form10-q.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, 2010

Commission file number 000-24272

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.   xYes  oNo

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).     xYes    o 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 o
Non-accelerated filer   o
Accelerated filer                    x
Smaller reporting company  o

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

The number of shares of the registrant’s Common Stock outstanding as of April 30, 2010 was 31,157,129



 
 

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

TABLE OF CONTENTS

 
PAGE
PART I  —  FINANCIAL INFORMATION
 
   
 
   
1
   
2
   
3
   
4
   
6
   
24
   
38
   
38
   
PART II  —  OTHER INFORMATION
 
   
38
   
ITEM 1A. Risk Factors
38
   
38
   
ITEM 4.   (Reserved)
38
   
     ITEM 6.  Exhibits.
39
   
40
   

 
i

 
 


Item 1.
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Financial Condition

   
March 31,
   
December 31,
 
   
2010
   
2009
 
ASSETS  
(Unaudited)
       
Cash and due from banks
  $ 25,769     $ 28,426  
Securities available for sale:
               
Mortgage-backed securities ($74,724 and $80,299 at fair value pursuant to the fair value option at March 31, 2010 and December 31, 2009, respectively)
    650,769       648,443  
Other securities ($16,934 and $17,229 at fair value pursuant to the fair value option at March 31, 2010 and December 31, 2009, respectively)
    66,343       35,361  
Loans:                 
Multi-family residential
    1,182,756       1,158,700  
Commercial real estate
    673,663       686,210  
One-to-four family ― mixed-use property
    742,029       744,560  
One-to-four family ― residential
    252,927       249,920  
Co-operative apartments
    6,565       6,553  
Construction
    92,375       97,270  
Small Business Administration
    16,666       17,496  
Taxi medallion
    75,717       61,424  
Commercial business and other
    179,705       181,240  
Net unamortized premiums and unearned loan fees
    17,121       17,110  
Allowance for loan losses
    (23,032 )     (20,324 )
Net loans
    3,216,492       3,200,159  
Interest and dividends receivable
    19,670       19,116  
Bank premises and equipment, net
    22,520       22,830  
Federal Home Loan Bank of New York stock
    41,310       45,968  
Bank owned life insurance
    69,877       69,231  
Goodwill      16,127       16,127  
Core deposit intangible
    1,757       1,874  
Other assets
    52,471       55,711  
Total assets
  $ 4,183,105     $ 4,143,246  
                 
LIABILITIES
               
Due to depositors:
               
Non-interest bearing
  $ 84,786     $ 91,376  
Interest-bearing:
               
Certificate of deposit accounts
    1,303,963       1,230,511  
Savings accounts
    420,147       426,821  
Money market accounts
    402,487       414,457  
NOW accounts
    578,153       503,159  
Total interest-bearing deposits
    2,704,750       2,574,948  
Mortgagors' escrow deposits
    37,765       26,791  
Borrowed funds ($65,048 and $106,167 at fair value pursuant to the fair value option at March 31, 2010 and December 31, 2009, respectively)
    768,717       873,345  
Securities sold under agreements to repurchase
    186,900       186,900  
Other liabilities
    31,322       29,742  
Total liabilities
    3,814,240       3,783,102  
                 
STOCKHOLDERS' EQUITY
               
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)
    -       -  
Common stock ($0.01 par value; 40,000,000 shares authorized; 31,157,374 shares and 31,131,059 shares issued at March 31, 2010 and December 31, 2009, respectively; 31,152,004 shares and 31,127,664 shares outstanding at March 31, 2010 and December 31, 2009, respectively)
    312       311  
Additional paid-in capital
    187,873       185,842  
Treasury stock, at average cost  (5,370 and 3,395 at March 31, 2010 and December 31, 2009, respectively)
    (66 )     (36 )
Unearned compensation
    (410 )     (575 )
Retained earnings
    185,212       181,181  
Accumulated other comprehensive loss, net of taxes
    (4,056 )     (6,579 )
Total stockholders' equity
    368,865       360,144  
                 
Total liabilities and stockholders' equity
  $ 4,183,105     $ 4,143,246  

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,
 
   
2010
   
2009
 
             
Interest and dividend income
           
Interest and fees on loans
  $ 49,684     $ 47,376  
Interest and dividends on securities:
               
   Interest
    7,911       9,337  
   Dividends
    200       412  
Other interest income
    13       43  
      Total interest and dividend income
    57,808       57,168  
                 
Interest expense
               
Deposits
    13,517       18,827  
Other interest expense
    10,786       12,285  
      Total interest expense
    24,303       31,112  
                 
Net interest income
    33,505       26,056  
Provision for loan losses
    5,000       4,500  
Net interest income after provision for loan losses
    28,505       21,556  
                 
Non-interest income
               
Loan fee income
    367       417  
Banking services fee income
    482       446  
Net gain on sale of loans
    5       -  
Net (loss) gain from fair value adjustments
    (103 )     2,349  
Federal Home Loan Bank of New York stock dividends
    611       346  
Bank owned life insurance
    645       599  
Other income
    570       523  
      Total non-interest income
    2,577       4,680  
                 
Non-interest expense
               
Salaries and employee benefits
    8,796       7,471  
Occupancy and equipment
    1,749       1,774  
Professional services
    1,764       1,655  
FDIC deposit insurance
    1,274       977  
Data processing
    1,078       1,089  
Depreciation and amortization
    679       622  
Other operating expenses
    2,596       2,404  
      Total non-interest expense
    17,936       15,992  
                 
Income before income taxes
    13,146       10,244  
                 
Provision for income taxes
               
Federal
    3,949       3,095  
State and local
    1,212       840  
      Total taxes
    5,161       3,935  
                 
Net income
  $ 7,985     $ 6,309  
                 
Preferred dividends and amortization of issuance costs
  $ -     $ 951  
                 
Net income available to common shareholders
  $ 7,985     $ 5,358  
                 
Basic earnings per common share
  $ 0.26     $ 0.26  
Diluted earnings per common share
  $ 0.26     $ 0.26  
Dividends per common share
  $ 0.13     $ 0.13  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
-2-

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)

   
For the three months ended
 
   
March 31,
 
(Dollars in thousands)
 
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 7,985     $ 6,309  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    5,000       4,500  
Depreciation and amortization of bank premises and equipment
    679       622  
Net gain on sales of loans (including delinquent loans)
    (5 )     -  
Amortization of premium, net of accretion of discount
    411       756  
Fair value adjustment for financial assets and financial liabilities
    103       (2,349 )
Income from bank owned life insurance
    (645 )     (599 )
Stock-based compensation expense
    961       588  
Deferred compensation
    45       8  
Amortization of core deposit intangibles
    117       117  
Tax benefits from stock-based payment arrangements
    (77 )     (45 )
Deferred income tax benefit
    (1,407 )     (743 )
Increase in other liabilities
    2,437       1,699  
Decrease (increase) in other assets
    88       (736 )
Net cash provided by operating activities
    15,692       10,127  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of bank premises and equipment
    (369 )     (1,175 )
Net redemptions of Federal Home Loan Bank of New York shares
    4,658       1,262  
Purchases of securities available for sale
    (76,936 )     (96,913 )
Proceeds from sales and calls of securities available for sale
    1,270       8,638  
Proceeds from maturities and prepayments of securities available for sale
    47,039       31,177  
Net originations and repayment of loans
    (20,268 )     (65,434 )
Purchases of loans
    (1,783 )     (8,835 )
Proceeds from sale of real estate owned
    279       -  
Proceeds from sale of delinquent loans
    1,289       1,233  
Net cash used in investing activities
    (44,821 )     (130,047 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net (decrease) increase in non-interest bearing deposits
    (6,590 )     2,496  
Net increase in interest-bearing deposits
    129,532       141,278  
Net increase in mortgagors' escrow deposits
    10,974       4,045  
Net (repayments) proceeds from of short-term borrowed funds
    (73,500 )     9,600  
Proceeds from long-term borrowings
    30,000       67,367  
Repayment of long-term borrowings
    (60,009 )     (105,009 )
Purchases of treasury stock
    (66 )     -  
Excess tax benefits from stock-based payment arrangements
    77       45  
Proceeds from issuance of common stock upon exercise of stock options
    -       618  
Cash dividends paid
    (3,946 )     (3,186 )
Net cash provided by financing activities
    26,472       117,254  
                 
Net increase (decrease) in cash and cash equivalents
    (2,657 )     (2,666 )
Cash and cash equivalents, beginning of period
    28,426       30,404  
Cash and cash equivalents, end of period
  $ 25,769     $ 27,738  
                 
SUPPLEMENTAL CASH  FLOW DISCLOSURE
               
Interest paid
  $ 24,482     $ 31,796  
Income taxes paid
    127       828  
Taxes paid if excess tax benefits were not tax deductible
    204       873  
Non-cash activities:
               
Securities purchased, not yet settled
    -       770  
Loans transferred to real estate owned
    518       -  
Loans provided for the sale of real estate owned
    800       -  
 
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 Changes in Stockholders’ Equity and Consolidated Statements of
Comprehensive Income
(Unaudited)
   
For the three months ended
 
   
March 31,
 
(Dollars in thousands, except per share data)
 
2010
   
2009
 
             
Preferred Stock
           
Balance, beginning of period
  $ -     $ 1  
No activity
    -       -  
Balance, end of period
  $ -     $ 1  
Common Stock
               
Balance, beginning of period
  $ 311     $ 216  
Issuance upon exercise of stock options (90,000 common shares for the three months ended March 31, 2009)
    -       1  
Shares issued upon vesting of restricted stock unit awards (26,315 and 100 common shares for the three months ended March 31, 2010 and 2009, respectively)
    1       -  
Balance, end of period
  $ 312     $ 217  
Additional Paid-In Capital
               
Balance, beginning of period
  $ 185,842     $ 150,662  
Additional preferred stock issuance costs
    -       (144 )
Amortization of preferred stock issuance costs
    -       76  
Award of common shares released from Employee Benefit Trust (169,353 and 156,937 common shares for the three months ended March  31, 2010 and 2009, respectively)
    1,064       802  
Shares issued upon vesting of restricted stock unit awards (26,415 and 100 common shares for the three months ended March 31, 2010 and 2009, respectively)
    222       2  
Issuance upon exercise of stock options (90,000 common shares for the three months ended March 31, 2009)
    -       617  
Stock-based compensation activity, net
    668       697  
Stock-based income tax benefit
    77       45  
Balance, end of period
  $ 187,873     $ 152,757  
Treasury Stock
               
Balance, beginning of period
  $ (36 )   $ -  
Shares issued upon vesting of restricted stock unit awards (3,395 common shares for the three months ended March 31, 2010)
    36       -  
Repurchase of shares to satisfy tax obligations (5,370 common shares for the three months ended March 31, 2010)
    (66 )     -  
Balance, end of period
  $ (66 )   $ -  

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 and Consolidated Statements of
Comprehensive Income
(continued)
(Unaudited)
   
For the three months ended
 
   
March 31,
 
(Dollars in thousands, except per share data)
 
2010
   
2009
 
             
Unearned Compensation
           
Balance, beginning of period
  $ (575 )   $ (1,300 )
Release of shares from the Employee Benefit Trust (48,135 and 53,347 common shares for the three months ended March 31, 2010 and 2009, respectively)
    165       184  
Balance, end of period
  $ (410 )   $ (1,116 )
Retained Earnings
               
Net income
    7,985       6,309  
Cash dividends declared and paid on common shares ($0.13 per common share for the three months ended March 31, 2010 and 2009, respectively)
    (3,946 )     (2,641 )
Cash dividends declared and paid on preferred shares (5.00% cumulative preferred dividends for the three months ended March 31, 2009)
    -       (545 )
Shares issued upon vesting of restricted stock unit awards (3,295 common shares for the three months ended March 31, 2010)
    (8 )     -  
Amortization of preferred stock issuance costs
    -       (76 )
Balance, end of period
  $ 4,031     $ 3,047  
Accumulated Other Comprehensive Loss
               
Balance, beginning of period
  $ (6,579 )   $ (20,303 )
Change in net unrealized loss on securities available for sale, net of taxes of approximately ($1,983) and ($2,546) for the three months ended March 31, 2010 and 2009, respectively
    2,486       3,056  
Amortization of actuarial losses, net of taxes of approximately ($34) and ($34) for the three months ended March 31, 2010 and 2009, respectively
    42       42  
Amortization of prior service (credits) costs, net of taxes of approximately $4 and ($5) for the three months ended March 31, 2010 and 2009, respectively
    (5 )     7  
Balance, end of period
  $ (4,056 )   $ (17,198 )
                 
Total Stockholders' Equity
  $ 368,865     $ 309,924  
                 
   
For the three months ended
   
March 31,
 
      2010       2009  
Comprehensive Income
               
Net income
  $ 7,985     $ 6,309  
Other comprehensive income, net of tax
               
Amortization of actuarial losses
    42       42  
Amortization of prior service (credits) costs
    (5 )     7  
Unrealized gains  on securities
    2,486       3,056  
Comprehensive income
  $ 10,508     $ 9,414  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
-5-


PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
1.
Basis of Presentation
 
The primary business of Flushing Financial Corporation (the “Holding Company”) is the operation of its wholly-owned subsidiary, Flushing Savings Bank, FSB (the “Savings Bank”).  The unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q (“Quarterly Report”) include the collective results of the Holding Company and the Savings Bank on a consolidated basis.
 
The accompanying unaudited consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). 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 Flushing Financial Corporation and its consolidated subsidiaries (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.  Additionally, during the three months ended March 31, 2010, the Company elected to reclassify owner-occupied commercial loans originated by the Business Banking Department from commercial real estate loans to commercial business loans.  These loans were underwritten using the same underwriting standards used to originate unsecured business loans, with the mortgage obtained as additional collateral.  Based upon the underwriting standards used to originate the loans, it is more appropriate to classify the loans as commercial business loans. Prior period amounts have been adjusted to reflect this reclassification.
 
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, 2009.
 
The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became effective for financial statements issued for interim and annual periods ending after September 15, 2009. The ASC became FASB’s officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. All references to accounting standards in this 10-Q now refer to the relevant ASC Topic.
 
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.  Actual results could differ from these estimates.
 
3.  
Earnings Per Share
 
Earnings per share are computed in accordance with ASC Topic 260 “Earnings Per Share,” which provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and as such should be included in the calculation of earnings per share.  Basic earnings per common share is computed by dividing net income available to common shareholders by the total weighted average number of common shares outstanding, which includes unvested participating securities. The Company’s unvested restricted stock and restricted stock unit awards are considered participating securities. Therefore, weighted average common shares outstanding used for computing basic earnings per common share includes common shares outstanding plus unvested restricted stock and restricted stock unit awards. The computation of diluted earnings per share includes the additional dilutive effect of stock options outstanding during the period.  Common stock equivalents that are anti-dilutive are not included in the computation of diluted earnings per common share. The numerator for calculating basic and diluted earnings per common share is net income available to common shareholders.
 
 
-6-


PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Earnings per common share have been computed based on the following:

   
For the three months ended
 
   
March 31,
 
   
2010
   
2009
 
   
(In thousands, except per share data)
 
Net income, as reported
  $ 7,985     $ 6,309  
Preferred dividends and amortization of issuance costs
    -       (951 )
Net income available to common shareholders
  $ 7,985     $ 5,358  
Divided by:
               
Weighted average common shares outstanding
    30,257       20,590  
Weighted average common stock equivalents
    29       6  
Total weighted average common shares outstanding and common stock equivalents
    30,286       20,596  
                 
Basic earnings per common share
  $ 0.26     $ 0.26  
Diluted earnings per common share (1)
  $ 0.26     $ 0.26  
Dividend payout ratio
    50.0 %     50.0 %
 

(1)  
For the three months ended March 31, 2010, options to purchase 1,003,513 shares at an average exercise price of $15.72 were not included in the computation of diluted earnings per common share since they were anti-dilutive.   For the three months ended March 31, 2009, a warrant to purchase 751,611 shares at an exercise price of $13.97 and options to purchase 1,455,053 shares at an average exercise price of $14.17 were not included in the computation of diluted earnings per common share since they were anti-dilutive.
 
4.  
Debt and Equity Securities
 
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 months ended March 31, 2010 and 2009. Securities available for sale are recorded at fair value.

 
-7-

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The amortized cost and fair value of the Company’s securities classified as available for sale at March 31, 2010 are as follows:
 
               
Gross
   
Gross
 
   
Amortized
         
Unrealized
   
Unrealized
 
   
Cost
   
Fair Value
   
Gains
   
Losses
 
   
(In thousands)
 
U.S. government agencies
  $ 36,147     $ 36,413     $ 266     $ -  
Other
    27,087       23,504       107       3,690  
Mutual funds
    6,426       6,426       -       -  
Total other securities
    69,660       66,343       373       3,690  
REMIC and CMO
    395,680       390,973       8,931       13,638  
GNMA
    97,138       101,279       4,152       11  
FNMA
    121,892       125,178       3,538       252  
FHLMC
    32,762       33,339       577       -  
Total mortgage-backed securities
    647,472       650,769       17,198       13,901  
Total securities available for sale
  $ 717,132     $ 717,112     $ 17,571     $ 17,591  
 
Mortgage-backed securities shown in the table above include one private issued collateralized mortgage obligation (“CMO”) that is collateralized by commercial real estate mortgages with an amortized cost and market value of $13.9 million and $14.3 million, respectively, at March 31, 2010.  The remaining 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 March 31, 2010:
 
   
Total
   
Less than 12 months
   
12 months or more
 
         
Unrealized
         
Unrealized
         
Unrealized
 
   
Fair Value
   
Losses
   
Fair Value
   
Losses
   
Fair Value
   
Losses
 
   
(In thousands)
                         
Other
  $ 7,360     $ 3,690     $ -     $ -     $ 7,360     $ 3,690  
Total other securities
    7,360       3,690       -       -       7,360       3,690  
REMIC and CMO
    121,602       13,638       68,623       1,492       52,979       12,146  
GNMA
    5,864       11       5,864       11       -       -  
FNMA
    19,576       252       19,576       252       -       -  
Total mortgage-backed securities
    147,042       13,901       94,063       1,755       52,979       12,146  
Total securities available for sale
  $ 154,402     $ 17,591     $ 94,063     $ 1,755     $ 60,339     $ 15,836  
 
The Company conducted a review of each investment that had an unrealized loss at March 31, 2010. 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, net of tax, in accumulated other comprehensive loss (“AOCL”) within Stockholders’ Equity.  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 in the Consolidated Statements of Income and the noncredit related impairment being recorded in AOCL, net of tax.
 
The Company evaluates its trust preferred securities using an impairment model through an independent third party.  This review also includes evaluating the financial condition of each counterparty.  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. When an other-than-temporary impairment (“OTTI”) is identified, the portion of the impairment that is credit related is determined by
 
 
-8-

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
management by 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: and (2) for mortgage-backed securities, credit related impairment is determined by estimating future losses based on a set of assumptions, which includes delinquency and foreclosure levels, projected losses at various loss severity levels, and credit enhancement and coverage and recording those estimated future losses as a credit related loss against earnings.
 
Other Securities:
The unrealized losses in Other securities at March 31, 2010 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 consist of two single issuer trust preferred securities and two pooled trust preferred issues. As noted above, the Company evaluates these securities using an impairment model through an independent third party that is applied to debt securities. Additionally, management reviews the financial condition of each counterparty. 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 two single issuer trust preferred securities 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.  This security is over 90 days past due and the Company has stopped accruing interest. The Company recorded a credit related OTTI on the two pooled trust preferred securities during the year ended December 31, 2009.
 
It is not anticipated at this time that the two single issuer trust preferred securities and two pooled trust preferred issues 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 trust preferred security discussed above, and, in the opinion of management based on the review performed at March 31, 2010, will continue to perform according to their terms. The Company does not have the intent to sell these securities and does not anticipate that these securities will be required to be sold before recovery of the full current amortized cost of the Company’s investment at March 31, 2010.  Therefore, the Company did not consider the two single issuer trust preferred securities and two pooled trust preferred issues to be other-than-temporarily impaired at March 31, 2010.
 
REMIC and CMO:
The unrealized losses in Real Estate Mortgage Investment Conduit (“REMIC”) REMIC and CMO securities at March 31, 2010 consist of two issues from Federal Home Loan Mortgage Corporation (“FHLMC”), three issues from Federal National Mortgage Association (“FNMA”), six issues from Government National Mortgage Association (“GNMA”) and 10 private issues.
 
The unrealized losses on the REMIC and CMO securities issued by FHLMC, FNMA and GNMA were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms, and, in the opinion of management, will continue to perform according to their terms. The Company does not have the intent to sell these securities and does not anticipate that these securities will be required to be sold before recovery of full principal and interest due, which may be at maturity.  Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2010.
 
The unrealized losses 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, nine of these securities are performing according to their terms, with one security, for which an OTTI charge was previously recorded, remitting less than the full principal amount due during the three months ended March 31, 2010.  The principal loss for this one security totaled $168,000 for the three months ended March 31, 2010.  This loss was anticipated in the previously recorded credit related OTTI charge for the security.
 
It is not anticipated at this time that the 10 private issued securities would be settled at a price that is less than the current amortized cost of the Company’s investment at March 31, 2010. Each of these securities are performing according to its terms, except for the one security discussed above, and, in the opinion of management, will continue to perform according to their terms. The Company does not have the intent to sell these securities and does not anticipate that these securities will be required to be sold before recovery of full current amortized cost of the Company’s investment at March 31, 2010, which may be at maturity.  Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2010.
 
 
-9-

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
GNMA and FNMA:
The unrealized losses in GNMA and FNMA mortgage-backed securities at March 31, 2010 consist of one issue from GNMA and three issues from FNMA.  The unrealized losses in GNMA and FNMA mortgage-backed securities 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 their terms. The Company does not have the intent to sell these securities and does not anticipate that these securities will be required to be sold before recovery of full principal and interest due, which may be at maturity.  Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2010.
 

The Company has previously recorded OTTI charges in the Consolidated Statements of Income on four private issued CMOs and two pooled trust preferred securities where a portion of the OTTI is recorded in AOCL. The following table details the total impairment on debt securities, as of March 31, 2010, for which the Company has previously recorded a credit related OTTI charge in the Consolidated Statements of Income:
 
               
Gross Unrealized
   
Cumulative
 
               
Losses Recorded
   
Credit OTTI
 
(in thousands)
 
Amortized Cost
   
Fair Value
   
In AOCL
   
Losses
 
                         
Private issued CMO's
  $ 37,253     $ 29,316     $ 7,937     $ 2,976  
Trust preferred securities
    10,250       6,655       3,595       2,750  
Total
  $ 47,503     $ 35,971     $ 11,532     $ 5,726  

The following table represents a rollforward of 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 other comprehensive loss for the periods indicated:
 
   
For the three
 
   
months ended
 
(in thousands)
 
March 31, 2010
 
Beginning balance
  $ 5,894  
         
Pass through of actual losses
    (168 )
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
  $ 5,726  

 
-10-

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The amortized cost and estimated fair value of the Company’s securities, classified as available for sale at March 31, 2010, by contractual maturity, are shown below. 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
  6,906     6,906  
Due after one year through five years
    10,784       10,900  
Due after five years through ten years
    23,007       23,063  
Due after ten years
    28,963       25,474  
                 
Total other securities
    69,660       66,343  
Mortgage-backed securities
    647,472       650,769  
                 
Total securities available for sale
  717,132     717,112  
 
The amortized cost and fair value of the Company’s securities, classified as available for sale at December 31, 2009 are as follows:

               
Gross
   
Gross
 
   
Amortized
         
Unrealized
   
Unrealized
 
   
Cost
   
Fair Value
   
Gains
   
Losses
 
   
(In thousands)
             
U.S. government agencies
  3,277     3,389     112     -  
Other
    28,718       25,112       90       3,696  
Mutual funds
    6,860       6,860       -       -  
Total other securities
    38,855       35,361       202       3,696  
REMIC and CMO
    388,891       380,325       7,666       16,232  
GNMA
    107,144       110,845       3,701       -  
FNMA
    124,199       127,364       3,561       396  
FHLMC
    29,201       29,909       708       -  
Total mortgage-backed securities
    649,435       648,443       15,636       16,628  
Total securities available for sale
  688,290     683,804     15,838     20,324  

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

The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2009:
   
Total
   
Less than 12 months
   
12 months or more
 
         
Unrealized
         
Unrealized
         
Unrealized
 
   
Fair Value
   
Losses
   
Fair Value
   
Losses
   
Fair Value
   
Losses
 
   
(In thousands)
 
Other
  7,354     3,696     -     -     7,354     3,696  
Total other securities
    7,354       3,696       -       -       7,354       3,696  
REMIC and CMO
    126,074       16,232       71,495       2,386       54,579       13,846  
FNMA
    26,567       396       26,567       396       -       -  
Total mortgage-backed securities
    152,641       16,628       98,062       2,782       54,579       13,846  
Total securities available for sale
  159,995     20,324     98,062     2,782     61,933     17,542  
 
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 discontinued when certain factors, such as contractual delinquency of ninety 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 after the loan meets certain criteria. Subsequent cash payments received on non-accrual loans that do not meet the criteria are applied first as a reduction of principal until all principal is recovered and then subsequently to interest. Loan fees and certain loan origination costs are deferred at the time of origination, and 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 recorded in interest income at the time the loan is paid in full.
 
A loan is considered impaired when, based upon 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 original contractual terms of the loan.  All non-accrual loans are considered impaired.  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. The property value of impaired mortgage loans are internally reviewed on a quarterly basis based on updated cash flows for income producing properties or updated independent appraisals.  The loan balance of impaired mortgage loans is then compared to the properties updated estimated value and any balance over 90% of the loans updated estimated value is charged-off against the allowance for loan losses.
 
As the Savings Bank continues to increase its loan portfolio, management continues to adhere to the Savings Bank’s conservative underwriting standards. The majority of the Savings 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 Savings Bank takes a proactive approach to managing delinquent loans, including conducting site examinations and encouraging borrowers to meet with a Savings Bank representative. The Savings 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 Savings 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 Savings 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 below market rates or reducing the amount of the monthly payment for a specified period of time, after which the interest rate and repayment terms would revert to the original terms of the
 
 
-12-

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
loan. The Savings Bank classifies these loans as “Troubled Debt Restructured,” and also classifies these loans as non-performing loans.
 
The total amount of non-performing loans increased $5.8 million during the three months ended March 31, 2010 to $91.6 million from $85.9 million at December 31, 2009.  The total amount of loans on non-accrual status was $84.1 million at March 31, 2010 and $80.1 million at December 31, 2009. The total amount of loans classified as impaired was $112.9 million at March 31, 2010 and $85.9 million at December 31, 2009. The portion of the allowance for loan losses allocated to impaired loans was $11.2 million, or 48.8%, at March 31, 2010 and $9.6 million, or 47.2%, at December 31, 2009.
 
The interest foregone on non-accrual loans was $1.8 million and $1.4 million for the three months ended March 31, 2010 and 2009, respectively.
 
The Company recorded a provision for loan losses of $5.0 million during the three months ended March 31, 2010, which was a $0.5 million increase from the $4.5 million provision recorded during the three months ended March 31, 2009.  The provision was deemed necessary as a result of the regular quarterly analysis of the allowance for loan losses.  The regular quarterly analysis is 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 at least annually), changes in the composition and volume of the portfolio, collection policies and experience, trends in the volume of non-accrual loans and regional and national economic conditions.
 
The allowance for loan losses is established through charges to earnings in the form of a 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.  During the three months ended March 31, 2010 and 2009, the Savings Bank recorded net loan charge-offs of $2.3 million and $0.2 million, respectively.
 

The following are changes in the allowance for loan losses for the periods indicated:

 
   
For the three months
 
   
ended March 31,
 
(In thousands)
 
2010
   
2009
 
             
Balance, beginning of period
  20,324     11,028  
Provision for loan losses
    5,000       4,500  
Charge-off's
    (2,943 )     (266 )
Recoveries
    651       18  
Balance, end of period
  23,032     15,280  
 
The following table shows net loan charge-offs for the periods indicated by type of loan:
 

   
For the three months
 
   
ended March 31,
 
   
March 31,
   
March 31,
 
(In thousands)
 
2010
   
2009
 
Multi-family residential
  1,092     8  
Commercial real estate
    140       -  
One-to-four family – mixed-use property
    360       -  
One-to-four family – residential
    69       -  
Construction
    862       -  
Small Business Administration
    290       233  
Commercial business and other loans
    (521 )     7  
Total net loan charge-offs (recoveries)
  2,292     248  

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
6.
Stock-Based Compensation
 
For the three months ended March 31, 2010 and 2009, the Company’s net income, as reported, includes $1.0 million, and $0.6 million, respectively, of stock-based compensation costs and $0.4 million and $0.2 million, respectively of income tax benefits related to the stock-based compensations plans.
 
The Company estimates the fair value of stock options using the Black-Scholes valuation model that uses the assumptions noted in the table below. 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 and 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, 2010, the Company did not grant stock options.  There were 118,100 stock options granted for the three months ended March 31, 2009.  There were 169,820 and 124,350 restricted stock units granted for the three months ended March 31, 2010 and 2009, respectively.
 
The following are the significant weighted assumptions relating to the valuation of the Company’s stock options granted for the three months ended March 31, 2009:
 

 
Fot the three months ended
 
March 31, 2009
Dividend yield
6.16%
Expected volatility
34.99%
Risk-free interest rate
2.27%
Expected option life (years)
7 years
 
The Company’s 2005 Omnibus Incentive Plan (the “Omnibus Plan”) became effective on May 17, 2005 after adoption by the Board of Directors and approval by the stockholders.  The Omnibus Plan authorizes the Company’s 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. The Company has applied the shares previously authorized by stockholders under the 1996 Restricted Stock Incentive Plan and the 1996 Stock Option Incentive Plan for use as full value awards and non-full value awards, respectively, for future awards under the Omnibus Plan.  As of March 31, 2010, there were 153,808 shares available for full value awards and 209,833 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.  All grants and awards under the 1996 Restricted Stock Incentive Plan and the 1996 Stock Option Incentive Plan prior to the effective date of the Omnibus Plan are still outstanding as 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 repriced 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 or the 1996 Restricted Stock Incentive Plan); (2) the settlement of such an award in cash; (3) the delivery to the award holder of fewer
 
 
-14-

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
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.
 
The following table summarizes the Company’s full value awards at or for the three months ended March 31, 2010:

         
Weighted-Average
 
         
Grant-Date
 
  Full Value Awards  
Shares
   
Fair Value
 
             
Non-vested at December 31, 2009
    232,398     14.08  
Granted
    169,820       12.34  
Vested
    (56,950 )     11.18  
Forfeited
    (520 )     10.40  
Non-vested at March 31, 2010
    344,748     13.71  
                 
Vested but unissued at March 31, 2010
    110,275     13.82  
 
As of March 31, 2010, there was $3.8 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 3.3 years.  The total fair value of awards vested for the three months ended March 31, 2010 and 2009 were $0.7 million and $0.3 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, 2010:
 
         
Weighted-
 
Weighted-Average
 
Aggregate
 
         
Average
 
Remaining
 
Intrinsic
 
         
Exercise
 
Contractual
 
Value
 
Non-Full Value Awards
 
Shares
   
Price
 
Term
  (000)*  
                       
Outstanding at December 31, 2009
    1,414,008     $ 14.33            
Granted
    -       -            
Exercised
    -       -            
Forfeited
    (45,390 )     14.39            
Outstanding at March 31, 2010
    1,368,618     $ 14.33  
5.1 years
  $ 783  
Exercisable shares at March 31, 2010
    1,114,148     $ 14.32  
4.4 years
  $ 398  
Vested but unexercisable shares at March 31, 2010
    7,260     $ 16.00  
7.6 years
  $ 4  
 
* 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.
 
 
-15-

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
As of March 31, 2010, there was $0.6 million 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 2.5 years.  The vested but unexercisable non-full value awards were 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 awards will be exercisable at the original contractual vesting dates.
 
There were no stock options granted or exercised during the three months ended March 31, 2010.  Cash proceeds, fair value received, tax benefits, and intrinsic value related to stock options exercised, and the weighted average grant date fair value for options granted, during the three months ended March 31, 2009 are provided in the following table:
 

   
For the three months
 
(In thousands, except grant date fair value)
 
ended March 31, 2009
 
Proceeds from stock options exercised
  $ 618  
Tax benefit related to stock options exercised
    45  
Intrinsic value of stock options exercised
    102  
Grant date fair value at weighted average
    1.26  
 
Phantom Stock Plan: The Company maintains a non-qualified phantom stock plan (the “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 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, 2010:
 

Phantom Stock Plan
 
Shares
   
Fair Value
 
             
Outstanding at December 31, 2009
    25,021     $ 11.26  
Granted
    5,463       12.06  
Forfeited
    (21 )     12.66  
Distributions
    (152 )     11.96  
Outstanding at March 31, 2010
    30,311     $ 12.66  
Vested at March 31, 2010
    24,096     $ 12.66  
 
The Company recorded stock-based compensation expense (benefit) for the Phantom Stock Plan of $42,000 and $(111,000) for the three months ended March 31, 2010 and 2009, respectively. The total fair value of distributions from the Phantom Stock Plan was $2,000 for each of the three-month periods ended Mach 31, 2010 and 2009.
 
 
-16-


PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
7.
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:
 

   
For the three months ended
 
   
March 31,
 
(In thousands)
 
2010
   
2009
 
             
Employee Pension Plan:
           
    Interest cost
  $ 239     $ 228  
    Amortization of unrecognized loss
    91       80  
    Expected return on plan assets
    (312 )     (321 )
        Net employee pension expense (benefit)
  $ 18     $ (13 )
                 
Outside Director Pension Plan:
               
    Service cost
  $ 16     $ 20  
    Interest cost
    33       34  
    Amortization of unrecognized gain
    (14 )     (4 )
    Amortization of past service liability
    10       10  
        Net outside director pension expense
  $ 45     $ 60  
                 
Other Postretirement Benefit Plans:
               
    Service cost
  $ 68     $ 55  
    Interest cost
    52       57  
    Amortization of unrecognized loss
    2       -  
    Amortization of past service (credit) liability
    (21 )     2  
        Net other postretirement expense
  $ 101     $ 114  
 
The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2009 that it expects to contribute $0.2 million to each of the Company’s Outside Director Pension Plan (the “Outside Director Pension Plan”) and other post retirement benefit plans (the “Other Postretirement Benefit Plans”) during the year ending December 31, 2010. The Company does not currently expect to make a contribution to its Employee Pension Plan (the “Employee Pension Plan”) during the year ending December 31, 2010. As of March 31, 2010, the Company has contributed $22,000 to the Outside Director Pension Plan and $10,000 to the Other Postretirement Benefit Plans.  The Company has not made any contribution to the Employee Pension Plan during the three months ended March 31, 2010.  As of March 31, 2010, the Company has not revised its expected contributions for the year ending December 31, 2010.
 
8.
Fair Value Measurements

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, 2010, the Company carried financial assets and financial liabilities under the fair value option with fair values of $91.7 million and $65.0 million, respectively. At December 31, 2009, the Company carried financial assets and financial liabilities under the fair value option with fair values of $97.5 million and $106.2 million, respectively. During the three-month periods ended March 31, 2010 and 2009, the Company did not elect to carry any additional financial assets or financial liabilities under the fair value option.
 
 
-17-

 
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
Measurements
   
Fair Value
Measurements
   
Changes in Fair Values For Items Measured at Fair Value Pursuant to Election of the Fair Value Option
 
   
at March 31,
   
at December 31,
   
For the three months ended March 31,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
                         
Mortgage-backed securities
  $ 74,724     $ 80,299     $ 569     $ 1,701  
Other securities
    16,934       17,229       184       (201 )
Borrowed funds
    65,048       106,167       862       639  
Securities sold under agreements to repurchase
    -       -               210  
Net gain from fair value adjustments (1)
            $ 1,615     $ 2,349  
 
(1) 
The net gain from fair value adjustments presented in the above table does not include losses of $1.7 million from the change in the fair value of interest rate caps recorded during the three months ended March 31, 2010.
 
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 have contractual principal amounts of $91.9 million and $131.9 million at March 31, 2010 and December 31, 2009, respectively.  During the three months ended March 31, 2010, a borrowing with a contractual principal amount of $40.0 million was repaid at its contractual maturity date. The fair value of borrowed funds includes accrued interest payable of $0.6 million and $0.8 million at March 31, 2010 and December 31, 2009, respectively.
 
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
 
 
-18-

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
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.  At March 31, 2010 and December 31, 2009, Level 1 includes preferred stock issued by Freddie Mac.
 
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, 2010 and December 31, 2009, Level 2 includes mortgage related securities, corporate debt, interest rate caps, securities sold under agreements to repurchase and Federal Home Loan Bank of New York (“FHLB-NY”) advances.
 
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, 2010 and December 31, 2009, Level 3 includes 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 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, 2010
 
   
Trust preferred
   
Junior subordinated
 
   
securities
   
debentures
 
   
(In thousands)
 
             
Beginning balance
  $ 10,153     $ 34,510  
Transfer into Level 3
    -       -  
Net loss from fair value adjustment of financial assets
    (45 )     -  
Net gain  from fair value adjustment of financial liabilities
    -       (55 )
Decrease in accrued interest
    -       (8 )
Change in unrealized losses included in other comprehensive loss
    (18 )     -  
Ending balance
  $ 10,090     $ 34,447  

 
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, and the method that was used to determine their fair value, at March 31, 2010 and December 31, 2009:
 

   
Quoted Prices
                                     
   
in Active Markets
   
Significant Other
   
Significant Other
             
   
for Identical Assets
   
Observable Inputs
   
Unobservable Inputs
   
Total carried at fair value
 
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
on a recurring basis
 
   
March 31,
   
December 31,
   
March 31,
   
December 31,
   
March 31,
   
December 31,
   
March 31,
   
December 31,
 
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
                                                 
Assets:
                                               
Securities available for sale
                                               
Mortgage-backed
                                               
Securities
  $ -     $ -     $ 650,769     $ 648,443     $ -     $ -     $ 650,769     $ 648,443  
Other securities
    157       140       56,096       25,068       10,090       10,153       66,343       35,361  
Interest rate caps
    -       -       5,684       7,403       -       -       5,684       7,403  
                                                                 
Total assets
  $ 157     $ 140     $ 712,549     $ 680,914     $ 10,090     $ 10,153     $ 722,796     $ 691,207  
                                                                 
                                                                 
Liabilities:
                                                               
Borrowings
  $ -     $ -     $ 30,601     $ 71,657     $ 34,447     $ 34,510     $ 65,048     $ 106,167  
Securities sold under agreements to repurchase
    -       -       -       -       -       -       -       -  
                                                                 
Total liabilities
  $ -     $ -     $ 30,601     $ 71,657     $ 34,447     $ 34,510     $ 65,048     $ 106,167  
 
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, 2010 and December 31, 2009:

   
Quoted Prices
                                     
   
in Active Markets
   
Significant Other
   
Significant Other
             
   
for Identical Assets
   
Observable Inputs
   
Unobservable Inputs
   
Total carried at fair value
 
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
on a non-recurring basis
 
   
March 31,
   
December 31,
 
March 31,
   
December 31,
 
March 31,
   
December 31,
 
March 31,
   
December 31,
 
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
                                                 
Assets:
                                               
Impaired loans
  $ -     $ -     $ -     $ -     $ 32,667     $ 25,879     $ 32,667     $ 25,879  
Real estate owned
    -       -       -       -       1,793       2,262       1,793       2,262  
                                                                 
Total assets
  $ -     $ -     $ -     $ -     $ 34,460     $ 28,141     $ 34,460     $ 28,141  
 
The Company did not have any liabilities that were carried at fair value on a non-recurring basis at March 31, 2010 and December 31, 2009.
 
The estimated fair value of each material class of financial instruments at March 31, 2010 and December 31, 2009 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, FHLB-NY Stock, Bank Owned Life Insurance, Interest and Dividends Receivable, Mortgagors’ Escrow Deposits and Other Liabilities:

The carrying amounts are a reasonable estimate of fair value.
 
Securities Available For Sale:
 
The estimated fair values of securities available for sale are contained in Note 4 of the Notes to Consolidated
 
 
-20-

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
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 inputs.
 
Loans:
 
The estimated fair value of loans, with carrying amounts of $3,239.5 million and $3,220.5 million at March 31, 2010 and December 31, 2009, respectively, was $3,391.9 million and $3,358.1 million at March 31, 2010 and December 31, 2009, respectively.
 
Fair value 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 2 input).
 
For impaired loans, fair value is estimated 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 (Level 3 input).
 
Due to depositors:
 
The estimated fair value of due to depositors, with carrying amounts of $2,789.5 million and $2,666.3 million at March 31, 2010 and December 31, 2009, respectively, was $2,729.5 million and $2,639.6 million at March 31, 2010 and December 31, 2009, respectively.
 
The fair values of demand, passbook savings, NOW and money market deposits are, by definition, equal to the amount payable on demand at the reporting dates (i.e. their carrying value). 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, with carrying amounts of $955.6 million and $1,060.2 million at March 31, 2010 and December 31, 2009, respectively, was $970.6 million and $1,068.0 million at March 31, 2010 and December 31, 2009, respectively.
 
The fair value of borrowings is 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 at March 31, 2010 and December 31, 2009 was $5.7 million and $7.4 million, respectively. We have not designated our interest rate cap agreements as hedges as defined under the Derivatives and Hedging Topic of the FASB ASC. Interest rate caps are carried at fair value in the Consolidated Financial Statements in Other assets and changes in their fair value are recorded through earnings in the Consolidated Statements of Income in Net gain (loss) from fair value adjustments.  The Company purchased interest rate caps during 2009 with a notional amount of $100.0 million. The Company uses interest rate caps to manage its exposure to rising interest rates on its financial liabilities without stated maturities. Fair value for interest rate caps is based upon broker quotes (Level 2 input). During the three months ended March 31, 2010, the Company recorded a loss of $1.7 million in the fair value of interest rate caps.
 
Real Estate Owned:
 
Real Estate Owned (“REO”) are carried at the lower of cost or estimated realizable value.  The estimated realizable 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).
 
 
-21-

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
At March 31, 2010 and December 31, 2009, the fair values of the above financial instruments approximated the recorded amounts of the related fees and were not considered to be material.
 
9.
Income Taxes

The Company has recorded a net deferred tax asset of $5.1 million at March 31, 2010, 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 years. In management’s opinion, in view of the Company’s previous, current and projected future earnings trend, 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, 2010.
 
10.
Stockholders’ Equity
 
Accumulated Other Comprehensive Loss:
 
The components of accumulated other comprehensive loss at March 31, 2010 and December 31, 2009 and the changes during the three months ended March 31, 2010 are as follows:

                   
         
Other
     
   
December 31,
 
Comprehensive
 
March 31,
 
   
2009
   
Income (Loss)
 
2010
 
   
(In thousands)
 
Net unrealized gain (loss) on securities available for sale
  $ (2,497 )   $ 2,486     $ (11 )
Net actuarial gain (loss) on pension plans and other postretirement benefits
    (4,480 )     42       (4,438 )
Prior service credit on pension plans and other postretirement benefits
    398       (5 )     393  
Accumulated other comprehensive loss
  $ (6,579 )   $ 2,523     $ (4,056 )

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
11.
Regulatory Capital

Under Office of Thrift Supervision (“OTS”) capital regulations, the Savings Bank is required to comply with each of three separate capital adequacy standards.  At March 31, 2010, the Savings Bank exceeded each of the three OTS capital requirements and is categorized as “well-capitalized” by the OTS under the prompt corrective action regulations.  Set forth below is a summary of the Savings Bank’s compliance with OTS capital standards as of March 31, 2010.

(Dollars in thousands)
 
Amount
   
Percent of Assets
 
             
Tangible Capital:
           
    Capital level
  $ 373,797       8.97 %
    Requirement
    62,495       1.50  
    Excess
    311,302       7.47  
                 
Leverage and Core Capital:
               
    Capital level
  $ 373,797       8.97 %
    Requirement
    124,990       3.00  
    Excess
    248,807       5.97  
                 
Risk-Based Capital:
               
    Capital level
  $ 396,828       13.67 %
    Requirement
    232,221       8.00  
    Excess
    164,607       5.67  
 
12.
New Authoritative Accounting Pronouncements
 
The FASB ASC became effective for financial statements issued for interim and annual periods ending after September 15, 2009. The ASC became FASB’s officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. All references to accounting standards in this Quarterly Report now refer to the relevant ASC Topic.
 
In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, which amends the authoritative accounting guidance under ASC Topic 820.  The update requires the following additional disclosures: (1) separately disclose the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and (2) separately disclose information about purchases, sales, issuances and settlements in the reconciliation for fair value measurements using Level 3.  The update provides for amendments to existing disclosures as follows: (1)  fair value measurement disclosures are to be made for each class of assets and liabilities; and (2) disclosures are to be made about valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.  The update also includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets.  The update is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of this update did not have a material effect on the Company’s results of operations or financial condition.
 
In February 2010, the FASB issued ASU No. 2010-09, which amends the authoritative accounting guidance under ASC Topic 855 “Subsequent Events.”  The update provides that an SEC filer is required to evaluate subsequent events through the date financial statements are issued.  However, an SEC filer is not required to disclose the date through which subsequent events have been evaluated. The update was effective as of the date of issuance.  Adoption of this update did not have a material effect on the Company’s results of operations or financial condition.
 
 
-23-

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 2.

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, 2009.  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 Flushing Savings Bank, FSB (the “Savings Bank”) and Flushing Commercial Bank (the “Commercial Bank,,” and together with the Savings Bank, the “Banks”).

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, the factors set forth in the preceding paragraph and 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, 2009. 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 at the direction of the Savings Bank. 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. The primary business of Flushing Financial Corporation at this time is the operation of its wholly owned subsidiary, the Savings Bank. The Savings Bank owns four subsidiaries: Flushing Commercial Bank, Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc. In November, 2006 the Savings Bank launched an internet branch, iGObanking.com®. The Company also operates under the trade name Flushing Bank.  The activities of Flushing Financial Corporation are primarily funded by dividends, if any, received from the Savings 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 one-to-four family (focusing on mixed-use properties, which are properties that contain both residential dwelling units and commercial units), multi-family residential and, to a lesser extent, 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 passbook loans and overdraft lines of credit. Our revenues are derived principally from interest on our mortgage and other loans and mortgage-backed securities portfolio, and interest and dividends on other investments in our securities portfolio.  Our primary sources of funds are deposits, FHLB-NY borrowings, repurchase agreements, principal and interest payments on loans, mortgage-backed and other securities, proceeds from sales of securities and, to a lesser extent, proceeds from sales of loans. As a federal savings bank, the Savings Bank’s primary regulator is the Office of Thrift Supervision (“OTS”). Deposits are insured to the maximum allowable amount by the Federal Deposit Insurance Corporation (“FDIC”). Additionally, the Banks are members of the Federal Home Loan Bank (“FHLB”) system.
 
 
-24-

 
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 and one-to-four family mixed-use property mortgage loans;
 
·  
transition from a traditional thrift to a more ‘commercial-like’ 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; and
 
·  
manage interest rate risk and capital.
 
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 results of operations depend primarily on net interest income, which is the difference between the income earned on our 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 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.
 
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 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, out 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 8 of the Notes to Consolidated Financial Statements.
 
We recorded a provision for loan losses of $5.0 million during the three months ended March 31, 2010, which was a $0.5 million increase from the $4.5 million provision recorded during the three months ended March 31, 2009.  The provision was deemed necessary as a result of the regular quarterly analysis of the allowance for loan losses.  The regular quarterly analysis is 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 at least annually), changes in the composition and volume of the portfolio, collection policies and experience, trends in the volume of non-accrual loans and regional and national economic conditions. See “-ALLOWANCE FOR LOAN LOSSES.”
 
Net income for the three months ended March 31, 2010 was $8.0 million, an increase of $1.7 million, or 26.6%, from $6.3 million for the period ended March 31, 2009. Our strong operating performance for the quarter was primarily driven by an increase of $7.4 million in net interest income, as the net interest margin for the quarter ended March 31, 2010 improved over the comparable prior year period by 67 basis points to 3.39%. We are particularly encouraged with the continued growth in our net interest margin during the first quarter of 2010, as it improved 25
 
 
-25-

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
basis points over the fourth quarter of 2009.
 
Our product expansion undertaken over the past several years continues to result in growth in our core deposits. During the past twelve months, we opened nearly 4,000 demand deposit accounts and saw an increase in demand deposit balances of almost 20%. As a result of deposit growth during the three months ended March 31, 2010, we were able to reduce borrowed funds by $104.6 million during the quarter. The increase in our core deposits during 2009 and the first quarter of 2010 resulted in a reduction in our cost of deposits and total funding costs of 94 basis points and 80 basis points, respectively, from the comparable prior year period.
 
We continue to adhere to our conservative underwriting standards to ensure we continue to originate quality loans. We also focus on the performance of our existing loan portfolio. Non-performing loans for the three months ended March 31, 2010 increased $5.8 million, or 6.7%, to $91.6 million from $85.9 million at December 31, 2009. The majority of non-performing loans are collateralized by residential income producing properties in the New York metropolitan area that remain occupied and generate revenue. Given New York City’s low vacancy rates, they have retained value and provided us with low loss content in our non-performing loans during the year.  We review the property values of impaired loans quarterly and charge-off amounts in excess of 90% of the value of the loan’s collateral. Net loan charge-offs during the quarter were 29 basis points of average loans, which continues to be below the industry average. The $5.0 million provision for loan losses recorded during the three months ended March 31, 2010 brought our allowance up to 71 basis points of total loans.  As of March 31, 2010, the current loan-to-value ratio on our impaired loans was 67.8%.
 
The Savings Bank continues to be well-capitalized under regulatory requirements at March 31, 2010, with core and risk-weighted capital ratios of 8.97% and 13.67%, respectively.
 
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 
General.  Net income for the three months ended March 31, 2010 was $8.0 million, an increase of $1.7 million, or 26.6%, from $6.3 million for the three months ended March 31, 2009. Diluted earnings per common share were $0.26 for the three-month periods ended March 31, 2010 and 2009.  Diluted earnings per common share were unchanged as the 26.6% increase in net income was offset by the net effect of a 47.0% increase in common shares used in the computation of earnings per common share and the redemption of preferred stock in October 2009. These additional shares were issued in the common stock offering completed in September 2009. The return on average assets was 0.77% for the three months ended March 31, 2010 as compared to 0.63% for the three months ended March 31, 2009, while the return on average equity was 8.81% for the three months ended March 31, 2010 as compared to 8.42% for the three months ended March 31, 2009.
 
Interest Income.  Total interest and dividend income increased $0.6 million, or 1.1%, to $57.8 million for the three months ended March 31, 2010 from $57.2 million for the three months ended March 31, 2009. The increase in interest income is attributed to the growth in the average balance of interest-earning assets, which increased $114.8 million to $3,952.1 million, partially offset by an 11 basis point reduction in the yield of interest-earning assets to 5.85% for the three months ended March 31, 2010 from 5.96% for the quarter ended March 31, 2009. The decline in the yield of interest-earning assets was primarily due to a 15 basis point reduction in the yield of the loan portfolio combined with a 47 basis point reduction in the yield of the securities portfolio. These reductions in rates were partially offset by a $104.6 million decline in the combined average balances of the lower yielding securities portfolio and interest-earning deposits, with each having a lower yield than the average yield of total interest-earning assets.  The 15 basis point reduction in the yield of the loan portfolio to 6.20% for the quarter ended March 31, 2010 from 6.35% for the quarter ended March 31, 2009 was primarily due to an increase in non-accrual loans for which we do not accrue interest income.  The yield on the mortgage loan portfolio, excluding prepayment penalty income, declined 14 basis points to 6.21% for the three months ended March 31, 2010 from 6.35% for the three months ended March 31, 2009. The 47 basis point reduction in the yield of the securities portfolio to 4.55% for the quarter ended March 31, 2010 from 5.02% for the quarter ended March 31, 2009 was due to higher yielding securities repaying and being replaced with securities with lower yields due to the current interest rate environment. The decline in the yield of interest-earning assets was partially offset by an increase of $219.4 million in the average balance of the loan portfolio to $3,205.3 million for the three months ended March 31, 2010 from $2,986.0 million for the three months ended March 31, 2009.
 
Interest Expense.  Interest expense decreased $6.8 million, or 21.9%, to $24.3 million for the three months ended March 31, 2010 from $31.1 million for the three months ended March 31, 2009. The decrease in interest expense is due to the reduction in the cost of interest-bearing liabilities, which decreased 80 basis points to 2.63% for the three
 
 
-26-

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
months ended March 31, 2010 from 3.43% for the comparable prior year period. This decrease was partially offset with a $68.9 million increase in the average balance of interest-bearing liabilities to $3,697.5 million for the three months ended March 31, 2010 from $3,628.7 million for the comparable prior year period.  The decrease in the cost of interest-bearing liabilities is primarily attributable to reductions in the rates paid on deposits combined with a shift in deposit concentrations.  The cost of certificates of deposit, money market accounts, savings accounts and NOW accounts decreased 65 basis points, 102 basis points, 74 basis points and 65 basis points respectively, for the quarter ended March 31, 2010 compared to the same period in 2009.  The cost of due to depositors was also reduced due to the Banks’ focus on increasing lower-costing core deposits. The combined average balances of lower-costing savings, money market and NOW accounts increased a total of $383.8 million for the quarter ended March 31, 2010 compared to the same period in 2009, while the average balance of higher-costing certificates of deposits decreased $252.8 million for the quarter ended March 31, 2010 compared to the same period in 2009.  This resulted in a decrease in the cost of due to depositors of 94 basis points to 2.03% for the quarter ended March 31, 2010 from 2.97% for the quarter ended March 31, 2009. The net increase in deposits allowed the Savings Bank to reduce its reliance on borrowed funds, as the average balance of borrowed funds declined $63.6 million to $999.2 million for the quarter ended March 31, 2010 from $1,062.8 million for the quarter ended March 31, 2009, with the cost of borrowed funds decreasing 30 basis points to 4.32% for the quarter ended March 31, 2010 from 4.62% for the quarter ended March 31, 2009.
 
Net Interest Income.  For the three months ended March 31, 2010, net interest income was $33.5 million, an increase of $7.4 million, or 28.6%, from $26.1 million for the three months ended March 31, 2009. The increase in net interest income is attributed to an increase in the average balance of interest-earning assets of $114.8 million to $3,952.1 million, combined with an increase in the net interest spread of 69 basis points to 3.22% for the quarter ended March 31, 2010 from 2.53% for the comparable period in 2009. The yield on interest-earning assets decreased 11 basis points to 5.85% for the three months ended March 31, 2010 from 5.96% in the three months ended March 31, 2009. The cost of interest-bearing liabilities decreased 80 basis points to 2.63% for the three months ended March 31, 2010 from 3.43% for the comparable prior year period. The net interest margin increased 67 basis points to 3.39% for the three months ended March 31, 2010 from 2.72% for the three months ended March 31, 2009. Excluding prepayment penalty income, the net interest margin would have been 3.35% and 2.67% for the three month periods ended March 31, 2010 and 2009, respectively.
 
Provision for Loan Losses.  A provision for loan losses of $5.0 million was recorded for the quarter ended March 31, 2010, which was an increase of $0.5 million from the $4.5 million recorded in the quarter ended March 31, 2009. During the three months ended March 31, 2010, non-performing loans increased $5.8 million to $91.6 million from $85.9 million at December 31, 2009. Net charge-offs for the quarter totaled $2.3 million, an increase of $2.0 million from the comparable prior year quarter and a decrease of $1.0 million from the fourth quarter of 2009.  Non-performing loans primarily consists of mortgage loans collateralized by residential income producing properties located in the New York metropolitan market. The Savings 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%. However, given the level of non-performing loans, the current economic uncertainties, and the level of charge-offs, management, as a result of the regular quarterly analysis of the allowance for loans losses, deemed it necessary to record a $5.0 million provision for possible loan losses in the first quarter of 2010. See “-ALLOWANCE FOR LOAN LOSSES.”.
 
Non-Interest Income.  Non-interest income for the three months ended March 31, 2010 was $2.6 million, a decrease of $2.1 million from $4.7 million for the three months ended March 31, 2009.  The decrease in non-interest income was primarily due to a $0.1 million loss recorded from fair value adjustments as compared to a gain of $2.3 million recorded in the comparable prior year period.  The decrease in income from fair value adjustments was partially offset by a $0.3 million increase in the quarterly dividend from the FHLB-NY to $0.6 million for the three months ended March 31, 2010 from $0.3 million for the comparable prior year period.
 
Non-Interest Expense.  Non-interest expense was $17.9 million for the three months ended March 31, 2010, an increase of $1.9 million, or 12.2%, from $16.0 million for the three months ended March 31, 2009. Employee salary and benefits increased $1.3 million, which is primarily attributed to the growth of the Savings Bank and an increase in stock-based salary expense due to an increase in the stock price as compared to the comparable prior year  period. FDIC insurance increased $0.3 million compared to the comparable prior year period due to an increase in assessment rates and deposit balances.  Other operating expense increased $0.2 million primarily due to the growth of the Savings Bank and an increase in foreclosure expense. The efficiency ratio was 49.8% and 56.3% for the three
 
 
-27-

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
months ended March 31, 2010 and 2009, respectively.
 
Income before Income Taxes.  Income before the provision for income taxes increased $2.9 million, or 28.3%, to $13.1 million for the three months ended March 31, 2010 from $10.2 million for the three months ended March 31, 2009 for the reasons discussed above.
 
Provision for Income Taxes.  Income tax expense increased $1.2 million, to $5.2 million, for the three months ended March 31, 2010 as compared to $3.9 million for the three months ended March 31, 2009. This increase was due to increased pre-tax income combined with an increase in the effective tax rate for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. The effective tax rate was 39.3% and 38.4% for the three-month periods ended March 31, 2010 and 2009, respectively. The increase in the effective tax rate was the result of an increase in net income combined with a decline in the impact of tax preference items for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009.
 
FINANCIAL CONDITION

Assets.  Total assets at March 31, 2010 were $4,183.1 million, an increase of $39.9 million, or 1.0%, from $4,143.2 million at December 31, 2009. Total loans, net increased $16.3 million, or 0.5%, during the three months ended March 31, 2010 to $3,216.5 million from $3,200.2 million at December 31, 2009. Loan originations and purchases were $95.0 million for the three months ended March 31, 2010, a decrease of $28.5 million from $123.5 million for the three months ended March 31, 2009, as we have tightened our underwriting standards to ensure we continue to originate quality loans.  Additionally, loan demand has declined due to the current economic environment. At March 31, 2010, loan applications in process totaled $151.8 million compared to $180.3 million at March 31, 2009 and $158.4 million at December 31, 2009. The following table shows loan originations and purchases for the periods indicated:
 
   
For the three months
 
   
ended March 31,
 
(In thousands)
 
2010
   
2009
 
Multi-family residential
  $ 38,405     $ 36,947  
Commercial real estate (1)
    4,600       20,857  
One-to-four family – mixed-use property
    12,712       6,108  
One-to-four family – residential
    6,675       7,014  
Co-operative apartments
    216       -  
Construction
    832       5,281  
Small Business Administration
    289       1,112  
Taxi Medallion (2)
    16,454       22,906  
Commercial business and other loans
    14,801       23,273  
Total loan originations and purchases
  $ 94,984     $ 123,498  
 
(1)  
Includes purchases of $2.9 million in the three months ended March 31, 2009.
(2)  
Includes purchases of $1.8 million and $18.0 million in the three months ended March 31, 2010 and 2009, respectively.

As we continue to increase our loan portfolio, management continues to adhere to our conservative underwriting standards. Non-accrual loans and charge-offs from impaired loans have increased, primarily due to the current economic environment. The majority of our non-performing loans are collateralized by residential income producing properties that are occupied, thereby retaining more of their value and reducing the potential loss. We take a proactive approach to managing delinquent loans, including conducting site examinations and encouraging borrowers to meet with a Savings Bank representative. We have been developing short-term payment plans that enable certain borrowers to bring their loans current. We review our delinquencies on a loan by loan basis and continually explore ways to help borrowers meet their obligations and return them back to current status. In the past year we have increased staffing to handle delinquent loans by hiring people experienced in loan workouts. Our non-performing assets were $98.5 million at March 31, 2010 an increase of $5.3 million from $93.3 million at December 31, 2009. Total non-performing assets as a percentage of total assets were 2.36% at March 31, 2010 compared to
 
 
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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
 
2.25% at December 31, 2009. The ratio of allowance for loan losses to total non-performing loans was 25% at March 31, 2010, compared to 24% at December 31, 2009.
 
During the three months ended March 31, 2010, mortgage-backed securities increased $2.3 million, or 0.4%, to $650.8 million. During the three months ended March 31, 2010, there were purchases and principal repayments of mortgage-backed securities of $43.9 million and $45.8 million, respectively. During the three months ended March 31, 2010, other securities increased $31.0 million, or 87.6%, to $66.3 million. Other securities primarily consists of securities issued by government agencies and mutual or bond funds that invest in government and government agency securities.  During the three months ended March 31, 2010, there were $33.0 million in purchases of government agency securities.
 
Liabilities.  Total liabilities were $3,814.2 million at March 31, 2010, an increase of $31.1 million, or 0.8%, from December 31, 2009. During the three months ended March 31, 2010, due to depositors increased $123.2 million to $2,789.5 million as a result of increases of $49.8 million in core deposits and of $73.5 million in certificates of deposit. Borrowed funds decreased $104.6 million as the increase in deposits allowed us to reduce our borrowed funds.
 
Equity.  Total stockholders’ equity increased $8.7 million, or 2.4%, to $368.9 million at March 31, 2010 from $360.1 million at December 31, 2009. The increase is primarily due to net income of $8.0 million and an increase in other comprehensive income of $2.5 million for the three months ended March 31, 2010. The increase in other comprehensive income was primarily attributed to an increase in the market value of securities held in the available for sale portfolio. These increases were partially offset by the declaration and payment of dividends on the Company’s common stock of $3.9 million.  Book value per common share was $11.84 at March 31, 2010 compared to $11.57 at December 31, 2009. Tangible book value per common share was $11.31 at March 31, 2010 compared to $11.03 at December 31, 2009.
 
The Company did not repurchase any shares during the three months ended March 31, 2010 under its current stock repurchase program. At March 31, 2010, 362,050 shares remain to be repurchased under the current stock repurchase program.
 
Cash flow.  During the three months ended March 31, 2010, funds provided by our operating activities amounted to $15.7 million. These funds, together with $26.5 million provided by financing activities and $28.4 million of cash and cash equivalents available at the beginning of the year, were utilized to fund net investing activities of $44.8 million. Our primary business objective is the origination and purchase of one-to-four family (focusing on mixed-use properties, which are properties that contain both residential dwelling units and commercial units), multi-family residential and, to a lesser extent, commercial real estate mortgage loans and business and SBA loans. During the three months ended March 31, 2010, the net total of loan originations and purchases less loan repayments and sales was $20.8 million. During the three months ended March 31, 2010, we also funded $76.9 million in purchases of securities available for sale.  Funds were primarily provided by increases of $122.9 million in due to depositors and $11.0 million in escrow deposits, combined with $1.3 million in calls of securities and $47.0 million in proceeds from maturities and prepayments of securities available for sale.  We also used funds of $3.9 million for dividend payments, and $103.5 million to repay borrowed funds, during the three months ended March 31, 2010.
 
 
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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 RATE RISK

Our consolidated statements of financial position have been prepared in accordance with GAAP, which requires 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 our interest-earning assets which could adversely affect our results of operation if such assets were sold, or, in the case of securities classified as available-for-sale, decreases in our stockholders' equity, if such securities were retained.
 
We manage the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust our 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 OTS currently places its focus on the net portfolio value, focusing on a rate shock up or down of 200 basis points.  The OTS uses the change in net portfolio value ratio to measure the interest rate sensitivity of the Company. 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, 2010.  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, 2010, we were within the guidelines set forth by the Board of Directors for each interest rate level.
 
The following table presents our interest rate shock as of March 31, 2010:
 

   
Projected Percentage Change In
       
   
Net Interest
   
Net Portfolio
   
Net Portfolio
 
Change in Interest Rate
 
Income
   
Value
   
Value Ratio
 
-200 Basis points
    -2.58 %    7.11 %   13.62
-100 Basis points
    -0.81      4.25     13.36  
Base interest rate
    0.00      0.00     12.98  
+100 Basis points
    -2.92      -7.86     12.19  
+200 Basis points
    -6.14      -15.54     11.43  

 
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 our consolidated statements of financial condition and consolidated statements of operations for the three-month periods ended March 31, 2010 and 2009, 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,
 
   
2010
   
2009
 
   
Average
         
Yield/
   
Average
         
Yield/
 
   
Balance
   
Interest
   
Cost
   
Balance
   
Interest
   
Cost
 
Assets
                                   
Interest-earning assets:
                                   
Mortgage loans, net (1)
  2,943,563     46,107       6.27   2,801,571     44,867       6.41
Other loans, net (1)
    261,784       3,577       5.47       184,387       2,509       5.44  
Total loans, net
    3,205,347       49,684       6.20       2,985,958       47,376       6.35  
Mortgage-backed securities
    653,029       7,588       4.65       703,343       8,913       5.07  
Other securities
    59,915       523       3.49       73,298       836       4.56  
Total securities
    712,944       8,111       4.55       776,641       9,749       5.02  
Interest-earning deposits and federal funds sold
    33,795       13       0.15       74,690       43       0.23  
Total interest-earning assets
    3,952,086       57,808       5.85       3,837,289       57,168       5.96  
Other assets
    218,771                       184,655                  
Total assets
  4,170,857                     4,021,944                  
                                                 
Liabilities and Equity
                                               
Interest-bearing liabilities:
                                               
Deposits:
                                               
Savings accounts
  423,013       920       0.87     392,995       1,578       1.61  
NOW accounts
    572,227       1,804       1.26       315,775       1,507       1.91  
Money market accounts
    404,023       975       0.97       306,708       1,524       1.99  
Certificate of deposit accounts
    1,263,849       9,804       3.10       1,516,617       14,200       3.75  
Total due to depositors
    2,663,112       13,503       2.03       2,532,095       18,809       2.97  
Mortgagors' escrow accounts
    35,216       14       0.16       33,748       18       0.21  
Total deposits
    2,698,328       13,517       2.00       2,565,843       18,827       2.94  
Borrowed funds
    999,195       10,786       4.32       1,062,813       12,285       4.62  
Total interest-bearing liabilities
    3,697,523       24,303       2.63       3,628,656       31,112       3.43  
Non interest-bearing deposits
    84,206                       67,059                  
Other liabilities
    26,628                       26,685                  
Total liabilities
    3,808,357                       3,722,400                  
Equity
    362,500                       299,544                  
Total liabilities and equity
  4,170,857                     4,021,944                  
                                                 
Net interest income / net interest rate spread
          33,505       3.22           26,056       2.53
                                                 
Net interest-earning assets / net interest margin
  254,563               3.39   208,633               2.72
 
                                               
Ratio of interest-earning assets to interest-bearing liabilities
                    1.07                     1.06
 
(1)  
Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $0.3 million for each of the three-month periods ended March 31, 2010 and 2009, respectively.

 
-31-

 
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 our loan originations (including the net effect of refinancing) and the changes in our portfolio of loans, including purchases, sales and principal reductions for the periods indicated:

   
For the three months ended March 31,
 
(In thousands)
 
2010
   
2009
 
             
Mortgage Loans
 
 
   
 
 
   
 
   
 
 
At beginning of period
  $ 2,943,213     $ 2,786,670  
                 
Mortgage loans originated:
               
Multi-family residential
    38,405       36,947  
Commercial real estate
    4,600       17,940  
One-to-four family – mixed-use property
    12,712       6,108  
One-to-four family – residential
    6,675       7,014  
Co-operative apartments
    216       -  
Construction
    832       5,281  
Total mortgage loans originated
    63,440       73,290  
                 
Mortgage loans purchased:
               
Commercial real estate
    -       2,917  
                 
Total acquired loans
    -       2,917  
                 
Less:
               
Principal and other reductions
    55,049       41,777  
Sales
    1,289       1,233  
                 
At end of period
  $ 2,950,315     $ 2,819,867  
                 
Commercial Business and Other Loans
               
                 
At beginning of period
  $ 260,160     $ 167,899  
                 
Other loans originated:
               
Small business administration
    289       1,112  
Taxi Medallion
    14,671       4,884  
Commercial business
    13,752       22,892  
Other
    1,049       381  
Total other loans originated
    29,761       29,269  
                 
Other loans purchased:
               
Taxi Medallion
    1,783       18,022  
Total other loans purchased
    1,783       18,022  
                 
Less:
               
Principal and other reductions
    19,616       8,150  
At end of period
  $ 272,088     $ 207,040  

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

We generally discontinue accruing interest on delinquent loans when a loan is 90 days past due or foreclosure proceedings have been commenced, whichever first occurs.  At that time, previously accrued but uncollected interest is reversed from income. Loans in default 90 days or more as to their maturity date but not their payments, however, continue to accrue interest as long as the borrower continues to remit monthly payments.
 
The following table shows our delinquent loans that are less than 90 days past due and still accruing interest at the periods indicated:

                         
   
March 31, 2010
   
December 31, 2009
 
     60 - 89      30 - 59      60 - 89      30 - 59  
   
days
   
days
   
days
   
days
 
   
(In thousands)
 
                                 
Multi-family residential
  $ 14,960     $ 28,820     $ 8,958     $ 28,054  
Commercial real estate
    7,334       13,056       5,788       8,003  
One-to-four family - mixed-use property
    6,971       22,986       9,032       22,741  
One-to-four family - residential
    1,470       2,789       1,555       4,015  
Co-operative apartments
    -       -       -       -  
Construction loans
    -       10,667       -       7,619  
Small Business Administration
    -       17       10       262  
Taxi medallion
    -       -       -       -  
Commercial business and other
    13       139       21       1,633  
Total delinquent loans
  $ 30,748     $ 78,474     $ 25,364     $ 72,327  
 
CLASSIFIED ASSETS

Our policy is to continuously review our assets, focusing primarily on the loan portfolio, 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 OTS regulations, we classify them as “Special Mention,” “Substandard,” “Doubtful,” or “Loss” as deemed necessary.  We classify an asset as Substandard when a well-defined weakness is identified that jeopardizes the orderly liquidation of the debt. We classify 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 classify an asset as Loss if it is deemed the debtor is incapable of repayment.  Loans that are classified as Loss are charged to the Allowance for Loan Losses.  Assets that are non-accrual are classified as Substandard, Doubtful or Loss. We classify an asset 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.

 
-33-


 
 
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’ classified assets at March 31, 2010:
 

(In thousands)
 
Special Mention
   
Substandard
   
Doubtful
   
Loss
   
Total
 
                               
Loans:
                             
Multi-family residential
  $ 25,180     $ 38,604     $ 2,045     $ -     $ 65,829  
Commercial real estate
    14,566       20,954       -       -       35,520  
One-to-four family - mixed-use property
    16,846       32,172       -       -       49,018  
One-to-four family - residential
    2,793       12,180       -       -       14,973  
Co-operative apartments
    -       78       -       -       78  
Construction loans
    32,813       11,771       -       -       44,584  
Small Business Administration
    394       1,042       -       -       1,436  
Commercial business and other
    9,675       2,329       1,472       -       13,476  
Total loans
    102,267       119,130       3,517       -       224,914  
                                         
Investment Securities: (1)
                                       
Pooled trust preferred securities
    -       12,651       -       -       12,651  
FHMLC preferred stock
    -       50       -       -       50  
Mutual funds
    -       4,408       -       -       4,408  
Private issue CMO
    -       62,826       -       -       62,826  
Total investment securities
    -       79,935       -       -       79,935  
                                         
Real Estate Owned
    -       1,793       -       -       1,793  
Total
  $ 102,267     $ 200,858     $ 3,517     $ -     $ 306,642  
 
(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 have a fair value at March 31, 2010 of $79.9 million. Under current applicable regulatory guidelines, we are required to disclose the classified investment securities, as shown on the table 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 Banks’ securities. At March 31, 2010, Flushing Financial Corporation had one mutual fund security classified as Substandard with a market value of $2.0 million, which is not included in the above table.
 
Special Mention: We classify loans as Special Mention when they are on repayment plans until they have been brought current and remain current for at least six months. We also classify loans as Special Mention when they are 60 to 89 days delinquent, or have shown other potential weaknesses.
 
Substandard: We classify loans as Substandard when they are on non-accrual status, or have other identified significant weaknesses.
 
Doubtful: We classify loans as Doubtful when payment in full is improbable.
 
On a quarterly basis all mortgage loans that are classified as Substandard or Doubtful are internally reviewed for impairment, based on updated cash flows for income producing properties, or updated independent appraisals.  The loan balance of the mortgage loans are then compared to the properties updated estimated value and any balance over 90% of the loans updated estimated value is charged-off against the allowance for loan losses. At March 31, 2010, the current loan-to-value ratio on our impaired loans was 67.8%.
 
We classify investment securities as Substandard when the investment grade rating by one or more of the rating agencies is below investment grade. We have classified a total of 20 investment securities as Substandard at March 31, 2010. Our classified investment securities at March 31, 2010 include 15 private issued CMO rated below investment grade by one or more of the rating agencies three issues of trust preferred securities, one mutual fund, and our holding of FHLMC preferred stock. The Investment Securities which are classified as Substandard at March 31, 2010 are securities that were triple A rated when we purchased them. These securities have each been subsequently downgraded by at least one rating agency to below investment grade. Through March 31, 2010, these securities, with the exception of the FHLMC stock, two of the pooled trust preferred securities and one private issued CMO, continued to pay interest and principal as scheduled. We test each of these securities quarterly, through an independent third party, for impairment.
 
 
-34-

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

As we continue to increase our loan portfolio, we continue to adhere to our conservative underwriting standards. Non-accrual loans and charge-offs from impaired loans have increased, primarily due to the current economic environment. The majority of our non-performing loans are collateralized by residential income producing properties that are occupied, thereby retaining more of their value and reducing the potential loss. We take a proactive approach to managing delinquent loans, including conducting site examinations and encouraging borrowers to meet with a Savings Bank representative. We have been developing short-term payment plans that enable certain borrowers to bring their loans current. We review our delinquencies on a loan by loan basis and continually explore ways to help borrowers meet their obligations and return them back to current status. In the past year, we have increased staffing to handle delinquent loans by hiring people experienced in loan workouts. Our non-performing assets were $98.5 million at March 31, 2010 an increase of $5.3 million from $93.3 million at December 31, 2009. Total non-performing assets as a percentage of total assets were 2.36% at March 31, 2010 compared to 2.25% at December 31, 2009. The ratio of allowance for loan losses to total non-performing loans was 25% at March 31, 2010 compared to 24% at December 31, 2009. The following table shows non-performing assets at the periods indicated:
 
   
March 31,
   
December 31,
 
(In thousands)
 
2010
   
2009
 
Loans 90 days or more past due and still accruing:
       
 
           
Commercial real estate
  $ -     $ 471  
One-to-four family - residential
    4,111       2,784  
Construction loans
    428       -  
                 
Total
    4,539       3,255  
                 
Troubled debt restructured:
               
Multi-family residential
    476       478  
Commercial real estate
    1,434       1,441  
One-to-four family - mixed-use property
    1,085       575  
                 
Total
    2,995       2,494  
                 
Non-accrual loans:
               
Multi-family residential
    29,693       27,483  
Commercial real estate
    16,382       18,153  
One-to-four family - mixed-use property
    25,209       23,422  
One-to-four family - residential
    4,882       4,959  
Co-operative apartments
    78       78  
Construction loans
    3,730       1,639  
Small business administration
    1,041       1,232  
Commercial business and other
    3,068       3,151  
Total
    84,083       80,117  
                 
Total non-performing loans
    91,617       85,866  
                 
Other non-performing assets:
               
Real estate acquired through foreclosure
    1,793       2,262  
Investment securities
    5,118       5,134  
Total
    6,911       7,396  
                 
Total non-performing assets
  $ 98,528     $ 93,262  

 
 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
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 at least annually), changes in the composition and volume of the portfolio, collection policies and experience, trends in the volume of non-accrual loans and regional 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 regional 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 their collateral and the estimated time to recover our investment in the loan, and the estimate of the recovery anticipated. For non-collateralized impaired loans, management estimates any recoveries that are anticipated for each loan. Specific reserves are allocated to impaired loans based on this review. Specific reserves allocated to impaired loans were $11.2 million and $9.6 million at March 31, 2010 and December 31, 2009, respectively. 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 property 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 balance of impaired mortgage loans is then compared to the properties updated estimated value and any balance over 90% of the loans updated estimated value is charged-off.  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 also review our loan portfolio by separate categories which have 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. General provisions are established against performing loans in our portfolio in amounts deemed prudent based on our qualitative analysis of the factors, including the historical loss experience, delinquency trends and regional economic conditions. During the three months ended March 31, 2010, we incurred total net charge-offs of $2.3 million. The national and regional economies were generally considered to be in a recession from December 2007 through the middle of 2009.  This resulted in increased unemployment and declining property values, although the property value declines in the New York metropolitan area have not been as great as many other areas of the country. While the national and regional economies have shown signs of improvement since the second half of 2009, unemployment has remained at elevated levels. The deterioration in the economy has resulted in an increase in our non-performing loans, which totaled $91.6 million at March 31, 2010 and $85.9 million at December 31, 2009. Our underwriting standards generally require a loan-to-value ratio of no more than 75% at the time the loan is originated. At March 31, 2010, the average outstanding principal balance of our impaired mortgage loans was less than 68% of the estimated current value of the supporting collateral, after considering the charge-offs that have been recorded. We have not been affected by the defaults of sub-prime mortgages as we do not originate, or hold in portfolio, sub-prime mortgages. A provision for loan losses of $5.0 million was recorded for the three months ended March 31, 2010 compared to $4.5 million recorded in the comparable prior year period.  Management has concluded, and the Board of Directors has concurred, that at March 31, 2010, the allowance was sufficient to absorb losses inherent in our loan portfolio.
 
 
-36-

 
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 our allowance for loan losses for the periods indicated:
 

   
For the three months ended March 31,
 
(Dollars in thousands)
 
2010
   
2009
 
             
Balance at beginning of period
  $ 20,324     $ 11,028  
                 
Provision for loan losses
    5,000       4,500  
                 
Loans charged-off:
               
Multi-family residential
    (1,097 )     (8 )
Commercial real estate
    (140 )     -  
One-to-four family – mixed-use property
    (360 )     -  
One-to-four family – residential
    (69 )     -  
Co-operative apartments
    -       -  
Construction
    (862 )     -  
SBA
    (334 )     (250 )
Commercial business and other loans
    (81 )     (8 )
Total loans charged-off
    (2,943 )     (266 )
                 
Recoveries:
               
Multi-family residential
    5       -  
SBA
    44       17  
Commercial business and other loans
    602       1  
Total recoveries
    651       18  
                 
Net charge-offs
    (2,292 )     (248 )
                 
Balance at end of period
  $ 23,032     $ 15,280  
                 
Ratio of net charge-offs during the period to average loans outstanding during the period
    0.29 %     0.03 %
Ratio of allowance for loan losses to gross loans at end of period
    0.71 %     0.50 %
Ratio of allowance for loan losses to non-performing assets at end of period
    23.38 %     25.40 %
Ratio of allowance for loan losses to non-performing loans at end of period
    25.14 %     25.71 %

 
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

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, 2010, 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.

PART II – OTHER INFORMATION

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, 2009.

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 quarter ended March 31, 2010.


 
Period
   
Total
Number
of Shares
Purchased
     
Average Price
Paid per Share
     
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
   
Maximum
Number of
Shares That May
Yet Be Purchased
Under the Plans
or Programs
 
January 1 to January 31, 2010
    -     $ -       -       362,050  
February 1 to February 28, 2010
    -       -       -       362,050  
March 1 to March 31, 2010
    -       -       -       362,050  
Total
    -     $ -       -          
 
Our current common stock repurchase program was approved by the Company’s Board of Directors on August 17, 2004.  This repurchase program authorized the repurchase of 1,000,000 common shares.  The repurchase program does not have an expiration date or a maximum dollar amount that may be paid to repurchase the common shares.  Stock repurchases under this program will be made from time to time, on the open market or in privately negotiated transactions, at the discretion of the management of the Company.

ITEM 4.     RESERVED.
 
 
-38-

 
PART II – OTHER INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
 
ITEM 6.     EXHIBITS.
 
Exhibit  No.
 
Description
 
         
 
3.1
 
Certificate of Incorporation of Flushing Financial Corporation (1)
 
 
3.2
 
Certificate of Amendment of Certificate of Incorporation of Flushing Financial       Corporation (3)
 
 
3.3
 
Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
 
 
3.4
 
Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
 
 
3.5
 
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 (6)
 
 
10.1
 
Flushing Financial Corporation Annual Incentive Plan for Executives and Senior Officers. (5)
 
 
31.1
 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
 
 
31.2
 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer
 
 
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
 
 
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
 
         
(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1, 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 10.1 filed with Form 8-K filed March 1, 2007.
 
(6) Incorporated by reference to Exhibit filed with Form 8-K filed September 11, 2006
 
 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
SIGNATURES


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

 
Flushing Financial Corporation,
   
   
   
   
Dated: May 7, 2010
By: /s/John R. Buran
 
John R. Buran
 
President and Chief Executive Officer
   
   
Dated: May 7, 2010
By: /s/David W. Fry
 
David W. Fry
 
Executive Vice President, Treasurer and
 
Chief Financial Officer


FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
EXHIBIT INDEX

 

Exhibit  No.
 
Description
 
         
 
3.1
 
Certificate of Incorporation of Flushing Financial Corporation (1)
 
 
3.2
 
Certificate of Amendment of Certificate of Incorporation of Flushing Financial       Corporation (3)
 
 
3.3
 
Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
 
 
3.4
 
Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
 
3.5
 
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 (6)
 
 
10.1
 
Flushing Financial Corporation Annual Incentive Plan for Executives and Senior Officers. (5)
   
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
 
   
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer
 
   
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
 
   
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
 
         
(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1, 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 10.1 filed with Form 8-K filed March 1, 2007.
(6) Incorporated by reference to Exhibit filed with Form 8-K filed September 11, 2006
 
 
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