Edgar Filing: FLUSHING FINANCIAL CORP

f10q_080811.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 June 30, 2011

Commission file number 001-33013

FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

11-3209278

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

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

(Address of principal executive offices)

(718) 961-5400

(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). X Yes ___ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer _____	Accelerated filer X
Non-accelerated filer _____	Smaller reporting company _____

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

The number of shares of the registrant’s Common Stock outstanding as of July 29, 2011 was 31,520,069.

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	33

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	51

ITEM 4. Controls and Procedures	51

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings	52

ITEM 1A. Risk Factors	52

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	52

ITEM 4. Removed and Reserved	52

ITEM 6. Exhibits	53

SIGNATURES	54

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

ITEM 1.

	June 30,			December 31,
(Dollars in thousands, except per share data)	2011			2010
ASSETS
Cash and due from banks	$	31,784		$	47,789
Securities available for sale:
Mortgage-backed securities ($44,071 and $51,475 at fair value pursuant to the fair value option at June 30, 2011 and December 31, 2010, respectively)		798,999			754,077
Other securities ($31,005 and $21,574 at fair value pursuant to the fair value option at June 30, 2011 and December 31, 2010 respectively)		54,820			50,112
Loans available for sale		4,139			-
Loans:
Multi-family residential		1,306,023			1,252,176
Commercial real estate		625,337			662,794
One-to-four family ― mixed-use property		714,733			728,810
One-to-four family ― residential		224,319			241,376
Co-operative apartments		5,937			6,215
Construction		60,295			75,519
Small Business Administration		14,869			17,511
Taxi medallion		71,763			88,264
Commercial business and other		192,313			187,161
Net unamortized premiums and unearned loan fees		15,639			16,503
Allowance for loan losses		(29,358	)		(27,699	)
Net loans		3,201,870			3,248,630
Interest and dividends receivable		18,926			19,475
Bank premises and equipment, net		22,771			23,041
Federal Home Loan Bank of New York stock		34,027			31,606
Bank owned life insurance		77,492			76,129
Goodwill		16,127			16,127
Core deposit intangible		1,171			1,405
Other assets		61,102			56,354
Total assets	$	4,323,228		$	4,324,745

LIABILITIES
Due to depositors:
Non-interest bearing	$	109,112		$	96,198
Interest-bearing:
Certificate of deposit accounts		1,594,819			1,520,572
Savings accounts		372,800			388,512
Money market accounts		251,488			371,998
NOW accounts		760,841			786,015
Total interest-bearing deposits		2,979,948			3,067,097
Mortgagors' escrow deposits		32,643			27,315
Borrowed funds ($30,702 and $32,227 at fair value pursuant to the fair value option at June 30, 2011 and December 31, 2010, respectively)		597,417			542,683
Securities sold under agreements to repurchase		165,300			166,000
Other liabilities		33,634			35,407
Total liabilities		3,918,054			3,934,700

STOCKHOLDERS' EQUITY
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)		-			-
Common stock ($0.01 par value; 100,000,000 shares authorized; 31,530,595 shares and 31,255,934 shares issued at June 30, 2011 and December 31, 2010, respectively; 31,519,942 shares and 31,255,934 shares outstanding at June 30, 2011 and December 31, 2010, respectively)		315			313
Additional paid-in capital		194,534			189,348
Treasury stock (10,653 shares at June 30, 2011 and none at December 31, 2010)		(134	)		-
Retained earnings		213,099			204,128
Accumulated other comprehensive loss, net of taxes		(2,640	)		(3,744	)
Total stockholders' equity		405,174			390,045

Total liabilities and stockholders' equity	$	4,323,228		$	4,324,745

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 Income

(Unaudited)

	For the three months						For the six months
	ended June 30,						ended June 30 ,
	2011			2010			2011			2010

Interest and dividend income
Interest and fees on loans	$	48,121		$	48,993		$	96,811		$	98,677
Interest and dividends on securities:
Interest		8,149			7,734			16,256			15,645
Dividends		202			203			404			403
Other interest income		27			9			54			22
Total interest and dividend income		56,499			56,939			113,525			114,747

Interest expense
Deposits		12,354			13,809			24,688			27,326
Other interest expense		7,350			9,690			14,887			20,476
Total interest expense		19,704			23,499			39,575			47,802

Net interest income		36,795			33,440			73,950			66,945
Provision for loan losses		5,000			5,000			10,000			10,000
Net interest income after provision for loan losses		31,795			28,440			63,950			56,945

Non-interest income (loss)
Other-than-temporary impairment ("OTTI") charge		-			(2,709	)		(3,939	)		(2,709	)
Less: Non-credit portion of OTTI charge recorded in Other Comprehensive Income, before taxes		-			1,721			3,013			1,721
Net OTTI charge recognized in earnings		-			(988	)		(926	)		(988	)
Loan fee income		515			483			949			850
Banking services fee income		388			431			849			913
Net gain on sale of loans		-			18			-			23
Net gain from sale of securities		-			23			-			23
Net loss from fair value adjustments		(165	)		(31	)		(820	)		(134	)
Federal Home Loan Bank of New York stock dividends		342			453			842			1,064
Bank owned life insurance		695			693			1,362			1,338
Other income		360			636			750			1,206
Total non-interest income		2,135			1,718			3,006			4,295

Non-interest expense
Salaries and employee benefits		9,682			8,576			19,709			17,372
Occupancy and equipment		1,874			1,716			3,741			3,465
Professional services		1,637			1,760			3,236			3,524
FDIC deposit insurance		951			1,249			2,379			2,523
Data processing		1,181			1,090			2,186			2,168
Depreciation and amortization		779			723			1,545			1,402
Other operating expenses		2,761			2,496			6,084			5,092
Total non-interest expense		18,865			17,610			38,880			35,546

Income before income taxes		15,065			12,548			28,076			25,694

Provision for income taxes
Federal		4,564			3,751			8,476			7,700
State and local		1,427			1,124			2,573			2,336
Total taxes		5,991			4,875			11,049			10,036

Net income	$	9,074		$	7,673		$	17,027		$	15,658


Basic earnings per common share	$	0.29		$	0.25		$	0.55		$	0.52
Diluted earnings per common share	$	0.29		$	0.25		$	0.55		$	0.52
Dividends per common share	$	0.13		$	0.13		$	0.26		$	0.26

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 Cash Flows

(Unaudited)

	For the six months ended
	June 30,
(Dollars in thousands)	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	17,027		$	15,658
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		10,000			10,000
Depreciation and amortization of bank premises and equipment		1,545			1,402
Net gain on sales of loans (including delinquent loans)		-			(23	)
Net gain on sales of securities		-			(23	)
Amortization of premium, net of accretion of discount		2,795			2,415
Net loss from fair value adjustments		820			134
OTTI charge recognized in earnings		926			988
Income from bank owned life insurance		(1,362	)		(1,338	)
Stock-based compensation expense		1,663			1,397
Deferred compensation		244			74
Amortization of core deposit intangibles		234			235
Excess tax expense (benefit) from stock-based payment arrangements		(205	)		35
Deferred income benefit provision		(568	)		(1,791	)
Decrease in other liabilities		(844	)		(3,811	)
(Increase) decrease in other assets		(5,365	)		3,820
Net cash provided by operating activities		26,910			29,172

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(1,275	)		(714	)
Net (purchases) redemptions of Federal Home Loan Bank of New York shares		(2,421	)		4,363
Purchases of securities available for sale		(119,462	)		(157,271	)
Proceeds from sales and calls of securities available for sale		-			14,827
Proceeds from maturities and prepayments of securities available for sale		68,362			94,408
Net (originations) and repayment of loans		38,146			(71,708	)
Purchases of loans		(14,455	)		(6,960	)
Proceeds from sale of real estate owned		515			646
Proceeds from sale of delinquent loans		7,766			4,302
Net cash used in investing activities		(22,824	)		(118,107	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		12,914			795
Net (decrease) increase in interest-bearing deposits		(87,728	)		205,731
Net increase in mortgagors' escrow deposits		5,328			5,536
Net activity of short-term borrowed funds		104,639			(14,500	)
Proceeds from long-term borrowings		26,335			30,000
Repayment of long-term borrowings		(75,416	)		(130,919	)
Purchases of treasury stock		(374	)		(345	)
Excess tax benefit (expense) from stock-based payment arrangements		205			(35	)
Proceeds from issuance of common stock upon exercise of stock options		2,016			234
Cash dividends paid		(8,010	)		(7,892	)
Net cash (used) provided by financing activities		(20,091	)		88,605

Net decrease in cash and cash equivalents		(16,005	)		(330	)
Cash and cash equivalents, beginning of period		47,789			28,426
Cash and cash equivalents, end of period	$	31,784		$	28,096

SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	39,210		$	47,927
Income taxes paid		13,656			14,166
Taxes paid if excess tax benefits were not tax deductible		13,861			14,131
Non-cash activities:
Loans transferred to other real estate owned		1,861			3,390
Loans provided for the sale of other real estate owned		1,345			1,969

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 six months ended
	June 30,
(Dollars in thousands, except per share data)	2011			2010

Preferred Stock
Balance, beginning of period	$	-		$	-
No activity		-			-
Balance, end of period	$	-		$	-
Common Stock
Balance, beginning of period	$	313		$	311
Issuance upon exercise of stock options (155,061 and 18,982 common shares for the six months ended June 30, 2011 and 2010, respectively)		1			-
Shares issued upon vesting of restricted stock unit awards (119,600 and 87,621 common shares for the six months ended June 30, 2011 and 2010, respectively)		1			1
Balance, end of period	$	315		$	312
Additional Paid-In Capital
Balance, beginning of period	$	189,348		$	185,842
Award of common shares released from Employee Benefit Trust (135,617 and 126,947 common shares for the six months ended June 30, 2011 and 2010, respectively)		1,468			1,100
Shares issued upon vesting of restricted stock unit awards (119,600 and 102,864 common shares for the six months ended June 30, 2011 and 2010, respectively)		1,667			1,391
Issuance upon exercise of stock options (175,570 and 18,982 common shares for the six months ended June 30, 2011and 2010, respectively)		1,825			208
Stock-based compensation activity, net		21			(283	)
Stock-based income tax benefit (expense)		205			(35	)
Balance, end of period	$	194,534		$	188,223
Treasury Stock
Balance, beginning of period	$	-		$	(36	)
Shares issued upon vesting of restricted stock unit awards (18,358 common shares for the six months ended June 30, 2010)		-			237
Issuance upon exercise of stock options (20,509 and 37,218 common shares for the six months ended June 30, 2011 and 2010, respectively)		294			514
Repurchase of shares to satisfy tax obligations (27,368 and 26,350 common shares for the six months ended June 30, 2011 and 2010, respectively)		(374	)		(345	)
Repurchase of shares to pay for option exercise (3,794 and 26,011 common shares for the six months ended June 30, 2011 and 2010)		(54	)		(370	)
Balance, end of period	$	(134	)	$	-
Unearned Compensation
Balance, beginning of period	$	-		$	(575	)
Release of shares from the Employee Benefit Trust (96,130 common shares for the six months ended June 30, 2010)		-			328
Balance, end of period	$	-		$	(247	)

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 six months ended
							June 30,
(Dollars in thousands)							2011			2010

Retained Earnings
Balance, beginning of period							$	204,128		$	181,181
Net income								17,027			15,658
Cash dividends declared and paid on common shares ($0.26 per common share for the six months ended June 30, 2011 and 2010, respectively)								(8,010	)		(7,892	)
Issuance upon exercise of stock options (175,570 and 37,218 common shares for the six months ended June 30, 2011 and 2010, respectively)								(46	)		(92	)
Shares issued upon vesting of restricted stock unit awards (3,295 common shares for the six months ended June 30, 2010)											(8	)
Balance, end of period							$	213,099		$	188,847
Accumulated Other Comprehensive (Loss) Gain
Balance, beginning of period							$	(3,744	)	$	(6,579	)
Change in net unrealized gains on securities available for sale, net of taxes of approximately ($336) and ($6,743) for the six months ended June 30, 2011 and 2010, respectively								443			8,450
Amortization of actuarial losses, net of taxes of approximately ($122) and ($68) for the six months ended June 30, 2011 and 2010, respectively								156			85
Amortization of prior service credits, net of taxes of approximately $10 and $8 for the six months ended June 30, 2011 and 2010, respectively								(13	)		(10	)
OTTI charges included in income, net of taxes of approximately ($408) and ($439)for the six months ended June 30, 2011 and 2010, respectively								518			549
Reclassification adjustment for gains included in net income, net of taxes of approximately $10 for the six months ended June 30, 2010								-			(13	)
Balance, end of period							$	(2,640	)	$	2,482

Total Stockholders' Equity							$	405,174		$	379,617



	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010				2011			2010
Comprehensive Income
Net income	$	9,074		$	7,673		$	17,027		$	15,658
Amortization of actuarial losses		79			43			156			85
Amortization of prior service credits		(7	)		(5	)		(13	)		(10	)
OTTI charges included in income		-			549			518			549
Unrealized gains on securities, net		3,933			5,951			443			8,437
Comprehensive income	$	13,079		$	14,211		$	18,131		$	24,719

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 Holding Company and its direct and indirect wholly-owned subsidiaries, the Savings Bank, Flushing Commercial Bank, Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc., are collectively herein referred to as the “Company.” The unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q (“Quarterly Report”) include the collective results of the Company on a consolidated basis.

The accompanying unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for such presented periods of the Company. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Quarterly Report. All inter-company balances and transactions have been eliminated in consolidation. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year.

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Certain reclassifications have been made to the prior-period consolidated financial statements to conform to the current-period presentation.

2. Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

3. Earnings Per Share

Earnings per share is computed in accordance with Accounting Standards Codification (“ASC”) Topic 260 “Earnings Per Share,” which provides that unvested share-based payment awards that contain non-forfeitable 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 has been computed based on the following:

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011			2010
	(In thousands, except per share data)
Net income, as reported	$	9,074		$	7,673		$	17,027		$	15,658
Divided by:
Weighted average common shares outstanding		30,823			30,352			30,722			30,305
Weighted average common stock equivalents		41			47			54			36
Total weighted average common shares outstanding and
common stock equivalents		30,864			30,399			30,776			30,341

Basic earnings per common share	$	0.29		$	0.25		$	0.55		$	0.52
Diluted earnings per common share (1)	$	0.29		$	0.25		$	0.55		$	0.52
Dividend payout ratio		44.8	%		52.0	%		47.3	%		50.0	%

(1) For the three and six months ended June 30, 2011, options to purchase 560,550 shares at an average exercise price of $17.62 were not included in the computation of diluted earnings per common share as they are anti-dilutive. For the three and six months ended June 30, 2010, options to purchase 722,530 shares at an average exercise price of $16.71 were not included in the computation of diluted earnings per common share as they are anti-dilutive.

4. Debt and Equity Securities

The Company’s investments are classified in one of the following three categories and accounted for accordingly: (1) trading securities, (2) securities available for sale and (3) securities held-to-maturity.

The Company did not hold any trading securities or securities held-to-maturity during the three and six month periods ended June 30, 2011 and 2010. Securities available for sale are recorded at fair value.

The following table summarizes the Company’s portfolio of securities available for sale at June 30, 2011:

					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
U.S. government agencies	$	10,262	$	10,229	$	98	$	131
Other		27,712		23,676		12		4,048
Mutual funds		20,915		20,915		-		-
Total other securities		58,889		54,820		110		4,179
REMIC and CMO		508,516		507,702		12,307		13,121
GNMA		70,055		74,891		4,849		13
FNMA		190,808		193,464		3,999		1,343
FHLMC		22,222		22,942		720		-
Total mortgage-backed securities		791,601		798,999		21,875		14,477
Total securities available for sale	$	850,490	$	853,819	$	21,985	$	18,656

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 $12.4 million at June 30, 2011. The remaining private issue mortgage-backed securities are backed by one-to-four family residential mortgage loans.

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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 June 30, 2011:

	Total				Less than 12 months				12 months or more
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)
U.S. government agencies	$	7,869	$	131	$	7,869	$	131	$	-	$	-
Other		5,514		4,048		-		-		5,514		4,048
Total other securities		13,383		4,179		7,869		131		5,514		4,048
REMIC and CMO		187,310		13,121		156,765		3,393		30,545		9,728
GNMA		1,184		13		1,184		13		-		-
FNMA		86,585		1,343		86,585		1,343		-		-
Total mortgage-backed securities		275,079		14,477		244,534		4,749		30,545		9,728
Total securities available for sale	$	288,462	$	18,656	$	252,403	$	4,880	$	36,059	$	13,776

Other-than-temporary impairment (“OTTI”) losses on impaired securities must be fully recognized in earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost. However, even if an investor does not expect to sell a debt security, it must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event that a credit loss has occurred, only the amount of impairment associated with the credit loss is recognized in earnings in the Consolidated Statements of Income. Amounts relating to factors other than credit losses are recorded in accumulated other comprehensive loss (“AOCL”) within Stockholders’ Equity. Additional disclosures regarding the calculation of credit losses as well as factors considered by the investor in reaching a conclusion that an investment is not other-than-temporarily impaired are required.

The Company reviewed each investment that had an unrealized loss at June 30, 2011. 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 AOCL. Unrealized losses that are considered to be other-than-temporary are split between credit related and noncredit related impairments, with the credit related impairment being recorded as a charge against earnings and the noncredit related impairment being recorded in AOCL, net of tax.

The Company evaluates its pooled trust preferred securities, included in the table above in the row labeled “Other”, using an impairment model through an independent third party, which includes evaluating the financial condition of each counterparty. For single issuer trust preferred securities, the Company evaluates the issuer’s financial condition. The Company evaluates its mortgage-backed securities by reviewing the characteristics of the securities, including delinquency and foreclosure levels, projected losses at various loss severity levels and credit enhancement and coverage. In addition, private issue CMOs are evaluated using an impairment model through an independent third party. When an OTTI is identified, the portion of the impairment that is credit related is determined by management 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 for each security by estimating losses based on a set of assumptions, which includes delinquency and foreclosure levels, projected losses at various loss severity levels, credit enhancement and coverage and (3) 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.

U.S Government Agencies:

The unrealized losses on U.S. government agencies were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms, and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements, and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2011.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Other Securities:

The unrealized losses in Other securities at June 30, 2011, consist of losses on one single issuer trust preferred security and two pooled trust preferred securities.

The unrealized losses on the single issuer trust preferred security and two pooled trust preferred securities were caused by market interest volatility, a significant widening of credit spreads across markets for these securities, and illiquidity and uncertainty in the financial markets. These securities are currently rated below investment grade. The pooled trust preferred securities do not have collateral that is subordinate to the classes we own. 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 individual issuer within the pooled trust preferred securities. All of the issuers of the underlying collateral of the pooled trust preferred securities we reviewed are banks.

For each bank, our review included the following performance items:

.	Ratio of tangible equity to assets

.	Tier 1 Risk Weighted Capital

.	Net interest margin

.	Efficiency ratio for most recent two quarters

.	Return on average assets for most recent two quarters

.	Texas Ratio (ratio of non-performing assets plus assets past due over 90 days divided by tangible equity plus the reserve for loan losses)

.	Credit ratings (where applicable)

.	Capital issuances within the past year (where applicable)

.	Ability to complete Federal Deposit Insurance Corporation (“FDIC”) assisted acquisitions (where applicable)

Based on the review of the above factors, we concluded that:

.	All of the performing issuers in our pools are well capitalized banks, and do not appear likely to be closed by their regulators.

.	All of the performing issuers in our pools will continue as a going concern and will not default on their securities.

In order to estimate potential future defaults and deferrals, we segregated the performing underlying issuers by their Texas Ratio. We then reviewed performing issuers with Texas Ratios in excess of 50%. The Texas Ratio is a key indicator of the health of the institution and the likelihood of failure. This ratio compares the problem assets of the institution to the institution’s available capital and reserves to absorb losses that are likely to occur in these assets. There were four issuers with Texas Ratios in excess of 50% for which we concluded there would not be a default, primarily due to their current operating results and demonstrated ability to raise additional capital.

There were no remaining issuers in our pooled trust preferred securities which had a Texas Ratio in excess of 70.00%. For the remaining issuers with a Texas Ratio between 50.00% and 69.99%, we estimated 25% of the related cash flows of the issuer would not be realized. We concluded that issuers with a Texas Ratio below 50.00% are considered healthy, and there was a minimal risk of default. We assigned a zero default rate to these issuers. Our analysis also assumed that issuers currently deferring would default with no recovery, and issuers that have defaulted will have no recovery.

We had an independent third party prepare a discounted cash flow analysis for each of these pooled trust preferred securities based on the assumptions discussed above. Other significant assumptions were: (1) no issuers will prepay; (2) senior classes will not call the debt on their portions; and (3) use of the forward London Interbank Offered Rate (“LIBOR”) curve. The cash flows were discounted at the effective rate for each security. For each issuer that we assumed a 25% shortfall in the cash flows, the cash flow analysis eliminates 25% of the cash flow for each issuer effective immediately.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

One of the pooled trust preferred securities is over 90 days past due and the Company has stopped accruing interest. The remaining pooled trust preferred security as well as the single issuer trust preferred security both are performing according to their terms. The Company also owns a pooled trust preferred security that is carried under the fair value option, where the unrealized losses are included in the Consolidated Statements of Income– Net gain (loss) from fair value adjustments. This security is over 90 days past due and the Company has stopped accruing interest.

It is not anticipated at this time that the one single issuer trust preferred security and the two pooled trust preferred securities, would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms; except for the pooled trust preferred securities for which the Company has stopped accruing interest as discussed above, and, in the opinion of management based on the review performed at June 30, 2011, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements, and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider the one single issuer trust preferred security and the two pooled trust preferred securities to be other-than-temporarily impaired at June 30, 2011.

At June 30, 2011, the Company held six trust preferred issues which had a current credit rating of at least one rating below investment grade. Two of those issues are carried under the fair value option and therefore, changes in fair value are included in the Consolidated Statement of Income – Net gain (loss) from fair value adjustments.

The following table details the remaining four trust preferred issues that were evaluated to determine if they were other-than-temporarily impaired at June 30, 2011. The class the Company owns in pooled trust preferred securities does not have any excess subordination. The table includes single-issuer or pooled trust preferred securities, class, number of performing banks in the security, amortized cost, fair value, cumulative credit related OTTI, deferrals/defaults as a percentage of the original security, expected deferrals/defaults as a percentage of currently performing issuers and the lowest current rating:

											Deferrals/Defaults
											Actual as a			Expected
									Cumulative		Percentage			Percentage			Current
Issuer			Performing		Amortized		Fair		Credit Related		of Original			of Performing			Lowest
Type	Class		Banks		Cost		Value		OTTI		Security			Collateral			Rating
					(Dollars in thousands)

Single issuer		n/a		1	$	300	$	254	$	-	None			None			BB		+
Single issuer		n/a		1		500		513		-	None			None			BB		-
Pooled issuer		B1		21		5,617		2,960		2,196		28.2	%		2.1	%		C
Pooled issuer		C1		19		3,645		2,300		1,542		25.6	%		2.9	%		C
Total					$	10,062	$	6,027	$	3,738

REMIC and CMO:

The unrealized losses in Real Estate Mortgage Investment Conduit (“REMIC”) and CMO securities at June 30, 2011 consist of five issues from the Federal Home Loan Mortgage Corporation (“FHLMC”), four issues from the Federal National Mortgage Association (“FNMA”), seven issues from the Government National Mortgage Association (“GNMA”) and eight private issues.

The unrealized losses on the REMIC and CMO securities issued by FHLMC, FNMA and GNMA were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements, and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2011.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The unrealized losses at June 30, 2011 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, five of these securities are performing according to their terms, with three securities remitting less than the full principal amount due. The principal loss for these three securities totaled $0.6 million for the six months ended June 30, 2011. These losses were anticipated in the cumulative credit related OTTI charges recorded for these three 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 six months ended June 30, 2011, on one private issue CMO of $3.9 million before tax, of which $0.9 million was charged against earnings in the Consolidated Statements of Income and $3.0 million before tax ($1.7 million after-tax) was recorded in AOCL. There was no credit related OTTI charge recorded during the three months ended June 30, 2011.

The portion of the above mentioned OTTI, recorded during the six months ended June 30, 2011, that was related to credit losses was calculated using the following significant assumptions: (1) delinquency and foreclosure levels of 21%; (2) projected loss severity of 50%; (3) assumed default rates of 10% for the first 12 months, 8% for the next 12 months, 6% for the next 12 months and 2% thereafter and (4) prepayment speeds of 10%.

It is not anticipated at this time that the eight private issue securities for which an OTTI charge during the three months ended June 30, 2011was not recorded, would be settled at a price that is less than the current amortized cost of the Company’s investment. Each of these securities is performing according to its terms; except for the three private issue securities that are remitting less than the full principal amount due as 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 it is more likely than not the Company will not be required to sell the securities before recovery of the securities amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements, and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2011.

At June 30, 2011, the Company held 16 private issue CMOs which had a current credit rating of at least one rating below investment grade. Six of those issues are carried under the fair value option and therefore, changes in fair value are included in the Consolidated Statement of Income – Net gain (loss) from fair value adjustments. The following table details the remaining 10 private issue CMOs that were evaluated to determine if they were other-than-temporarily impaired at June 30, 2011. The table includes, by security, amortized cost, fair value, outstanding principal, cumulative credit related OTTI charges, year security was issued, maturity date, current rating, location of underlying collateral and average FICO score of borrower:

								Cumulative
								OTTI			Current							Average
		Amortized		Fair		Outstanding		Charges	Year of		Lowest	Collateral Located in:						FICO
Security		Cost		Value		Principal		Recorded	Issuance	Maturity	Rating	CA	FL	VA	NY	TX	MD	Score
		(Dollars in thousands)

1	$	12,983	$	10,124	$	15,025	$	3,279	2006	05/25/36	D	45%			14%			720
2		6,113		4,550		6,213		100	2006	08/19/36	C	52%						738
3		5,811		4,040		6,257		774	2006	08/25/36	D	38%	13%					713
4		4,589		3,909		5,166		582	2006	08/25/36	CC	36%	15%		12%	10%		727
5		3,655		3,294		3,888		171	2006	03/25/36	CCC	36%						728
6		2,707		2,729		2,724		-	2005	12/25/35	Ba2	38%						736
7		5,509		3,070		5,785		222	2006	05/25/36	CC	31%		19%			10%	714
8		1,660		1,670		1,675		-	2006	08/25/36	B2	28%						738
9		1,889		1,866		1,916		-	2005	11/25/35	B	39%		17%			11%	732
10		1,613		1,558		1,616		-	2005	11/25/35	CCC	45%						740
Total	$	46,529	$	36,810	$	50,265	$	5,128

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

GNMA:

The unrealized losses on the securities issued by GNMA were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements, and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2011.

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 it is more likely than not the Company will not be required to sell the securities before recovery of the securities amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements, and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2011.

The following table details the total impairment on debt securities, as of June 30, 2011, 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 (1)	$	38,660	$	28,986	$	9,674	$	3,601
Trust preferred securities (1)		9,262		5,260		4,002		3,738
Total	$	47,922	$	34,246	$	13,676	$	7,339

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

The following table represents the activity related to the credit loss component recognized in earnings on debt securities held by the Company for which a portion of OTTI was recognized in AOCL for the period indicated:

	For the six months ended
(in thousands)	June 30, 2011
Beginning balance	$	7,011

Recognition of actual losses		(598	)
OTTI charges due to credit loss recorded in earnings		926
Securities sold during the period		-
Securities where there is an intent to sell or requirement to sell		-
Ending balance	$	7,339

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table details the amortized cost and estimated fair value of the Company’s securities, classified as available for sale at June 30, 2011, by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized
	Cost		Fair Value
	(In thousands)

Due in one year or less	$	23,448	$	23,448
Due after one year through five years		9,933		10,031
Due after five years through ten years		-		-
Due after ten years		25,508		21,341
Total other securities		58,889		54,820
Mortgage-backed securities		791,601		798,999
Total securities available for sale	$	850,490	$	853,819

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2010:

					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
U.S. government agencies	$	10,556	$	10,459	$	111	$	208
Other		31,423		29,028		6		2,401
Mutual funds		10,625		10,625		-		-
Total other securities		52,604		50,112		117		2,609
REMIC and CMO		456,210		453,465		10,039		12,784
GNMA		81,439		85,955		4,580		64
FNMA		192,750		194,540		3,813		2,023
FHLMC		19,561		20,117		556		-
Total mortgage-backed securities		749,960		754,077		18,988		14,871
Total securities available for sale	$	802,564	$	804,189	$	19,105	$	17,480

Mortgage-backed securities shown in the table above included one private issue CMO that was collateralized by commercial real estate mortgages with an amortized cost and market value of $14.6 million at December 31, 2010. The remaining private issue mortgage-backed securities are backed by one-to-four family residential mortgage loans.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	Total				Less than 12 months				12 months or more
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)
U.S. government agencies	$	7,792	$	208	$	7,792	$	208	$	-	$	-
Other		9,161		2,401		2,000		1		7,161		2,400
Total other securities		16,953		2,609		9,792		209		7,161		2,400
REMIC and CMO		209,682		12,784		169,356		5,783		40,326		7,001
GNMA		16,214		64		16,214		64		-		-
FNMA		97,255		2,023		97,255		2,023		-		-
Total mortgage-backed securities		323,151		14,871		282,825		7,870		40,326		7,001
Total securities available for sale	$	340,104	$	17,480	$	292,617	$	8,079	$	47,487	$	9,401

5. Loans

Loans are reported at their outstanding principal balance net of any unearned income, charge-offs, deferred loan fees and costs on originated loans and unamortized premiums or discounts on purchased loans. Interest on loans is recognized on the accrual basis. The accrual of income on loans is generally discontinued when certain factors, such as contractual delinquency of 90 days or more, indicate reasonable doubt as to the timely collectability of such income. Uncollected interest previously recognized on non-accrual loans is reversed from interest income at the time the loan is placed on non-accrual status. A non-accrual loan can be returned to accrual status when contractual delinquency returns to less than 90 days delinquent. Subsequent cash payments received on non-accrual loans that do not bring the loan to less than 90 days delinquent are recorded on a cash basis. Subsequent cash payments can also be applied first as a reduction of principal until all principal is recovered and then subsequently to interest, if in management’s opinion, it is evident that recovery of all principal due is unlikely to occur. Net loan origination costs and premiums or discounts on loans purchased are amortized into interest income over the contractual life of the loans using the level-yield method. Prepayment penalties received on loans which pay in full prior to their scheduled maturity are included in interest income in the period they are collected.

The Company maintains an allowance for loan losses at an amount, which, in management’s judgment, is adequate to absorb probable estimated losses inherent in the loan portfolio. Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectability of loans. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available. In assessing the adequacy of the Company's allowance for loan losses, management considers various factors such as, the current fair value of collateral for collateral dependent loans, the Company's historical loss experience, recent trends in losses, collection policies and collection experience, trends in the volume of non-performing and classified loans, changes in the composition and volume of the gross loan portfolio and local and national economic conditions. The Company’s Board of Directors (the “Board of Directors”) reviews and approves management’s evaluation of the adequacy of the allowance for loan losses on a quarterly basis.

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Increases and decreases in the allowance other than charge-offs and recoveries are included in the provision for loan losses. When a loan or a portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance, and subsequent recoveries, if any, are credited to the allowance.

The Company recognizes a loan as non-performing when the borrower has indicated the inability to bring the loan current, or due to other circumstances which, in our opinion, indicate the borrower will be unable to bring the loan current within a reasonable time, or if the collateral value is deemed to have been impaired. All loans classified as non-performing, which includes all loans past due 90 days or more, are classified as non-accrual unless there is, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future. Appraisals and/or updated internal evaluations are obtained as soon as practical, and before the loan becomes 90 days delinquent. The loan balances of collateral dependant impaired loans are compared to the loan’s updated fair value. The balance which exceeds fair value is charged-off. Management reviews the allowance for loan losses on a quarterly basis, and records as a provision the amount deemed appropriate, after considering current year charge-offs, charge-off trends, new loan production, current balance by particular loan categories and delinquent loans by particular loan categories.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

A loan is considered impaired when, based upon the most current information, the Company believes it is probable that it will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan. Impaired loans are measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Interest income on impaired loans is recorded on a cash basis. The Company’s management considers all non-accrual loans impaired.

The Company reviews each impaired loan to determine if a charge-off is to be recorded or if a valuation allowance is to be allocated to the loan. The Company does not allocate a valuation allowance to loans for which we have concluded the current value of the underlying collateral will allow for recovery of the loan balance either through the sale of the loan or by foreclosure and sale of the property.

The Company uses multiple valuation approaches in evaluating the underlying collateral. These include obtaining a third party appraisal, an income approach and a sales approach. When obtained, third party appraisals are given the most weight. The income approach is used for income producing properties, and uses current revenues less operating expenses to determine the net cash flow of the property. Once the net cash flow is determined, the value of the property is calculated using an appropriate capitalization rate for the property. The sales approach uses comparable sales prices in the market. When we do not obtain third party appraisals, we place greater reliance on the income approach to value the collateral.

In preparing internal evaluations of property values, the Company seeks to obtain current data on the subject property from various sources, including: (1) the borrower; (2) copies of existing leases; (3) local real estate brokers and appraisers; (4) public records (such as for real estate taxes and water and sewer charges); (5) comparable sales and rental data in the market; (6) an inspection of the property and (7) interviews with tenants. These internal evaluations primarily focus on the income approach and comparable sales data to value the property.

As of June 30, 2011, the Company utilized recent third party appraisals of the collateral to measure impairment for $88.5 million, or 60.0%, of collateral dependent impaired loans, and used internal evaluations of the property’s value for $59.1 million, or 40.0%, of collateral dependent impaired loans.

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

	For the three months ended					For the six months ended
	June 30,		June 30,			June 30,		June 30,
(In thousands)	2011		2010			2011		2010
Multi-family residential	$	879	$	1,142		$	1,796	$	2,234
Commercial real estate		572		192			2,522		332
One-to-four family – mixed-use property		307		465			480		825
One-to-four family – residential		454		25			1,928		94
Construction		703		-			703		862
Small Business Administration		148		(38	)		471		252
Commercial business and other		9		336			441		(185	)
Total net loan charge-offs	$	3,072	$	2,122		$	8,341	$	4,414

The Company may restructure a loan to enable a borrower to continue making payments when it is deemed to be in our best long-term interest. This restructure may include reducing the interest rate or amount of the monthly payment for a specified period of time, after which the interest rate and repayment terms revert to the original terms of the loan. The Company classifies these loans as troubled debt restructured (“TDR”).

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company 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. Management takes a proactive approach to managing delinquent loans, including conducting site examinations and encouraging borrowers to meet with a Bank representative. We have been developing short-term payment plans that enable certain borrowers to bring their loans current. In addition, we have restructured certain problem loans by either: reducing the interest rate until the next reset date, extending the amortization period thereby lowering the monthly payments, deferring a portion of the interest payment, 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. These restructurings have not included a reduction of principal balance. We believe that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. These restructured loans are classified as TDR. Loans which have been current for six consecutive months at the time they are restructured as TDR remain on accrual status. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status until they have made timely payments for six consecutive months. Loans that are restructured as TDR but are not performing in accordance with the restructured terms are excluded from the TDR table below, as they are placed on non-accrual status and reported as non-performing loans.

The following table shows loans classified as TDR that are performing according to their restructured terms at the periods indicated:

	June 30,		December 31,
(In thousands)	2011		2010
Accrual Status:
Multi-family residential	$	9,711	$	11,242
Commercial real estate		2,430		2,448
One-to-four family - mixed-use property		800		206
Construction		23,431		-
Commercial business and other		2,000		-
Total performing troubled debt restructured	$	38,372	$	13,896

The following table shows non-performing loans at the periods indicated:

	June 30,		December 31,
(In thousands)	2011		2010
Loans 90 days or more past due and still accruing:
Multi-family residential	$	-	$	103
Commercial real estate		330		3,328
Construction		775		-
Commercial business and other		-		6
Total		1,105		3,437

Non-accrual loans:
Multi-family residential		35,540		35,633
Commercial real estate		23,918		22,806
One-to-four family - mixed-use property		28,968		30,478
One-to-four family - residential		10,186		10,695
Co-operative apartments		133		-
Construction		2,665		4,465
Small business administration		803		1,159
Commercial business and other		6,727		3,419
Total		108,940		108,655
Total non-performing loans	$	110,045	$	112,092

The interest foregone on non-accrual loans and loans classified as TDR totaled $2.3 million and $1.9 million for the three months ended June 30, 2011 and 2010, respectively. The interest foregone on non-accrual loans and loans classified as TDR totaled $4.9 million and $4.0 million for the six months ended June 30, 2011 and 2010, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows an age analysis of our recorded investment in loans at June 30, 2011: