Edgar Filing: FLUSHING FINANCIAL CORP

form10q.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 September 30, 2010

Commission file number 001-33013

FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

11-3209278

(I.R.S. Employer Identification No.)

1979 Marcus Avenue, Suite E140, Lake Success, New York 11042

(Address of principal executive offices)

(718) 961-5400

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes 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	Accelerated filer x
Non-accelerated filer o	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 October 29, 2010 was 31,237,874

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

TABLE OF CONTENTS

	PAGE
PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements - (Unaudited)

Consolidated Statements of Financial Condition	1

Consolidated Statements of Income	2

Consolidated Statements of Cash Flows	3

Consolidated Statements of Changes in Stockholders’ Equity and Consolidated Statements of Comprehensive Income	4

Notes to Consolidated Financial Statements	6

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	49

ITEM 4. Controls and Procedures	49

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings	49

ITEM 1A. Risk Factors	49

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	51

ITEM 4. Reserved	51

ITEM 6. Exhibits	52

SIGNATURES	53

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

ITEM 1.

	September 30, 2010			December 31, 2009
ASSETS
Cash and due from banks	$	26,567		$	28,426
Securities available for sale:
Mortgage-backed securities ($61,576 and $80,299 at fair value pursuant to the fair value option at September 30, 2010 and December 31, 2009, respectively)		703,903			648,443
Other securities ($16,337 and $17,229 at fair value pursuant to the fair value option at September 30, 2010 and December 31, 2009, respectively)		34,976			35,361
Loans:
Multi-family residential		1,230,692			1,158,700
Commercial real estate		677,315			686,210
One-to-four family ― mixed-use property		731,053			744,560
One-to-four family ― residential		249,042			249,920
Co-operative apartments		6,427			6,553
Construction		80,364			97,270
Small business administration		18,746			17,496
Taxi medallion		89,605			61,424
Commercial business and other		184,667			181,240
Net unamortized premiums and unearned loan fees		16,799			17,110
Allowance for loan losses		(27,402	)		(20,324	)
Net loans		3,257,308			3,200,159
Interest and dividends receivable		19,529			19,116
Bank premises and equipment, net		22,118			22,830
Federal Home Loan Bank of New York stock		39,616			45,968
Bank owned life insurance		71,271			69,231
Goodwill		16,127			16,127
Core deposit intangible		1,522			1,874
Other assets		53,792			55,711
Total assets	$	4,246,729		$	4,143,246

LIABILITIES
Due to depositors:
Non-interest bearing	$	89,564		$	91,376
Interest-bearing:
Certificate of deposit accounts		1,261,182			1,230,511
Savings accounts		425,698			426,821
Money market accounts		382,062			414,457
NOW accounts		744,530			503,159
Total interest-bearing deposits		2,813,472			2,574,948
Mortgagors' escrow deposits		33,129			26,791
Borrowed funds ($31,622 and $106,167 at fair value pursuant to the fair value option at September 30, 2010 and December 31, 2009, respectively)		720,076			873,345
Securities sold under agreements to repurchase		166,000			186,900
Other liabilities		30,995			29,742
Total liabilities		3,853,236			3,783,102

STOCKHOLDERS' EQUITY
Preferred stock ($0.01 par value; 5,000,000 shares authorized; None issued)		-			-
Common stock ($0.01 par value; 100,000,000 shares authorized; 31,237,874shares and 31,131,059 shares issued at September 30, 2010 and December 31,2009, respectively; 31,237,874 shares and 31,127,664 shares outstanding atSeptember 30, 2010 and December 31, 2009, respectively)		312			311
Additional paid-in capital		188,673			185,842
Treasury stock (None and 3,395 shares at September 30, 2010 and December 31, 2009, respectively)		-			(36	)
Unearned compensation		(84	)		(575	)
Retained earnings		199,527			181,181
Accumulated other comprehensive income (loss), net of taxes		5,065			(6,579	)
Total stockholders' equity		393,493			360,144
Total liabilities and stockholders' equity	$	4,246,729		$	4,143,246

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

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

	For the three months ended September 30,					For the nine months ended September 30,
(Dollars in thousands, except per share data)	2010			2009		2010			2009

Interest and dividend income
Interest and fees on loans	$	50,098		$	48,518	$	148,775		$	144,745
Interest and dividends on securities:
Interest		7,955			8,365		23,600			26,674
Dividends		207			326		610			1,104
Other interest income		11			14		33			71
Total interest and dividend income		58,271			57,223		173,018			172,594

Interest expense
Deposits		13,315			16,024		40,641			51,780
Other interest expense		9,095			12,127		29,571			36,765
Total interest expense		22,410			28,151		70,212			88,545

Net interest income		35,861			29,072		102,806			84,049
Provision for loan losses		5,000			5,000		15,000			14,500
Net interest income after provision for loan losses		30,861			24,072		87,806			69,549

Non-interest income
Other-than-temporary impairment ("OTTI") charge		(3,319	)		-		(6,136	)		(9,637	)
Less: Non-credit portion of OTTI charge recorded in Other Comprehensive Income, before taxes		2,769			-		4,598			8,497
Net OTTI charge recognized in earnings		(550	)		-		(1,538	)		(1,140	)
Loan fee income		433			403		1,283			1,333
Banking services fee income		437			459		1,350			1,326
Net (loss) gain on sale of loans		(6	)		-		17			-
Net gain on sale of securities		39			1,051		62			1,074
Net gain (loss) from fair value adjustments		(20	)		950		(154	)		4,002
Federal Home Loan Bank of New York stock dividends		444			644		1,508			1,600
Bank owned life insurance		702			659		2,040			1,862
Other income		470			391		1,676			1,541
Total non-interest income		1,949			4,557		6,244			11,598

Non-interest expense
Salaries and employee benefits		8,754			7,159		26,126			22,026
Occupancy and equipment		1,850			1,669		5,315			5,067
Professional services		1,535			1,283		5,059			4,485
FDIC deposit insurance		1,200			1,186		3,723			5,383
Data processing		1,106			1,086		3,274			3,258
Depreciation and amortization of premises and equipment		692			675		2,094			1,979
Other operating expenses		2,519			2,275		7,611			6,849
Total non-interest expense		17,656			15,333		53,202			49,047

Income before income taxes		15,154			13,296		40,848			32,100

Provision for income taxes
Federal		7,489			4,400		15,189			8,698
State and local		(6,963	)		786		(4,627	)		3,821
Total taxes		526			5,186		10,562			12,519

Net income	$	14,628		$	8,110	$	30,286		$	19,581

Preferred dividends and amortization of issuance costs	$	-		$	951	$	-		$	2,854
Net income available to common shareholders	$	14,628		$	7,159	$	30,286		$	16,727

Basic earnings per common share	$	0.48		$	0.33	$	1.00		$	0.80
Diluted earnings per common share	$	0.48		$	0.33	$	1.00		$	0.80
Dividends per common share	$	0.13		$	0.13	$	0.39		$	0.39

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

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	For the nine months ended September 30,
(Dollars in thousands)	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	30,286		$	19,581
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		15,000			14,500
Depreciation and amortization of bank premises and equipment		2,094			1,979
Net gain on sales of loans (including delinquent loans)		(17	)		-
Net gain on sale of securities		(62	)		(1,074	)
Amortization of premium, net of accretion of discount		3,691			3,125
Net loss (gain) from fair value adjustments		154			(4,002	)
OTTI charge recognized in earnings		1,538			1,140
Income from bank owned life insurance		(2,040	)		(1,862	)
Stock-based compensation expense		1,780			1,747
Deferred compensation		153			(7	)
Amortization of core deposit intangibles		352			351
Excess tax expense from stock-based payment arrangements		14			188
Deferred income tax (benefit) provision		(8,760	)		10,257
Increase in other liabilities		1,895			22
Increase in other assets		(5,511	)		(16,219	)
Net cash provided by operating activities		40,567			29,726

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(1,382	)		(2,151	)
Net redemptions of Federal Home Loan Bank of New York shares		6,352			3,204
Purchases of securities available for sale		(217,591	)		(130,695	)
Proceeds from sales and calls of securities available for sale		42,311			53,968
Proceeds from maturities and prepayments of securities available for sale		139,312			157,608
Net originations and repayment of loans		(73,066	)		(186,550	)
Purchases of loans		(7,698	)		(32,572	)
Proceeds from sale of real estate owned		2,090			114
Proceeds from sale of delinquent loans		6,605			3,046
Net cash used in investing activities		(103,067	)		(134,028	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		(1,812	)		14,310
Net increase in interest-bearing deposits		237,704			214,222
Net increase (decrease) in mortgagors' escrow deposits		6,338			(413	)
Net repayments of short-term borrowed funds		(18,200	)		(4,800	)
Proceeds from long-term borrowings		42,505			79,911
Repayment of long-term borrowings		(193,928	)		(185,026	)
Purchases of treasury stock		(347	)		(231	)
Excess tax benefits from stock-based payment arrangements		(14	)		(188	)
Proceeds from issuance of common stock upon exercise of stock options		235			617
Proceeds from issuance of common stock		-			90,505
Cash dividends paid		(11,840	)		(10,374	)
Net cash provided by financing activities		60,641			198,533

Net (decrease) increase in cash and cash equivalents		(1,859	)		94,231
Cash and cash equivalents, beginning of period		28,426			30,404
Cash and cash equivalents, end of period	$	26,567		$	124,635

SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	70,306		$	89,040
Income taxes paid		21,107			9,630
Taxes paid if excess tax benefits were not tax deductible		21,093			9,442
Non-cash activities:
Securities purchased, not yet settled		-			5,804
Loans transferred to real estate owned		3,850			1,681
Loans provided for the sale of real estate owned		2,862			-

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

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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 nine months ended September 30,
(Dollars in thousands)	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 (18,994 and 96,742 common shares for the nine months ended September 30, 2010 and 2009, respectively)		-			1
Shares issued upon vesting of restricted stock unit awards (87,821 and 78,598 common shares for the nine months ended September 30, 2010 and 2009, respectively)		1			1
Issuance of common shares (8,317,400 common shares for the nine months ended September 30, 2009)		-			83
Balance, end of period	$	312		$	301
Additional Paid-In Capital
Balance, beginning of period	$	185,842		$	150,662
Additional preferred stock issuance costs		-			(144	)
Amortization of preferred stock issuance costs		-			228
Award of common shares released from Employee Benefit Trust (130,499 and 165,376common shares for the nine months ended September 30, 2010 and 2009, respectively)		1,131			854
Shares issued upon vesting of restricted stock unit awards (103,109 and 95,779 common shares for the nine months ended September 30, 2010 and 2009, respectively)		1,394			1,513
Issuance upon exercise of stock options (18,994 and 96,742 common shares for the nine months ended September 30, 2010 and 2009, respectively)		208			669
Stock-based compensation activity, net		112			20
Stock-based income tax benefit (expense)		(14	)		(188	)
Issuance of common shares (8,317,400 common shares for the nine months ended September 30, 2009)		-			90,422
Balance, end of period	$	188,673		$	244,036
Treasury Stock
Balance, beginning of period	$	(36	)	$	-
Shares issued upon vesting of restricted stock unit awards (18,583 and 17,181 common shares for the nine months ended September 30, 2010 and 2009, respectively)		238			179
Issuance upon exercise of stock options (37,266 and 25,558 common shares for the nine months ended September 30, 2010 and 2009, respectively)		515			258
Repurchase of shares to satisfy tax obligations (26,443 and 22,186common shares for the nine months ended September 30, 2010 and 2009, respectively)		(347	)		(231	)
Purchase of shares to pay for option exercise (26,011 and 24,848 common shares for the nine months ended September 30, 2010 and 2009, respectively)		(370	)		(252	)
Balance, end of period	$	-		$	(46	)
Unearned Compensation
Balance, beginning of period	$	(575	)	$	(1,300	)
Release of shares from the Employee Benefit Trust (143,995 and 159,470 common shares for the nine months ended September 30, 2010 and 2009, respectively)		491			545
Balance, end of period	$	(84	)	$	(755	)

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

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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 nine months ended September 30,
(Dollars in thousands)	2010			2009

Retained Earnings
Balance, beginning of period	$	181,181		$	172,216
Net income		30,286			19,581
Cash dividends declared and paid on common shares ($0.39 per common share for the nine months ended September 30, 2010 and 2009, respectively)		(11,840	)		(8,079	)
Cash dividends declared and paid on preferred shares (5.00% cumulative preferred dividends for the nine months ended September 30, 2009)		-			(2,295	)
Issuance upon exercise of stock options (37,266 and 25,558 common shares for the nine months ended September 30, 2010 and 2009, respectively)		(92	)		(52	)
Shares issued upon vesting of restricted stock unit awards (3,295 common shares for the nine months ended September 30, 2010)		(8	)		-
Amortization of preferred stock issuance costs		-			(228	)
Balance, end of period	$	199,527		$	181,143
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period	$	(6,579	)	$	(20,303	)
Change in net unrealized gains on securities available for sale, net of taxes of approximately ($8,548) and ($9,785) for the nine months ended September 30, 2010and 2009, respectively		10,710			12,148
Amortization of actuarial losses, net of taxes of approximately ($103) and ($101)for the nine months ended September 30, 2010 and 2009, respectively		129			126
Amortization of prior service (credits) costs, net of taxes of approximately $13 and ($16) for the nine months ended September 30, 2010 and 2009, respectively		(16	)		20
OTTI charges included in income, net of taxes of approximately ($683) and ($507) for the nine months ended September 30, 2010 and 2009, respectively		855			633
Reclassification adjustment for gains included in net income, net of taxes of approximately $28 and $478 for the nine months ended September 30, 2010 and 2009, respectively		(34	)		(596	)
Balance, end of period	$	5,065		$	(7,972	)
Total Stockholders' Equity	$	393,493		$	416,708

	For the three months ended September 30,						For the nine months ended September 30,
	2010			2009			2010			2009
Comprehensive Income
Net income	$	14,628		$	8,110		$	30,286		$	19,581
Reclassification adjustment for gains included in income		(21	)		(583	)		(34	)		(596	)
Amortization of actuarial losses		44			41			129			126
Amortization of prior service (credits) costs		(6	)		7			(16	)		20
OTTI charges included in income		306			-			855			633
Unrealized gains on securities, net		2,260			9,433			10,710			12,148
Comprehensive income	$	17,211		$	17,008		$	41,930		$	31,912

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

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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 the fair presentation of the financial statements of Flushing Financial Corporation and its consolidated subsidiaries (the “Company”), for the periods presented. 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, the Company elected to reclassify owner-occupied commercial loans that were originated by the Business Banking Department prior to January 1, 2010, from commercial real estate loans to commercial business loans. All loan originations of this type from January 1, 2010 forward have been and will be reported as commercial business loans. These loans are 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 report the loans as commercial business loans. Prior period amounts have been adjusted to reflect this change.

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.

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 expense during the reporting periods. 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.

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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 September 30,						For the nine months ended September 30,
	2010			2009			2010			2009
	(Dollars in thousands, except per share data)
Net income, as reported	$	14,628		$	8,110		$	30,286		$	19,581
Preferred dividends and amortization of issuance costs		-			(951	)		-			(2,854	)
Net income available to common shareholders	$	14,628		$	7,159		$	30,286		$	16,727
Divided by:
Weighted average common shares outstanding		30,359			21,519			30,323			20,946
Weighted average common stock equivalents		19			15			29			8
Total weighted average common shares outstanding and common stock equivalents		30,378			21,534			30,352			20,954

Basic earnings per common share	$	0.48		$	0.33		$	1.00		$	0.80
Diluted earnings per common share (1) (2)	$	0.48		$	0.33		$	1.00		$	0.80
Dividend payout ratio		27.1	%		39.4	%		39.0	%		48.8	%

(1)

For the three months ended September 30, 2010, options to purchase 1,064,983 shares at an average exercise price of $15.42 were not included in the computation of diluted earnings per common share since they were anti-dilutive. For the three months ended September 30, 2009, a warrant to purchase 751,611 shares at an exercise price of $13.97 and options to purchase 1,160,323 shares at an average exercise price of $15.35 were not included in the computation of diluted earnings per common share since they were anti-dilutive.

(2)

For the nine months ended September 30, 2010, options to purchase 955,723 shares at an average exercise price of $15.77 were not included in the computation of diluted earnings per common share since they were anti-dilutive. For the nine months ended September 30, 2009, a warrant to purchase 751,611 shares at an exercise price of $13.97 and options to purchase 1,418,073 shares at an average exercise price of $14.33 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- and nine-month periods ended September 30, 2010 and 2009. Securities available for sale are recorded at fair value.

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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 September 30, 2010 are as follows:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
U.S. government agencies	$	2,747	$	2,876	$	129	$	-
Other		29,594		26,418		3		3,179
Mutual funds		5,682		5,682		-		-
Total other securities		38,023		34,976		132		3,179
REMIC and CMO		462,767		472,462		18,293		8,598
GNMA		88,413		93,130		4,717		-
FNMA		111,322		115,629		4,328		21
FHLMC		22,109		22,682		573		-
Total mortgage-backed securities		684,611		703,903		27,911		8,619
Total securities available for sale	$	722,634	$	738,879	$	28,043	$	11,798

Mortgage-backed securities shown in the table above include one private issue collateralized mortgage obligation (“CMO”) that is collateralized by commercial real estate mortgages with an amortized cost and market value of $14.4 million, at September 30, 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 September 30, 2010:

	Total				Less than 12 months				12 months or more
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Other	$	6,899	$	3,179	$	4	$	11	$	6,895	$	3,168
Total other securities		6,899		3,179		4		11		6,895		3,168
REMIC and CMO		92,053		8,598		46,049		569		46,004		8,029
FNMA		1,935		21		1,935		21		-		-
Total mortgage-backed securities		93,988		8,619		47,984		590		46,004		8,029
Total securities available for sale	$	100,887	$	11,798	$	47,988	$	601	$	52,899	$	11,197

The Company reviewed each investment that had an unrealized loss at September 30, 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 income (“AOCI”) 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 AOCI, net of tax.

The Company evaluates its pooled trust preferred securities using an impairment model through an independent third party, which includes evaluating the financial condition of each counterparty. For single issuer trust preferred securities, the Company evaluates each issuer’s financial condition. The Company evaluates its mortgage-backed securities by reviewing the characteristics of the securities, including delinquency and foreclosure levels, projected losses at various loss severity levels and credit enhancement and coverage. In addition, private issue CMOs are evaluated using an impairment model through an independent third party. When an other-than-temporary impairment (“OTTI”) is identified, the portion of the impairment that is credit related is determined by management by using the following methods: (1) for trust preferred securities, the credit related impairment is determined by

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Notes to Consolidated Financial Statements

(Unaudited)

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 for each security by estimating losses based on a set of assumptions, which includes delinquency and foreclosure levels, projected losses at various loss severity levels, credit enhancement and coverage, and in the case of private issue CMOs through an impairment model from an independent third party, and then recording those estimated losses as a credit related loss against earnings.

Other Securities:

The unrealized losses in Other securities at September 30, 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 securities. These securities are currently rated below investment grade. The pooled trust preferred securities do not have collateral that is subordinate to the classes we own, and therefore there are no subordinate classes to absorb any losses. As noted above, the Company evaluates these securities using an impairment model, through an independent third party, that is applied to debt securities. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the current interest rate environment, (3) the financial condition and near-term prospects of the issuer, if applicable, and (4) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. 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 securities as well as the two single issuer trust preferred securities are performing according to their terms. Based on these reviews, an OTTI charge was recorded during the nine months ended September 30, 2010, on one of the pooled trust preferred securities of $2.7 million before tax, of which $1.0 million was charged against earnings in the Consolidated Statements of Income and $1.7 million before tax ($1.0 million after-tax) was recorded in AOCI. The Company recorded credit related OTTI charges totaling $2.8 million on the two pooled trust preferred securities during the year ended December 31, 2009.

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 portion of the above mentioned OTTI that was related to credit losses was calculated using a discounted cash flow model. Significant assumptions used to calculate the credit related impairment were (1) all amounts currently deferring interest, except for one underlying counterparty for which it was assumed there will be a 60% recovery, will default with no recovery, (2) additional defaults of 1.2% will occur every three years with no recoveries (which results in additional defaults totaling 8.8% of the current outstanding paying collateral), (3) no issues will prepay, (4) senior classes will not call the debt on their portions, (5) use of the forward LIBOR curve, and (6) the discounting of future cash flows at 2.15%, the current coupon rate of the security.

It is not anticipated at this time that the two single issuer trust preferred securities and the one pooled trust preferred security for which an OTTI charge was not recorded during the nine months ended September 30, 2010, would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms; except for the pooled trust preferred securities for which the Company has stopped accruing interest as discussed above, and, in the opinion of management based on the review performed at September 30, 2010, will continue to perform according to its 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 September 30, 2010. Therefore, the Company did not consider the two single issuer trust preferred securities and the one pooled trust preferred security to be other-than-temporarily impaired at September 30, 2010.

REMIC and CMO:

The unrealized losses in Real Estate Mortgage Investment Conduit (“REMIC”) and CMO securities at September 30, 2010 consist of two issues from the Federal Home Loan Mortgage Corporation (“FHLMC”), six issues from the Federal National Mortgage Association (“FNMA”), two issues from the Government National Mortgage Association (“GNMA”) and nine private issues.

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Notes to Consolidated Financial Statements

(Unaudited)

The unrealized losses on the REMIC and CMO securities issued by FHLMC, FNMA and GNMA were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms, and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and 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 September 30, 2010.

The unrealized losses at September 30, 2010 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, seven of these securities are performing according to their terms, with two securities remitting less than the full principal amount due. The principal loss for these two securities totaled $792,000 for the nine months ended September 30, 2010. These losses were anticipated in the cumulative OTTI charges recorded for these two securities.

Credit related impairment for mortgage-backed securities are determined for each security by estimating losses based on the following set of assumptions, (1) delinquency and foreclosure levels, (2) projected losses at various loss severity levels and, (3) credit enhancement and coverage. Based on these reviews, an OTTI charge was recorded during the nine months ended September 30, 2010, on three private issue CMOs of $3.3 million before tax, of which $0.6 million was charged against earnings in the Consolidated Statements of Income and $2.7 million before tax ($1.5 million after-tax) was recorded in AOCI. The Company recorded credit related OTTI charges totaling $3.1 million on four private issue CMOs during the year ended December 31, 2009.

The portion of the above mentioned OTTI that was related to credit losses was calculated using the following significant assumptions: (1) delinquency and foreclosure levels of 10%-20%, (2) projected loss severity of 40%, (3) assumed default rates of 5%-12% for the first 12 months, 2%-10% for the next 12 months, 2%-8% for the next six months, 2%-4%for the next six months and 2% thereafter and prepayment speeds of 10%-20%.

It is not anticipated at this time that the six private issue securities for which an OTTI charge in the current period was not recorded would be settled at a price that is less than the current amortized cost of the Company’s investment at September 30, 2010. Each of these securities is performing according to its terms, except for one of these securities which is remitting less than the full scheduled principal payment each month and for which an OTTI charge was previously recorded. In the opinion of management, the remaining five securities will continue to perform according to their terms, and the losses incurred on the one security discussed in the preceding sentence will not be in excess of the OTTI charges previously recorded. 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 September 30, 2010, which may be at maturity. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2010.

FNMA

The unrealized losses on the securities issued by FNMA were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms, and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and 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 September 30, 2010.

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Notes to Consolidated Financial Statements

(Unaudited)

The following table details the total impairment on debt securities, as of September 30, 2010, for which the Company has previously recorded a credit related OTTI charge in the Consolidated Statements of Income:

(in thousands)	Amortized Cost		Fair Value		Gross Unrealized Losses Recorded In AOCI		Cumulative Credit OTTI Losses

Private issued CMO's (1)	$	38,912	$	32,268	$	6,644	$	2,902
Trust preferred securities (1)		9,262		6,157		3,105		3,738
Total	$	48,174	$	38,425	$	9,749	$	6,640

(1)

The Company has recorded OTTI charges in the Consolidated Statements of Income on five private issue CMOs and two pooled trust preferred securities for which a portion of the OTTI is currently recorded in AOCI.

The following table represents 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 AOCI for the period indicated:

(in thousands)	For the nine months ended September 30, 2010
Beginning balance	$	5,894

Pass through of actual losses		(792	)
OTTI charges due to credit loss recorded in earnings		1,538
Securities sold during the period		-
Securities where there is an intent to sell or requirement to sell		-
Ending balance	$	6,640

The amortized cost and estimated fair value of the Company’s securities classified as available for sale at September 30, 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	$	9,544	$	9,547
Due after one year through five years		10,409		10,539
Due after five years through ten years		-		-
Due after ten years		18,070		14,890

Total other securities		38,023		34,976
Mortgage-backed securities		684,611		703,903
Total securities available for sale	$	722,634	$	738,879

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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 December 31, 2009 were as follows:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized 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

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 had been in a continuous unrealized loss position, at December 31, 2009:

	Total				Less than 12 months				12 months or more
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized 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		78,712		16,232		4,529		2,386		74,183		13,846
FNMA		9,761		396		9,761		396		-		-
Total mortgage-backed securities		88,473		16,628		14,290		2,782		74,183		13,846
Total securities available for sale	$	95,827	$	20,324	$	14,290	$	2,782	$	81,537	$	17,542

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 income on loans is recognized on the accrual basis. The accrual of income on loans is discontinued when certain factors, such as contractual delinquency of 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 Savings Bank 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 using multiple valuation approaches in evaluating the underlying collateral. These include obtaining a third party appraisal, an income approach or a sales approach. When obtained, third party appraisals are given the most weight. The income approach is used for income producing properties, and

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Notes to Consolidated Financial Statements

(Unaudited)

uses current revenues less operating expenses to determine the net cash flow of the property. Once the net cash flow is determined, the value of the property is calculated using an appropriate capitalization rate for the property. The sales approach uses comparable sales prices in the market. In the absence of a third party appraisal, greater reliance is placed on the income approach to value the collateral. The loan balance of impaired mortgage loans is then compared to the property’s 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 Savings 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 Savings Bank would not make in the normal course of business, such as reducing the interest rate until the next reset date, extending the amortization period thereby lowering the monthly payments, or changing the loan to interest only payments for a limited time period. At times, certain problem loans have been restructured by combining more than one of these options. The Savings Bank believes that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. The Savings Bank classifies these loans as “troubled debt restructured,” and also classifies these loans as non-performing loans. The Savings Bank had $13.9 million and $2.5 million in loans classified as troubled debt restructured at September 30, 2010 and December 31, 2009, respectively.

The total amount of non-performing loans increased $33.5 million during the nine months ended September 30, 2010 to $119.4 million from $85.9 million at December 31, 2009. The total amount of loans on non-accrual status increased $22.4 million during the nine months ended September 30, 2010 to $102.5 million from $80.1 million at December 31, 2009. The total amount of loans classified as impaired increased $84.3 million during the nine months ended September 30, 2010 to $170.0 million from $85.7 million at December 31, 2009. The portion of the allowance for loan losses allocated to impaired loans was $13.1 million, or 47.9%, at September 30, 2010 and $9.6 million, or 47.2%, at December 31, 2009.

Each impaired loan is reviewed to determine if a specific valuation allowance is to be allocated to the loan. A specific valuation allowance is not provided to loans for which it is concluded the current value of the underlying collateral will allow for recovery of the loan balance either through the sale of the loan or by foreclosure and sale of the property. At September 30, 2010, there were $69.8 million of impaired loans for which the allocated portion of the allowance was $13.1 million, and $100.2 million of impaired loans for which no portion of the allowance was allocated. At December 31, 2009, there were $60.5 million of impaired loans for which the allocated portion of the allowance was $9.6 million, and $25.4 million of impaired loans for which no portion of the allowance was allocated.

The interest foregone on non-accrual loans and loans classified as Troubled Debt Restructured totaled $1.9 million and $1.3 million for the three months ended September 30, 2010 and 2009, respectively. The interest foregone on non-accrual loans and loans classified as Troubled Debt Restructured totaled $5.5 million and $3.6 million for the nine months ended September 30, 2010 and 2009, respectively.

The Company recorded a provision for loan losses of $15.0 million during the nine months ended September 30, 2010, which was a $0.5 million increase from the $14.5 million provision recorded during the nine months ended September 30, 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 September 30, 2010 and 2009, the Savings Bank recorded net loan charge-offs of $3.5 million and $0.8 million, respectively. During the nine months ended September 30, 2010 and 2009, the Savings Bank recorded net loan charge-offs of $7.9 million and $7.0 million, respectively.

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Notes to Consolidated Financial Statements

(Unaudited)

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

	For the nine months ended September 30
(In thousands)	2010			2009

Balance, beginning of period	$	20,324		$	11,028
Provision for loan losses		15,000			14,500
Charge-off's		(8,851	)		(7,006	)
Recoveries		929			56
Balance, end of period	$	27,402		$	18,578

The following table shows net loan charge-offs (recoveries) for the periods indicated by type of loan:

	For the three months ended September 30,				For the nine months ended September 30,
(In thousands)	2010		2009		2010			2009
Multi-family residential	$	1,808	$	212	$	4,042		$	1,744
Commercial real estate		806		100		1,138			116
One-to-four family – mixed-use property		758		158		1,583			864
One-to-four family – residential		21		1		115			56
Construction		-		-		862			407
Small Business Administration		93		318		345			815
Commercial business and other loans		22		60		(163	)		2,948
Total net loan charge-offs (recoveries)	$	3,508	$	849	$	7,922		$	6,950

6.	Real Estate Owned

The following are changes in Real Estate Owned (“REO”) during the period indicated:

	For the nine months ended September 30, 2010
	(In thousands)

Balance at beginning of period	$	2,262
Acquisitions		3,811
Sales		(4,983	)
Balance at end of period	$	1,090

During the three months ended September 30, 2010 and 2009, the Company recorded net gains and (losses) from the sale of REO properties in the amount of $2,000 and ($7,000), respectively. During the nine months ended September 30, 2010 and 2009, the Company recorded net losses from the sale of REO properties in the amount of $31,000 and $7,000, respectively.

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Notes to Consolidated Financial Statements

(Unaudited)

7.	Stock-Based Compensation

For the three months ended September 30, 2010 and 2009, the Company’s net income, as reported, includes $0.4 million and $0.5 million, respectively, of stock-based compensation costs, and $0.2 million and $0.2 million, respectively, of income tax benefits related to the stock-based compensation plans. For the nine months ended September 30, 2010 and 2009, the Company’s net income, as reported, includes $1.8 million and $1.7 million, respectively, of stock-based compensation costs, and $0.7 million and $0.7 million, respectively, of income tax benefits related to the stock-based compensation plans.

The Company estimates the fair value of stock options using the Black-Scholes valuation model 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. There were no stock options or restricted stock units granted during the three months ended September 30, 2010 and 2009. During the nine months ended September 30, 2010 and 2009, the Company granted 169,820 and 124,350 restricted stock units, respectively. There were no stock options granted during the nine months ended September 30, 2010. During the nine months ended September 30, 2009, the Company granted 118,100 stock options.

The following are the significant weighted assumptions relating to the valuation of the Company’s stock options granted for the nine months ended September 30, 2009:

	For the nine months ended September 30, 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 September 30, 2010, there were 175,009 shares available for full value awards and 300,793 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 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.

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Notes to Consolidated Financial Statements

(Unaudited)

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 nine months ended September 30, 2010:

Full Value Awards	Shares			Weighted-Average Grant-Date Fair Value

Non-vested at December 31, 2009		232,398		$	14.08
Granted		169,820			12.34
Vested		(109,744	)		14.25
Forfeited		(3,580	)		11.75
Non-vested at September 30, 2010		288,894		$	13.02
Vested but unissued at September 30, 2010		86,375		$	12.47

As of September 30, 2010, there was $3.0 million of total unrecognized compensation cost related to non-vested full value awards granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of 2.9 years. The total fair value of awards vested for the three months ended September 30, 2010 and 2009 were $14,000 and $9,000. The total fair value of awards vested for the nine months ended September 30, 2010 and 2009 were $1.4 million and $0.9 million, respectively. The vested but unissued full value awards consist of awards made to employees and directors who are eligible for retirement. According to the terms of the Omnibus Plan, these employees and directors have no risk of forfeiture. These shares will be issued at the original contractual vesting dates.

Non-Full Value Awards: The second pool is available for non-full value awards, such as stock options. The pool will be increased from time to time by the number of shares that are returned to or retained by the Company as a result of the cancellation, expiration, forfeiture or other termination of a non-full value award (under the Omnibus Plan or the 1996 Stock Option Incentive Plan). The second pool will not be replenished by shares withheld or surrendered in payment of the exercise price or taxes, retained by the Company as a result of the delivery to the award holder of fewer shares than the number underlying the award, or the settlement of the award in cash.

The following table summarizes certain information regarding the non-full value awards, all of which have been granted as stock options, at or for the nine months ended September 30, 2010:

Non-Full Value Awards	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value ($000)

Outstanding at December 31, 2009		1,414,008		$	14.33
Granted		-			-
Exercised		(56,260	)		10.74
Forfeited		(90,960	)		14.50
Outstanding at September 30, 2010		1,266,788		$	14.48	4.5 years	$	420
Exercisable shares at September 30, 2010		1,067,703		$	14.66	4.0 years	$	137
Vested but unexercisable shares at September 30, 2010		6,975		$	15.25	7.1 years	$	5

* 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.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

As of September 30, 2010, there was $0.5 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 2.1 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.

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 and nine months ended September 30, 2010 and 2009 are provided in the following table:

	For the three months ended September 30,				For the nine months ended September 30,
(In thousands except grant date fair value)	2010		2009		2010		2009
Proceeds from stock options exercised	$	1	$	-	$	235	$	617
Fair value of shares received upon exercise of stock options		-		-		370		251
Tax benefit (expense) related to stock options exercised		-		-		15		39
Intrinsic value of stock options exercised		-		-		156		177
Grant date fair value at weighted average		n/a		n/a		n/a		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 nine months ended September 30, 2010:

Phantom Stock Plan	Shares			Fair Value

Outstanding at December 31, 2009		25,021		$	11.26
Granted		6,126			12.04
Forfeited		(21	)		12.66
Distributions		(366	)		12.31
Outstanding at September 30, 2010		30,760		$	11.56
Vested at September 30, 2010		29,849		$	11.56

The Company recorded stock-based compensation (benefit) expense for the Phantom Stock Plan of $(16,000) and $54,000 for the three months ended September 30, 2010 and 2009, respectively. The total fair value of the distributions from the Phantom Stock Plan was $1,000 for each of the three month periods ended September 30, 2010 and 2009.

The Company recorded stock-based compensation expense for the Phantom Stock Plan of $17,000 and $27,000 for the nine months ended September 30, 2010 and 2009, respectively. The total fair value of the distributions from the Phantom Stock Plan during the nine months ended September 30, 2010 and 2009 were $5,000 and $4,000, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

8.	Pension and Other Postretirement Benefit Plans

The following table sets forth information regarding the components of net expense for the pension and other postretirement benefit plans.

	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2010			2009			2010			2009

Employee Pension Plan:
Interest cost		239			228			717			684
Amortization of unrecognized loss		91			80			273			240
Expected return on plan assets		(312	)		(321	)		(936	)		(963	)
Net employee pension expense (benefit)	$	18		$	(13	)	$	54		$	(39	)

Outside Director Pension Plan:
Service cost	$	16		$	20		$	48		$	60
Interest cost		33			34			99			102
Amortization of unrecognized gain		(14	)		(4	)		(42	)		(12	)
Amortization of past service liability		10			10			30			30
Net outside director pension expense	$	45		$	60		$	135		$	180

Other Postretirement Benefit Plans:
Service cost	$	68		$	55		$	204		$	165
Interest cost		52			57			156			171
Amortization of unrecognized loss		2			-			6			-
Amortization of past service liability		(21	)		2			(63	)		6
Net other postretirement expense	$	101		$	114		$	303		$	342

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 September 30, 2010, the Company has contributed $66,000 to the Outside Director Pension Plan and $28,000 to the Other Postretirement Benefit Plans. The Company has not made any contribution to the Employee Pension Plan during the nine months ended September 30, 2010. As of September 30, 2010, the Company has revised its expected contributions for the Outside Director Pension Plan and the Other Postretirement Benefit Plans to approximately $0.1 million and $50,000, respectively, for the year ending December 31, 2010.

9.	Fair Value of Financial Instruments

The Company carries certain financial assets and financial liabilities at fair value in accordance with ASC Topic 825, “Financial Instruments” (“ASC Topic 825”), and values those financial assets and financial liabilities in accordance with ASC Topic 820, “Fair Value Measurements and Disclosures” (ASC Topic 820”). ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC Topic 825 permits entities to choose to measure many financial instruments and certain other items at fair value. At September 30, 2010, the Company carried financial assets and financial liabilities under the fair value option with fair values of $77.9 million and $31.6 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 and nine months ended September 30, 2010 and 2009, the Company did not elect to carry any additional financial assets or financial liabilities under the fair value option.

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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 at		Fair Value Measurements at		Changes in Fair Values For Items Measured at Fair Value Pursuant to Election of the Fair Value Option
	September 30,		December 31,		Three Months Ended					Nine Months Ended
(Dollars in thousands)	2010		2009		September 30, 2010			September 30, 2009		September 30, 2010		September 30, 2009

Mortgage-backed securities	$	61,576	$	80,299	$	(86	)	$	1,385	$	1,099	$	3,877
Other securities		16,337		17,229		359			501		483		394
Borrowed funds		31,622		106,167		1,225			1,139		4,154		1,321
Securities sold under agreements to repurchase		-		-		-			-		-		485
Net gain from fair value adjustments (1) (2)					$	1,498		$	3,025	$	5,736	$	6,077

(1)

The net gain from fair value adjustments presented in the above table does not include losses of $1.5 million and $2.1 million from the change in the fair value of interest rate caps recorded during the three months ended September 30, 2010 and 2009, respectively.

(2)

The net gain from fair value adjustments presented in the above table does not include losses of $5.9 million and $2.1 million from the change in the fair value of interest rate caps recorded during the nine months ended September 30, 2010 and 2009, respectively.

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 $61.9 million and $131.9 million at September 30, 2010 and December 31, 2009, respectively. During the nine months ended September 30, 2010, borrowings with combined contractual principal amount of $70.0 million were repaid at their contractual maturity dates. The fair value of borrowed funds includes accrued interest payable of $0.4 million and $0.8 million at September 30, 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).

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

A description of the methods and significant assumptions utilized in estimating the fair value of the Company’s assets and liabilities that are carried at fair value on a recurring basis are as follows:

Level 1 – where quoted market prices are available in an active market. At December 31, 2009, Level 1 includes preferred stock issued by Freddie Mac. During the three months ended June 30, 2010, preferred stock issued by Freddie Mac was transferred to Level 2 due to the inactivity of the preferred stocks market. The Company does not value any of its assets or liabilities that are carried at fair value on a recurring basis as Level 1 at September 30, 2010.

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 September 30, 2010 and December 31, 2009, Level 2 includes mortgage related securities, corporate debt and interest rate caps. In addition, at September 30, 2010, Level 2 includes preferred stock issued by Freddie Mac and at December 31, 2009, Level 2 includes 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 September 30, 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 nine months ended September 30, 2010
	Trust preferred securities			Junior subordinated debentures
	(In thousands)

Beginning balance	$	10,153		$	34,510
Transfer into Level 3		-			-
Net loss from fair value adjustment of financial assets		(352	)		-
Net gain from fair value adjustment of financial liabilities		-			(2,889	)
Decrease in accrued interest		-			-
Other-than-temporary impairment charge		(988	)		-
Change in unrealized gains included in other comprehensive income		445			-
Ending balance	$	9,258		$	31,621

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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 September 30, 2010 and December 31, 2009: