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)


1. Basis of Presentation
 
The primary business of Flushing Financial Corporation (the “Holding Company”) is the operation of its wholly-owned subsidiary, Flushing Savings Bank, FSB (the “Savings Bank”).  The Holding Company and its direct and indirect wholly-owned subsidiaries, the Savings Bank, Flushing Commercial Bank, Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc., are collectively herein referred to as the “Company.” The unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q (“Quarterly Report”) include the collective results of the Company on a consolidated basis.
 
The accompanying unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for such presented periods of the Company.  Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Quarterly Report. All inter-company balances and transactions have been eliminated in consolidation.  The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year.
 
The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements.  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
When necessary, certain reclassifications have been made to the prior-period consolidated financial statements to conform to the current-period presentation.
 
2.  Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Estimates that are particularly susceptible to change in the near term are used in connection with the determination of the allowance for loan losses, the evaluation of goodwill for impairment, the evaluation of the need for a valuation allowance of the Company’s deferred tax assets and the evaluation of other-than-temporary impairment (“OTTI”) on securities. The current economic environment has increased the degree of uncertainty inherent in these material estimates.  Actual results could differ from these estimates.
 
3.  Earnings Per Share
 
Earnings per share are computed in accordance with Accounting Standards Codification (“ASC”) Topic 260 “Earnings Per Share,” which provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and as such should be included in the calculation of earnings per share.  Basic earnings per common share is computed by dividing net income available to common shareholders by the total weighted average number of common shares outstanding, which includes unvested participating securities. The Company’s unvested restricted stock and restricted stock unit awards are considered participating securities. Therefore, weighted average common shares outstanding used for computing basic earnings per common share includes common shares outstanding plus unvested restricted stock and restricted stock unit awards. The computation of diluted earnings per share includes the additional dilutive effect of stock options outstanding during the period.  Common stock equivalents that are anti-dilutive are not included in the computation of diluted earnings per common share. The numerator for calculating basic and diluted earnings per common share is net income available to common shareholders.

 
- 6 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)



Earnings per common share have been computed based on the following:
 
   
For the three months ended
March 31,
 
   
2012
   
2011
 
   
(In thousands, except per share data)
 
Net income, as reported
  $ 7,129     $ 7,953  
Divided by:
               
Weighted average common shares outstanding
    30,396       30,620  
Weighted average common stock equivalents
    24       66  
Total weighted average common shares outstanding and common stock equivalents
    30,420       30,686  
                 
Basic earnings per common share
  $ 0.23     $ 0.26  
Diluted earnings per common share (1)
  $ 0.23     $ 0.26  
Dividend payout ratio
    56.5 %     50.0 %


(1)  
For the three months ended March 31, 2012, options to purchase 720,340 shares at an average exercise price of $16.71 were not included in the computation of diluted earnings per common share as they were anti-dilutive. For the three months ended March 31, 2011, options to purchase 560,550 shares at an average exercise price of $17.62 were not included in the computation of diluted earnings per common share as they were anti-dilutive.


4.  Debt and Equity Securities
 

The Company’s investments are classified in one of the following three categories and accounted for accordingly: (1) trading securities, (2) securities available for sale and (3) securities held-to-maturity.
 
The Company did not hold any trading securities or securities held-to-maturity during the three month periods ended March 31, 2012 and 2011. Securities available for sale are recorded at fair value.
 
The following table summarizes the Company’s portfolio of securities available for sale at March 31, 2012:
 
   
Amortized
Cost
   
Fair Value
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
 
          (In thousands)        
U.S. government agencies
  $ 21,819     $ 21,517     $ 44     $ 346  
Corporate
    61,810       63,143       1,333       -  
Municipals
    40,324       39,648       -       676  
Mutual funds
    21,450       21,450       -       -  
Other
    22,296       18,002       15       4,309  
Total other securities
    167,699       163,760       1,392       5,331  
REMIC and CMO
    453,662       467,988       22,556       8,230  
GNMA
    57,869       62,870       5,001       -  
FNMA
    175,243       182,078       6,871       36  
FHLMC
    20,181       20,937       756       -  
Total mortgage-backed securities
    706,955       733,873       35,184       8,266  
Total securities available for sale
  $ 874,654     $ 897,633     $ 36,576     $ 13,597  

Mortgage-backed securities shown in the table above include two private issue collateralized mortgage obligations (“CMO”) that are collateralized by commercial real estate mortgages with amortized cost and market values totaling $18.1 million and $18.5 million, respectively, at March 31, 2012.  The remaining private issue mortgage-backed securities are backed by one-to-four family residential mortgage loans.
 
 
- 7 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value aggregated by category and length of time the individual securities have been in a continuous unrealized loss position, at March 31, 2012:
 
   
Total
   
Less than 12 months
   
12 months or more
 
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
                (In thousands)              
U.S. government agencies
  $ 19,651     $ 346     $ 19,651     $ 346     $ -     $ -  
Municipals
    33,354       676       33,354       676       -       -  
Other
    5,253       4,309       -       -       5,253       4,309  
Total other securities
    58,258       5,331       53,005       1,022       5,253       4,309  
REMIC and CMO
    40,607       8,230       13,525       254       27,082       7,976  
FNMA
    10,444       36       10,444       36       -       -  
Total mortgage-backed securities
    51,051       8,266       23,969       290       27,082       7,976  
Total securities available for sale
  $ 109,309     $ 13,597     $ 76,974     $ 1,312     $ 32,335     $ 12,285  
 
Other-than-temporary impairment (“OTTI”) losses on impaired securities must be fully recognized in earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost. However, even if an investor does not expect to sell a debt security, the investor must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event that a credit loss has occurred, only the amount of impairment associated with the credit loss is recognized in earnings in the Consolidated Statements of Income. Amounts relating to factors other than credit losses are recorded in accumulated other comprehensive income (“AOCI”) within Stockholders’ Equity. Additional disclosures regarding the calculation of credit losses as well as factors considered by the investor in reaching a conclusion that an investment is not other-than-temporarily impaired are required.
 
The Company reviewed each investment that had an unrealized loss at March 31, 2012. An unrealized loss exists when the current fair value of an investment is less than its amortized cost basis. Unrealized losses on available for sale securities, that are deemed to be temporary, are recorded in AOCI, net of tax.  Unrealized losses that are considered to be other-than-temporary are split between credit related and noncredit related impairments, with the credit related impairment being recorded as a charge against earnings and the noncredit related impairment being recorded in AOCI, net of tax.
 
The Company evaluates its pooled trust preferred securities, included in the table above in the row labeled “Other”, using an impairment model through an independent third party, which includes evaluating the financial condition of each counterparty.  For single issuer trust preferred securities, the Company evaluates the issuer’s financial condition. The Company evaluates its mortgage-backed securities by reviewing the characteristics of the securities, including delinquency and foreclosure levels, projected losses at various loss severity levels and credit enhancement and coverage. In addition, private issue CMOs are evaluated using an impairment model through an independent third party. When an OTTI is identified, the portion of the impairment that is credit related is determined by management using the following methods: (1) for trust preferred securities, the credit related impairment is determined by using a discounted cash flow model from an independent third party, with the difference between the present value of the projected cash flows and the amortized cost basis of the security recorded as a credit related loss against earnings; (2) for mortgage-backed securities, credit related impairment is determined for each security by estimating losses based on a set of assumptions, which includes delinquency and foreclosure levels, projected losses at various loss severity levels, credit enhancement and coverage; and (3) for private issue CMOs, through an impairment model from an independent third party and then recording those estimated losses as a credit related loss against earnings.
 
 
- 8 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

U.S. Government Agencies:
The unrealized losses in U.S. Government Agencies at March 31, 2012, consist of losses on two U.S. Government securities. The unrealized losses were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2012.
 
Municipals:
The unrealized losses in Municipal securities at March 31, 2012, consist of losses on 12 municipal securities. The unrealized losses were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2012.
 
Other Securities:
The unrealized losses in Other Securities at March 31, 2012, consist of losses on one single issuer trust preferred security and two pooled trust preferred securities. The unrealized losses on  such securities were caused by market interest volatility, a significant widening of credit spreads across markets for these securities and illiquidity and uncertainty in the financial markets. These securities are currently rated below investment grade. The pooled trust preferred securities do not have collateral that is subordinate to the classes the Company owns. The Company’s management evaluates these securities using an impairment model, through an independent third party, that is applied to debt securities. In estimating other-than-temporary impairment losses, management considers: (1) the length of time and the extent to which the fair value has been less than amortized cost; (2) the current interest rate environment; (3) the financial condition and near-term prospects of the issuer, if applicable; and (4) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value. Additionally, management reviews the financial condition of each individual issuer within the pooled trust preferred securities. All of the issuers of the underlying collateral of the pooled trust preferred securities we reviewed are banks.
For each bank, our review included the following performance items:
 
§
 Ratio of tangible equity to assets
§
 Tier 1 Risk Weighted Capital
§
 Net interest margin
§
 Efficiency ratio for most recent two quarters
§
 Return on average assets for most recent two quarters
§
 Texas Ratio (ratio of non-performing assets plus assets past due over 90 days divided by tangible equity plus the reserve for loan losses)
§
 Credit ratings (where applicable)
§
 Capital issuances within the past year (where applicable)
§
 Ability to complete Federal Deposit Insurance Corporation (“FDIC”) assisted acquisitions (where applicable)
 
Based on the review of the above factors, we concluded that:
 
§
 All of the performing issuers in our pools are well capitalized banks and do not appear likely to be closed by their regulators.
 
§
 All of the performing issuers in our pools will continue as a going concern and will not default on their securities.
 
 
- 9 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

In order to estimate potential future defaults and deferrals, we segregated the performing underlying issuers by their Texas Ratio. We then reviewed performing issuers with Texas Ratios in excess of 50%. The Texas Ratio is a key indicator of the health of the institution and the likelihood of failure. This ratio compares the problem assets of the institution to the institution’s available capital and reserves to absorb losses that are likely to occur in these assets. There was one issuer with a Texas Ratio in excess of 50% for which we concluded there would not be a default, primarily due to its current operating results and demonstrated ability to raise additional capital.
 
There were no remaining performing issuers in our pooled trust preferred securities which had a Texas Ratio in excess of 85.00%. For the remaining issuers with a Texas Ratio between 50.00% and 84.99%, we estimated 25% of the related cash flows of the issuer would not be realized. We concluded that issuers with a Texas Ratio below 50.00% are considered healthy and there was a minimal risk of default. We assigned a zero default rate to these issuers. Our analysis also assumed that issuers currently deferring would default with no recovery and issuers that have defaulted will have no recovery.
 
We had an independent third party prepare a discounted cash flow analysis for each of these pooled trust preferred securities based on the assumptions discussed above. Other significant assumptions were: (1) no issuers will prepay; (2) senior classes will not call the debt on their portions; and (3) use of the forward London Interbank Offered Rate (“LIBOR”) curve. The cash flows were discounted at the effective rate for each security. For each issuer that we assumed a 25% shortfall in the cash flows, the cash flow analysis eliminates 25% of the cash flow for each issuer effective immediately.
 
One of the pooled trust preferred securities is over 90 days past due and the Company has stopped accruing interest. The remaining pooled trust preferred security as well as the single issuer trust preferred security both are performing according to their terms.  The Company also owns a pooled trust preferred security that is carried under the fair value option, where the unrealized losses are included in the Consolidated Statements of Income – Net gain (loss) from fair value adjustments.  This security is over 90 days past due and the Company has stopped accruing interest.
 
It is not anticipated at this time that the one single issuer trust preferred security and the two pooled trust preferred securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms; except for the pooled trust preferred securities for which the Company has stopped accruing interest as discussed above and, in the opinion of management based on the review performed at March 31, 2012, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider the one single issuer trust preferred security and the two pooled trust preferred securities to be other-than-temporarily impaired at March 31, 2012.
 
At March 31, 2012, the Company held six trust preferred issues which had a current credit rating of at least one rating below investment grade. Two of those issues are carried under the fair value option and therefore, changes in fair value are included in the Consolidated Statement of Income – Net gain (loss) from fair value adjustments.

The following table details the remaining four trust preferred issues that were evaluated to determine if they were other-than-temporarily impaired at March 31, 2012. The class the Company owns in pooled trust preferred securities does not have any excess subordination.

                                 
Deferrals/Defaults (1)
       
Issuer
Type
 
Class
   
Performing
Banks
   
Amortized
Cost
   
Fair
Value
   
Cumulative
Credit Related
OTTI
   
Actual as a
Percentage
of Original
Security
   
Expected
Percentage
of Performing
Collateral
   
Current
Lowest
Rating
 
               
(Dollars in thousands)
                   
                                                 
Single issuer
    n/a       1     $ 300     $ 268     $ -    
None
   
None
   
BB
Single issuer
    n/a       1       500       515       -    
None
   
None
      B +
Pooled issuer
    B1       19       5,617       2,960       2,196       28.2 %     0.9 %     C  
Pooled issuer
    C1       19       3,645       2,025       1,542       25.6 %     0.0 %     C  
Total
                  $ 10,062     $ 5,768     $ 3,738                          
 
(1)  
Represents deferrals/defaults as a percentage of the original security and expected deferrals/defaults as a percentage of performing issuers.
 
 
- 10 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

REMIC and CMO:
The unrealized losses in Real Estate Mortgage Investment Conduit (“REMIC”) and CMO securities at March 31, 2012 consist of three issues from the Federal Home Loan Mortgage Corporation (“FHLMC”), one issue from the Federal National Mortgage Association (“FNMA”), one issue from Government National Mortgage Association (“GNMA”) and seven private issues.
 
The unrealized losses on the REMIC and CMO securities issued by FHLMC, FNMA and GNMA were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities.  Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2012.
 
The unrealized losses at March 31, 2012 on REMIC and CMO securities issued by private issuers were caused by movements in interest rates, a significant widening of credit spreads across markets for these securities and illiquidity and uncertainty in the financial markets. Each of these securities has some level of credit enhancements and none are collateralized by sub-prime loans.  Currently, three of these securities are performing according to their terms, with four of these securities remitting less than the full principal amount due.  The principal loss for these four securities totaled $0.4 million for the three months ended March 31, 2012.  These losses were anticipated in the cumulative credit related OTTI charges recorded for these four securities.
 
Credit related impairment for mortgage-backed securities are determined for each security by estimating losses based on the following set of assumptions: (1) delinquency and foreclosure levels; (2) projected losses at various loss severity levels; and (3) credit enhancement and coverage. Based on these reviews, an OTTI charge was not recorded during the three months ended March 31, 2012.
 
It is not anticipated at this time that the seven private issue CMOs would be settled at a price that is less than the current amortized cost of the Company’s investment.  The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities.  Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2012.
 
At March 31, 2012, the Company held 16 private issue CMOs which had a current credit rating of at least one rating below investment grade. Six of those issues are carried under the fair value option and therefore, changes in fair value are included in the Consolidated Statement of Income – Net gain (loss) from fair value adjustments.

The following table details the remaining 10 private issue CMOs that were evaluated to determine if they were other-than-temporarily impaired at March 31, 2012:

       
 
                     
                               
         
 
 
 
Collateral Located in:
 
Security
Amortized
Cost
Fair
Value
Outstanding
Principal
Cumulative
OTTI
Charges
Recorded
Year of
Issuance
Maturity
Current
Lowest
Rating
CA
FL
VA
NY
NJ
TX
MD
Average
FICO
Score
 
(Dollars in  thousands)
                     
                               
1
 $            11,611
 $      8,529
 $              12,774
 $                 3,279
2006
05/25/36
D
44%
   
15%
     
720
2
                5,218
          3,745
                     5,310
                          447
2006
08/19/36
D
54%
           
737
3
                5,193
           4,167
                    5,658
                          954
2006
08/25/36
D
36%
15%
         
714
4
               3,936
          3,428
                    4,468
                          657
2006
08/25/36
D
38%
13%
 
12%
 
12%
 
724
5
                3,156
          2,868
                    3,439
                           221
2006
03/25/36
CC
36%
           
727
6
                1,705
           1,732
                      1,716
                                -
2005
12/25/35
B-
39%
           
734
7
                4,781
           3,193
                    5,057
                          222
2006
05/25/36
CC
27%
 
19%
10%
11%
   
715
8
                   884
              892
                        892
                                -
2006
08/25/36
CCC
29%
           
737
9
                1,348
           1,366
                     1,367
                                -
2005
11/25/35
B-
40%
 
17%
     
13%
729
10
                 1,162
            1,153
                      1,164
                                -
2005
11/25/35
CC
46%
10%
         
739
Total
 $        38,994
 $    31,073
 $              41,845
 $                 5,780
                     
 
 
- 11 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

FNMA:
The unrealized losses in FNMA securities at March 31, 2012 consist of losses on one FNMA security. The unrealized losses were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms, and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements, and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities.  Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2012.
 
The following table details gross unrealized losses recorded in AOCI and the ending credit loss amount on debt securities, as of March 31, 2012, for which the Company has recorded a credit related OTTI charge in the Consolidated Statements of Income:

(in thousands)
 
Amortized Cost
   
Fair Value
   
Gross Unrealized
Losses Recorded
In AOCI
   
Cumulative
Credit OTTI
Losses
 
                         
Private issued CMO's (1)
  $ 33,895     $ 25,929     $ 7,966     $ 2,740  
Trust preferred securities (1)
    9,262       4,985       4,277       3,738  
Total
  $ 43,157     $ 30,914     $ 12,243     $ 6,478  
 
(1)  
The Company has recorded OTTI charges in the Consolidated Statements of Income on six private issue CMOs and two pooled trust preferred securities for which a portion of the OTTI is currently recorded in AOCI.
 
The following table represents the activity related to the credit loss component recognized in earnings on debt securities held by the Company for which a portion of OTTI was recognized in AOCI for the period indicated:

(in thousands)
 
For the three months ended
March 31, 2012
 
Beginning balance
  $ 6,922  
         
Recognition of actual losses
    (444 )
OTTI charges due to credit loss recorded in earnings
    -  
Securities sold during the period
    -  
Securities where there is an intent to sell or requirement to sell
    -  
         
Ending balance
  $ 6,478  
 
 
- 12 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following table details the amortized cost and estimated fair value of the Company’s securities classified as available for sale at March 31, 2012, by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
Amortized
Cost
   
Fair Value
 
   
(In thousands)
 
             
Due in one year or less
  $ 34,369     $ 34,412  
Due after one year through five years
    25,857       26,487  
Due after five years through ten years
    31,620       32,058  
Due after ten years
    75,853       70,803  
                 
Total other securities
    167,699       163,760  
Mortgage-backed securities
    706,955       733,873  
                 
Total securities available for sale
  $ 874,654     $ 897,633  
 
 
The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2011:

   
Amortized
Cost
   
Fair Value
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
 
          (In thousands)        
U.S. government agencies
  $ 1,980     $ 2,039     $ 59     $ -  
Corporate
    20,777       20,592       -       185  
Municipals
    4,534       4,532       -       2  
Mutual funds
    21,369       21,369       -       -  
Other
    22,023       16,710       9       5,322  
Total other securities
    70,683       65,242       68       5,509  
REMIC and CMO
    460,824       473,639       22,796       9,981  
GNMA
    62,040       67,632       5,592       -  
FNMA
    175,627       182,630       7,003       -  
FHLMC
    22,556       23,387       831       -  
Total mortgage-backed securities
    721,047       747,288       36,222       9,981  
Total securities available for sale
  $ 791,730     $ 812,530     $ 36,290     $ 15,490  
 
Mortgage-backed securities shown in the table above include two private issue CMO that are collateralized by commercial real estate mortgages with amortized cost and market values of $19.0 million and $19.2 million, respectively, at December 31, 2011.  The remaining private issue mortgage-backed securities are backed by one-to-four family residential mortgage loans.
 
 
- 13 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2011.
 
   
Total
   
Less than 12 months
   
12 months or more
 
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
                (In thousands)              
Corporate
  $ 17,980     $ 185     $ 17,980     $ 185     $ -     $ -  
Municipals
    1,997       2       1,997       2       -       -  
Other
    4,241       5,322       -       -       4,241       5,322  
Total other securities
    24,218       5,509       19,977       187       4,241       5,322  
REMIC and CMO
    38,684       9,981       12,560       124       26,124       9,857  
Total securities available for sale
  $ 62,902     $ 15,490     $ 32,537     $ 311     $ 30,365     $ 15,179  
 
5.           Loans
 
Loans are reported at their outstanding principal balance, net of any unearned income, charge-offs, deferred loan fees and costs on originated loans and unamortized premiums or discounts on purchased loans. Interest on loans is recognized on the accrual basis. The accrual of income on loans is generally discontinued when certain factors, such as contractual delinquency of 90 days or more, indicate reasonable doubt as to the timely collectability of such income. Uncollected interest previously recognized on non-accrual loans is reversed from interest income at the time the loan is placed on non-accrual status. A non-accrual loan can be returned to accrual status when contractual delinquency returns to less than 90 days delinquent. Subsequent cash payments received on non-accrual loans that do not bring the loan to less than 90 days delinquent are recorded on a cash basis. Subsequent cash payments can also be applied first as a reduction of principal until all principal is recovered and then subsequently to interest, if in management’s opinion, it is evident that recovery of all principal due is unlikely to occur. Net loan origination costs and premiums or discounts on loans purchased are amortized into interest income over the contractual life of the loans using the level-yield method. Prepayment penalties received on loans which pay in full prior to their scheduled maturity are included in interest income in the period they are collected.
 
The Company maintains an allowance for loan losses at an amount, which, in management’s judgment, is adequate to absorb probable estimated losses inherent in the loan portfolio. Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectability of loans. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available. In assessing the adequacy of the Company's allowance for loan losses, management considers various factors such as, the current fair value of collateral for collateral dependent loans, the Company's historical loss experience, recent trends in losses, collection policies and collection experience, trends in the volume of non-performing and classified loans, changes in the composition and volume of the gross loan portfolio and local and national economic conditions. The Company’s Board of Directors (the “Board of Directors”) reviews and approves management’s evaluation of the adequacy of the allowance for loan losses on a quarterly basis.
 
The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Increases and decreases in the allowance for loan losses other than charge-offs and recoveries are included in the provision for loan losses. When a loan or a portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance.
 
The Company recognizes a loan as non-performing when the borrower has indicated the inability to bring the loan current, or due to other circumstances which, in our opinion, indicate the borrower will be unable to bring the loan current within a reasonable time. All loans classified as non-performing, which includes all loans past due 90 days or more, are classified as non-accrual unless there is, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future. Appraisals and/or updated internal evaluations are obtained as soon as practical and before the loan become 90 days delinquent. The loan balances of collateral dependant impaired loans are compared to the loan’s updated fair value. The balance which exceeds fair value is generally charged-off.  Management reviews the allowance for loan losses on a quarterly basis and records as a provision the amount deemed appropriate, after considering current year charge-offs, charge-off trends, new loan production, current balance by particular loan categories and delinquent loans by particular loan categories.
 
 
- 14 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

A loan is considered impaired when, based upon the most current information, the Company believes it is probable that it will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan. Impaired loans are measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Interest income on impaired loans is recorded on a cash basis. The Company’s management considers all non-accrual loans impaired.
 
The Company reviews each impaired loan to determine if a charge-off is to be recorded or if a valuation allowance is to be allocated to the loan. The Company does not allocate a valuation allowance to loans for which we have concluded the current value of the underlying collateral will allow for recovery of the loan balance either through the sale of the loan or by foreclosure and sale of the property.
 
The Company evaluates the underlying collateral through a third party appraisal, or when a third party appraisal is not available, the Company will use an internal evaluation. The internal evaluations are performed using an income approach or a sales approach. The income approach is used for income producing properties and uses current revenues less operating expenses to determine the net cash flow of the property. Once the net cash flow is determined, the value of the property is calculated using an appropriate capitalization rate for the property. The sales approach uses comparable sales prices in the market.  When an internal evaluation is used, we place greater reliance on the income approach to value the collateral.
 
In preparing internal evaluations of property values, the Company seeks to obtain current data on the subject property from various sources, including: (1) the borrower; (2) copies of existing leases; (3) local real estate brokers and appraisers; (4) public records (such as for real estate taxes and water and sewer charges); (5) comparable sales and rental data in the market; (6) an inspection of the property; and (7) interviews with tenants. These internal evaluations primarily focus on the income approach and comparable sales data to value the property.
 
As of March 31, 2012, the Company utilized recent third party appraisals of the collateral to measure impairment for $143.1 million, or 75.5%, of collateral dependent impaired loans and used internal evaluations of the property’s value for $46.4 million, or 24.5%, of collateral dependent impaired loans.
 
The Company may restructure a loan to enable a borrower to continue making payments when it is deemed to be in the Company’s best long-term interest. This restructure may include reducing the interest rate or amount of the monthly payment for a specified period of time, after which the interest rate and repayment terms revert to the original terms of the loan. We classify these loans as Troubled Debt Restructured (“TDR”) when the Savings Bank grants a concession to a borrower who is experiencing financial difficulties.
 
These restructurings have not included a reduction of principal balance. The Company believes that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. All loans classified as TDR are considered impaired, however TDR loans which have been current for six consecutive months at the time they are restructured as TDR remain on accrual status and are not included as part of non-performing loans. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status and reported as non-performing loans until they have made timely payments for six consecutive months. Loans that are restructured as TDR but are not performing in accordance with the restructured terms are placed on non-accrual status and reported as non-performing loans.
 
The allocation of a portion of the allowance for loan losses for a performing TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate, or for a non-performing TDR which is collateral dependent, the fair value of the collateral. At March 31, 2012, there were no commitments to lend additional funds to borrowers whose loans were modified to a TDR. The modification of loans to a TDR did not have a significant effect on our operating results, nor did it require a significant allocation of the allowance for loan losses.
 
During the three months ended March 31, 2012, two one-to-four family – mixed use property loans totaling $0.5 million were modified and classified as TDR, as each of these borrowers was given an interest rate that was considered below market for that borrower; and one commercial mortgage loan totaling $1.4 million was modified and classified as TDR, as the borrower had two business line of credit loans rolled into one five year fixed rate commercial mortgage and was given an interest rate that was considered below market for that borrower with the loan’s amortization term extended. For each of the loans that were modified and classified as TDR, the borrower was experiencing financial difficulties. The recorded investment of each of the loans modified and classified to TDR was unchanged as there was no principal forgiven in any of these modifications.
 
 
- 15 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

During the three months ended March 31, 2011, six multi-family loans totaling $1.8 million were modified and classified as TDR, as each of these borrowers was given an interest rate that was considered below market for that borrower and each had the loan’s amortization term extended; two constructions loans totaling $24.2 million were modified and classified as TDR, as each of these borrowers was given an interest rate that was considered below market for that borrower; one commercial business loan for $2.0 million was modified and classified as TDR, as the borrower was given an interest rate that was considered below market for that borrower.
 
The following table shows loans classified as TDR that are performing according to their restructured terms at the periods indicated:
 
   
March 31, 2012
   
December 31, 2011
 
(Dollars in thousands)
 
Number
of contracts
   
Recorded
investment
   
Number
 of contracts
   
Recorded
investment
 
                         
Multi-family residential
    8     $ 2,356       11     $ 9,412  
Commercial real estate
    2       2,456       2       2,499  
One-to-four family - mixed-use property
    4       1,084       3       795  
Construction
    1       5,312       1       5,888  
Commercial business and other
    1       2,000       1       2,000  
                                 
Total performing troubled debt restructured
    16     $ 13,208       18     $ 20,594  
 
The following table shows loans classified as TDR that are not performing according to their restructured terms at the periods indicated:
 
   
March 31, 2012
   
December 31, 2011
 
(Dollars in thousands)
 
Number
of contracts
   
Recorded
investment
   
Number
 of contracts
   
Recorded
investment
 
                         
Multi-family residential
    3     $ 6,856       -     $ -  
Commercial real estate
    3       5,313       2       4,340  
One-to-four family - mixed-use property
    4       1,369       3       1,193  
One-to-four family - residential
    -       -       -       -  
Construction
    1       11,496       1       11,673  
                                 
Total troubled debt restructurings that subsequently defaulted
    11     $ 25,034       6     $ 17,206  
 
During the three months ended March 31, 2012, three multi-family TDR totaling $6.9 million were transferred to non-accrual.
 
 
- 16 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following table shows our non-performing loans at the periods indicated:
 
         
 
 
(Dollars in thousands)
 
March 31,
2012
   
December 31,
2011
 
             
Loans ninety days or more past due and still accruing:
           
Multi-family residential
  $ -     $ 6,287  
Commercial real estate
    -       92  
Construction
    108       -  
Total
    108       6,379  
                 
Non-accrual mortgage loans:
               
Multi-family residential
    25,986       19,946  
Commercial real estate
    24,876       19,895  
One-to-four family - mixed-use property
    23,475       28,429  
One-to-four family - residential
    12,337       12,766  
Co-operative apartments
    110       152  
Construction
    11,944       14,721  
Total
    98,728       95,909  
                 
Non-accrual non-mortgage loans:
               
Small Business Administration
    592       493  
Commercial Business and other
    20,478       14,660  
Total
    21,070       15,153  
                 
Total non-accrual loans
    119,798       111,062  
                 
Total non-accrual loans and loans ninety days or more past due and still accruing
  $ 119,906     $ 117,441  

The interest foregone on non-accrual loans and loans classified as TDR totaled $2.5 million and $2.7 million for the three months ended March 31, 2012 and March 31, 2011, respectively.
 
 
The following table shows an age analysis of our recorded investment in loans at March 31, 2012:
 
(in thousands)
 
30 - 59 Days
Past Due
   
60 - 89 Days
Past Due
   
Greater
than
90 Days
   
Total Past
Due
   
Current
   
Total Loans
 
                                     
                                     
Multi-family residential
  $ 26,466     $ 10,474     $ 19,165     $ 56,105     $ 1,362,149     $ 1,418,254  
Commercial real estate
    10,241       2,463       23,862       36,566       521,122       557,688  
One-to-four family - mixed-use property
    15,336       5,539       22,997       43,872       637,517       681,389  
One-to-four family - residential
    4,476       1,488       12,338       18,302       195,861       214,163  
Co-operative apartments
    -       -       110       110       5,299       5,409  
Construction loans
    -       -       12,052       12,052       30,603       42,655  
Small Business Administration
    15       227       453       695       12,970       13,665  
Taxi medallion
    -       -       -       -       49,391       49,391  
Commercial business and other
    2,771       85       19,423       22,279       209,395       231,674  
    Total
  $ 59,305     $ 20,276     $ 110,400     $ 189,981     $ 3,024,307     $ 3,214,288  
 
 
- 17 -

 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following table shows an age analysis of our recorded investment in loans at December 31, 2011:
 
(in thousands)
 
30 - 59 Days
Past Due
   
60 - 89 Days
Past Due
   
Greater
than
90 Days
   
Total Past
Due
   
Current
   
Total Loans
 
                (in thousands)              
                                     
Multi-family residential
  $ 20,083     $ 6,341     $ 26,233     $ 52,657     $ 1,338,564     $ 1,391,221  
Commercial real estate
    10,804       1,797       19,987       32,588       548,195       580,783  
One-to-four family - mixed-use property
    20,480       3,027       27,950       51,457       642,475       693,932  
One-to-four family - residential
    4,699       1,769       12,766       19,234       201,197       220,431  
Co-operative apartments
    -       -       152       152       5,353       5,505  
Construction loans
    5,065       -       14,721       19,786       27,354       47,140  
Small Business Administration
    16       41       452       509       13,530       14,039  
Taxi medallion
    71       -       -       71       54,257       54,328  
Commercial business and other
    5,476       966       10,241       16,683       189,931       206,614  
    Total
  $ 66,694     $ 13,941     $ 112,502     $ 193,137     $ 3,020,856     $ 3,213,993  
 
The following table shows the activity in the allowance for loan losses for the three months ended March 31, 2012:
 
(in thousands)
 
Multi-family
residential
   
Commercial
real estate
   
One-to-four
family -
mixed-use
property
   
One-to-four
family -
residential
   
Co-operative
apartments
   
Construction
loans
   
Small Business
Administration
   
Taxi
medallion
   
Commercial
business and
 other
   
Total
 
                                                             
Allowance for credit losses: