Qualified Thrift Lender Test
Thrift institutions regulated by the OCC are required to meet a QTL test to avoid certain restrictions on their
operations. FDICIA and applicable OCC regulations require such institutions to maintain at least 65% of their portfolio
assets (total assets less intangibles, properties used to conduct the institution’s business and liquid assets not exceeding
20% of total assets) in “qualified thrift investments” on a monthly average basis in nine of every 12 months. Qualified
thrift investments constitute primarily residential mortgage loans and related investments, including certain mortgagebacked and mortgage-related securities. A savings institution that fails the QTL test must either convert to a bank charter
or, in general, it will be prohibited from: (1) making an investment or engaging in any new activity not permissible for a
national bank, (2) paying dividends not permissible under national bank regulations and (3) establishing any new branch
office in a location not permissible for a national bank in the institution’s home state. One year following the institution’s
failure to meet the QTL test, any holding company parent of the institution must register and be subject to supervision as
a bank holding company. In addition, beginning three years after the institution failed the QTL test, the institution would
be prohibited from retaining any investment or engaging in any activity not permissible for a national bank. At
December 31, 2011 the Savings Bank had maintained more than 65% of its “portfolio assets” in qualified thrift
investments in at least nine of the preceding 12 months. Accordingly, on that date, the Savings Bank had met the QTL
test.
Under the Economic Growth and Paperwork Reduction Act of 1996 (“Regulatory Paperwork Reduction Act”),
Congress modified and expanded investment authority under the QTL test. The Regulatory Paperwork Reduction Act
amendments permit federal thrifts to invest in, sell, or otherwise deal in education and credit card loans without
limitation and raised from 10% to 20% of total assets the aggregate amount of commercial, corporate, business, or
agricultural loans or investments that may be made by a thrift, subject to a requirement that amounts in excess of 10% of
total assets be used only for small business loans. In addition, the Regulatory Paperwork Reduction Act defines
“qualified thrift investment” to include, without limit, education, small business, and credit card loans; and removes the
10% limit on personal, family, or household loans for purposes of the QTL test. The legislation also provides that a
thrift meets the QTL test if it qualifies as a domestic building and loan association.
Transactions with Affiliates
Transactions between the Savings Bank and any related party or “affiliate” are governed by Sections 23A and
23B of the Federal Reserve Act. An affiliate is generally any company or entity which controls, is controlled by or is
under common control with the Savings Bank, including Flushing Financial Corporation, the Commercial Bank, the
Trusts, the Savings Bank’s subsidiaries, and any other qualifying subsidiary of the Savings Bank or Flushing Financial
Corporation that may be formed or acquired in the future. Generally, Sections 23A and 23B: (1) limit the extent to which
the Savings Bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to
10% of the Savings Bank’s capital stock and surplus, and impose an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and (2) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Savings Bank or subsidiary as those provided to a nonaffiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. Each loan or extension of credit to an affiliate by the Savings Bank must be secured
by collateral with a market value ranging from 100% to 130% (depending on the type of collateral) of the amount of
credit extended. In addition, the Savings Bank may not: (1) loan or otherwise extend credit to an affiliate, except to any
affiliate which engages only in activities which are permissible for bank holding companies under Section 4(c) of the
Bank Company Act, or (2) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any
affiliates, except subsidiaries of the Savings Bank.
In addition, the Savings Bank is subject to Regulation O promulgated under Sections 22(g) and 22(h) of the
Federal Reserve Act. Regulation O requires that loans by the Savings Bank to a director, executive officer or to a holder
of more than 10% of the Common Stock, and to certain affiliated interests of any such insider, may not, in the aggregate,
exceed the Savings Bank’s loans-to-one borrower limit. Loans to insiders and their related interests must also be made
on terms substantially the same as offered, and follow credit underwriting procedures that are not less stringent than
those applied, in comparable transactions to other persons. Prior Board approval is required for certain loans. In addition,
the aggregate amount of extensions of credit by the Savings Bank to all insiders cannot exceed the institution’s
unimpaired capital and unimpaired surplus. These laws place additional restrictions on loans to executive officers of the
Savings Bank. The Savings Bank is in compliance with these regulations.
Restrictions on Dividends and Capital Distributions
The Savings Bank is subject to regulatory limitations on capital distributions, which include cash dividends,
stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and some other
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