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FLUSHING FINANCIAL CORP - Quarter Report: 2013 March (Form 10-Q)

f10q_051013.htm
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, 2013

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, 2013 was 30,835,169.

 
 

 
TABLE OF CONTENTS

 
PAGE
PART I  —  FINANCIAL INFORMATION
 
 
PART II  —  OTHER INFORMATION
 

 

 
 

 
  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,
2013
   
December 31,
2012
 
ASSETS
           
Cash and due from banks
  $ 46,046     $ 40,425  
Securities available for sale:
               
Mortgage-backed securities ($17,965 and $24,911 at fair value pursuant to the fair value option at March 31, 2013 and December 31, 2012, respectively)
    764,701       720,113  
Other securities ($29,933 and $29,577 at fair value pursuant to the fair value option at March 31, 2013 and December 31, 2012 respectively)
    235,593       229,453  
Loans held for sale
    9,907       5,313  
Loans:
               
Multi-family residential
    1,528,353       1,534,438  
Commercial real estate
    507,932       515,438  
One-to-four family ― mixed-use property
    615,661       637,353  
One-to-four family ― residential
    197,268       198,968  
Co-operative apartments
    8,221       6,303  
Construction
    10,952       14,381  
Small Business Administration
    8,812       9,496  
Taxi medallion
    8,777       9,922  
Commercial business and other
    302,726       295,076  
Net unamortized premiums and unearned loan fees
    12,495       12,746  
Allowance for loan losses
    (31,027 )     (31,104 )
Net loans
    3,170,170       3,203,017  
Interest and dividends receivable
    17,209       17,917  
Bank premises and equipment, net
    22,016       22,500  
Federal Home Loan Bank of New York stock
    38,686       42,337  
Bank owned life insurance
    107,068       106,244  
Goodwill
    16,127       16,127  
Core deposit intangible
    351       468  
Other assets
    48,639       47,502  
Total assets
  $ 4,476,513     $ 4,451,416  
                 
LIABILITIES
               
Due to depositors:
               
Non-interest bearing
  $ 160,234     $ 155,789  
Interest-bearing:
               
Certificate of deposit accounts
    1,200,906       1,253,229  
Savings accounts
    281,145       288,398  
Money market accounts
    139,711       148,618  
NOW accounts
    1,278,071       1,136,599  
Total interest-bearing deposits
    2,899,833       2,826,844  
Mortgagors' escrow deposits
    46,585       32,560  
Borrowed funds ($24,742 and $23,922 at fair value pursuant to the fair value option at March 31, 2013 and December 31, 2012, respectively)
    683,064       763,105  
Securities sold under agreements to repurchase
    185,300       185,300  
Other liabilities
    57,614       45,453  
Total liabilities
    4,032,630       4,009,051  
                 
Commitments and contingencies (Note 4 and Note 5)                
                 
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, 2013 and December 31, 2012; 30,846,118 shares and 30,743,329 shares outstanding at March 31, 2013 and December 31, 2012, respectively)
    315       315  
Additional paid-in capital
    200,135       198,314  
Treasury stock, at average cost (684,477 shares and 787,266 shares at March 31, 2013 and December 31, 2012, respectively)
    (9,174 )     (10,257 )
Retained earnings
    244,505       241,856  
Accumulated other comprehensive income, net of taxes
    8,102       12,137  
Total stockholders' equity
    443,883       442,365  
                 
Total liabilities and stockholders' equity
  $ 4,476,513     $ 4,451,416  
 
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)
 
2013
   
2012
 
             
Interest and dividend income
           
Interest and fees on loans
  $ 42,940     $ 46,560  
Interest and dividends on securities:
               
Interest
    6,954       7,631  
Dividends
    175       207  
Other interest income
    17       17  
Total interest and dividend income
    50,086       54,415  
                 
Interest expense
               
Deposits
    8,291       10,910  
Other interest expense
    7,649       6,160  
Total interest expense
    15,940       17,070  
                 
Net interest income
    34,146       37,345  
Provision for loan losses
    6,000       6,000  
Net interest income after provision for loan losses
    28,146       31,345  
                 
Non-interest income
               
Loan fee income
    608       466  
Banking services fee income
    432       455  
Net loss on sale of loans
    (9 )     -  
Net gain on sale of securities
    2,858       -  
Net loss from fair value adjustments
    (123 )     (448 )
Federal Home Loan Bank of New York stock dividends
    414       385  
Bank owned life insurance
    825       696  
Other income
    343       324  
Total non-interest income
    5,348       1,878  
                 
Non-interest expense
               
Salaries and employee benefits
    12,233       11,041  
Occupancy and equipment
    1,860       1,930  
Professional services
    1,618       1,722  
FDIC deposit insurance
    991       1,017  
Data processing
    1,043       976  
Depreciation and amortization
    767       834  
Other real estate owned/foreclosure expense
    668       712  
Other operating expenses
    3,239       3,304  
Total non-interest expense
    22,419       21,536  
                 
Income before income taxes
    11,075       11,687  
                 
Provision for income taxes
               
Federal
    3,461       3,624  
State and local
    858       934  
Total taxes
    4,319       4,558  
                 
Net income
  $ 6,756     $ 7,129  
                 
                 
Basic earnings per common share
  $ 0.22     $ 0.23  
Diluted earnings per common share
  $ 0.22     $ 0.23  
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)
 
2013
   
2012
 
             
             
Comprehensive Income, net of tax
           
Net income
  $ 6,756     $ 7,129  
Amortization of actuarial losses
    174       149  
Amortization of prior service credits
    (6 )     (6 )
Unrealized gains (losses) on securities, net
    (4,203 )     1,217  
Comprehensive income
  $ 2,721     $ 8,489  
 



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)
 
2013
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 6,756     $ 7,129  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    6,000       6,000  
Depreciation and amortization of bank premises and equipment
    767       834  
Amortization of premium, net of accretion of discount
    1,774       1,561  
Net loss from fair value adjustments
    123       448  
Net loss from sale of loans
    9       -  
Net gain from sale of securities
    (2,858 )     -  
Income from bank owned life insurance
    (825 )     (696 )
Stock-based compensation expense
    1,993       1,418  
Deferred compensation
    (423 )     (306 )
Amortization of core deposit intangibles
    117       117  
Excess tax benefit from stock-based payment arrangements
    (245 )     (106 )
Deferred income tax provision
    904       713  
Decrease in prepaid FDIC assessment
    927       946  
Increase (decrease) in other liabilities
    2,089       (1,676 )
Decrease in other assets
    3,004       540  
Net cash provided by operating activities
    20,112       16,922  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of bank premises and equipment
    (283 )     (470 )
Net (purchase) redemptions of Federal Home Loan Bank of New York shares
    3,651       (1,976 )
Purchases of securities available for sale
    (171,018 )     (122,512 )
Proceeds from sales and calls of securities
    96,396       -  
Proceeds from maturities and prepayments of securities available for sale
    37,461       39,035  
Net (originations) and repayment of loans
    4,426       (19,871 )
Purchases of loans
    (452 )     (3,456 )
Proceeds from sale of real estate owned
    1,793       624  
Proceeds from sale of delinquent loans
    8,166       9,091  
Net cash used in investing activities
    (19,860 )     (99,535 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase in non-interest bearing deposits
    4,445       12,921  
Net (decrease) increase in interest-bearing deposits
    72,700       (743 )
Net increase in mortgagors' escrow deposits
    14,025       11,457  
Net (repayment) proceeds from short-term borrowed funds
    (121,500 )     58,500  
Proceeds from long-term borrowings
    110,271       47,414  
Repayment of long-term borrowings
    (69,912 )     (62,000 )
Purchases of treasury stock
    (954 )     (1,652 )
Excess tax benefit from stock-based payment arrangements
    245       106  
Proceeds from issuance of common stock upon exercise of stock options
    22       244  
Cash dividends paid
    (3,973 )     (3,965 )
Net cash provided by financing activities
    5,369       62,282  
                 
Net increase (decrease) in cash and cash equivalents
    5,621       (20,331 )
Cash and cash equivalents, beginning of period
    40,425       55,721  
Cash and cash equivalents, end of period
  $ 46,046     $ 35,390  
                 
SUPPLEMENTAL CASH  FLOW DISCLOSURE
               
Interest paid
  $ 15,652     $ 16,995  
Income taxes paid
    1,581       5,218  
Taxes paid if excess tax benefits were not tax deductible
    1,826       5,324  
Non-cash activities:
               
Securities purchased not yet settled
    14,308       -  
Loans transferred to Other Real Estate Owned
    679       1,293  
Loans provided for the sale of Other Real Estate Owned
    2,088       221  
Loans held for investment transferred to loans held for sale
    7,682       -  

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)
 
2013
   
2012
 
             
Common Stock
           
Balance, beginning of period
  $ 315     $ 315  
No activity
    -       -  
Balance, end of period
  $ 315     $ 315  
Additional Paid-In Capital
               
Balance, beginning of period
  $ 198,314     $ 195,628  
Award of common shares released from Employee Benefit Trust (133,656 and 146,735 common shares for the three months ended March 31, 2013 and 2012, respectively)
    1,563       1,363  
Shares issued upon vesting of restricted stock unit awards (98,610 and 85,163 common shares for the three months ended March 31, 2013 and 2012, respectively)
    78       151  
Issuance upon exercise of stock options (42,400 and 56,850 common shares for the three months ended March 31, 2013 and 2012, respectively)
    55       73  
Stock-based compensation activity, net
    (120 )     4  
Stock-based income tax benefit
    245       106  
Balance, end of period
  $ 200,135     $ 197,325  
Treasury Stock
               
Balance, beginning of period
  $ (10,257 )   $ (7,355 )
Purchases of outstanding shares (18,560 and 97,200 common shares for the three months ended March 31, 2013 and 2012, respectively)
    (301 )     (1,282 )
Shares issued upon vesting of restricted stock unit awards (151,652 and 113,993 common shares for the three months ended March 31, 2013 and 2012, respectively)
    1,983       1,343  
Issuance upon exercise of stock options (52,320 and 67,330 common shares for the three months ended March 31, 2013 and 2012, respectively)
    691       802  
Purchases of shares to fund options exercised (39,957 and 40,866 common shares for the three months ended March 31, 2013 and 2012, respectively)
    (637 )     (548 )
Repurchase of shares to satisfy tax obligations (42,666 and 27,883 common shares for the three months ended March 31, 2013 and 2012, respectively)
    (653 )     (370 )
Balance, end of period
  $ (9,174 )   $ (7,410 )
Retained Earnings
               
Balance, beginning of period
  $ 241,856     $ 223,510  
Net income
    6,756       7,129  
Cash dividends declared and paid on common shares ($0.13 per common share for the three months ended March 31, 2013 and 2012)
    (3,973 )     (3,965 )
Issuance upon exercise of stock options (9,920 and 10,480 common shares for the three months ended March 31, 2013 and 2012, respectively)
    (35 )     (24 )
Shares issued upon vesting of restricted stock unit awards (53,042 and 28,830 common shares for the three months ended March 31, 2013 and 2012, respectivley)
    (99 )     (97 )
Balance, end of period
  $ 244,505     $ 226,553  
Accumulated Other Comprehensive Income
               
Balance, beginning of period
  $ 12,137     $ 4,813  
Change in net unrealized gains (losses) on securities available for sale, net of taxes of approximately $2,013 and ($962) for the three months ended March 31, 2013 and 2012, respectively
    (2,594 )     1,217  
Amortization of actuarial losses, net of taxes of approximately ($135) and ($117) for the three months ended March 31, 2013 and 2012, respectively
    174       149  
Amortization of prior service credits, net of taxes of approximately $5 for the three months ended March 31, 2013 and 2012)
    (6 )     (6 )
Reclassification adjustment for losses included in net income, net of taxes of approximatley $1,249 for the three months ended March 31, 2013
    (1,609 )     -  
Balance, end of period
  $ 8,102     $ 6,173  
                 
Total Stockholders' Equity
  $ 443,883     $ 422,956  
 
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
 
Flushing Financial Corporation (the “Holding Company”), a Delaware corporation, is a bank holding company. On February 28, 2013 the Holding Company’s wholly owned subsidiary Flushing Savings Bank, FSB (the “Savings Bank”), merged with and into (the “Merger”) Flushing Commercial Bank. Flushing Commercial Bank was the surviving entity of the Merger and its name was changed to Flushing Bank.  References herein to the “Bank” mean the Savings Bank (including its wholly owned subsidiary, Flushing Commercial Bank) prior to the Merger and the surviving entity after the Merger. The Holding Company and its direct and indirect wholly-owned subsidiaries, including the Bank, Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc., are collectively herein referred to as “we,” “us,” “our” and the “Company.”
 
The Merger was the result of the combination of two entities under common control, and in accordance with ASC 805-50-30-5, the Bank measured the recognized assets and liabilities transferred at their carrying amounts (historical cost) for this transaction.
 
The primary business of the Holding Company is the operation of its wholly-owned subsidiary, the Bank. 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 Holding Company also owns Flushing Financial Capital Trust II, Flushing Financial Capital Trust III, and Flushing Financial Capital Trust IV (the “Trusts”), which are special purpose business trusts. The Trusts are not included in the Company’s consolidated financial statements as the Company would not absorb the losses of the Trusts if losses were to occur.
 
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, 2012.
 
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 (“ALLL”), the evaluation of goodwill for impairment, the evaluation of the need for a valuation allowance of the Company’s deferred tax assets, the evaluation of other-than-temporary impairment (“OTTI”) on securities and the valuation of certain financial instruments. 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 is 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 has been computed based on the following:
 
   
For the three months ended
March 31,
 
   
2013
   
2012
 
   
(In thousands, except per share data)
 
Net income, as reported
  $ 6,756     $ 7,129  
Divided by:
               
Weighted average common shares outstanding
    30,449       30,396  
Weighted average common stock equivalents
    32       24  
Total weighted average common shares outstanding and common stock equivalents
    30,481       30,420  
                 
Basic earnings per common share
  $ 0.22     $ 0.23  
Diluted earnings per common share (1)
  $ 0.22     $ 0.23  
Dividend payout ratio
    59.1 %     56.5 %

(1)
For the three months ended March 31, 2013, options to purchase 542,400 shares at an average exercise price of $17.66 were not included in the computation of diluted earnings per common share as they were anti-dilutive. For the three months ended March 31, 2012, options to purchase 720,340 shares at an average exercise price of $16.71were 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 in equity securities that have readily determinable fair values and all investments in debt securities 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, 2013 and 2012. 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, 2013:
 
   
Amortized
Cost
   
Fair Value
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
 
   
(In thousands)
 
U.S. government agencies
  $ 10,006     $ 10,020     $ 14     $ -  
Corporate
    103,668       108,323       4,674       19  
Municipals
    81,113       81,200       417       330  
Mutual funds
    21,823       21,823       -       -  
Other
    18,172       14,227       17       3,962  
Total other securities
    234,782       235,593       5,122       4,311  
REMIC and CMO
    492,492       509,440       19,445       2,497  
GNMA
    37,487       40,843       3,356       -  
FNMA
    193,310       197,903       5,322       729  
FHLMC
    16,068       16,515       447       -  
Total mortgage-backed securities
    739,357       764,701       28,570       3,226  
Total securities available for sale
  $ 974,139     $ 1,000,294     $ 33,692     $ 7,537  
 
The table above includes commitments to purchase securities totaling $14.3 million which settled during April 2013.
 
Mortgage-backed securities shown in the table above include two private issue collateralized mortgage obligations (“CMOs”) that are collateralized by commercial real estate mortgages with amortized cost and market values totaling $18.0 million and $18.4 million, respectively, at March 31, 2013.  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, 2013:
 
   
Total
   
Less than 12 months
   
12 months or more
 
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
   
(In thousands)
 
Corporate
  $ 9,981     $ 19     $ 9,981     $ 19     $ -     $ -  
Municipals
    21,666       330       21,666       330       -       -  
Other
    5,600       3,962       -       -       5,600       3,962  
Total other securities
    37,247       4,311       31,647       349       5,600       3,962  
REMIC and CMO
    130,532       2,497       106,771       560       23,761       1,937  
FNMA
    73,523       729       73,523       729       -       -  
Total mortgage-backed securities
    204,055       3,226       180,294       1,289       23,761       1,937  
Total securities available for sale
  $ 241,302     $ 7,537     $ 211,941     $ 1,638     $ 29,361     $ 5,899  

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, 2013. 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.
 



 
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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Corporate:
The unrealized losses in Corporate securities at March 31, 2013 consist of losses on one Corporate security. The unrealized loss was caused by movements in interest rates. It is not anticipated that this security would be settled at a price that is less than the amortized cost of the Company’s investment. This security 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 this security and it is more likely than not the Company will not be required to sell the security before recovery of the security’s 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 security. Therefore, the Company did not consider this investment to be other-than-temporarily impaired at March 31, 2013.
 
Municipals:
The unrealized losses in Municipal securities at March 31, 2013, consist of losses on eight 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, 2013.
  
Other Securities:
The unrealized losses in Other Securities at March 31, 2013, 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 OTTI 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 of the banks:
 
§  
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.
 
 
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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 were no issuers in our pooled trust preferred securities which had a Texas Ratio in excess of 50.00%. 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) two issuers totaling $7.7 million will prepay in the second quarter of 2013 and two issuers totaling $21.5 million will prepay in the second quarter of 2015; (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.
 
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, 2013, 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, 2013.
 
At March 31, 2013, 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, 2013. The class the Company owns in pooled trust preferred securities does not have any excess subordination.
 
                                 
Deferrals/Defaults
       
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     $ 295     $ -    
None
   
None
   
BB-
 
Single issuer
  n/a     1       500       517       -    
None
   
None
    B+  
Pooled issuer
  B1     19       5,617       2,880       2,196     24.8%     0.0%     C  
Pooled issuer
  C1     19       3,645       2,425       1,542     21.3%     0.0%     C  
Total
              $ 10,062     $ 6,117     $ 3,738                    

REMIC and CMO:
The unrealized losses in Real Estate Mortgage Investment Conduit (“REMIC”) and CMO securities at March 31, 2013 consist of seven issues from the Federal Home Loan Mortgage Corporation (“FHLMC”), six issues from the Federal National Mortgage Association (“FNMA”) and five private issues.
 
 
- 10 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The unrealized losses on the REMIC and CMO securities issued by FHLMC and FNMA 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, 2013.
  
The unrealized losses at March 31, 2013 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, one of these securities is performing according to its terms, with four of these securities remitting less than the full principal amount due.  The principal loss for these four securities totaled $0.2 million for the three months ended March 31, 2013.  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, 2013.
 
It is not anticipated at this time that the five 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, 2013.
  
At March 31, 2013, the Company held five private issue CMOs which had a current credit rating of at least one rating below investment grade.

The following table details the five private issue CMOs that were evaluated to determine if they were other-than-temporarily impaired at March 31, 2013:

                     
Cumulative
                                                               
                     
OTTI
           
Current
                                             
Average
 
   
Amortized
   
Fair
   
Outstanding
   
Charges
   
Year of
     
Lowest
   
Collateral Located in:
   
FICO
 
Security
 
Cost
   
Value
   
Principal
   
Recorded
   
Issuance
 
Maturity
 
Rating
   
CA
   
FL
   
VA
   
NY
   
NJ
   
TX
   
CO
   
Score
 
   
(Dollars in thousands)
                                                               
                                                                                       
1
  $ 9,478     $ 8,845     $ 10,432     $ 3,470     2006  
05/25/36
  D     40 %               16 %                     716  
2
    4,216       3,695       4,353       727     2006  
08/19/36
  D     58 %                                 10 %   737  
3
    4,420       4,169       4,815       1,107     2006  
08/25/36
  D     35 %   15 %                                 711  
4
    3,309       3,150       3,828       780     2006  
08/25/36
  D     41 %   14 %         13 %         10 %         724  
5
    4,275       3,903       4,551       222     2006  
03/25/36
 
CC
    24 %         21 %   12 %   12 %               710  
Total
  $ 25,698     $ 23,762     $ 27,979     $ 6,306                                                                
 
FNMA:
The unrealized losses in FNMA securities at March 31, 2013 consist of losses on nine FNMA 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, 2013.
 
 
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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 

The following table details gross unrealized losses recorded in AOCI and the ending credit loss amount on debt securities, as of March 31, 2013, 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
   
Ending Credit
Loss Amount
 
                         
Private issued CMO's (1)
  $ 25,698     $ 23,762     $ 1,937     $ 2,271  
Trust preferred securities (1)
    9,262       5,305       3,957       3,738  
Total
  $ 34,960     $ 29,067     $ 5,894     $ 6,009  
 
(1)
The Company has recorded OTTI charges in the Consolidated Statements of Income on five 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, 2013
 
Beginning balance
  $ 6,178  
         
Recognition of actual losses
    (169 )
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
  $ 6,009  
 
The following table details the amortized cost and estimated fair value of the Company’s securities classified as available for sale at March 31, 2013, 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
  $ 22,823     $ 22,823  
Due after one year through five years
    59,256       62,081  
Due after five years through ten years
    49,774       51,110  
Due after ten years
    102,929       99,579  
Total other securities
    234,782       235,593  
Mortgage-backed securities
    739,357       764,701  
Total securities available for sale
  $ 974,139     $ 1,000,294  
 
During the three months ended March 31, 2013, as part of a balance sheet restructuring, the Company sold $68.5 million in mortgage-backed securities and recorded gross gains of $3.2 million and gross losses of $0.3 million.  The Company did not sell any securities during the three months ended March 31, 2012.
 
- 12 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2012:
 
   
Amortized
Cost
   
Fair Value
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
 
   
(In thousands)
 
U.S. government agencies
  $ 31,409     $ 31,513     $ 104     $ -  
Corporate
    83,389       87,485       4,096       -  
Municipals
    74,228       75,297       1,152       83  
Mutual funds
    21,843       21,843       -       -  
Other
    17,797       13,315       17       4,499  
Total other securities
    228,666       229,453       5,369       4,582  
REMIC and CMO
    453,468       474,050       23,690       3,108  
GNMA
    43,211       46,932       3,721       -  
FNMA
    168,040       175,929       7,971       82  
FHLMC
    22,562       23,202       640       -  
Total mortgage-backed securities
    687,281       720,113       36,022       3,190  
Total securities available for sale
  $ 915,947     $ 949,566     $ 41,391     $ 7,772  
 
Mortgage-backed securities shown in the table above include two private issue CMOsthat are collateralized by commercial real estate mortgages with an amortized cost and market value of $15.2 million and $15.7 million, respectively, at December 31, 2012.  The remaining private issue mortgage-backed securities are backed by one-to-four family residential mortgage loans.
 
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, 2012.
 
   
Total
   
Less than 12 months
   
12 months or more
 
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
   
(In thousands)
 
Municipals
  $ 9,782     $ 83     $ 9,782     $ 83     $ -     $ -  
Other
    5,064       4,499       -       -       5,064       4,499  
Total other securities
    14,846       4,582       9,782       83       5,064       4,499  
                                                 
REMIC and CMO
    64,126       3,108       40,651       155       23,475       2,953  
FNMA
    10,331       82       10,331       82       -       -  
Total mortgage-backed  securities
    74,457       3,190       50,982       237       23,475       2,953  
Total securities available for sale
  $ 89,303     $ 7,772     $ 60,764     $ 320     $ 28,539     $ 7,452  
 
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.
 
 
- 13 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
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.
 
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, 2013, the Company utilized recent third party appraisals of the collateral to measure impairment for $86.1 million, or 78.1%, of collateral dependent impaired loans and used internal evaluations of the property’s value for $24.5 million, or 21.9%, 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 Bank grants a concession to a borrower who is experiencing financial difficulties.
 
 
- 14 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
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, 2013, 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.
 
The following table shows loans modified and classified as TDR during the three months ended March 31, 2013 and 2012:
 
   
For the three months ended
March 31, 2013
 
For the three months ended
March 31, 2012
(Dollars in thousands)
 
Number
   
Balance
 
Modification description
 
Number
   
Balance
 
Modification description
                             
                             
Multi-family residential
    1     $ 413  
 Received a below market interest rate and the loan amortization was extended
    -     $ -    
Commercial real estate
    1       273  
 Received a below market interest rate and the loan amortization was extended
    1       1,388  
 Received a below market interest rate, loan amortization term extended and loan term extended
One-to-four family - mixed-use property
    -       -         2       462  
 Received a below market interest rate
Commercial business and other
    1       615  
 Received a below market interest rate and the loan term was extended
    -       -    
Total
    3     $ 1,301         3     $ 1,850    
 
The recorded investment of each of the loans modified and classified to a TDR, presented in the table above, 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)
 
The following table shows our recorded investment for loans classified as TDR that are performing according to their restructured terms at the periods indicated:
 
   
March 31, 2013
   
December 31, 2012
 
(Dollars in thousands)
 
Number
of contracts
   
Recorded
investment
   
Number
of contracts
   
Recorded
investment
 
                         
Multi-family residential
    9     $ 2,816       8     $ 2,347  
Commercial real estate
    6       8,698       5       8,499  
One-to-four family - mixed-use property
    7       2,326       7       2,336  
One-to-four family - residential
    1       372       1       374  
Construction
    1       3,137       1       3,805  
Commercial business and other
    3       3,135       2       2,540  
Total performing troubled debt restructured
    27     $ 20,484       24     $ 19,901  
 
During the three months ended March 31, 2013, there were no loans classified as TDR transferred to non-accrual status.
 
The following table shows our recorded investment for loans classified as TDR that are not performing according to their restructured terms at the periods indicated:
 
   
March 31, 2013
   
December 31, 2012
 
(Dollars in thousands)
 
Number
of contracts
   
Recorded
investment
   
Number
of contracts
   
Recorded
investment
 
                         
Multi-family residential
    -     $ -       2     $ 323  
Commercial real estate
    2       2,987       2       3,075  
One-to-four family - mixed-use property
    2       688       2       816  
Construction
    1       7,296       1       7,368  
Total troubled debt restructurings that subsequently defaulted
    5     $ 10,971       7     $ 11,582  
 
 
 
 
- 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,
2013
   
December 31,
2012
 
             
Loans ninety days or more past due and still accruing:
           
Multi-family residential
  $ 1,073     $ -  
Co-operative apartment
    103       -  
Commercial Business and other
    602       644  
Total
    1,778       644  
                 
Non-accrual mortgage loans:
               
Multi-family residential
    18,569       13,095  
Commercial real estate
    13,811       15,640  
One-to-four family - mixed-use property
    10,523       16,553  
One-to-four family - residential
    13,547       13,726  
Co-operative apartments
    160       234  
Construction
    7,396       7,695  
Total
    64,006       66,943  
                 
Non-accrual non-mortgage loans:
               
Small Business Administration
    458       283  
Commercial Business and other
    12,640       16,860  
Total
    13,098       17,143  
                 
Total non-accrual loans
    77,104       84,086  
                 
                 
Total non-accrual loans and loans ninety days or more past due and still accruing
  $ 78,882     $ 84,730  

The following is a summary of interest foregone on non-accrual loans and loans classified as TDR for the periods indicated:
 
   
For the three months ended
March 31,
 
   
2013
   
2012
 
   
(In thousands)
 
Interest income that would have been recognized had the loans performed in accordance with their original terms
  $ 2,202     $ 2,646  
Less:  Interest income included in the results of operations
    243       147  
Total foregone interest
  $ 1,959     $ 2,499  
 
 
- 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 March 31, 2013:
 
(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
  $ 14,669     $ 2,879     $ 18,688     $ 36,236     $ 1,492,117     $ 1,528,353  
Commercial real estate
    11,067       1,309       13,812       26,188       481,744       507,932  
One-to-four family - mixed-use property
    22,994       2,293       10,135       35,422       580,239       615,661  
One-to-four family - residential
    4,067       705       13,209       17,981       179,287       197,268  
Co-operative apartments
    -       -       161       161       8,060       8,221  
Construction loans
    -       -       7,396       7,396       3,556       10,952  
Small Business Administration
    31       -       458       489       8,323       8,812  
Taxi medallion
    -       -       -       -       8,777       8,777  
Commercial business and other
    62       1       11,451       11,514       291,212       302,726  
Total
  $ 52,890     $ 7,187     $ 75,310     $ 135,387     $ 3,053,315     $ 3,188,702  
 
The following table shows an age analysis of our recorded investment in loans at December 31, 2012:
 
(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
  $ 24,059     $ 4,828     $ 13,095     $ 41,982     $ 1,492,456     $ 1,534,438  
Commercial real estate
    9,764       3,622       15,639       29,025       486,413       515,438  
One-to-four family - mixed-use property
    21,012       3,368       16,554       40,934       596,419       637,353  
One-to-four family - residential
    3,407       2,010       13,602       19,019       179,949       198,968  
Co-operative apartments
    -       -       234       234       6,069       6,303  
Construction loans
    2,462       -       7,695       10,157       4,224       14,381  
Small Business Administration
    404       -       283       687       8,809       9,496  
Taxi medallion
    -       -       -       -       9,922       9,922  
Commercial business and other
    2       5       15,601       15,608       279,468       295,076  
Total
  $ 61,110     $ 13,833     $ 82,703     $ 157,646     $ 3,063,729     $ 3,221,375  
 
 
- 18 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The following table shows the activity in the allowance for loan losses for the three months ended March 31, 2013:
 
(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:
                                                           
Beginning balance
  $ 13,001     $ 5,705     $ 5,960     $ 1,999     $ 46     $ 66     $ 505     $ 7     $ 3,815     $ 31,104  
Charge-off's
    1,488       681       2,606       691       74       234       204       -       304       6,282  
Recoveries
    11       80       53       31       -       -       30       -       -       205  
Provision
    871       556       2,933       738       116       235       140       -       411       6,000  
Ending balance
  $ 12,395     $ 5,660     $ 6,340     $ 2,077     $ 88     $ 67     $ 471     $ 7     $ 3,922     $ 31,027  
Ending balance: individually evaluated for impairment
  $ 209     $ 320     $ 592     $ 60     $ -     $ 37     $ -     $ -     $ 180       1,398  
Ending balance: collectively evaluated for impairment
  $ 12,186     $ 5,340     $ 5,748     $ 2,017     $ 88     $ 30     $ 471     $ 7     $ 3,742     $ 29,629  
                                                                                 
Financing Receivables:
                                                                               
Ending balance
  $ 1,528,353     $ 507,932     $ 615,661     $ 197,268     $ 8,221     $ 10,952     $ 8,812     $ 8,777     $ 302,726     $ 3,188,702  
Ending balance: individually evaluated for impairment
  $ 26,094     $ 25,545     $ 18,762     $ 15,548     $ 267     $ 10,229     $ 505     $ -     $ 18,613     $ 115,563  
Ending balance: collectively evaluated for impairment
  $ 1,502,259     $ 482,387     $ 596,899     $ 181,720     $ 7,954     $ 723     $ 8,307     $ 8,777     $ 284,113     $ 3,073,139  
 
 
 
 
- 19 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The following table shows the activity in the allowance for loan losses for the year ended December 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:
                                                           
Beginning balance
  $ 11,267     $ 5,210     $ 5,314     $ 1,649     $ 80     $ 668     $ 987     $ 41     $ 5,128     $ 30,344  
Charge-off's
    6,016       2,746       4,286       1,583       62       4,591       324       -       1,661       21,269  
Recoveries
    144       307       358       29       -       -       87       -       104       1,029  
Provision
    7,606       2,934       4,574       1,904       28       3,989       (245 )     (34 )     244       21,000  
Ending balance
  $ 13,001     $ 5,705     $ 5,960     $ 1,999     $ 46     $ 66     $ 505     $ 7     $ 3,815     $ 31,104  
Ending balance: individually evaluated for impairment
  $ 183     $ 359     $ 571     $ 94     $ -     $ 38     $ -     $ -     $ 249     $ 1,494  
Ending balance: collectively evaluated for impairment
  $ 12,818     $ 5,346     $ 5,389     $ 1,905     $ 46     $ 28     $ 505     $ 7     $ 3,566     $ 29,610  
                                                                                 
Financing Receivables:
                                                                               
Ending balance
  $ 1,534,438     $ 515,438     $ 637,353     $ 198,968     $ 6,303     $ 14,381     $ 9,496     $ 9,922     $ 295,076     $ 3,221,375  
Ending balance: individually evaluated for impairment
  $ 21,675     $ 23,525     $ 26,368     $ 15,702     $ 237     $ 14,232     $ 850     $ -     $ 26,021     $ 128,610  
Ending balance: collectively evaluated for impairment
  $ 1,512,763     $ 491,913     $ 610,985     $ 183,266     $ 6,066     $ 149     $ 8,646     $ 9,922     $ 269,055     $ 3,092,765  
 

 
- 20 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The following table shows our recorded investment, unpaid principal balance and allocated allowance for loan losses, average recorded investment and interest income recognized for loans that were considered impaired at or for the three month period ended March 31, 2013:
 
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
                               
   
(Dollars in thousands)
 
With no related allowance recorded:
                             
Mortgage loans:
                             
Multi-family residential
  $ 23,637     $ 26,895     $ -     $ 21,695     $ 47  
Commercial real estate
    18,875       19,644       -       26,774       78  
One-to-four family mixed-use property
    15,175       17,537               19,115       63  
One-to-four family residential
    15,176       19,226       -       15,252       20  
Co-operative apartments
    267       403       -       252       2  
Construction
    7,835       12,488       -       9,217       -  
Non-mortgage loans:
                    -                  
Small Business Administration
    505       621       -       678       1  
Taxi Medallion
    -       -       -       -          
Commercial Business and other
    13,434       15,442       -       8,913       15  
Total loans with no related allowance recorded
    94,904       112,256       -       101,896       226  
                                         
With an allowance recorded:
                                       
Mortgage loans:
                                       
Multi-family residential
    2,457       2,458       209       2,190       36  
Commercial real estate
    6,670       6,736       320       7,222       69  
One-to-four family mixed-use property
    3,587       3,586       592       3,451       55  
One-to-four family residential
    372       372       60       373       4  
Co-operative apartments
    -       -       -       -          
Construction
    3,137       3,137       37       3,471       28  
Non-mortgage loans:
                                       
Small Business Administration
    -       -       -       -          
Taxi Medallion
    -       -       -       -          
Commercial Business and other
    4,436       4,436       180       3,488       52  
Total loans with an allowance recorded
    20,659       20,725       1,398       20,195       244  
                                         
Total Impaired Loans:
                                       
Total mortgage loans
  $ 97,188     $ 112,482     $ 1,218     $ 109,012     $ 402  
                                         
Total non-mortgage loans
  $ 18,375     $ 20,499     $ 180     $ 13,079     $ 68  
 
 
- 21 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The following table shows our recorded investment, unpaid principal balance and allocated allowance for loan losses, average recorded investment and interest income recognized for loans that were considered impaired at or for the year ended December 31, 2012:
 
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
                               
   
(Dollars in thousands)
 
With no related allowance recorded:
                             
Mortgage loans:
                             
Multi-family residential
  $ 19,753     $ 22,889     $ -     $ 27,720     $ 429  
Commercial real estate
    34,672       38,594       -       43,976       536  
One-to-four family mixed-use property
    23,054       25,825       -       27,018       485  
One-to-four family residential
    15,328       18,995       -       15,047       186  
Co-operative apartments
    237       299       -       174       2  
Construction
    10,598       15,182       -       14,689       173  
Non-mortgage loans:
                                       
Small Business Administration
    850       1,075       -       1,042       25  
Taxi Medallion
    -       -       -       -       -  
Commercial Business and other
    4,391       5,741       -       5,102       53  
Total loans with no related allowance recorded
    108,883       128,600       -       134,768       1,889  
                                         
With an allowance recorded:
                                       
Mortgage loans:
                                       
Multi-family residential
    1,922       1,937       183       3,174       124  
Commercial real estate
    7,773       7,839       359       6,530       400  
One-to-four family mixed-use property
    3,314       3,313       571       4,385       205  
One-to-four family residential
    374       374       94       188       19  
Co-operative apartments
    -       -       -       101       -  
Construction
    3,805       3,805       38       4,275       140  
Non-mortgage loans:
                                       
Small Business Administration
    -       -       -       -       -  
Taxi Medallion
    -       -       -       -       -  
Commercial Business and other
    2,539       2,540       249       2,273       116  
Total loans with an allowance recorded
    19,727       19,808       1,494       20,926       1,004  
                                         
Total Impaired Loans:
                                       
Total mortgage loans
  $ 120,830     $ 139,052     $ 1,245     $ 147,277     $ 2,699  
                                         
Total non-mortgage loans
  $ 7,780     $ 9,356     $ 249     $ 8,417     $ 194  
 
In accordance with our policy and the current regulatory guidelines, we designate loans as “Special Mention,” which are considered “Criticized Loans,” and “Substandard,” “Doubtful,” or “Loss,” which are considered “Classified Loans”.  If a loan does not fall within one of the previous mentioned categories then the loan would be considered “Pass.” We designate a loan as Substandard when a well-defined weakness is identified that jeopardizes the orderly liquidation of the debt. We designate a loan Doubtful when it displays the inherent weakness of a Substandard loan with the added provision that collection of the debt in full, on the basis of existing facts, is highly improbable. We designate a loan as Loss if it is deemed the debtor is incapable of repayment.  Loans that are designated as Loss are charged to the Allowance for Loan Losses. Loans that are non-accrual are designated as Substandard, Doubtful or Loss. We designate a loan as Special Mention if the asset does not warrant classification within one of the other classifications, but does contain a potential weakness that deserves closer attention.

 
- 22 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The following table sets forth the recorded investment in loans designated as Criticized or Classified at March 31, 2013:
 
(In thousands)
 
Special Mention
   
Substandard (1)
   
Doubtful
   
Loss
   
Total
 
                               
Multi-family residential
  $ 11,153     $ 23,690     $ -     $ -     $ 34,843  
Commercial real estate
    8,600       25,545       -       -       34,145  
One-to-four family - mixed-use property
    11,813       17,039       -       -       28,852  
One-to-four family - residential
    2,842       15,176       -       -       18,018  
Co-operative apartments
    -       267       -       -       267  
Construction loans
    3,137       7,834       -       -       10,971  
Small Business Administration
    226       141       -       -       367  
Commercial business and other
    2,228       14,792       1,080       -       18,100  
Total loans
  $ 39,999     $ 104,484     $ 1,080     $ -     $ 145,563  
 
The following table sets forth the recorded investment in loans designated as Criticized or Classified at December 31, 2012:
 
(In thousands)
 
Special Mention
   
Substandard (1)
   
Doubtful
   
Loss
   
Total
 
                               
Multi-family residential
  $ 16,345     $ 19,327     $ -     $ -     $ 35,672  
Commercial real estate
    11,097       27,877       -       -       38,974  
One-to-four family - mixed-use property
    13,104       24,635       -       -       37,739  
One-to-four family - residential
    5,223       15,328       -       -       20,551  
Co-operative apartments
    103       237       -       -       340  
Construction loans
    3,805       10,598       -       -       14,403  
Small Business Administration
    323       212       244       -       779  
Commercial business and other
    3,044       18,419       1,080       -       22,543  
Total loans
  $ 53,044     $ 116,633     $ 1,324     $ -     $ 171,001  
 
(1)  
The tables above do not include $9.9 million and $5.3 million of Substandard loans held for sale at March 31, 2013 and December 31, 2012, respectively.
 
The following table shows the changes in the allowance for loan losses for the periods indicated:
 
   
For the three months
ended March 31
 
(In thousands)
 
2013
   
2012
 
             
Balance, beginning of period
  $ 31,104     $ 30,344  
Provision for loan losses
    6,000       6,000  
Charge-off's
    (6,282 )     (6,019 )
Recoveries
    205       293  
Balance, end of period
  $ 31,027     $ 30,618  
 
 
- 23 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The following table shows net loan charge-offs for the periods indicated:
 
   
Three Months Ended
 
(In thousands)
 
March 31,
2013
   
March 31,
2012
 
Multi-family residential
  $ 1,477     $ 1,004  
Commercial real estate
    601       1,710  
One-to-four family – mixed-use property
    2,553       1,412  
One-to-four family – residential
    660       825  
Co-operative apartments
    74       42  
Construction
    234       234  
Small Business Administration
    174       104  
Commercial business and other
    304       395  
Total net loan charge-offs
  $ 6,077     $ 5,726  
 
Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally home equity lines of credit and business line of credit) amounted to $54.7 million and $138.9 million, respectively, at March 31, 2013.
 
6. 
Loans held for sale
 
Loans held for sale are carried at the lower of cost or estimated fair value.
 
The following table shows our Loans held for sale for the periods indicated:
 
   
March 31, 2013
   
December 31, 2012
 
(Dollars in thousands)
 
Number
of loans
   
Carrying
Value
   
Number
of loans
   
Carrying
Value
 
                         
Multi-family residential
    6     $ 2,892       4     $ 3,442  
Commercial real estate
    4       970       -       -  
One-to-four family - mixed-use property
    25       5,906       4       1,871  
One-to-four family - residential
    2       139       -       -  
                                 
                                 
Total
    37     $ 9,907       8     $ 5,313  
 
The Company has implemented a strategy of selling certain delinquent and non-performing loans. Once the Company has decided to sell a loan, the sale usually closes in a short period of time, generally within the same quarter.  Loans designated held for sale are reclassified from loans held for investment to loans held for sale. Terms of sale include cash due upon the closing of the sale, no contingencies or recourse to the Company and servicing is released to the buyer.
 
 
- 24 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The following table shows delinquent and non-performing loans sold during the period indicated:
 
   
For the three months ended
March 31, 2013
 
(Dollars in thousands)
 
Loans sold
   
Proceeds
   
Net charge-offs
   
Net gain (loss)
 
                         
Multi-family residential
    6     $ 4,612     $ (109 )   $ 6  
Commercial real estate
    2       1,115       (76 )     -  
One-to-four family - mixed-use property
    6       2,373       (40 )     (15 )
Commercial business and other
    2       66       (185 )     -  
Total
    16     $ 8,166     $ (410 )   $ (9 )
 
The following table shows delinquent and non-performing loans sold during the period indicated:
 
   
For the three months ended
March 31, 2012
 
(Dollars in thousands)
 
Loans sold
   
Proceeds
   
Net charge-offs
   
Net gain (loss)
 
                         
Multi-family residential
    6     $ 3,968     $ (181 )   $ -  
Commercial real estate
    3       1,678       (250 )     -  
One-to-four family - mixed-use property
    4       1,280       (399 )     -  
Construction
    3       2,540       (57 )     -  
Commercial business and other
    1       215       (136 )     -  
Total
    17     $ 9,681     $ (1,023 )   $ -  
 
7. 
Other Real Estate Owned
 
The following are changes in Other Real Estate Owned (“OREO”) during the periods indicated:
 
   
For the three months ended
March 31,
 
   
2013
   
2012
 
   
(In thousands)
 
             
Balance at beginning of period
  $ 5,278     $ 3,179  
Acquisitions
    679       1,293  
Write-down of carrying value
    (65 )     (88 )
Sales
    (3,703 )     (780 )
Balance at end of period
  $ 2,189     $ 3,604  
 
 
- 25 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following table shows the gross gains, gross losses and write-downs of OREO reported in the Consolidated Statements of Income during the periods indicated:
 
   
For the three months ended
March 31,
 
   
2013
   
2012
 
   
(In thousands)
 
             
Gross gains
  $ 201     $ 45  
Gross losses
    (23 )     (110 )
Write-down of carrying value
    (65 )     (88 )
Total
  $ 113     $ (153 )

8. 
Stock-Based Compensation

For the three months ended March 31, 2013 and 2012, the Company’s net income, as reported, includes $2.0 million and $1.4 million, respectively, of stock-based compensation costs and $0.8 million and $0.6 million, respectively, of income tax benefits related to the stock-based compensation plans.
 
The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock price, the risk-free interest rate over the options’ expected term and the annual dividend yield. The Company uses the fair value of the common stock on the date of award to measure compensation cost for restricted stock unit awards. Compensation cost is recognized over the vesting period of the award using the straight line method. During the three months ended March 31, 2013 and 2012, the Company granted 230,675 and 230,675 restricted stock units, respectively.  There were no stock options granted during the three months ended March 31, 2013 and 2012.

The 2005 Omnibus Incentive Plan (“Omnibus Plan”) became effective on May 17, 2005 after approval by the stockholders. The Omnibus Plan authorizes the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) to grant a variety of equity compensation awards as well as long-term and annual cash incentive awards, all of which can be structured so as to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). On May 17, 2011, stockholders of the Company approved an amendment to the Omnibus Plan authorizing an additional 625,000 shares for use for full value awards. As of March 31, 2013, there were 340,125 shares available for full value awards and 56,440 shares available for non-full value awards. To satisfy stock option exercises or fund restricted stock and restricted stock unit awards, shares are issued from treasury stock, if available, otherwise new shares are issued.  The Company will maintain separate pools of available shares for full value as opposed to non-full value awards, except that shares can be moved from the non-full value pool to the full value pool on a 3-for-1 basis. The exercise price per share of a stock option grant may not be less than the fair market value of the common stock of the Company, as defined in the Omnibus Plan, on the date of grant and may not be re-priced without the approval of the Company’s stockholders. Options, stock appreciation rights, restricted stock, restricted stock units and other stock based awards granted under the Omnibus Plan are generally subject to a minimum vesting period of three years with stock options having a 10-year contractual term. Other awards do not have a contractual term of expiration. Restricted stock unit awards include participants who have reached or are close to reaching retirement eligibility, at which time such awards fully vest. These amounts are included in stock-based compensation expense.
 
Full Value Awards: The first pool is available for full value awards, such as restricted stock unit awards. The pool will be decreased by the number of shares granted as full value awards. The pool will be increased from time to time by: (1) the number of shares that are returned to or retained by the Company as a result of the cancellation, expiration, forfeiture or other termination of a full value award (under the Omnibus Plan); (2) the settlement of such an award in cash; (3) the delivery to the award holder of fewer shares than the number underlying the award, including shares which are withheld from full value awards; or (4) the surrender of shares by an award holder in payment of the exercise price or taxes with respect to a full value award. The Omnibus Plan will allow the Company to transfer shares from the non-full value pool to the full value pool on a 3-for-1 basis, but does not allow the transfer of shares from the full value pool to the non-full value pool.
 
 
- 26 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The following table summarizes the Company’s full value awards at or for the three months ended March 31, 2013:

Full Value Awards
 
Shares
   
Weighted-Average
Grant-Date
Fair Value
 
             
Non-vested at December 31, 2012
    318,051     $ 13.35  
Granted
    243,645       15.26  
Vested
    (175,486 )     14.19  
Forfeited
    -       -  
Non-vested at March 31, 2013
    386,210     $ 14.18  
                 
Vested but unissued at March 31, 2013
    232,395     $ 14.29  
 
As of March 31, 2013, there was $5.0 million of total unrecognized compensation cost related to non-vested full value awards granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of 3.6 years.  The total fair value of awards vested for the three months ended March 31, 2013 and 2012 were $2.7 million and $1.9 million, respectively.  The vested but unissued full value awards consist of awards made to employees and directors who are eligible for retirement. According to the terms of the Omnibus Plan, these employees and directors have no risk of forfeiture.  These shares will be issued at the original contractual vesting dates.
 
Non-Full Value Awards: The second pool is available for non-full value awards, such as stock options. The pool will be increased from time to time by the number of shares that are returned to or retained by the Company as a result of the cancellation, expiration, forfeiture or other termination of a non-full value award (under the Omnibus Plan or the 1996 Stock Option Incentive Plan).  The second pool will not be replenished by shares withheld or surrendered in payment of the exercise price or taxes, retained by the Company as a result of the delivery to the award holder of fewer shares than the number underlying the award or the settlement of the award in cash.
 
The following table summarizes certain information regarding the non-full value awards, all of which have been granted as stock options, at or for the three months ended March 31, 2013:
 
Non-Full Value Awards
 
Shares
   
Weighted-
Average
Exercise
Price
   
Weighted-Average
Remaining
Contractual
Term
   
Aggregate
Intrinsic
Value
$(000) *
 
                           
Outstanding at December 31, 2012
    770,355     $ 15.92                
Granted
    -       -                
Exercised
    (52,320 )     12.62                
Forfeited
    -       -                
Outstanding at March 31, 2013
    718,035     $ 16.16       2.8     $ 1,014  
Exercisable shares at March 31, 2013
    680,095     $ 16.34       2.7     $ 824  
Vested but unexercisable shares at March 31, 2013
    14,560     $ 13.29       5.6     $ 69  
 
* The intrinsic value of a stock option is the difference between the market value of the underlying stock and the exercise price of the option.
 
As of March 31, 2013, there was $23,000 of total unrecognized compensation cost related to unvested non-full value awards granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of 0.6 years.  The vested but unexercisable non-full value awards were made to employees who are eligible for retirement. According to the terms of the Omnibus Plan, these employees have no risk of forfeiture.  These awards will be exercisable at the original contractual vesting dates.
 
 
- 27 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Cash proceeds, fair value received, tax benefits and the intrinsic value related to stock options exercised during the three months ended March 31, 2013 and 2012 are provided in the following table:
 
   
For the three months ended
March 31,
 
(In thousands)
 
2013
   
2012
 
Proceeds from stock options exercised
  $ 22     $ 244  
Fair value of shares received upon exercised of stock options
    637       548  
Tax benefit related to stock options exercised
    53       24  
Intrinsic value of stock options exercised
    174       114  
 
Phantom Stock Plan: The Company maintains a non-qualified phantom stock plan as a supplement to its profit sharing plan for officers who have achieved the level of Senior Vice President and above and completed one year of service.  However, officers who had achieved at least the level of Vice President and completed one year of service prior to January 1, 2009 remain eligible to participate in the phantom stock plan.  Awards are made under this plan on certain compensation not eligible for awards made under the profit sharing plan, due to the terms of the profit sharing plan and the Internal Revenue Code. Employees receive awards under this plan proportionate to the amount they would have received under the profit sharing plan, but for limits imposed by the profit sharing plan and the Internal Revenue Code. The awards are made as cash awards, and then converted to common stock equivalents (phantom shares) at the then current market value of the Company’s common stock. Dividends are credited to each employee’s account in the form of additional phantom shares each time the Company pays a dividend on its common stock. In the event of a change of control (as defined in this plan), an employee’s interest is converted to a fixed dollar amount and deemed to be invested in the same manner as his or her interest in the Savings Bank’s non-qualified deferred compensation plan. Employees vest under this plan 20% per year for 5 years. Employees also become 100% vested upon a change of control. Employees receive their vested interest in this plan in the form of a cash lump sum payment or installments, as elected by the employee, after termination of employment. The Company adjusts its liability under this plan to the fair value of the shares at the end of each period.
 
The following table summarizes the Phantom Stock Plan at or for the three months ended March 31, 2013:

Phantom Stock Plan
 
Shares
   
Fair Value
 
             
Outstanding at December 31, 2012
    50,067     $ 15.34  
Granted
    8,589       15.57  
Forfeited
    -       -  
Distributions
    (13 )     15.84  
Outstanding at March 31, 2013
    58,643     $ 16.94  
Vested at March 31, 2013
    58,311     $ 16.94  
 
The Company recorded stock-based compensation expense for the Phantom Stock Plan of $99,000 and $42,000 for the three months ended March 31, 2013 and 2012, respectively. The total fair value of the distributions from the Phantom Stock Plan was $1,000 for each of the three month periods ended March 31, 2013 and 2012, respectively.
 
 
- 28 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

9. 
Pension and Other Postretirement Benefit Plans

The following table sets forth information regarding the components of net expense for the pension and other postretirement benefit plans.
 
   
Three months ended
March 31,
 
(In thousands)
 
2013
   
2012
 
             
Employee Pension Plan:
           
Interest cost
  $ 207     $ 220  
Amortization of unrecognized loss
    306       263  
Expected return on plan assets
    (315 )     (310 )
Net employee pension expense
  $ 198     $ 173  
                 
Outside Director Pension Plan:
               
Service cost
  $ 21     $ 20  
Interest cost
    24       28  
Amortization of unrecognized gain
    (9 )     (7 )
Amortization of past service liability
    9       9  
Net outside director pension expense
  $ 45     $ 50  
                 
Other Postretirement Benefit Plans:
               
Service cost
  $ 112     $ 100  
Interest cost
    55       54  
Amortization of unrecognized loss
    12       10  
Amortization of past service credit
    (20 )     (21 )
Net other postretirement expense
  $ 159     $ 143  

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2012 that it expects to contribute $0.8 million to the Company’s Employee Pension Plan (the “Employee Pension Plan”) and $0.2 million to each of the Outside Director Pension Plan (the “Outside Director Pension Plan”) and the other post retirement benefit plans (the “Other Postretirement Benefit Plans”) during the year ending December 31, 2013. As of March 31, 2013, the Company has contributed $159,000 to the Employee Pension Plan, $22,000 to the Outside Director Pension Plan and $13,000 to the Other Postretirement Benefit Plans. As of March 31, 2013, the Company has not revised its expected contributions for the year ending December 31, 2012.

10.
Fair Value of Financial Instruments

The Company carries certain financial assets and financial liabilities at fair value in accordance with ASC Topic 825, “Financial Instruments” (“ASC Topic 825”) and values those financial assets and financial liabilities in accordance with ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”).  ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  ASC Topic 825 permits entities to choose to measure many financial instruments and certain other items at fair value. At March 31, 2013, the Company carried financial assets and financial liabilities under the fair value option with fair values of $47.9 million and $24.7 million, respectively. At December 31, 2012, the Company carried financial assets and financial liabilities under the fair value option with fair values of $54.5 million and $23.9 million, respectively. During the three months ended March 31, 2013 and 2012, the Company did not elect to carry any additional financial assets or financial liabilities under the fair value option. During the three months ended March 31, 2013, the Company sold financial assets carried under the fair value option totaling $4.4 million.  The Company did not sell any financial assets during the three months ended March 31, 2012.
 
 
- 29 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The following table presents the financial assets and financial liabilities reported at fair value under the fair value option, and the changes in fair value included in the Consolidated Statement of Income – Net gain (loss) from fair value adjustments, at or for the periods ended as indicated:
 
   
Fair Value
   
Fair Value
   
Changes in Fair Values For Items Measured at Fair Value
 
   
Measurements
   
Measurements
   
Pursuant to Election of the Fair Value Option
 
   
at March 31,
   
at December 31,
 
Three Months Ended
 
(Dollars in thousands)
 
2013
   
2012
   
March 31, 2013
   
March 31, 2012
 
                         
Mortgage-backed securities
  $ 17,965     $ 24,911     $ (362 )   $ (18 )
Other securities
    29,933       29,577       273       241  
Borrowed funds
    24,742       23,922       (819 )     171  
Net gain from fair value adjustments (1)
                  $ (908 )   $ 394  
 
(1)
The net gain (loss) from fair value adjustments presented in the above table does not include net gains of $0.8 million and losses of $0.8 million for the three months ended March 31, 2013 and 2012, respectively, from the change in the fair value of interest rate caps / swaps.
 
Included in the fair value of the financial assets and financial liabilities selected for the fair value option is the accrued interest receivable or payable for the related instrument. One pooled trust preferred security is over 90 days past due and the Company has stopped accruing interest. The Company continues to accrue on the remaining financial instruments and reports, as interest income or interest expense in the Consolidated Statement of Income, the interest receivable or payable on the financial instruments selected for the fair value option at their respective contractual rates.
 
The borrowed funds had a contractual principal amount of $61.9 million at March 31, 2013 and December 31, 2012.  The fair value of borrowed funds includes accrued interest payable of $0.4 million at March 31, 2013 and December 31, 2012.
 
The Company generally holds its earning assets, other than securities available for sale, to maturity and settles its liabilities at maturity. However, fair value estimates are made at a specific point in time and are based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Accordingly, as assumptions change, such as interest rates and prepayments, fair value estimates change and these amounts may not necessarily be realized in an immediate sale.
 
Disclosure of fair value does not require fair value information for items that do not meet the definition of a financial instrument or certain other financial instruments specifically excluded from its requirements. These items include core deposit intangibles and other customer relationships, premises and equipment, leases, income taxes, foreclosed properties and equity.
 
Further, fair value disclosure does not attempt to value future income or business. These items may be material and accordingly, the fair value information presented does not purport to represent, nor should it be construed to represent, the underlying “market” or franchise value of the Company.
 
Financial assets and financial liabilities reported at fair value are required to be measured based on either: (1) quoted prices in active markets for identical financial instruments (Level 1); (2) significant other observable inputs (Level 2); or (3) significant unobservable inputs (Level 3).
 
A description of the methods and significant assumptions utilized in estimating the fair value of the Company’s assets and liabilities that are carried at fair value on a recurring basis are as follows:
 
Level 1 – where quoted market prices are available in an active market. The Company did not value any of its assets or liabilities that are carried at fair value on a recurring basis as Level 1 at March 31, 2013 and December 31, 2012.
 
Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued.  Fair value can also be estimated by using pricing models, or discounted cash flows.  Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads.  In addition to observable market information, models also incorporate maturity and cash flow assumptions. At March 31, 2013 and December 31, 2012, Level 2 includes mortgage related securities, mutual funds, corporate debt and interest rate caps/swaps.
 
 
- 30 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3.  At March 31, 2013 and December 31, 2012, Level 3 includes REMIC and CMO securities, municipal securities and trust preferred securities owned by and junior subordinated debentures issued by the Company.
 
The methods described above may produce fair values that may not be indicative of net realizable value or reflective of future fair values. While the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies, assumptions and models to determine fair value of certain financial instruments could produce different estimates of fair value at the reporting date.
 
The following table sets forth the assets and liabilities that are carried at fair value on a recurring basis and the method that was used to determine their fair value, at March 31, 2013 and December 31, 2012:
 
   
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant Other
Unobservable Inputs
(Level 3)
   
Total carried at fair value
on a recurring basis
 
   
2013
   
2012
   
2013
   
2012
   
2013
   
2012
   
2013
   
2012
 
                                                 
                                                 
Assets:
                                               
Mortgage-backed Securities
 
$ -     $ -     $ 740,940     $ 696,638     $ 23,761     $ 23,475     $ 764,701     $ 720,113  
Other securities
    -       -       218,788       213,374       16,805       16,079       235,593       229,453  
Interest rate caps
    -       -       16       19       -       -       16       19  
Interest rate swaps
    -       -       51       3       -       -       51       3  
Total assets
  $ -     $ -     $ 959,795     $ 910,034     $ 40,566     $ 39,554     $ 1,000,361     $ 949,588  
                                                                 
Liabilities:
                                                               
Liabilities:
                                                               
Borrowings
  $ -     $ -     $ -     $ -     $ 24,742     $ 23,922     $ 24,742     $ 23,922  
Interest rate swaps
    -       -       1,138       1,922       -       -       1,138       1,922  
Total liabilities
  $ -     $ -     $ 1,138     $ 1,922     $ 24,742     $ 23,922     $ 25,880     $ 25,844  
 

 

 
- 31 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The following table sets forth the Company's assets and liabilities that are carried at fair value on a recurring basis, classified within Level 3 of the valuation hierarchy for the period indicated:
 
   
For the three months ended
March 31, 2013
 
   
REMIC and
CMO
   
Municipals
   
Trust preferred
securities
   
Junior subordinated
debentures
 
   
(In thousands)
 
                         
Beginning balance
  $ 23,475     $ 9,429     $ 6,650     $ 23,922  
Transfer into Level 3
    -       -       -       -  
Net gain from fair value adjustment of financial assets
    -       -       247       -  
Net loss from fair value adjustment of financial liabilities
    -       -       -       819  
Increase in accrued interest payable
    -       -       -       1  
Change in unrealized gains (losses) included in other comprehensive income
    286       (51 )     530       -  
Ending balance
  $ 23,761     $ 9,378     $ 7,427     $ 24,742  
                                 
Changes in unrealized held at period end
  $ 286     $ (51 )   $ 530     $ -  
 
The following table presents the quantitative information about recurring Level 3 fair value of financial instruments and the fair value measurements as of March 31, 2013:
 
March 31, 2013
 
Fair Value
 
 Valuation Technique
 Unobservable Input
  Range (Weighted Average)  
   
(Dollars in thousands)
 
Assets:
                     
                       
         
Spread to index
  2.4% - 4.1% (3.3%)  
REMIC and CMO
  $ 23,761  
Discounted cash flows
Average Life (years)
  4.4 - 7.6 (5.6)  
                         
Municipals
  $ 9,378  
Discounted cash flows
Discount rate
  0.4% - 4.0% (3.6%)  
                         
           
Discount rate
  8.0% - 16.9% (11.9%)  
           
Prepayment assumptions
  0% - 73.0% (45.6%)  
Trust Preferred Securities
  $ 7,427  
Discounted cash flows
Defaults
  0% - 10.3% (7.6%)  
                         
Liabilities:
                       
                         
Junior subordinated debentures
  $ 24,742  
Discounted cash flows
Discount rate
  8.0% - 8.0% (8.0%)  
 
The significant unobservable inputs used in the fair value measurement of the Company’s REMIC and CMO securities valued under Level 3 are the spread to an index and the average life of the security. Significant increases or decreases in either of those inputs in isolation would result in a significantly lower or higher fair value measurement.
 
The significant unobservable inputs used in the fair value measurement of the Company’s municipal securities valued under Level 3 are the securities’ effective yield. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.
 
The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities valued under Level 3 are the securities’ prepayment assumptions and default rate. Significant increases or decreases in any of the inputs in isolation would result in a significantly lower or higher fair value measurement.
 
 
- 32 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The significant unobservable inputs used in the fair value measurement of the Company’s junior subordinated Debentures are effective yield. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.
 
The following table sets forth the Company’s assets that are carried at fair value on a non-recurring basis and the method that was used to determine their fair value, at March 31, 2013 and December 31, 2012:
 
   
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant Other
Unobservable Inputs
(Level 3)
   
Total carried at fair value
on a recurring basis
 
   
2013
   
2012
   
2013
   
2012
   
2013
   
2012
   
2013
   
2012
 
                                                 
Assets:
                                               
Loans held for sale
  $ -     $ -     $ -     $ -     $ 9,907     $ 5,313     $ 9,907     $ 5,313  
Impaired loans
    -       -       -       -       39,689       49,703       39,689       49,703  
Other real estate owned
    -       -       -       -       2,189       5,278       2,189       5,278  
Total assets
  $ -     $ -     $ -     $ -     $ 51,785     $ 60,294     $ 51,785     $ 60,294  
 
The following table presents the quantitative information about non-recurring Level 3 fair value of financial instruments and the fair value measurements as of March 31, 2013:
 
March 31, 2013
 
Fair Value
 
 Valuation Technique
 Unobservable Input
 
Range (Weighted Average)
 
   
(Dollars in thousands)
 
Assets:
                     
                       
Loans held for sale
  $ 9,907  
Fair value of collateral
Loss severity discount
  3.8% - 45.9% (26.7%)  
Impaired loans
  $ 39,689  
Fair value of collateral
Loss severity discount
  0.2% - 90.7% (26.8%)  
Other real estate owned
  $ 2,189  
Fair value of collateral
Loss severity discount
  0.0% - 80.7% (25.3%)  
 
The Company carries its Loans held for sale and OREO at the expected sales price less selling costs.
 
The Company carries its impaired collateral dependent loans at 85% of the appraised or internally estimated value of the underlying property.
 
The Company did not have any liabilities that were carried at fair value on a non-recurring basis at March 31, 2013 and December 31, 2012.

The estimated fair value of each material class of financial instruments at March 31, 2013 and December 31, 2012 and the related methods and assumptions used to estimate fair value are as follows:
 
Cash and Due from Banks, Overnight Interest-Earning Deposits and Federal Funds Sold:

The fair values of financial instruments that are short-term or reprice frequently and have little or no risk are considered to have a fair value that approximates carrying value (Level 1).
 
FHLB-NY stock:

The fair value is based upon the par value of the stock which equals its carrying value (Level 2).
 
Securities Available for Sale:
 
The estimated fair values of securities available for sale are contained in Note 6 of the Notes to Consolidated Financial Statements. Fair value is based upon quoted market prices (Level 1 input), where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued (Level 2 input). When there is limited activity or less transparency around inputs to the valuation, securities are valued using (Level 3 input).
 
 
- 33 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Loans held for sale:
 
The fair value of non-performing loans held for sale is estimated through bids received on the loans and, as such, are classified as a Level 3 input.
 
Loans:
 
The estimated fair value of loans is estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities (Level 3 input).
 
For non-accruing loans, fair value is generally estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets or for collateral dependent loans 85% of the appraised or internally estimated value of the property (Level 3 input).
 
Due to Depositors:
 
The fair values of demand, passbook savings, NOW, money market deposits and escrow deposits are, by definition, equal to the amount payable on demand at the reporting dates (i.e. their carrying value) (Level 1). The fair value of fixed-maturity certificates of deposits are estimated by discounting the expected future cash flows using the rates currently offered for deposits of similar remaining maturities (Level 2 input).
 
Borrowings:
 
The estimated fair value of borrowings are estimated by discounting the contractual cash flows using interest rates in effect for borrowings with similar maturities and collateral requirements (Level 2 input) or using a market-standard model (Level 3 input).
 
Interest Rate Caps:
 
The estimated fair value of interest rate caps is based upon broker quotes (Level 2 input).
 
Interest Rate Swaps:
 
The estimated fair value of interest rate swaps is based upon broker quotes (Level 2 input).

Other Real Estate Owned:
 
OREO are carried at fair value less selling costs.  The fair value is based on appraised value through a current appraisal, or sometimes through an internal review, additionally adjusted by the estimated costs to sell the property (Level 3 input).
 
Other Financial Instruments:
 
The fair values of commitments to sell, lend or borrow are estimated using the fees currently charged or paid to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties or on the estimated cost to terminate them or otherwise settle with the counterparties at the reporting date. For fixed-rate loan commitments to sell, lend or borrow, fair values also consider the difference between current levels of interest rates and committed rates (where applicable).
 
At March 31, 2013 and 2012, the fair values of the above financial instruments approximate the recorded amounts of the related fees and were not considered to be material.
 
 
- 34 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The following table sets forth the carrying amounts and estimated fair values of selected financial instruments based on the assumptions described above used by the Company in estimating fair value at March 31, 2013:
 
   
March 31, 2013
 
   
Carrying
Amount
   
Fair
Value
   
Level 1
   
Level 2
   
Level 3
 
   
(in thousands)
 
Assets:
                             
                               
Cash and due from banks
  $ 46,046     $ 46,046     $ 46,046     $ -     $ -  
Mortgage-backed Securities
    764,701       764,701       -       740,940       23,761  
Other securities
    235,593       235,593       -       218,788       16,805  
Loans held for sale
    9,907       9,907       -       -       9,907  
Loans
    3,201,197       3,365,486       -       -       3,365,486  
FHLB-NY stock
    38,686       38,686       -       38,686       -  
Interest rate caps
    16       16       -       16       -  
Interest rate swaps
    51       51       -       51       -  
OREO
    2,189       2,189       -       -       2,189  
Total assets
  $ 4,298,386     $ 4,462,675     $ 46,046     $ 998,481     $ 3,418,148  
                                         
                                         
Liabilities:
                                       
Deposits
  $ 3,106,652       3,141,268     $ 1,905,746     $ 1,235,522     $ -  
Borrowings
    868,364       905,984       -       882,062       23,922  
Interest rate swaps
    1,138       1,138       -       1,138       -  
Total liabilities
  $ 3,976,154     $ 4,048,390     $ 1,905,746     $ 2,118,722     $ 23,922  
 
 
- 35 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following table sets forth the carrying amounts and estimated fair values of selected financial instruments based on the assumptions described above used by the Company in estimating fair value at December 31, 2012:
 
   
December 31, 2012
 
   
Carrying
Amount
   
Fair
Value
   
Level 1
   
Level 2
   
Level 3
 
   
(in thousands)
 
Assets:
                             
                               
Cash and due from banks
  $ 40,425     $ 40,425     $ 40,425     $ -     $ -  
Mortgage-backed Securities
    720,113       720,113       -       696,638       23,475  
Other securities
    229,453       229,453       -       213,374       16,079  
Loans held for sale
    5,313       5,313       -       -       5,313  
Loans
    3,234,121       3,416,313       -       -       3,416,313  
FHLB-NY stock
    42,337       42,337       -       42,337       -  
Interest rate caps
    19       19       -       19       -  
Interest rate swaps
    3       3       -       3       -  
OREO
    5,278       5,278       -       -       5,278  
Total assets
  $ 4,277,062     $ 4,459,254     $ 40,425     $ 952,371     $ 3,466,458  
                                         
                                         
Liabilities:
                                       
Deposits
  $ 3,015,193       3,057,152     $ 1,761,964     $ 1,295,188     $ -  
Borrowings
    948,405       992,069       -       968,147       23,922  
Interest rate swaps
    1,922       1,922       -       1,922       -  
Total liabilities
  $ 3,965,520     $ 4,051,143     $ 1,761,964     $ 2,265,257     $ 23,922  
 
11. 
Derivative Financial Instruments
 
At March 31, 2013 and December 31, 2012, the Company’s derivative financial instruments consist of purchased options and swaps. The purchased options are used to mitigate the Company’s exposure to rising interest rates on its financial liabilities without stated maturities. The Company’s swaps are used to mitigate the Company’s exposure to rising interest rates on a portion ($18.0 million) of its floating rate junior subordinated debentures that have a contractual value of $61.9 million. Additionally, the Company at times may use swaps to mitigate the Company’s exposure to rising interest rates on its fixed rate loans.
 
At March 31, 2013, derivatives with a combined notional amount of $118.0 million are not designated as hedges and a derivative with a notional amount of $4.3 million is designated as a fair value hedge. Changes in the fair value of the derivatives not designated as hedges are reflected in “Net loss from fair value adjustments” in the Consolidated Statements of Income.  The portions of the changes in the fair value of the derivative designated as a fair value hedge which is considered ineffective are reflected in “Net loss from fair value adjustments” in the Consolidated Statements of Income.
 
 
- 36 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

 
The following table sets forth information regarding the Company’s derivative financial instruments at March 31, 2013:
 
   
March 31, 2013
 
   
Notional
Amount
   
Purchase Price
   
Net Carrying
Value
 
   
(In thousands)
 
                   
Interest rate caps (non-hedge)
  $ 100,000     $ 9,035     $ 16  
Interest rate swaps (non-hedge)
    18,000       -       (1,138 )
Interest rate swaps (hedge)
    4,280       -       51  
Total derivatives
  $ 122,280     $ 9,035     $ (1,071 )
 
The following table sets forth information regarding the Company’s derivative financial instruments at December 31, 2012:
 
   
December 31, 2012
 
   
Notional
Amount
   
Purchase Price
   
Net Carrying
Value
 
   
(In thousands)
 
                   
Interest rate caps (non-hedge)
  $ 100,000     $ 9,035     $ 19  
Interest rate swaps (non-hedge)
    18,000       -       (1,922 )
Interest rate swaps (hedge)
    4,300       -       3  
Total derivatives
  $ 122,300     $ 9,035     $ (1,900 )
 
(1)
Derivatives in a net positive position are recorded as “Other assets” and derivatives in a net negative position are recorded as “Other liabilities” in the Consolidated Statements of Financial Condition.
 
The following table sets forth the effect of derivative instruments on the Consolidated Statements of Income for the periods indicated:
 
   
For the three months ended
March 31,
 
(In thousands)
 
2013
   
2012
 
             
Financial Derivatives:
           
Interest rate caps
  $ (3 )   $ (337 )
Interest rate swaps
    788       (1,927 )
Net Gain (loss) (1)
  $ 785     $ (2,264 )
 
(1)
Net gains and (losses) are recorded as part of “Net loss from fair value adjustments” in the Consolidated Statements of Income.

12. 
Income Taxes
 
Flushing Financial Corporation files consolidated Federal and combined New York State and New York City income tax returns with its subsidiaries, with the exception of Flushing Financial Capital Trust II, Flushing Financial Capital Trust III, and Flushing Financial Capital Trust IV, which file separate Federal income tax returns as trusts, and Flushing Preferred Funding Corporation, which files a separate Federal and New York State income tax return as a real estate investment trust.
 
 
- 37 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Income tax provisions are summarized as follows:
 
   
For the three months
ended March 31,
 
(In thousands)
 
2013
   
2012
 
Federal:
           
Current
  $ 2,834     $ 3,132  
Deferred
    627       492  
Total federal tax provision
    3,461       3,624  
State and Local:
               
Current
    581       713  
Deferred
    277       221  
Total state and local tax provision
    858       934  
                 
Total income tax provision
  $ 4,319     $ 4,558  
 
The income tax provision in the Consolidated Statements of Income has been provided at effective rates of 39.0% for the three months ended March 31, 2013 and 2012.
 
The effective rates differ from the statutory federal income tax rate as follows:
 
   
For the three months
ended March 31,
 
(dollars in thousands)
 
2013
   
2012
 
                         
Taxes at federal statutory rate
  $ 3,876       35.0 %   $ 4,090       35.0 %
Increase (reduction) in taxes resulting from:
                               
State and local income tax, net of Federal income tax benefit
    558       5.0       607       5.2  
Other
    (115 )     (1.0 )     (139 )     (1.2 )
Taxes at effective rate
  $ 4,319       39.0 %   $ 4,558       39.0 %
 
The Company has recorded a deferred tax asset of $33.3 million at March 31, 2013, which is included in “Other assets” in the Consolidated Statements of Financial Condition. This represents the anticipated net federal, state and local tax benefits expected to be realized in future years upon the utilization of the underlying tax attributes comprising this balance. The Company has reported taxable income for federal, state, and local tax purposes in each of the past three fiscal years. In management’s opinion, in view of the Company’s previous, current and projected future earnings trend, the probability that some of the Company’s $31.9 million deferred tax liability can be used to offset a portion of the deferred tax asset, as well as certain tax planning strategies, it is more likely than not that the deferred tax asset will be fully realized. Accordingly, no valuation allowance was deemed necessary for the deferred tax asset at March 31, 2013.
 
 
 
- 38 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

13. 
Accumulated Other Comprehensive Income:
 
The following table sets forth the changes in accumulated other comprehensive income by component for the three months ended March 31, 2013:
 
   
Unrealized Gains
and Losses on
Available for Sale
Securities
   
 
Defined Benefit
Pension Items
   
Total
 
   
(In thousands)
 
Beginning balance, net of tax
  $ 18,921     $ (6,784 )   $ 12,137  
Other comprehensive income before reclassifications, net of tax
    (2,594 )     -     $ (2,594 )
                         
Amounts reclassified from accumulated other comprehensive income, net of tax
    (1,609 )     168       (1,441 )
                         
Net current period other comprehensive income, net of tax
    (4,203 )     168       (4,035 )
                         
Ending balance, net of tax
  $ 14,718     $ (6,616 )   $ 8,102  
 
The following table sets forth significant amounts reclassified out of accumulated other comprehensive income by component for the three months ended March 31, 2013:
 
Details about Accumulated Other
Comprehensive Income Components
 
Amounts Reclassified from
Accumulated Other
Comprehensive Income
   
Affected Line Item in the Statement
Where Net Income is Presented
(Dollars in thousands)
           
Unrealized gains losses on available for sale securities:
  $ 2,858      
 Net gain on sale of securities
      (1,249 )    
 Tax expense
    $ 1,609      
 Net of tax
               
Amortization of defined benefit pension items:
             
Actuarial losses
  $ (309 ) (1)  
 Other expense
Prior service credits
    11   (1)  
 Other expense
      (298 )    
Total before tax
      130      
 Tax benefit
    $ (168 )    
 Net of tax
 
(1)
These accumulated other comprehensive income components are included in the computation of net periodic pension cost (See Note 9 of the Notes to Consolidated Financial Statements “Pension and Other Postretirement Benefit Plans.”
 
 
- 39 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
14.
Regulatory
 
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) imposes a number of mandatory supervisory measures on banks and thrift institutions. Among other matters, FDICIA established five capital zones or classifications (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized). Such classifications are used by bank regulatory agencies to determine matters ranging from each institution’s quarterly FDIC deposit insurance premium assessments, to approvals of applications authorizing institutions to grow their asset size or otherwise expand business activities. Under current capital regulations, the Bank is required to comply with each of three separate capital adequacy standards.

At March 31, 2013, the Bank exceeded each of the three capital requirements and is categorized as “well-capitalized” under the prompt corrective action regulations.  Set forth below is a summary of the Bank’s compliance:
 
(Dollars in thousands)
 
Amount
   
Percent of Assets
 
             
Tier I (leverage) capital:
           
    Capital level
  $ 427,849       9.78 %
    Requirement to be well capitalized
    218,655       5.00  
    Excess
    209,194       4.78  
                 
Tier I risk-based capital:
               
    Capital level
  $ 427,849       14.33 %
    Requirement to be well capitalized
    179,162       6.00  
    Excess
    248,687       8.33  
                 
Total risk-based capital:
               
    Capital level
  $ 458,876       15.37 %
    Requirement to be well capitalized
    298,603       10.00  
    Excess
    160,273       5.37  
 
As a result of its conversion to a bank holding company on February 28, 2013, the Holding Company became subject to the same regulatory capital requirements as the Bank. At March 31, 2013, the Holding Company’s Tier I (leverage) capital, Tier I risk-based capital and Total risk-based capital was 10.16%, 14.89%, and 15.93%, respectively.
 
 
- 40 -

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
15.
New Authoritative Accounting Pronouncements

In February 2013, the FASB issued ASU No. 2013-02, which amends the authoritative accounting guidance under ASC Topic 220 “Comprehensive Income.”  The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is permitted. Adoption of this update did not have a material effect on the Company’s consolidated results of operations or financial condition. See Note 13 of the Notes to Consolidated Financial Statements “Accumulated Other Comprehensive Income.”
 
 
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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations


ITEM 2. 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2012.  In addition, please read this section in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.
 
As used in this Quarterly Report, the words “we,” “us,” “our” and the “Company” are used to refer to Flushing Financial Corporation and our consolidated subsidiaries, including the surviving entity of the merger (the “Merger”) on February 28, 2013 of our wholly owned subsidiary, Flushing Savings Bank, FSB (the “Savings Bank”) with and into Flushing Commercial Bank (the “Commercial Bank”). The surviving entity of the Merger was the Commercial Bank, whose name has been changed to “Flushing Bank.” References herein to the “Bank” mean the Savings Bank (including its wholly owned subsidiary, the Commercial Bank) prior to the Merger and the surviving entity after the Merger.

Statements contained in this Quarterly Report relating to plans, strategies, objectives, economic performance and trends, projections of results of specific activities or investments and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Forward-looking information is inherently subject to risks and uncertainties and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed elsewhere in this Quarterly Report and in other documents filed by us with the Securities and Exchange Commission from time to time, including, without limitation, our Annual Report on Form 10-K for the year ended December 31, 2012. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “potential” or “continue” or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  We have no obligation to update these forward-looking statements.
 
Executive Summary
 
We are a Delaware corporation organized in May 1994. The Savings Bank was organized in 1929 as a New York State-chartered mutual savings bank. In 1994, the Savings Bank converted to a federally chartered mutual savings bank and changed its name from Flushing Savings Bank to Flushing Savings Bank, FSB. The Savings Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank on November 21, 1995, at which time Flushing Financial Corporation acquired all of the stock of the Savings Bank. On February 28, 2013, in the Merger, the Savings Bank merged with and into the Commercial Bank, with the Commercial Bank as the surviving entity. Pursuant to the Merger, the Commercial Bank’s charter was changed to a full-service New York State chartered commercial bank, and its name was changed to Flushing Bank. On July 21, 2011, as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Savings Bank’s primary regulator became the Office of the Comptroller of the Currency and Flushing Financial Corporation’s primary regulator became the Federal Reserve Board of Governors. Upon completion of the Merger, the Bank’s primary regulator became the New York State Department of Financial Services (formerly, the New York State Banking Department), and its primary federal regulator became the Federal Deposit Insurance Corporation (“FDIC”). Deposits are insured to the maximum allowable amount by the FDIC. Additionally, the Bank is a member of the Federal Home Loan Bank system. Also in connection with the Merger, Flushing Financial Corporation became a bank holding company. We do not anticipate any significant changes to our operations or services as a result of the Merger. The primary business of Flushing Financial Corporation has been the operation of the Bank. The Bank owns three subsidiaries: Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc. In November 2006, the Bank launched an internet branch, iGObanking.com®. The activities of Flushing Financial Corporation are primarily funded by dividends, if any, received from the Bank, issuances of junior subordinated debt, and issuances of equity securities. Flushing Financial Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol “FFIC.”
 
Our principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from ongoing operations and borrowings, primarily in (1) originations and purchases of multi-family residential properties and, to a lesser extent, one-to-four family (focusing on mixed-use properties, which are properties that contain both residential dwelling units and commercial units) and commercial real estate mortgage loans; (2) construction loans, primarily for residential properties; (3) Small Business Administration (“SBA”) loans and other small business loans; (4) mortgage loan surrogates such as mortgage-backed securities; and (5) U.S. government securities, corporate fixed-income securities and other marketable securities. We also originate certain other consumer loans including overdraft lines of credit. Our results of operations depend primarily on net interest income, which is the difference between the income earned on its interest-earning assets and the cost of our interest-bearing liabilities. Net interest income is the result of our interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities. We also generate non-interest income from loan fees, service charges on deposit accounts, mortgage servicing fees, and other fees, income earned on Bank Owned Life Insurance (“BOLI”), dividends on Federal Home Bank of New York (“FHLB-NY”) stock and net gains and losses on sales of securities and loans. Our operating expenses consist principally of employee compensation and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. Our results of operations also can be significantly affected by our periodic provision for loan losses and specific provision for losses on real estate owned.
 
 
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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
 
Our strategy is to continue our focus on being an institution serving consumers, businesses, and governmental units in our local markets. In furtherance of this objective, we intend to:
 
·  
continue our emphasis on the origination of multi-family residential mortgage loans;
 
·  
continue our transition to a ‘commercial’ banking institution;
 
·  
increase our commitment to the multi-cultural marketplace, with a particular focus on the Asian community in Queens;
 
·  
maintain asset quality;
 
·  
manage deposit growth and maintain a low cost of funds through
 
§  
business banking deposits,
§  
municipal deposits through government banking, and
§  
new customer relationships via iGObanking.com®
 
·  
cross sell to lending and deposit customers;
 
·  
take advantage of market disruptions to attract talent and customers from competitors;
 
·  
manage interest rate risk and capital; and
 
·  
manage enterprise-wide risk.
 
There can be no assurance that we will be able to effectively implement this strategy. Our strategy is subject to change by the Board of Directors.
 
Our investment policy, which is approved by the Board of Directors, is designed primarily to manage the interest rate sensitivity of our overall assets and liabilities, to generate a favorable return without incurring undue interest rate risk and credit risk, to complement our lending activities and to provide and maintain liquidity. In establishing our investment strategies, we consider our business and growth strategies, the economic environment, our interest rate risk exposure, our interest rate sensitivity “gap” position, the types of securities to be held and other factors. We classify our investment securities as available for sale.
 
We carry a portion of our financial assets and financial liabilities at fair value and record changes in their fair value through earnings in non-interest income on our Consolidated Statements of Income and Comprehensive Income. A description of the financial assets and financial liabilities that are carried at fair value through earnings can be found in Note 10 of the Notes to the Consolidated Financial Statements.
 
During the three months ended March 31, 2013, the Bank sold $68.5 million of mortgage-backed securities realizing a gain of $2.9 million, and prepaid $69.9 million of FHLB-NY advances scheduled to mature in 2014 and incurred a prepayment penalty of $2.6 million. Based on market prepayment assumptions, the mortgage-backed securities sold were yielding 1.96% while the advances prepaid were costing 3.21%. The mortgage-backed securities were replaced with securities yielding approximately 2.00% and were funded by a mixture of new FHLB-NY advances and deposits costing approximately 0.75%. This restructuring is expected to increase net interest income in future periods.
 
 
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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
 
Additionally, during the three months ended March 31, 2013, the Bank continued to take an aggressive approach to reduce the level of non-performing loans.  The Bank sold 16 non-performing loans for proceeds totaling $8.2 million, with charge-offs recorded at the time of sale totaling $0.4 million.  Additionally, the Bank has agreed to sell 34 non-performing loans for total proceeds of $7.7 million, and recorded $3.2 million in charge-offs. The sale of 30 of these loans, with net proceeds of $7.2 million, was completed in April.  These loans are reported as Loans held for sale in our consolidated financial statements.
 
We continue to maintain conservative underwriting standards that include, among other things, a loan-to-value ratio of 75% or less and a debt coverage ratio of at least 125%. Multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans originated during the three months ended March 31, 2013 had an average loan-to-value ratio of 37.3% and an average debt coverage ratio of 265%.
 
Non-performing loans decreased by $2.3 million, or 3%, to $87.6 million, and are at their lowest level since the fourth quarter of 2009. Loans delinquent over 30 days decreased $18.3 million, or 11%, during the first quarter of 2013, and are at their lowest level since the second quarter of 2009. Loans delinquent over 90 days decreased $3.4 million, or 4%, and are at their lowest level since the first quarter of 2010. Classified and criticized loans continued their improving trend that began over a year ago, which resulted in a 16% reduction in these categories in the first quarter of 2013, and a 40% reduction since their peak level at June 30, 2011.
 
Charge-offs during the three months ended March 31, 2013 were primarily due to sales of delinquent loans and the transfer of loans to Loans held for sale. The net charge-offs totaled $3.7 million. Additional charge-offs were recorded as we continued our program of obtaining updated appraisals, and recording charge-offs based on these up-to-date values as opposed to adding to the allowance for loan losses. These charge-offs totaled $1.8 million. As a result, we do not carry any non-performing assets at more than 85% of their current appraised value. This process has insured that we have kept pace with changing values in the real estate market. The average loan-to-value ratio for our non-performing loans, based upon current appraisals, was 54.3% at the end of the quarter.
 
Our net interest margin for the three months ended March 31, 2013 was 3.29%. Excluding the prepayment penalty incurred as a result of prepaying the FHLB-NY advances, our net interest margin would have been 3.54%, a decrease of six basis points from 3.60% in the fourth quarter of 2012, and a decrease of 14 basis points from 3.68% in the first quarter of 2012.  Excluding prepayment penalty income received on loans and prepayment penalty incurred on borrowings, our net interest margin for the first quarter of 2013 was 3.44%, a decrease of three basis points from 3.47% for the fourth quarter of 2012. While we saw a decrease in our funding costs of 13 basis points for the quarter, excluding the prepayment penalty on advances, the yield on interest-earning assets decreased 15 basis points, excluding prepayment penalty income on loans. In the current interest rate environment, new loans and securities are added at rates well below our portfolio average yield, and higher yielding loans and securities are prepaid.  We also continued to experience higher than average activity in loans refinancing during the first quarter of 2013, which further reduced the yield on our loan portfolio.
 
The Bank continues to be well-capitalized under regulatory requirements, with Core, Tier 1 risk-based and Total risk-based capital ratios of 9.78%, 14.33% and 15.37%, respectively, at March 31, 2013. The Company is also subject to the same regulatory requirements.  At March 31, 2013, the Company’s capital ratios for Core, Tier 1 risk-based and Total risk-based capital ratios were 10.16%, 14.89% and 15.93%, respectively.
 
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

General.  Net income for the three months ended March 31, 2013 was $6.8 million, a decrease of $0.4 million, or 5.2%, compared to $7.1 million for the three months ended March 31, 2012.  Diluted earnings per common share were $0.22 for the three months ended March 31, 2013, a decrease of $0.01, or 4.4%, from $0.23 for the three months ended March 31, 2012.
 
Return on average equity was 6.1% for the three months ended March 31, 2013 compared to 6.8% for the three months ended March 31, 2012. Return on average assets was 0.6% for the three months ended March 31, 2013 compared to 0.7% for the three months ended March 31, 2012.
 
Interest Income. Total interest and dividend income decreased $4.3 million, or 8.0%, to $50.1 million for the three months ended March 31, 2013 from $54.4 million for the three months ended March 31, 2012. The decrease in interest income was attributable to a 54 basis point decline in the yield of interest-earning assets to 4.82% for the three months ended March 31, 2013 from 5.36% in the comparable prior year period partially offset by an increase of $92.6 million in the average balance of interest-earning assets to $4,154.9 million for the three months ended March 31, 2013 from $4,062.3 million for the comparable prior year period.   The 54 basis point decline in the yield of interest-earning assets was primarily due to a 44 basis point reduction in the yield of the loan portfolio to 5.39% for the three months ended March 31, 2013 from 5.83% for the three months ended March 31, 2012, combined with a 74 basis point decline in the yield on total securities to 3.07% for the three months ended March 31, 2013 from 3.81% for the comparable prior year period. In addition, the yield of interest-earning assets was negatively impacted by a $7.2 million decrease in the average balance of the higher yielding loan portfolio and an $105.8 million increase in the average balances of the lower yielding securities portfolio for the three months ended March 31, 2013 as compared to the comparable prior year period, which has a lower yield than the yield of total interest-earning assets. These factors that reduced the yield were partially offset by a $6.0 million decrease in the average balance of lower yielding interest-earning deposits to $39.0 million for the three months ended March 31, 2013 from $45.0 million for the comparable prior year period. The 44 basis point decrease in the loan portfolio was primarily due to the decline in the rates earned on new loan originations. The yield on the mortgage loan portfolio, excluding prepayment penalty income, decreased 42 basis points to 5.26% for the three months ended March 31, 2013 from 5.70% for the three months ended March 31, 2012. The 74 basis point decrease in the securities portfolio yield was primarily due to the purchase of new securities at lower yields than the existing portfolio.
 
 
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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
 
Interest Expense.  Interest expense decreased $1.1 million, or 6.6%, to $15.9 million for the three months ended March 31, 2013 from $17.1 million for the three months ended March 31, 2012. The decrease in interest expense was due to the reduction in the cost of interest-bearing liabilities, which decreased 15 basis points to 1.68% for the three months ended March 31, 2013 from 1.83% for the comparable prior year period. The 15 basis point decrease in the cost of interest-bearing liabilities was primarily due to a decline in the cost of total deposits and borrowed funds of 28 basis points and 25 basis points, respectively, partially offset by a shift in deposit concentrations as lower costing total deposits average balance decreased $165.0 million during the three months ended March 31, 2013, while the average balance of higher costing borrowed funds increased $229.4 million during the same period.    The 28 basis point reduction in the cost of total deposits was primarily due to the Bank reducing the rates it pays on its deposit products. The cost of certificates of deposit, money market accounts, savings accounts and NOW accounts decreased 25 basis points, 19 basis points, eight basis points and 14 basis points, respectively, for the three months ended March 31, 2013 from the comparable prior year period.  The decline in the cost of borrowed funds was primarily due to the prepayment of $68.5 million in FHLB-NY advances during the three months ended March 31, 2013 at an average cost of 3.21% which was scheduled to mature in 2014 and replacing those borrowings with new long-term advances costing 0.75%, partially offset by a $2.6 million prepayment penalty incurred on the transaction.
 
Net Interest Income.  For the three months ended March 31, 2013, net interest income was $34.1 million, a decrease of $3.2 million, or 8.6%, from $37.3 million for the three months ended March 31, 2012. The decrease in net interest income was primarily attributable to a 39 basis point decrease in the net-interest spread to 3.14% for the three months ended March 31, 2013 from 3.53% for the three months ended March 31, 2012, partially offset by an increase of $92.6 million in the average balance of interest-earning assets to $4,154.9 million for the three months ended March 31, 2013 from $4,062.3 million for the comparable prior year period.  The yield on interest-earning assets decreased 54 basis points to 4.82% for the three months ended March 31, 2013 from 5.36% for the three months ended March 31, 2012. The cost of funds decreased 15 basis points to 1.68% for the three months ended March 31, 2013 from 1.83% for the comparable prior year period. The net interest margin declined 39 basis points to 3.29% for the three months ended March 31, 2013 from 3.68% for the three months ended March 31, 2012. Excluding prepayment penalty income on loans and prepayment penalties on borrowings, the net interest margin would have been 3.44% for the three months ended March 31, 2013, a 13 basis point decrease from 3.57 for the comparable prior year period.
 
Provision for Loan Losses.  A provision for loan losses of $6.0 million was recorded for the three months ended March 31, 2013, which was the same as that recorded for the three months ended March 31, 2012.  During the three months ended March 31, 2013, non-performing loans decreased $2.3 million to $87.6 million from $89.8 million at December 31, 2012. Net charge-offs for the three months ended March 31, 2013 totaled $6.1 million. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 54.3% at March 31, 2013. When we have obtained properties through foreclosure, we have been able to quickly sell the properties at amounts that approximate book value. We anticipate that we will continue to see low loss content in our loan portfolio. The Bank continues to maintain conservative underwriting standards. However, given the charge-offs recorded in the first quarter of 2013 and the current economic uncertainties, management, as a result of the regular quarterly analysis of the allowance for loans losses, deemed it necessary to record a $6.0 million provision for possible loan losses in the first quarter of 2013.See “-ALLOWANCE FOR LOAN LOSSES.”
 
 
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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
 
Non-Interest Income.  Non-interest income for the three months ended March 31, 2013 was $5.3 million, an increase of $3.5 million from $1.9 million for the three months ended March 31, 2012.  The increase in non-interest income was primarily due to the $2.9 million gain from the sale of mortgage-backed securities during the three months ended March 31, 2012, as part of the balance sheet restructuring previously discussed.  Additionally, non-interest income improved due to a $0.3 million decrease in net losses from fair value adjustments and $0.1 million increases in both BOLI and FHLB-NY stock dividends from the comparable prior year period.
 
Non-Interest Expense. Non-interest expense was $22.4 million for the three months ended March 31, 2013, an increase of $0.9 million, or 4.1%, from $21.5 million for the three months ended March 31, 2012. The increase was primarily due to an increase of $1.2 million in salaries and benefits expense which was primarily due to increases in stock based compensation expense and employee benefits expense, partially offset by decreases of $0.1 million in both occupancy and equipment expense and professional services from the comparable prior year period. The first quarter of each year includes the effect of grants of annual restricted stock unit awards. GAAP requires a significant portion of these awards to be expensed at the time of grant. Included in Salaries and benefits expense is $0.7 million and $0.3 million for these awards in the three months ended March 31, 2013 and 2012, respectively, for accelerated expensing. Other expense includes $0.8 million and $0.7 million for these awards in the three months ended March 31, 2013 and 2012, respectively, for accelerated expensing. The increase in the current period accelerated expense as compared to the prior year period is due to the increase in the Company’s stock price and additional employees whose grants are required to be fully expensed on grant date. Since this accelerated expense for the annual restricted stock unit awards occurs in the first quarter, subsequent quarters of 2013 should have a lower level of non-interest expense.
 
Income before Income Taxes.  Income before the provision for income taxes decreased $0.6 million, or 5.2%, to $11.1 million for the three months ended March 31, 2012 from $11.7 million for the three months ended March 31, 2012 for the reasons discussed above.
 
Provision for Income Taxes.  Income tax expense decreased $0.2 million to $4.3 million for the three months ended March 31, 2013 from $4.6 million for the three months ended March 31, 2012. The effective tax rate was 39.0% for the three months ended March 31, 2013 and 2012.
 
FINANCIAL CONDITION

Assets.  Total assets at March 31, 2013 were $4,476.5 million, an increase of $25.1 million, or 0.6%, from $4,451.4 million at December 31, 2012. Total loans, net decreased $32.8 million, during the three months ended March 31, 2013 to $3,170.2 million from $3,203.0 million at December 31, 2012. Loan originations and purchases were $121.4 million for the three months ended March 31, 2013, an increase of $2.8 million from $118.6 million for the three months ended March 31, 2012. During the three months ended March 31, 2013, we continued to focus on the origination of multi-family properties and business loans with a full relationship.   Loan applications in process have continued to show improvement, totaling $360.4 million at March 31, 2013 compared to $211.4 million at December 31, 2012 and $258.4 million at March 31, 2012.
 
 
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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

The following table shows loan originations and purchases for the periods indicated:
 
   
For the three months
 
   
ended March 31,
 
(In thousands)
 
2013
   
2012
 
Multi-family residential
  $ 42,925     $ 61,903  
Commercial real estate (1)
    6,986       3,424  
One-to-four family – mixed-use property
    4,390       5,115  
One-to-four family – residential
    6,510       5,805  
Co-operative apartments
    2,067       -  
Construction
    -       -  
Small Business Administration
    168       266  
Taxi medallion (2)
    -       3,464  
Commercial business and other
    58,340       38,636  
    Total
  $ 121,386     $ 118,613  

 (1) Includes purchases of $0.5 million for the three months ended March 31, 2013.
 (2)  Includes purchases of $3.5 million for the three months ended March 31, 2012.

The Bank continues to maintain conservative underwriting standards that include, among other things, a loan-to-value ratio of 75% or less and a debt coverage ratio of at least 125%. Multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans originated during the first quarter of 2013 had an average loan-to-value ratio of 37.3% and an average debt coverage ratio of 265%.
 
The Bank’s non-performing assets totaled $93.6 million at March 31, 2013, a decrease of $4.9 million from $98.5 million at December 31, 2012. Total non-performing assets as a percentage of total assets were 2.09% at March 31, 2013 compared to 2.21% at December 31, 2012. The ratio of allowance for loan losses to total non-performing loans was 35% at March 31, 2013 and December 31, 2012.   See – “TROUBLED DEBT RESTRUCUTURED AND NON-PERFORMING ASSETS.”
 
During the three months ended March 31, 2013, mortgage-backed securities increased $44.6 million, or 6.2%, to $764.7 million from $720.1 million at December 31, 2012. The increase in mortgage-backed securities during the three months ended March 31, 2013 was primarily due to purchases of $158.0 million, partially offset by sales and repayments of $68.5 million and $36.2 million, respectively. During the three months ended March 31, 2013, other securities increased $6.1 million, or 2.7%, to $235.6 million from $229.5 million at December 31, 2012. The increase in other securities during the three months ended March 31, 2013 was primarily due to purchases of $27.3 million, partially offset by $20.3 million in calls. Other securities primarily consist of securities issued by government agencies, mutual or bond funds that invest in government and government agency securities and corporate bonds.
 
Liabilities.  Total liabilities were $4,032.6 million at March 31, 2013, an increase of $23.6 million, or 0.6%, from $4,009.1 million at December 31, 2012. During the three months ended March 31, 2013, due to depositors increased $91.5 million, or 3.0%, to $3,106.7 million, as a result of a $143.8 million increase in core deposits partially offset by a $52.3 million decrease in certificates of deposit. Borrowed funds decreased $80.0 million during the three months ended March 31, 2013 primarily due to the $91.5 increase in due to depositors.
 
Equity. Total stockholders’ equity increased $1.5 million, or 0.3%, to $443.9 million at March 31, 2013 from $442.4 million at December 31, 2012. Stockholders’ equity increased primarily due to net income of $6.8 million for the three months ended March 31, 2013, and $1.5 million due to the issuance of shares from the annual funding of certain employee retirement plans through the release of common shares from the Employee Benefit Trust. These increases were partially offset by the declaration and payment of dividends on the Company’s common stock of $4.01 million, the purchase of 18,560 treasury shares at a cost of $0.3 million and a decrease in other comprehensive income of $4.0 million primarily due to a decrease in the fair value of the securities portfolio. Book value per common share was $14.39 at March 31, 2013 and December 31, 2012. Tangible book value per common share was $13.87 at March 31, 2013 and December 31, 2012.
 
On September 28, 2011, the Company announced the authorization by the Board of Directors of a new common stock repurchase program, which authorizes the purchase of up to 1,000,000 shares of the Company’s common stock. During the three months ended March 31, 2013, the Company repurchased 18,560 shares of the Company’s common stock at an average cost of $16.24 per share. At March 31, 2013, 367,402 shares remain to be repurchased under the current stock repurchase program. Stock will be purchased under the current stock repurchase program from time to time, in the open market or through private transactions, subject to market conditions. There is no expiration or maximum dollar amount under this authorization.
 
 
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 PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
 
Cash flow.  During the three months ended March 31, 2013, funds provided by the Company's operating activities amounted to $20.1 million. These funds were utilized to fund net investing activities of $19.9 million. The Company's primary business objective is the origination and purchase of one-to-four family (including mixed-use properties), multi-family residential and commercial real estate mortgage loans and commercial, business and SBA loans. During the three months ended March 31, 2013, the net total of loan originations and purchases less loan repayments and sales was a $12.1 million inflow of cash. During the three months ended March 31, 2013, the Company also funded $171.0 million in purchases of securities available for sale and repaid $121.5 million in short-term borrowed funds.  During the three months ended March 31, 2013, funds were provided by a net increase of $40.4 million in long-term borrowed funds.  Additionally, funds were provided by $133.9 million in proceeds from maturities, sales, calls and prepayments of securities available for sale and $91.2 million from a net increase in deposits. The Company also used funds of $4.0 million and $1.0 million for dividend payments and purchases of treasury stock, respectively, during the three months ended March 31, 2013.
 
INTEREST RATE RISK
 
The Consolidated Statements of Financial Position have been prepared in accordance with generally accepted accounting principles in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in fair value of certain investments due to changes in interest rates.  Generally, the fair value of financial investments such as loans and securities fluctuates inversely with changes in interest rates.  As a result, increases in interest rates could result in decreases in the fair value of the Company’s interest-earning assets which could adversely affect the Company’s results of operations if such assets were sold, or, in the case of securities classified as available-for-sale, decreases in the Company’s stockholders’ equity, if such securities were retained.
 
The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust its exposure to interest rate risk. On a quarterly basis, management prepares the “Earnings and Economic Exposure to Changes in Interest Rate” report for review by the Board of Directors, as summarized below.  This report quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down (shocked) 200 basis points, assuming the yield curves of the rate shocks will be parallel to each other. The Company’s regulators currently place focus on the net portfolio value, focusing on a rate shock up or down of 200 basis points.  Net portfolio value is defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is determined using a discounted cash flow calculation.  The net portfolio value ratio is the ratio of the net portfolio value to the market value of assets.  All changes in income and value are measured as percentage changes from the projected net interest income and net portfolio value at the base interest rate scenario.  The base interest rate scenario assumes interest rates at March 31, 2013.  Various estimates regarding prepayment assumptions are made at each level of rate shock. However, prepayment penalty income is excluded from this analysis. Actual results could differ significantly from these estimates.  At March 31, 2013, the Company was within the guidelines set forth by the Board of Directors for each interest rate level.
 
The following table presents the Company’s interest rate shock as of March 31, 2013:

   
Projected Percentage Change In
       
   
Net Interest
   
Net Portfolio
   
Net Portfolio
 
Change in Interest Rate
 
Income
   
Value
   
Value Ratio
 
-200 Basis points
    -2.89 %     9.70 %     14.37 %
-100 Basis points
    -0.82       6.12       14.08  
Base interest rate
    0.00       0.00       13.59  
+100 Basis points
    -2.64       -10.73       12.53  
+200 Basis points
    -5.86       -21.39       11.39  

 
- 48 -

 
 PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
 
AVERAGE BALANCES

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities.  Net interest income depends upon the relative amount of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.  The following table sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the three months ended March 31, 2013 and 2012, and reflects the average yield on assets and average cost of liabilities for the periods indicated.  Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown.  Average balances are derived from average daily balances.  The yields include amortization of fees which are considered adjustments to yields.

   
For the three months ended March 31,
 
   
2013
   
2012
 
   
Average
         
Yield/
   
Average
         
Yield/
 
   
Balance
   
Interest
   
Cost
   
Balance
   
Interest
   
Cost
 
Assets
                                   
Interest-earning assets:
                                   
  Mortgage loans, net (1)
  $ 2,882,021       39,747       5.52 %   $ 2,906,820       43,197       5.94 %
  Other loans, net (1)
    304,704       3,193       4.19       287,147       3,363       4.68  
      Total loans, net
    3,186,725       42,940       5.39       3,193,967       46,560       5.83  
  Mortgage-backed securities
    708,977       5,721       3.23       706,576       7,013       3.97  
  Other securities
    220,181       1,408       2.56       116,757       825       2.83  
      Total securities
    929,158       7,129       3.07       823,333       7,838       3.81  
  Interest-earning deposits and
                                               
    federal funds sold
    38,975       17       0.17       44,969       17       0.15  
Total interest-earning assets
    4,154,858       50,086       4.82       4,062,269       54,415       5.36  
Other assets
    271,809                       235,056                  
      Total assets
  $ 4,426,667                     $ 4,297,325                  
                                                 
Liabilities and Equity
                                               
Interest-bearing liabilities:
                                               
  Deposits:
                                               
    Savings accounts
  $ 284,982       135       0.19     $ 339,059       228       0.27  
    NOW accounts
    1,184,758       1,582       0.53       980,775       1,650       0.67  
    Money market accounts
    143,405       54       0.15       195,102       164       0.34  
    Certificate of deposit accounts
    1,227,033       6,511       2.12       1,494,154       8,857       2.37  
      Total due to depositors
    2,840,178       8,282       1.17       3,009,090       10,899       1.45  
    Mortgagors' escrow accounts
    42,139       9       0.09       38,238       11       0.12  
      Total deposits
    2,882,317       8,291       1.15       3,047,328       10,910       1.43  
  Borrowed funds
    913,298       7,649       3.35       683,917       6,160       3.60  
      Total interest-bearing liabilities
    3,795,615       15,940       1.68       3,731,245       17,070       1.83  
Non interest-bearing deposits
    148,357                       114,489                  
Other liabilities
    41,245                       32,109                  
      Total liabilities
    3,985,217                       3,877,843                  
Equity
    441,450                       419,482                  
      Total liabilities and equity
  $ 4,426,667                     $ 4,297,325                  
                                                 
Net interest income /
                                               
  net interest rate spread
          $ 34,146       3.14 %           $ 37,345       3.53 %
                                                 
Net interest-earning assets /
                                               
  net interest margin
  $ 359,243               3.29 %   $ 331,024               3.68 %
                                                 
Ratio of interest-earning assets to
                                               
  interest-bearing liabilities
                    1.09
X
                    1.09
X
 
(1)  
Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $0.8 million and $0.7 million for the three months ended March 31, 2013 and 2012, respectively.
 
 
- 49 -

 
 PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
 
LOANS

The following table sets forth the Company’s loan originations (including the net effect of refinancing) and the changes in the Company’s portfolio of loans, including purchases, sales and principal reductions for the periods indicated.

   
For the three months ended March 31,
 
(In thousands)
 
2013
   
2012
 
             
Mortgage Loans
 
 
   
 
 
   
 
   
 
 
At beginning of period
  $ 2,906,881     $ 2,939,012  
                 
Mortgage loans originated:
               
    Multi-family residential
    42,925       61,903  
    Commercial real estate
    6,534       3,424  
    One-to-four family – mixed-use property
    4,390       5,115  
    One-to-four family – residential
    6,510       5,805  
    Co-operative apartments
    2,067       -  
    Construction
    -       -  
        Total mortgage loans originated
    62,426       76,247  
                 
Mortgage loans purchased:
               
    Commercial real estate
    452       -  
        Total mortgage loans purchased
    452       -  
                 
Less:
               
    Principal and other reductions
    96,853       86,859  
    Sales
    4,519       8,842  
                 
At end of period
  $ 2,868,387     $ 2,919,558  
                 
Commercial Business and Other Loans
               
                 
At beginning of period
  $ 314,494     $ 274,981  
                 
Other loans originated:
               
    Small Business Administration
    168       266  
    Taxi medallion
    -       8  
    Commercial business
    57,139       37,936  
    Other
    1,201       700  
        Total other loans originated
    58,508       38,910  
                 
Other loans purchased:
               
    Taxi medallion
    -       3,456  
        Total other loans purchased
    -       3,456  
                 
Less:
               
    Principal and other reductions
    52,687       22,403  
    Sales
    -       214  
                 
At end of period
  $ 320,315     $ 294,730  
 
 
- 50 -

 
 PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
TROUBLED DEBT RESTRUCUTURED AND NON-PERFORMING ASSETS

Management continues to adhere to the Bank’s conservative underwriting standards. The majority of the Bank’s non-performing loans are collateralized by residential income producing properties that are occupied, thereby retaining more of their value and reducing the potential loss. The Bank takes a proactive approach to managing delinquent loans, including conducting site examinations and encouraging borrowers to meet with a Bank representative. The Bank has been developing short-term payment plans that enable certain borrowers to bring their loans current. The Bank reviews its delinquencies on a loan by loan basis and continually explores ways to help borrowers meet their obligations and return them back to current status. At times, the Bank may restructure a loan to enable a borrower to continue making payments when it is deemed to be in the best long-term interest of the Bank. This restructure may include making concessions to the borrower that the Bank would not make in the normal course of business, such as reducing the interest rate until the next reset date, extending the amortization period thereby lowering the monthly payments, or changing the loan to interest only payments for a limited time period. At times, certain problem loans have been restructured by combining more than one of these options. The Bank believes that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. The Bank classifies these loans as TDR. Loans which have been current for six consecutive months at the time they are restructured as TDR remain on accrual status. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status 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 excluded from the TDR table below, as they are placed on non-accrual status and reported as non-performing loans.
 
The following table shows loans classified as TDR that are performing according to their restructured terms at the periods indicated:
 
   
March 31,
   
December 31,
 
(In thousands)
 
2013
   
2012
 
Accrual Status:
           
Multi-family residential
  $ 2,816     $ 2,348  
Commercial real estate
    3,810       3,263  
One-to-four family - mixed-use property
    2,326       2,338  
One-to-four family - residential
    371       374  
Construction
    2,833       3,500  
Commercial business and other
    4,436       3,849  
                 
Total
    16,592       15,672  
                 
Non-accrual status:
               
Commercial real estate
    3,571       3,872  
Total
    3,571       3,872  
                 
Total performing troubled debt restructured
  $ 20,163     $ 19,544  
 
During the three months ended March 31, 2013, three loans totaling $1.3 million were restructured as TDR.
 
Interest income on loans is recognized on the accrual basis. The accrual of income on loans is discontinued when certain factors, such as contractual delinquency of 90 days or more, indicate reasonable doubt as to the timely collectability of such income. Additionally, uncollected interest previously recognized on non-accrual loans is reversed from interest income at the time the loan is placed on non-accrual status. Loans in default 90 days or more, as to their maturity date but not their payments, continue to accrue interest as long as the borrower continues to remit monthly payments.
 
 
- 51 -

 
 PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

The following table shows non-performing assets at the periods indicated:
 
   
March 31,
   
December 31,
 
(In thousands)
 
2013
   
2012
 
Loans 90 days or more past due
           
and still accruing:
           
Multi-family residential
  $ 1,073     $ -  
Co-operative apartments
    103       -  
Construction
    602       644  
Total
    1,778       644  
                 
Non-accrual loans:
               
Multi-family residential
    21,261       16,486  
Commercial real estate
    14,554       15,640  
One-to-four family - mixed-use property
    16,029       18,280  
One-to-four family - residential
    13,686       13,726  
Co-operative apartments
    160       234  
Construction
    7,396       7,695  
Small business administration
    458       283  
Commercial business and other
    12,640       16,860  
Total
    86,184       89,204  
                 
Total non-performing loans
    87,962       89,848  
                 
Other non-performing assets:
               
Real estate acquired through foreclosure
    2,189       5,278  
Investment securities
    3,804       3,332  
Total
    5,993       8,610  
                 
Total non-performing assets
  $ 93,955     $ 98,458  
 
Included in non-accrual loans were five loans totaling $10.5 million and seven loans totaling $11.1 million which were restructured as TDR which were not performing in accordance with their restructured terms at March 31, 2013 and December 31, 2012, respectively.
 
The Bank’s non-performing assets totaled $93.6 million at March 31, 2013, a decrease of $4.9 million from $98.5 million at December 31, 2012. Total non-performing assets as a percentage of total assets were 2.09% at March 31, 2013 compared to 2.21% at December 31, 2012. The ratio of allowance for loan losses to total non-performing loans was 35% at March 31, 2013 and December 31, 2012.
 
The Bank’s non-performing loans totaled $87.6 million at March 31, 2013, a decrease of $2.3 million from $89.8 million at December 31, 2012. During the three months ended March 31, 2013, 48 loans totaling $18.0 million were added to non-performing loans, eight loans totaling $1.4 million were returned to performing status, 11 loans totaling $5.5 million were paid in full, 16 loans totaling $7.8 million were sold, four loans totaling $0.7 million were transferred to other real estate owned, and charge-offs of $5.4 million were recorded on non-performing loans that were non-performing at the beginning of the first quarter of 2013.
 
Non-performing investment securities include two pooled trust preferred securities for which we are not receiving payments. At March 31, 2013, these investment securities had a combined amortized cost and market value of $8.3 million and $3.8 million, respectively.
 
 
- 52 -

 
 PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
 
The following table shows our delinquent loans that are less than 90 days past due still accruing interest and considered performing at the periods indicated:
 
   
March 31, 2013
   
December 31, 2012
 
   
60 - 89
days
   
30 - 59
days
   
60 - 89
days
   
30 - 59
days
 
   
(In thousands)
 
                                 
Multi-family residential
  $ 2,542     $ 14,669     $ 4,827     $ 24,059  
Commercial real estate
    1,309       11,067       3,622       9,764  
One-to-four family - mixed-use property
    1,905       22,994       3,368       21,012  
One-to-four family - residential
    705       3,729       1,886       3,407  
Co-operative apartments
    -       -       -       -  
Construction loans
    -       -       -       2,462  
Small Business Administration
    -       31       -       404  
Taxi medallion
    -       -               -  
Commercial business and other
    1       62       6       2  
  Total delinquent loans
  $ 6,462     $ 52,552     $ 13,709     $ 61,110  

CRITICIZED AND CLASSIFIED ASSETS

Our policy is to review our assets, focusing primarily on the loan portfolio, other real estate owned and the investment portfolios, to ensure that the credit quality is maintained at the highest levels.  When weaknesses are identified, immediate action is taken to correct the problem through direct contact with the borrower or issuer. We then monitor these assets and, in accordance with our policy and current regulatory guidelines, we designate them as “Special Mention,” which is considered a “Criticized Asset,” and “Substandard,” “Doubtful,” or “Loss,” which are considered “Classified Assets,” as deemed necessary.  We designate an asset as Substandard when a well-defined weakness is identified that jeopardizes the orderly liquidation of the debt. We designate an asset as Doubtful when it displays the inherent weakness of a Substandard asset with the added provision that collection of the debt in full, on the basis of existing facts, is highly improbable. We designate an asset as Loss if it is deemed the debtor is incapable of repayment.  Loans that are designated as Loss are charged to the Allowance for Loan Losses.  Assets that are non-accrual are designated as Substandard, Doubtful or Loss. We designate an asset as Special Mention if the asset does not warrant designation within one of the other categories, but does contain a potential weakness that deserves closer attention. Our total Criticized and Classified assets were $199.9 million at March 31, 2013, a decrease of $24.3 million from $224.2 million at December 31, 2012.
 
 
- 53 -

 
 PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

The following table sets forth the Banks’ assets designated as Criticized and Classified at March 31, 2013:
 
(In thousands)
 
Special Mention
   
Substandard
   
Doubtful
   
Loss
   
Total
 
                               
Loans:
                             
Multi-family residential
  $ 11,153     $ 26,582     $ -     $ -     $ 37,735  
Commercial real estate
    8,600       26,515       -       -       35,115  
One-to-four family - mixed-use property
    11,813       22,945       -       -       34,758  
One-to-four family - residential
    2,842       15,315       -       -       18,157  
Co-operative apartments
    -       267       -       -       267  
Construction loans
    3,137       7,834       -       -       10,971  
Small Business Administration
    226       141       -       -       367  
Commercial business and other
    2,228       14,792       1,080       -       18,100  
Total loans
    39,999       114,391       1,080       -       155,470  
                                         
Investment Securities: (1)
                                       
Pooled trust preferred securities
    -       16,541       -       -       16,541  
Private issue CMO
    -       25,698       -       -       25,698  
Total investment securities
    -       42,239       -       -       42,239  
                                         
Other Real Estate Owned
    -       2,189       -       -       2,189  
Total
  $ 39,999     $ 158,819     $ 1,080     $ -     $ 199,898  

The following table sets forth the Bank’s assets designated as Criticized and Classified at December 31, 2012:
 
(In thousands)
 
Special Mention
   
Substandard
   
Doubtful
   
Loss
   
Total
 
                               
Loans:
                             
Multi-family residential
  $ 16,345     $ 22,769     $ -     $ -     $ 39,114  
Commercial real estate
    11,097       27,877       -       -       38,974  
One-to-four family - mixed-use property
    13,104       26,506       -       -       39,610  
One-to-four family - residential
    5,223       15,328       -       -       20,551  
Co-operative apartments
    103       237       -       -       340  
Construction loans
    3,805       10,598       -       -       14,403  
Small Business Administration
    323       212       244       -       779  
Commercial business and other
    3,044       18,419       1,080       -       22,543  
Total loans
    53,044       121,946       1,324       -       176,314  
                                         
Investment Securities: (1)
                                       
Pooled trust preferred securities
    -       16,189       -       -       16,189  
Private issue CMO
    -       26,429       -       -       26,429  
Total investment securities
    -       42,618       -       -       42,618  
                                         
Other Real Estate Owned
    -       5,278       -       -       5,278  
Total
  $ 53,044     $ 169,842     $ 1,324     $ -     $ 224,210  
 
(1)   Our investment securities are classified as securities available for sale and as such are carried at their fair value in our Consolidated Financial Statements. The securities above had a fair value of $36.3 million and $35.2 million at March 31, 2013 and December 31, 2012, respectively. Under current applicable regulatory guidelines, we are required to disclose the classified investment securities, as shown in the tables above, at their book values (amortized cost, or fair value for securities that are under the fair value option). Additionally, the requirement is only for the Bank’s securities. Flushing Financial Corporation had one private issue trust preferred security with a market value of $0.3 million classified as Substandard at March 31, 2013 and two private issue trust preferred securities classified as Substandard with a combined market value of $0.8 million at December 31, 2012.
 
 
- 54 -

 
 PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
 
 
On a quarterly basis, all collateral dependant loans that are designated as Special Mention, Substandard or Doubtful are internally reviewed for impairment, based on updated cash flows for income producing properties or updated independent appraisals.  The loan balances of collateral dependant impaired loans are then compared to the loans updated fair value. The balance which exceeds fair value is generally charged-off to the allowance for loan losses.
 
We designate investment securities as Substandard when the investment grade rating by one or more of the rating agencies is below investment grade. We have designated a total of nine investment securities that are held at the Bank as Substandard at March 31, 2013. Our classified investment securities at March 31, 2013 held by the Bank include five private issue CMOs rated below investment grade by one or more of the rating agencies, three issues of pooled trust preferred securities and one private issue trust preferred security. The Investment Securities which are classified as Substandard at March 31, 2013 are securities that were rated investment grade when we purchased them. These securities have each been subsequently downgraded by at least one rating agency to below investment grade. Through March 31, 2013, two of the pooled trust preferred securities and four private issue CMOs are not paying principal and interest as scheduled. We test each of these securities quarterly for impairment, through an independent third party.
 
ALLOWANCE FOR LOAN LOSSES
 
We have established and maintain on our books an allowance for loan losses that is designed to provide a reserve against estimated losses inherent in our overall loan portfolio. The allowance is established through a provision for loan losses based on management’s evaluation of the risk inherent in the various components of the loan portfolio and other factors, including historical loan loss experience (which is updated quarterly), changes in the composition and volume of the portfolio, collection policies and experience, trends in the volume of non-accrual loans and local and national economic conditions. The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and local economic conditions and other factors. We review our loan portfolio by separate categories with similar risk and collateral characteristics. Impaired loans are segregated and reviewed separately. All non-accrual loans are classified impaired. Impaired loans secured by collateral are reviewed based on the fair value of their collateral. For non-collateralized impaired loans, management estimates any recoveries that are anticipated for each loan. In connection with the determination of the allowance, the market value of collateral ordinarily is evaluated by our staff appraiser. On a quarterly basis, the estimated values of impaired mortgage loans are internally reviewed, based on updated cash flows for income producing properties, and at times an updated independent appraisal is obtained.  The loan balances of collateral dependent impaired loans are then compared to the property’s updated fair value. We consider fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property. The balance which exceeds fair value is generally charged-off. When evaluating a loan for impairment, we do not rely on guarantees, and the amount of impairment, if any, is based on the fair value of the collateral. We do not carry loans at a value in excess of the fair value due to a guarantee from the borrower. Impaired mortgage loans that were written down resulted from quarterly reviews or updated appraisals that indicated the properties’ estimated value had declined from when the loan was originated.  Current year charge-offs, charge-off trends, new loan production, current balance by particular loan categories, and delinquent loans by particular loan categories are also taken into account in determining the appropriate amount of allowance. The Board of Directors reviews and approves the adequacy of the allowance for loan losses on a quarterly basis.
 
In assessing the adequacy of the allowance, we review our loan portfolio by separate categories with similar risk and collateral characteristics, e.g., multi-family residential, commercial real estate, one-to-four family mixed-use property, one-to-four family residential, co-operative apartment, construction, SBA, commercial business, taxi medallion and consumer loans. Impaired loans are segregated and reviewed separately. All non-accrual loans and TDRs are considered impaired. Impaired loans secured by real estate are reviewed based on the fair value of their collateral. In connection with the determination of the allowance, the market value of collateral ordinarily is evaluated by our staff appraiser. On a quarterly basis, the estimated values of impaired mortgage loans are internally reviewed based on updated cash flows for income producing properties and, at times, an updated independent appraisal is obtained.  The loan balances of collateral dependent impaired loans are then compared to the loans updated fair value. The balance which exceeds fair value is generally charged-off. We do not allocate additional reserves to loans which have been written down to their fair value. When evaluating a loan for impairment, we do not rely on guarantees and the amount of impairment, if any, is based on the fair value of the collateral. We do not carry loans at a value in excess of the fair value due to a guarantee from the borrower. Impaired mortgage loans that were written down resulted from quarterly reviews or updated appraisals that indicated the properties’ estimated value had declined from when the loan was originated.  Loans classified as TDR which are performing in accordance with their modified terms are evaluated based on the projected discounted cash flow of the restructured loan at the loans effective interest rate prior to restructuring. A portion of the allowance for loan losses is allocated in the amount by which the recorded investment in the TDR exceeds the discounted cash flow. For non-collateralized impaired loans, management estimates any recoveries that are anticipated for each loan. A portion of the allowance is allocated to non-collateralized loans based on these estimates. Based on the review of impaired loans, which includes loans classified as TDR, a portion of the allowance was allocated to impaired loans in the amount of $1.4 million and $1.5 million at March 31, 2013 and December 31, 2012, respectively.
 
 
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 PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
 
General provisions are established against performing loans in our portfolio in amounts deemed prudent by management. A portion of the allowance is allocated to the remaining portfolio based on historical loss experience. The historical loss period used for this allocation was three years. Management also prepared an additional analysis to ensure that the remaining portion of the allowance for possible loan losses is sufficient to cover losses inherent in the loan portfolio. This analysis considered: (1) the current economic environment, (2) delinquency and non-accrual trends, (3) classified loan trends, (4) the risk inherent in our loan portfolio and volume and trends of loan types, (5) recent trends in charge-offs, (6) changes in underwriting standards, (7) the experience, ability and depth of our lenders, and (8) collection policies and experience. Based on these reviews, management concluded the general portion of the allowance should be $29.6 million at March 31, 2013 and December 31, 2012, respectively, resulting in a total allowance of $31.0 million and $31.1 million at March 31, 2013 and December 31, 2012, respectively. The Board of Directors reviews and approves the adequacy of the allowance for loan losses on a quarterly basis. Management has concluded and the Board of Directors has concurred, that at March 31, 2013, the allowance was sufficient to absorb losses inherent in our loan portfolio.

 
 
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 PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

 
The following table sets forth the activity in the Company's allowance for loan losses for the periods indicated:
 
   
For the three months ended March 31,
 
(Dollars in thousands)
 
2013
   
2012
 
             
Balance at beginning of period
  $ 31,104     $ 30,344  
                 
Provision for loan losses
    6,000       6,000  
                 
Loans charged-off:
               
    Multi-family residential
    (1,488 )     (1,061 )
    Commercial real estate
    (681 )     (1,780 )
    One-to-four family – mixed-use property
    (2,606 )     (1,468 )
    One-to-four family – residential
    (691 )     (826 )
    Co-operative apartments
    (74 )     (42 )
    Construction
    (234 )     (234 )
    Small Business Administration
    (204 )     (113 )
    Commercial business and other
    (304 )     (495 )
        Total loans charged-off
    (6,282 )     (6,019 )
                 
Recoveries:
               
    Multi-family residential
    11       57  
    Commercial real estate
    80       70  
    One-to-four family – mixed-use property
    53       56  
    One-to-four family – residential
    31       1  
    Small Business Administration
    30       9  
    Commercial business and other
    -       100  
        Total recoveries
    205       293  
                 
Net charge-offs
    (6,077 )     (5,726 )
                 
Balance at end of period
  $ 31,027     $ 30,618  
                 
Ratio of net charge-offs during the period to
               
   average loans outstanding during the period
    0.76 %     0.72 %
Ratio of allowance for loan losses to gross loans at end of period
    0.97 %     0.95 %
Ratio of allowance for loan losses to non-performing
               
   assets at end of period
    33.16 %     24.20 %
Ratio of allowance for loan losses to non-performing
               
   loans at end of period
    35.43 %     25.53 %

 
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 PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
 
ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of the qualitative and quantitative disclosures about market risk, see the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk."

ITEM 4.     CONTROLS AND PROCEDURES

The Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2013, the design and operation of these disclosure controls and procedures were effective.  During the period covered by this Quarterly Report, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
- 58 -

 
PART II – OTHER INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
 
ITEM 1.     LEGAL PROCEEDINGS

The Company is a defendant in various lawsuits.  Management of the Company, after consultation with outside legal counsel, believes that the resolution of these various matters will not result in any material adverse effect on the Company's consolidated financial condition, results of operations and cash flows.

ITEM 1A.  RISK FACTORS

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.


ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information regarding the shares of common stock repurchased by the Company during the three months ended March 31, 2013:

                     
Maximum
 
               
Total Number of
   
Number of
 
   
Total
         
Shares Purchased
   
Shares That May
 
   
Number
         
as Part of Publicly
   
Yet Be Purchased
 
   
of Shares
   
Average Price
   
Announced Plans
   
Under the Plans
 
Period
 
Purchased
   
Paid per Share
   
or Programs
   
or Programs
 
January 1 to January 31, 2013
    -     $ -       -       385,962  
February 1 to February 28, 2013
    -       -       -       385,962  
March 1 to March 31, 2013
    18,560       16.24       18,560       367,402  
     Total
    18,560     $ 16.24       18,560          
 
On September 28, 2011, the Company announced the authorization by the Board of Directors of a new common stock repurchase program, which authorizes the purchase of up to 1,000,000 shares of the Company’s common stock.  During the three months ended March 31, 2013, the Company repurchased 18,560 shares of the Company’s common stock at an average cost of $16.24 per share.  At March 31, 2013, 367,402 shares remain to be repurchased under the current stock repurchase program.    Stock will be purchased under the current stock repurchase program from time to time, in the open market or through private transactions subject to market conditions. There is no expiration or maximum dollar amount under this authorization.
 
ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.     MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5.     OTHER INFORMATION

None.


 
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PART II – OTHER INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES



ITEM 6.     EXHIBITS
 
Exhibit  No.
Description
     
 
2.1
Agreement and Plan of Merger dated as of December 20, 2005 by and between Flushing Financial Corporation and Atlantic Liberty Financial Corp. (7)
 
3.1
Certificate of Incorporation of Flushing Financial Corporation (1)
 
3.2
Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (3)
 
3.3
Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (6)
 
3.4
Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
 
3.5
Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
 
3.6
By-Laws of Flushing Financial Corporation (1)
 
4.1
Rights Agreement, dated as of September 8, 2006, between Flushing Financial Corporation and Computershare Trust Company N.A., as Rights Agent, which includes the form of Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock as Exhibit A, form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C (5)
 
4.2
Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
 
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
 
31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
 
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (furnished herewith)
 
32.2
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (furnished herewith)
 
101.INS
XBRL Instance Document (furnished herewith)
 
101.SCH
XBRL Taxonomy Extension Schema Document (furnished herewith)
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith)
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith)
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (furnished herewith)
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith)
     
(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed September 1, 1995, Registration No. 33-96488.
(2) Incorporated by reference to Exhibits filed with Form 8-K filed September 26, 2006.
(3) Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.
(4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.
(5) Incorporated by reference to Exhibit filed with Form 8-K filed September 11, 2006.
(6) Incorporated by reference to Exhibit filed with Form 10-K filed March 15, 2012.
(7) Incorporated by reference to Exhibit filed with Form 8-K filed December 23, 2005.
 

 
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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
 
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.


Flushing Financial Corporation,




Dated: May 10, 2013                                                                            By: /s/John R. Buran
John R. Buran
President and Chief Executive Officer




Dated: May 10, 2013                                                                            By: /s/David W. Fry
David W. Fry
Executive Vice President, Treasurer and
Chief Financial Officer


 
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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
EXHIBIT INDEX

 
 
Exhibit  No.
Description
     
 
2.1
Agreement and Plan of Merger dated as of December 20, 2005 by and between Flushing Financial Corporation and Atlantic Liberty Financial Corp. (7)
 
3.1
Certificate of Incorporation of Flushing Financial Corporation (1)
 
3.2
Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (3)
 
3.3
Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (6)
 
3.4
Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
 
3.5
Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
 
3.6
By-Laws of Flushing Financial Corporation (1)
 
4.1
Rights Agreement, dated as of September 8, 2006, between Flushing Financial Corporation and Computershare Trust Company N.A., as Rights Agent, which includes the form of Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock as Exhibit A, form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C (5)
 
4.2
Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
 
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
 
31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
 
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (furnished herewith)
 
32.2
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (furnished herewith)
 
101.INS
XBRL Instance Document (furnished herewith)
 
101.SCH
XBRL Taxonomy Extension Schema Document (furnished herewith)
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith)
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith)
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (furnished herewith)
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith)
     
(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed September 1, 1995, Registration No. 33-96488.
(2) Incorporated by reference to Exhibits filed with Form 8-K filed September 26, 2006.
(3) Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.
(4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.
(5) Incorporated by reference to Exhibit filed with Form 8-K filed September 11, 2006.
(6) Incorporated by reference to Exhibit filed with Form 10-K filed March 15, 2012.
(7) Incorporated by reference to Exhibit filed with Form 8-K filed December 23, 2005.
 
 
 
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