Edgar Filing: FLUSHING FINANCIAL CORP

f10q_110911.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, 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 [ ]

Non-accelerated filer [ ]

Accelerated filer [X]

Smaller reporting company [ ]

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

The number of shares of the registrant’s Common Stock outstanding as of October 31, 2011 was 31,160,639.

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	34
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	52
ITEM 4. Controls and Procedures	52
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings	53
ITEM 1A. Risk Factors	53
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	53
ITEM 4. Reserved	53
ITEM 6. Exhibits	54
SIGNATURES	55

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

ITEM 1. FINANCIAL STATEMENTS

	September 30,			December 31,
(Dollars in thousands, except per share data)	2011			2010
ASSETS
Cash and due from banks	$	50,902		$	47,789
Securities available for sale:
Mortgage-backed securities ($40,770 and $51,475 at fair value pursuant to the fair value option at September 30, 2011 and December 31, 2010, respectively)		784,524			754,077
Other securities ($30,716 and $21,574 at fair value pursuant to the fair value option at September 30, 2011 and December 31, 2010 respectively)		47,166			50,112
Loans:
Multi-family residential		1,333,806			1,252,176
Commercial real estate		604,781			662,794
One-to-four family ― mixed-use property		705,936			728,810
One-to-four family ― residential		222,552			241,376
Co-operative apartments		5,562			6,215
Construction		51,522			75,519
Small Business Administration		14,460			17,511
Taxi medallion		68,570			88,264
Commercial business and other		206,560			187,161
Net unamortized premiums and unearned loan fees		15,312			16,503
Allowance for loan losses		(29,603	)		(27,699	)
Net loans		3,199,458			3,248,630
Interest and dividends receivable		18,485			19,475
Bank premises and equipment, net		23,193			23,041
Federal Home Loan Bank of New York stock		30,827			31,606
Bank owned life insurance		78,196			76,129
Goodwill		16,127			16,127
Core deposit intangible		1,054			1,405
Other assets		53,604			56,354
Total assets	$	4,303,536		$	4,324,745

LIABILITIES
Due to depositors:
Non-interest bearing	$	111,175		$	96,198
Interest-bearing:
Certificate of deposit accounts		1,549,958			1,520,572
Savings accounts		363,025			388,512
Money market accounts		230,608			371,998
NOW accounts		862,047			786,015
Total interest-bearing deposits		3,005,638			3,067,097
Mortgagors' escrow deposits		33,254			27,315
Borrowed funds ($27,189 and $32,226 at fair value pursuant to the fair value option at September 30, 2011 and December 31, 2010, respectively)		513,359			542,683
Securities sold under agreements to repurchase		185,300			166,000
Other liabilities		35,818			35,407
Total liabilities		3,884,544			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 September 30, 2011 and December 31, 2010, respectively; 31,160,639 shares and 31,255,934 shares outstanding a September 30, 2011 and December 31, 2010, respectively)		315			313
Additional paid-in capital		195,138			189,348
Treasury stock (369,956 shares at September 30, 2011 and none at December 31, 2010)		(4,235	)		-
Retained earnings		219,282			204,128
Accumulated other comprehensive income (loss), net of taxes		8,492			(3,744	)
Total stockholders' equity		418,992			390,045

Total liabilities and stockholders' equity	$	4,303,536		$	4,324,745

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

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

	For the three months						For the nine months
	ended September 30,						ended September 30 ,
	2011			2010			2011			2010

Interest and dividend income
Interest and fees on loans	$	47,767		$	50,098		$	144,578		$	148,775
Interest and dividends on securities:
Interest		8,325			7,955			24,581			23,600
Dividends		202			207			606			610
Other interest income		35			11			89			33
Total interest and dividend income		56,329			58,271			169,854			173,018

Interest expense
Deposits		12,266			13,315			36,954			40,641
Other interest expense		6,962			9,095			21,849			29,571
Total interest expense		19,228			22,410			58,803			70,212

Net interest income		37,101			35,861			111,051			102,806
Provision for loan losses		5,000			5,000			15,000			15,000
Net interest income after provision for loan losses		32,101			30,861			96,051			87,806

Non-interest income (loss)
Other-than-temporary impairment ("OTTI") charge		(4,816	)		(3,319	)		(8,999	)		(6,136	)
Less: Non-credit portion of OTTI charge recorded in Other Comprehensive Income, before taxes		4,164			2,769			7,421			4,598
Net OTTI charge recognized in earnings		(652	)		(550	)		(1,578	)		(1,538	)
Loan fee income		538			433			1,487			1,283
Banking services fee income		430			437			1,279			1,350
Net gain (loss) on sale of loans		493			(6	)		493			17
Net gain from sale of securities		-			39			-			62
Net gain (loss) from fair value adjustments		2,085			(20	)		1,265			(154	)
Federal Home Loan Bank of New York stock dividends		338			444			1,180			1,508
Bank owned life insurance		705			702			2,067			2,040
Other income		358			470			1,108			1,676
Total non-interest income		4,295			1,949			7,301			6,244

Non-interest expense
Salaries and employee benefits		9,715			8,754			29,424			26,126
Occupancy and equipment		1,971			1,850			5,712			5,315
Professional services		1,697			1,535			4,933			5,059
FDIC deposit insurance		1,030			1,200			3,409			3,723
Data processing		1,139			1,106			3,325			3,274
Depreciation and amortization		792			692			2,337			2,094
Other real estate owned / foreclosure expense		770			389			1,638			769
Other operating expenses		2,376			2,130			7,592			6,842
Total non-interest expense		19,490			17,656			58,370			53,202

Income before income taxes		16,906			15,154			44,982			40,848

Provision (benefit) for income taxes
Federal		5,099			7,489			13,575			15,189
State and local		1,657			(6,963	)		4,230			(4,627	)
Total taxes		6,756			526			17,805			10,562

Net income	$	10,150		$	14,628		$	27,177		$	30,286


Basic earnings per common share	$	0.33		$	0.48		$	0.89		$	1.00
Diluted earnings per common share	$	0.33		$	0.48		$	0.88		$	1.00
Dividends per common share	$	0.13		$	0.13		$	0.39		$	0.39

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

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)	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	27,177		$	30,286
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		15,000			15,000
Depreciation and amortization of bank premises and equipment		2,337			2,094
Net gain on sales of loans (including delinquent loans)		(493	)		(17	)
Net gain on sales of securities		-			(62	)
Amortization of premium, net of accretion of discount		4,167			3,691
Net (gain) loss from fair value adjustments		(1,265	)		154
OTTI charge recognized in earnings		1,578			1,538
Income from bank owned life insurance		(2,067	)		(2,040	)
Stock-based compensation expense		2,101			1,780
Deferred compensation		395			153
Amortization of core deposit intangibles		351			352
Excess tax expense (benefit) from stock-based payment arrangements		(260	)		14
Deferred income benefit provision		(335	)		(8,760	)
(Decrease) increase in other liabilities		(4,928	)		1,895
Increase in other assets		(4,306	)		(5,511	)
Net cash provided by operating activities		39,452			40,567

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(2,489	)		(1,382	)
Net redemptions of Federal Home Loan Bank of New York shares		779			6,352
Purchases of securities available for sale		(121,570	)		(217,591	)
Proceeds from sales and calls of securities available for sale		8,000			42,311
Proceeds from maturities and prepayments of securities available for sale		103,495			139,312
Net (originations) and repayment of loans		29,016			(73,066	)
Purchases of loans		(14,455	)		(7,698	)
Proceeds from sale of real estate owned		842			2,090
Proceeds from sale of delinquent loans		15,340			6,605
Net cash provided by (used) in investing activities		18,958			(103,067	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in non-interest bearing deposits		14,977			(1,812	)
Net (decrease) increase in interest-bearing deposits		(62,329	)		237,704
Net increase in mortgagors' escrow deposits		5,939			6,338
Net activity of short-term borrowed funds		-			(18,200	)
Proceeds from long-term borrowings		245,447			42,505
Repayment of long-term borrowings		(245,149	)		(193,928	)
Purchases of treasury stock		(4,508	)		(347	)
Excess tax benefit (expense) from stock-based payment arrangements		260			(14	)
Proceeds from issuance of common stock upon exercise of stock options		2,039			235
Cash dividends paid		(11,973	)		(11,840	)
Net cash (used) in provided by financing activities		(55,297	)		60,641

Net increase (decrease) in cash and cash equivalents		3,113			(1,859	)
Cash and cash equivalents, beginning of period		47,789			28,426
Cash and cash equivalents, end of period	$	50,902		$	26,567

SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	58,427		$	70,306
Income taxes paid		19,334			21,107
Taxes paid if excess tax benefits were not tax deductible		19,594			21,093
Non-cash activities:
Securities purchased, not yet settled		1,000			-
Loans transferred to other real estate owned		4,750			3,850
Loans provided for the sale of other real estate owned		1,345			2,862

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

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, except per share data)	2011			2010

Common Stock
Balance, beginning of period	$	313		$	311
Issuance upon exercise of stock options (155,061 and 18,994 common shares for the nine months ended September 30, 2011 and 2010, respectively)		1			-
Shares issued upon vesting of restricted stock unit awards (119,600 and 87,821 common shares for the nine months ended September 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 (140,298 and 130,499 common shares for the nine months ended September 30, 2011 and 2010, respectively)		1,505			1,131
Shares issued upon vesting of restricted stock unit awards (119,800 and 103,109 common shares for the nine months ended September 30, 2011 and 2010, respectively)		1,668			1,394
Issuance upon exercise of stock options (155,061 and 18,994 common shares for the nine months ended September 30, 2011and 2010, respectively)		1,825			208
Stock-based compensation activity, net		532			112
Stock-based income tax benefit (expense)		260			(14	)
Balance, end of period	$	195,138		$	188,673
Treasury Stock
Balance, beginning of period	$	-		$	(36	)
Purchases of common shares outstanding (362,050 common shares for the nine months ended September 30, 2011)		(4,132	)		-
Shares issued upon vesting of restricted stock unit awards (200 and 18,583 common shares for the nine months ended September 30, 2011 and 2010, respectively)		3			238
Issuance upon exercise of stock options (23,129 and 37,266 common shares for the nine months ended September 30, 2011 and 2010, respectively)		324			515
Repurchase of shares to satisfy tax obligations (27,441 and 26,443 common shares for the nine months ended September 30, 2011 and 2010, respectively)		(376	)		(347	)
Repurchase of shares to pay for option exercise (3,794 and 26,011 common shares for the nine months ended September 30, 2011 and 2010)		(54	)		(370	)
Balance, end of period	$	(4,235	)	$	-
Unearned Compensation
Balance, beginning of period	$	-		$	(575	)
Release of shares from the Employee Benefit Trust (143,995 common shares for the nine months ended September 30, 2010)		-			491
Balance, end of period	$	-		$	(84	)

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

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, except per share data)	2011			2010

Retained Earnings
Balance, beginning of period	$	204,128		$	181,181
Net income		27,177			30,286
Cash dividends declared and paid on common shares ($0.39 per common share for the nine months ended September 30, 2011 and 2010, respectively)		(11,973	)		(11,840	)
Issuance upon exercise of stock options (23,129 and 37,266 common shares for the nine months ended September 30, 2011 and 2010, respectively)		(50	)		(92	)
Shares issued upon vesting of restricted stock unit awards (3,295 common shares for the nine months ended September 30, 2010)		-			(8	)
Balance, end of period	$	219,282		$	199,527
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 ($8,707) and ($8,548) for the nine months ended September 30, 2011 and 2010, respectively		11,137			10,710
Amortization of actuarial losses, net of taxes of approximately ($183) and ($103) for the nine months ended September 30, 2011 and 2010, respectively		233			129
Amortization of prior service credits, net of taxes of approximately $15 and $13 for the nine months ended September 30, 2011 and 2010, respectively		(19	)		(16	)
OTTI charges included in income, net of taxes of approximately ($693) and ($683)for the nine months ended September 30, 2011 and 2010, respectively		885			855
Reclassification adjustment for gains included in net income, net of taxes of approximately $28 for the nine months ended September 30, 2010		-			(34	)
Balance, end of period	$	8,492		$	5,065

Total Stockholders' Equity	$	418,992		$	379,617

	For the three months ended						For the nine months ended
	September 30,						September 30,
	2011			2010			2011			2010
Comprehensive Income
Net income	$	10,150		$	14,628		$	27,177		$	30,286
Reclassification adjustment for gains included in income		-			(21	)		-			(34	)
Amortization of actuarial losses		77			44			233			129
Amortization of prior service credits		(6	)		(6	)		(19	)		(16	)
OTTI charges included in income		367			306			885			855
Unrealized gains on securities, net		10,694			2,260			11,137			10,710
Comprehensive income	$	21,282		$	17,211		$	39,413		$	41,930

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

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, 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.

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 nine months ended
	September 30,						September 30,
	2011			2010			2011			2010
	(In thousands, except per share data)
Net income, as reported	$	10,150		$	14,628		$	27,177		$	30,286
Divided by:
Weighted average common shares outstanding		30,679			30,359			30,707			30,323
Weighted average common stock equivalents		14			19			37			29
Total weighted average common shares outstanding and common stock equivalents		30,693			30,378			30,744			30,352

Basic earnings per common share	$	0.33		$	0.48		$	0.89		$	1.00
Diluted earnings per common share (1) (2)	$	0.33		$	0.48		$	0.88		$	1.00
Dividend payout ratio		39.4	%		27.1	%		43.8	%		39.0	%

(1)

For the three months ended September 30, 2011, options to purchase 869,200 shares at an average exercise price of $15.99 were not included in the computation of diluted earnings per common share since they were anti-dilutive. 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.

(2)

For the nine months ended September 30, 2011, options to purchase 721,240 shares at an average exercise price of $16.71 were not included in the computation of diluted earnings per common share since they were anti-dilutive. 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.

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 nine month periods ended September 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 September 30, 2011:

					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
U.S. government agencies	$	2,137	$	2,220	$	83	$	-
Other		29,059		23,667		5		5,397
Mutual funds		21,279		21,279		-		-
Total other securities		52,475		47,166		88		5,397
REMIC and CMO		485,976		501,520		25,353		9,809
GNMA		66,214		71,349		5,135		-
FNMA		182,513		189,377		6,864		-
FHLMC		21,463		22,278		815		-
Total mortgage-backed securities		756,166		784,524		38,167		9,809
Total securities available for sale	$	808,641	$	831,690	$	38,255	$	15,206

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 $11.4 million at September 30, 2011. The remaining private issue mortgage-backed securities are backed by one-to-four family residential mortgage loans.

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value aggregated by category and length of time the individual securities have been in a continuous unrealized loss position, at September 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)
Other	$	6,164	$	5,397	$	1,996	$	4	$	4,168	$	5,393
REMIC and CMO		35,001		9,809		7,319		20		27,682		9,789
Total securities available for sale	$	41,165	$	15,206	$	9,315	$	24	$	31,850	$	15,182

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, the investor must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event that a credit loss has occurred, only the amount of impairment associated with the credit loss is recognized in earnings in the Consolidated Statements of Income. Amounts relating to factors other than credit losses are recorded in accumulated other comprehensive income (“AOCI”) within Stockholders’ Equity. Additional disclosures regarding the calculation of credit losses as well as factors considered by the investor in reaching a conclusion that an investment is not other-than-temporarily impaired are required.

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

The Company evaluates its pooled trust preferred securities, included in the table above in the row labeled “Other”, using an impairment model through an independent third party, which includes evaluating the financial condition of each counterparty. For single issuer trust preferred securities, the Company evaluates the issuer’s financial condition. The Company evaluates its mortgage-backed securities by reviewing the characteristics of the securities, including delinquency and foreclosure levels, projected losses at various loss severity levels and credit enhancement and coverage. In addition, private issue CMOs are evaluated using an impairment model through an independent third party. When an OTTI is identified, the portion of the impairment that is credit related is determined by management 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; (2) for mortgage-backed securities, credit related impairment is determined for each security by estimating losses based on a set of assumptions, which includes delinquency and foreclosure levels, projected losses at various loss severity levels, credit enhancement and coverage and (3) for private issue CMOs, through an impairment model from an independent third party and then recording those estimated losses as a credit related loss against earnings.

Other Securities:

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

The unrealized losses on the two municipal securities were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to 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 September 30, 2011.

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 75.00%. For the remaining issuers with a Texas Ratio between 50.00% and 74.99%, 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.

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.

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 September 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 September 30, 2011.

At September 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 September 30, 2011. The class the Company owns in pooled trust preferred securities does not have any excess subordination.

Deferrals/Defaults (1)

Actual as a

Expected

Cumulative

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	$	258	$	-	None		None		BB+
Single issuer	n/a	1		500		505		-	None		None		BB-
Pooled issuer	B1	19		5,617		2,160		2,196	28.2	%	2.3	%	C
Pooled issuer	C1	19		3,645		1,750		1,542	25.6	%	2.9	%	C
Total			$	10,062	$	4,673	$	3,738

(1) Represents deferrals/defaults as a percentage of the original security and expected deferrals/defaults as a percentage of performing issuers.

REMIC and CMO:

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

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

The unrealized losses at September 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, four of these securities are performing according to their terms, with four of these securities remitting less than the full principal amount due. The principal loss for these four securities totaled $1.2 million for the nine months ended September 30, 2011. These losses were anticipated in the cumulative credit related OTTI charges recorded for these four securities.

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 three months ended September 30, 2011, on four private issue CMOs of $4.8 million before tax, of which $0.7 million was charged against earnings in the Consolidated Statements of Income and $4.1 million before tax ($2.3 million after-tax) was recorded in AOCI. During the nine months ended September 30, 2011, an OTTI charge was recorded on five private issue CMOs of $9.0 million before tax, of which $1.6 million was charged against earnings in the Consolidated Statements of Income and $7.4 million before tax ($4.2 million after-tax) was recorded in AOCI.

The portion of the above mentioned OTTI, recorded during the three and nine months ended September 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 four private issue securities for which an OTTI charge during the three months ended September 30, 2011 was not recorded, would be settled at a price that is less than the current amortized cost of the Company’s investment. Except for one private issue security that is remitting less than the full principal amount due, 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 September 30, 2011.

At September 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 September 30, 2011:

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

	1	$	12,406	$	9,202	$	14,041	$	3,279	2006	05/25/36			D	44	%					15	%							721
	2		5,494		3,897		5,876		447	2006	08/19/36			D	51	%													737
	3		5,503		3,887		6,082		954	2006	08/25/36			D	37	%	14	%											714
	4		4,198		3,618		4,812		657	2006	08/25/36			D	35	%	14	%			12	%			11	%			726
	5		3,398		3,028		3,681		221	2006	03/25/36		CC		37	%													728
	6		2,412		2,418		2,428		-	2005	12/25/35			B2	39	%													736
	7		4,973		2,613		5,249		222	2006	05/25/36		CC		26	%			18	%	10	%	10	%					714
	8		1,354		1,362		1,366		-	2006	08/25/36		CCC		29	%													738
	9		1,734		1,726		1,759		-	2005	11/25/35			B	39	%			17	%							12	%	731
	10		1,498		1,437		1,501		-	2005	11/25/35		CCC		45	%	10	%											740
Total		$	42,970	$	33,188	$	46,795	$	5,780

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table details the total impairment on debt securities, as of September 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 AOCI		Losses

Private issued CMO's (1)	$	35,972	$	26,245	$	9,727	$	3,698
Trust preferred securities (1)		9,262		3,910		5,352		3,738

Total	$	45,234	$	30,155	$	15,079	$	7,436

(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 AOCI.

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

	For the nine months ended
(in thousands)	September 30, 2011

Beginning balance		$	7,011
Recognition of actual losses			(1,153	)
OTTI charges due to credit loss recorded in earnings			1,578
Securities sold during the period			-
Securities where there is an intent to sell or requirement to sell			-
Ending balance		$	7,436

The following table details the amortized cost and estimated fair value of the Company’s securities, classified as available for sale at September 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	$	28,422	$	28,418
Due after one year through five years		7,137		7,220
Due after five years through ten years		-		-
Due after ten years		16,916		11,528
Total other securities		52,475		47,166
Mortgage-backed securities		756,166		784,524
Total securities available for sale	$	808,641	$	831,690

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2010:

	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.

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Increases and decreases in the allowance 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 become 90 days delinquent. The loan balances of collateral dependant impaired loans are compared to the loan’s updated fair value. The balance which exceeds fair value is charged-off. Management reviews the allowance for loan losses on a quarterly basis and records as a provision the amount deemed appropriate, after considering current year charge-offs, charge-off trends, new loan production, current balance by particular loan categories and delinquent loans by particular loan categories.

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

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

The Company 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 September 30, 2011, the Company utilized recent third party appraisals of the collateral to measure impairment for $74.4 million, or 53.8%, of collateral dependent impaired loans and used internal evaluations of the property’s value for $64.0 million, or 46.2%, of collateral dependent impaired loans.

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	For the three months ended				For the nine months ended
	September 30,		September 30,		September 30,		September 30,
(In thousands)	2011		2010		2011		2010
Multi-family residential	$	2,188	$	1,808	$	3,984	$	4,042
Commercial real estate		1,549		806		4,071		1,138
One-to-four family – mixed-use property		808		758		1,288		1,583
One-to-four family – residential		-		21		1,928		115
Construction		-		-		703		862
Small Business Administration		137		93		608		345
Commercial business and other		73		22		514		(163	)
Total net loan charge-offs	$	4,755	$	3,508	$	13,096	$	7,922

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”).

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. Restructured loans are classified as a TDR when the Savings Bank grants a concession to a borrower who is experiencing financial difficulties. 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.

No loans were modified and classified as a TDR during the three months ended September 30, 2011.During the three months ended September 30, 2010, two multi-family loans totaling $7.2 million were modified and classified as a TDR as each of these borrowers was given an interest rate that was considered below market for that borrower, with one also having the loan’s amortization term extended, and one also having deferral of the payment of a portion of the interest; and two commercial mortgage loans totaling $2.5 million were modified and classified as TDR as each of these borrowers was given an interest rate that was considered below market for that borrower, with one loan also changed to payments of interest only.

During the nine months ended September 30, 2011, six multi-family loans totaling $1.8 million were modified and classified as a TDR as each of these borrowers was given an interest rate that was considered below market for that borrower and each had the loan’s amortization term extended; two constructions loans totaling $24.2 million were modified and classified as a TDR as each of these borrowers was given an interest rate that was considered below market for that borrower; one commercial business loan for $2.0 million was modified and classified as a TDR as the borrower was given an interest rate that was considered below market for that borrower; and three one-to-four family – mixed-use property loans totaling $0.9 million was modified and classified as a TDR as each of these borrowers was given an interest rate that was considered below market for that borrower with two of the loans also having the loan’s amortization term extended. During the nine months ended September 30, 2010, three multi-family loans totaling $7.5 million were modified and classified as a TDR as each of these borrowers was given an interest rate that was considered below market for that borrower, with one also having the loan’s amortization term extended, and one also having deferral of the payment of a portion of the interest; three commercial mortgage loans totaling $5.6 million were modified and classified as a TDR as each of these borrowers was given an interest rate that was considered below market for that borrower, with one loan also changed to payments of interest only; and one one-to-four family – mixed-use property loan for $0.5 million was modified and classified as a TDR as the borrower was given an interest rate that was considered below market for that borrower. For each of the loans that were modified and classified as a TDR the borrower was experiencing financial difficulties. The recorded investment of each of the loans modified and classified to a TDR was unchanged as there was no principal forgiven in any of these modifications.

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The allocation of a portion of the allowance for loan losses for a TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate or if the loan is collateral dependent, the fair value of the collateral less costs to sell. At September 30, 2011, there were no commitments to lend additional funds to borrowers whose loans were modified to a TDR. The modification of loans to a TDR did not have a significant effect on our operating results, nor did it require a significant allocation of the allowance for loan losses to these loans.

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

	September 30, 2011				December 31, 2010
	Number		Recorded		Number		Recorded
(Dollars in thousands)	of contracts		investment		of contracts		investment

Multi-family residential		11	$	9,893		5	$	7,946
Commercial real estate		2		2,480		3		5,815
One-to-four family - mixed-use property		3		797		1		206
Construction		1		8,508		-		-
Commercial business and other		1		2,000		-		-
Total performing troubled debt restructured		18	$	23,678		9	$	13,967

During the three months ended September 30, 2011, one construction loan for $11.5 million, which was modified and classified as a TDR within the previous 12 months, was reclassified to non-accrual status as it was no longer performing in accordance with its modified terms. No loans which were previously modified and classified as a TDR were reclassified to non-accrual status during the three months ended September 30, 2010. During the nine months ended September 30, 2011, one construction loan for $11.5 million, one commercial loan for $3.3 million and two one-to-four family – mixed-use property loans totaling $0.7 million , which were modified and classified as a TDR within the previous 12 months, were reclassified to non-accrual status as they are no longer performing in accordance with their modified terms. During the nine months ended September 30, 2010, one commercial loan for $1.4 million and two one-to-four family – mixed-use property loans totaling $0.9 million , which were modified and classified as a TDR within the previous 12 months, were reclassified to non-accrual status as they are no longer performing in accordance with their modified terms.

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows loans classified as TDR that are not performing according to their restructured terms at the periods indicated:

September 30, 2011

December 31, 2010

Number

Recorded

Number

Recorded

(Dollars in thousands)

of contracts

investment

of contracts

investment

Multi-family residential