Edgar Filing: FLUSHING FINANCIAL CORP

f10q_110912.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, 2012

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, 2012 was 30,896,467.

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 Comprehensive Income	3
Consolidated Statements of Cash Flows	4
Consolidated Statements of Changes in Stockholders’ Equity	5
Notes to Consolidated Financial Statements	6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	57
ITEM 4. Controls and Procedures	57
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings	58
ITEM 1A. Risk Factors	58
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	58
ITEM 3. Defaults Upon Senior Securities	58
ITEM 4. Mine Safety Disclosures	58
ITEM 5. Other Information	58
ITEM 6. Exhibits	59
SIGNATURES	60

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements

(Dollars in thousands, except per share data)	September 30, 2012			December 31, 2011
ASSETS
Cash and due from banks	$	36,098		$	55,721
Securities available for sale:
Mortgage-backed securities ($28,365 and $37,787 at fair value pursuant to the fair value option at September 30, 2012 and December 31, 2011, respectively)		728,537			747,288
Other securities ($29,226 and $30,942 at fair value pursuant to the fair value option at September 30, 2012 and December 31, 2011 respectively)		232,959			65,242
Loans held for sale		8,780			-
Loans:
Multi-family residential		1,482,765			1,391,221
Commercial real estate		527,337			580,783
One-to-four family ― mixed-use property		653,151			693,932
One-to-four family ― residential		202,291			220,431
Co-operative apartments		6,632			5,505
Construction		16,319			47,140
Small Business Administration		10,764			14,039
Taxi medallion		13,103			54,328
Commercial business and other		260,998			206,614
Net unamortized premiums and unearned loan fees		13,288			14,888
Allowance for loan losses		(30,687	)		(30,344	)
Net loans		3,155,961			3,198,537
Interest and dividends receivable		18,235			17,965
Bank premises and equipment, net		22,894			24,417
Federal Home Loan Bank of New York stock		35,002			30,245
Bank owned life insurance		85,541			83,454
Goodwill		16,127			16,127
Core deposit intangible		586			937
Other assets		39,730			48,016
Total assets	$	4,380,450		$	4,287,949

LIABILITIES
Due to depositors:
Non-interest bearing	$	148,838		$	118,507
Interest-bearing:
Certificate of deposit accounts		1,482,255			1,529,110
Savings accounts		297,224			349,630
Money market accounts		158,857			200,183
NOW accounts		986,996			919,029
Total interest-bearing deposits		2,925,332			2,997,952
Mortgagors' escrow deposits		35,865			29,786
Borrowed funds ($23,709 and $26,311 at fair value pursuant to the fair value option at September 30, 2012 and December 31, 2011, respectively)		599,606			499,839
Securities sold under agreements to repurchase		185,300			185,300
Other liabilities		44,111			39,654
Total liabilities		3,939,052			3,871,038

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 issued at September 30, 2012 and December 31, 2011; 30,904,130 shares and 30,904,177 shares outstanding at September 30, 2012 and December 31, 2011, respectively)		315			315
Additional paid-in capital		198,328			195,628
Treasury stock, at average cost (626,465 shares and 626,418 shares at September 30, 2012 and December 31, 2011, respectively)		(7,794	)		(7,355	)
Retained earnings		236,622			223,510
Accumulated other comprehensive income, net of taxes		13,927			4,813
Total stockholders' equity		441,398			416,911

Total liabilities and stockholders' equity	$	4,380,450		$	4,287,949

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 ended September 30,					For the nine months ended September 30 ,
(Dollars in thousands, except per share data)	2012		2011			2012			2011

Interest and dividend income
Interest and fees on loans	$	44,857	$	47,767		$	137,540		$	144,578
Interest and dividends on securities:
Interest		8,120		8,325			23,796			24,581
Dividends		191		202			603			606
Other interest income		25		35			53			89
Total interest and dividend income		53,193		56,329			161,992			169,854

Interest expense
Deposits		10,097		12,266			31,232			36,954
Other interest expense		5,513		6,962			17,545			21,849
Total interest expense		15,610		19,228			48,777			58,803

Net interest income		37,583		37,101			113,215			111,051
Provision for loan losses		5,000		5,000			16,000			15,000
Net interest income after provision for loan losses		32,583		32,101			97,215			96,051

Non-interest income
Other-than-temporary impairment ("OTTI") charge		-		(4,816	)		(4,102	)		(8,999	)
Less: Non-credit portion of OTTI charge recorded in Other Comprehensive Income, before taxes		-		4,164			3,326			7,421
Net OTTI charge recognized in earnings		-		(652	)		(776	)		(1,578	)
Loan fee income		731		538			1,831			1,487
Banking services fee income		411		430			1,275			1,279
Net gain on sale of loans		52		493			91			493
Net gain from sale of securities		96		-			96			-
Net gain (loss) from fair value adjustments		825		2,085			(185	)		1,265
Federal Home Loan Bank of New York stock dividends		390		338			1,113			1,180
Bank owned life insurance		703		705			2,088			2,067
Other income		305		358			966			1,108
Total non-interest income		3,513		4,295			6,499			7,301

Non-interest expense
Salaries and employee benefits		10,725		9,715			32,223			29,424
Occupancy and equipment		2,019		1,971			5,867			5,712
Professional services		1,546		1,697			4,821			4,933
FDIC deposit insurance		1,064		1,030			3,168			3,409
Data processing		1,016		1,139			3,043			3,325
Depreciation and amortization		810		792			2,429			2,337
Other real estate owned/foreclosure expense		887		770			2,194			1,638
Other operating expenses		2,676		2,376			8,773			7,592
Total non-interest expense		20,743		19,490			62,518			58,370

Income before income taxes		15,353		16,906			41,196			44,982

Provision for income taxes
Federal		4,543		5,099			12,403			13,575
State and local		1,445		1,657			3,662			4,230
Total taxes		5,988		6,756			16,065			17,805

Net income	$	9,365	$	10,150		$	25,131		$	27,177


Basic earnings per common share	$	0.31	$	0.33		$	0.83		$	0.89
Diluted earnings per common share	$	0.31	$	0.33		$	0.82		$	0.88
Dividends per common share	$	0.13	$	0.13		$	0.39		$	0.39

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

	For the three months ended September 30,						For the nine months ended September 30,
(in thousands)	2012			2011			2012			2011


Comprehensive Income
Net income	$	9,365		$	10,150		$	25,131		$	27,177
Amortization of actuarial losses		149			77			447			233
Amortization of prior service credits		(6	)		(6	)		(19	)		(19	)
OTTI charges included in income		-			367			437			885
Reclassification adjustment for gains included in income		(54	)		-			(54	)		-
Unrealized gains (losses) on securities, net		5,034			10,694			8,303			11,137
Comprehensive income	$	14,488		$	21,282		$	34,245		$	39,413

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 nine months ended September 30,
(Dollars in thousands)	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	25,131		$	27,177
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		16,000			15,000
Depreciation and amortization of bank premises and equipment		2,429			2,337
Net gain on sale of loans		(91	)		(493	)
Net gain on sale of securities		(96	)		-
Amortization of premium, net of accretion of discount		4,893			4,167
Net loss (gain) from fair value adjustments		185			(1,265	)
OTTI charge recognized in earnings		776			1,578
Income from bank owned life insurance		(2,088	)		(2,067	)
Stock-based compensation expense		2,864			2,101
Deferred compensation		(169	)		395
Amortization of core deposit intangibles		351			351
Excess tax benefit from stock-based payment arrangements		(111	)		(260	)
Deferred income tax provision		(600	)		(335	)
Decrease in prepaid FDIC assessment		2,941			3,123
Increase (decrease) in other liabilities		2,057			(4,928	)
Decrease in other assets		1,964			757
Net cash provided by operating activities		56,444			47,638

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(906	)		(2,489	)
Net (purchase) redemption of Federal Home Loan Bank of New York shares		(4,757	)		779
Purchases of securities available for sale		(264,508	)		(121,570	)
Proceeds from sales and call of securities available for sale		6,856			8,000
Proceeds from maturities and prepayments of securities available for sale		121,215			103,495
Net (originations) and repayments of loans		(15,482	)		19,553
Purchases of loans		(3,456	)		(14,455	)
Proceeds from sale of real estate owned		1,261			842
Proceeds from sale of delinquent loans		30,092			16,617
Net cash used in investing activities		(126,685	)		10,772

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		30,331			14,977
Net decrease in interest-bearing deposits		(73,417	)		(62,329	)
Net increase in mortgagors' escrow deposits		6,079			5,939
Net proceeds from short-term borrowed funds		19,000			-
Proceeds from long-term borrowings		162,518			245,447
Repayment of long-term borrowings		(80,000	)		(245,149	)
Purchases of treasury stock		(2,955	)		(4,508	)
Excess tax benefit from stock-based payment arrangements		111			260
Proceeds from issuance of common stock upon exercise of stock options		836			2,039
Cash dividends paid		(11,885	)		(11,973	)
Net cash provided by (used in) financing activities		50,618			(55,297	)

Net decrease in cash and cash equivalents		(19,623	)		3,113
Cash and cash equivalents, beginning of period		55,721			47,789
Cash and cash equivalents, end of period	$	36,098		$	50,902

SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	48,365		$	58,427
Income taxes paid		15,520			19,334
Taxes paid if excess tax benefits were not tax deductible		15,631			19,594
Non-cash activities:
Securities purchased, not yet settled		-			1,000
Loans transferred to real estate owned		3,541			4,750
Loans provided for the sale of real estate owned		1,646			1,345
Loans held for investment transferred to held for sale		8,780			-

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

(Unaudited)

	For the nine months ended September 30,
(Dollars in thousands, except per share data)	2012			2011

Common Stock
Balance, beginning of period	$	315		$	313
Issuance upon exercise of stock options (155,061 common shares for the nine months ended September 30, 2011)		-			1
Shares issued upon vesting of restricted stock unit awards (119,600 commons shares for the nine months ended September 30, 2011)		-			1
Balance, end of period	$	315		$	315
Additional Paid-In Capital
Balance, beginning of period	$	195,628		$	189,348
Award of common shares released from Employee Benefit Trust (154,543 and 140,298 common shares for the nine months ended September 30, 2012 and 2011, respectively)		1,442			1,505
Shares issued upon vesting of restricted stock unit awards (113,272 and 119,800 common shares for the nine months ended September 30, 2012 and 2011, respectively)		317			1,668
Issuance upon exercise of stock options (154,543 and 155,061 common shares for the nine months ended September 30, 2012 and 2011, respectively)		160			1,825
Stock-based compensation activity, net		670			532
Stock-based income tax benefit		111			260
Balance, end of period	$	198,328		$	195,138
Treasury Stock
Balance, beginning of period	$	(7,355	)	$	-
Purchases of shares outstanding(181,000 and 362,050 common shares for the nine months ended September 30, 2012 and 2011, respectively)		(2,444	)		(4,132	)
Shares issued upon vesting of restricted stock unit awards (142,222 and 200 common shares for the nine months ended September 30, 2012 and 2011, respectively)		1,686			3
Issuance upon exercise of stock options (138,025 and 23,129 common shares for the nine months ended September 30, 2012 and 2011, respectively)		1,665			324
Purchases of shares to fund options exercised (60,571 and 3,794 common shares for the nine months ended September 30, 2012 and 2011, respectively)		(835	)		(54	)
Repurchase of shares to satisfy tax obligations (38,723 and 27,441 common shares for the nine months ended September 30, 2012 and 2011, respectively)		(511	)		(376	)
Balance, end of period	$	(7,794	)	$	(4,235	)
Retained Earnings
Balance, beginning of period	$	223,510		$	204,128
Net income		25,131			27,177
Cash dividends declared and paid on common shares ($0.39 per common share for the nine months ended September 30, 2012 and 2011)		(11,885	)		(11,973	)
Issuance upon exercise of stock options (10,480 and 23,129 common shares for the nine months ended September 30, 2012 and 2011, respectively)		(37	)		(50	)
Shares issued upon vesting of restricted stock unit awards (28,950 common shares for the nine months ended September 30, 2012)		(97	)		-
Balance, end of period	$	236,622		$	219,282
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period	$	4,813		$	(3,744	)
Change in net unrealized gains on securities available for sale, net of taxes of approximately ($6,401) and ($8,707) for the nine months ended September 30, 2012 and 2011, respectively		8,303			11,137
Amortization of actuarial losses, net of taxes of approximately ($347) and ($183) for the nine months ended September 30, 2012 and 2011, respectively		447			233
Amortization of prior service credits, net of taxes of approximately $15 for nine months ended September 30, 2012 and 2011		(19	)		(19	)
OTTI charges included in income, net of taxes of approximately ($339) and ($693) for the nine months ended September 30, 2012 and 2011, respectively		437			885
Reclassification adjustment for gains included in net income, net of taxes of approximately $42 for the nine months ended September 30, 2012		(54	)		-
Balance, end of period	$	13,927		$	8,492

Total Stockholders' Equity	$	441,398		$	418,992

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 Holding Company also owns Flushing Financial Capital Trust II, Flushing Financial Capital Trust III, and Flushing Financial Capital Trust IV (the “Trusts”), which are special purpose business trusts. The Trusts are not included in the Company’s consolidated financial statements as the Company would not absorb the losses of the Trusts if losses were to occur.

The accompanying unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. 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, 2011.

When necessary, 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. Estimates that are particularly susceptible to change in the near term are used in connection with the determination of the allowance for loan losses, the evaluation of goodwill for impairment, the evaluation of the need for a valuation allowance of the Company’s deferred tax assets and the evaluation of other-than-temporary impairment (“OTTI”) on securities. The current economic environment has increased the degree of uncertainty inherent in these material estimates. 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 nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and as such should be included in the calculation of earnings per share. Basic earnings per common share is computed by dividing net income available to common shareholders by the total weighted average number of common shares outstanding, which includes unvested participating securities. The Company’s unvested restricted stock and restricted stock unit awards are considered participating securities. Therefore, weighted average common shares outstanding used for computing basic earnings per common share includes common shares outstanding plus unvested restricted stock and restricted stock unit awards. The computation of diluted earnings per share includes the additional dilutive effect of stock options outstanding during the period. Common stock equivalents that are anti-dilutive are not included in the computation of diluted earnings per common share. The numerator for calculating basic and diluted earnings per common share is net income available to common shareholders.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Earnings per common share has been computed based on the following:

	For the three months ended September 30,						For the nine months ended September 30,
	2012			2011			2012			2011
	(In thousands, except per share data)
Net income, as reported	$	9,365		$	10,150		$	25,131		$	27,177
Divided by:
Weighted average common shares outstanding		30,432			30,679			30,434			30,707
Weighted average common stock equivalents		30			14			30			37
Total weighted average common shares outstanding and common stock equivalents		30,462			30,693			30,464			30,744

Basic earnings per common share	$	0.31		$	0.33		$	0.83		$	0.89
Diluted earnings per common share (1) (2)	$	0.31		$	0.33		$	0.82		$	0.88
Dividend payout ratio		41.9	%		39.4	%		47.0	%		43.8	%

(1)

For the three months ended September 30, 2012, options to purchase 557,140 shares at an average exercise price of $17.62 were not included in the computation of diluted earnings per common share since they were anti-dilutive. 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.

(2)

For the nine months ended September 30, 2012, options to purchase 557,140 shares at an average exercise price of $17.62 were not included in the computation of diluted earnings per common share since they were anti-dilutive. 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.

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, 2012 and 2011. 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, 2012:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
U.S. government agencies	$	31,578	$	31,799	$	221	$	-
Corporate		83,117		86,726		3,609		-
Municipals		73,594		75,067		1,556		83
Mutual funds		21,856		21,856		-		-
Other		22,432		17,511		14		4,935
Total other securities		232,577		232,959		5,400		5,018
REMIC and CMO		449,921		470,910		25,303		4,314
GNMA		48,653		53,081		4,428		-
FNMA		169,359		178,903		9,544		-
FHLMC		24,802		25,643		841		-
Total mortgage-backed securities		692,735		728,537		40,116		4,314
Total securities available for sale	$	925,312	$	961,496	$	45,516	$	9,332

Mortgage-backed securities shown in the table above include two private issue collateralized mortgage obligations (“CMOs”) that are collateralized by commercial real estate mortgages with amortized cost and market values totaling $15.8 million and $16.3 million, respectively, at September 30, 2012. 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 the individual securities have been in a continuous unrealized loss position, at September 30, 2012:

	Total				Less than 12 months				12 months or more
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Municipals	$	9,825	$	83	$	9,825	$	83	$	-	$	-
Other		4,627		4,935		-		-		4,627		4,935
Total other securities		14,452		5,018		9,825		83		4,627		4,935

REMIC and CMO		37,964		4,314		11,862		94		26,102		4,220


Total	$	52,416	$	9,332	$	21,687	$	177	$	30,729	$	9,155

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, 2012. 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 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.

Municipals:

The unrealized losses in Municipal securities at September 30, 2012, consist of losses on four municipal securities. The unrealized losses 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, 2012.

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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 September 30, 2012, consist of losses on one single issuer trust preferred security and two pooled trust preferred securities. The unrealized losses on such 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 the Company owns. The Company’s management evaluates these securities using an impairment model, through an independent third party, that is applied to debt securities. In estimating OTTI 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 security 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 was one performing issuer in our pooled trust preferred securities which had a Texas Ratio in excess of 50.00%. We estimated 25% of the related cash flows of this issuer would not be realized. We concluded that issuers with a Texas Ratio below 50.00% are considered healthy and with 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) two issuers totaling $21.5 million will prepay in five years and two issuers totaling $18.7 million will prepay at their next quarterly payment date; (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 are both 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 September 30, 2012, 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, 2012.

At September 30, 2012, 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, 2012. The class the Company owns in pooled trust preferred securities does not have any excess subordination.

											Deferrals/Defaults (1)
Issuer Type	Class		Performing Banks		Amortized Cost		Fair Value		Cumulative Credit Related OTTI		Actual as a Percentage of Original Security	Expected Percentage of Performing Collateral	Current Lowest Rating
					(Dollars in thousands)

Single issuer		n/a		1	$	300	$	277	$	-	None	None	BB-
Single issuer		n/a		1		500		514		-	None	None	B+
Pooled issuer		B1		18		5,617		2,400		2,196	24.8%	0.4%	C
Pooled issuer		C1		18		3,645		1,950		1,542	22.6%	0.0%	C
Total					$	10,062	$	5,141	$	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, 2012 consist of one issue from the Federal Home Loan Mortgage Corporation (“FHLMC”), one issue from the Federal National Mortgage Association (“FNMA”), one issue from the Government National Mortgage Association (“GNMA”), and six 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 September 30, 2012.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The unrealized losses on the six 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, two 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 $0.9 million for the nine months ended September 30, 2012. These losses were anticipated in the cumulative credit related OTTI charges recorded for these four securities.

Credit related impairment for mortgage-backed securities are determined for each security by estimating losses based on the following set of assumptions: (1) delinquency and foreclosure levels; (2) projected losses at various loss severity levels; and (3) credit enhancement and coverage. Based on these reviews, an OTTI charge was recorded during the nine months ended September 30, 2012 on five private issue CMOs of $4.1 million before tax, of which $0.8 million was charged against earnings in the Consolidated Statements of Income and $3.3 million before tax ($1.9 million after-tax) was recorded in AOCI. There was no OTTI charge recorded against earnings in the Consolidated Statements of Income during the three months ended September 30, 2012.

The portion of the above mentioned OTTI, recorded during the nine months ended September 30, 2012, that was related to credit losses was calculated using the following significant assumptions: (1) delinquency and foreclosure levels of 11%-18%; (2) projected loss severity of 40%-50%; (3) assumed default rates of 6%-10% for the first 12 months, 2%-7% for the next 12 months, 2%-8% for the next 12 months and 2% thereafter; and (4) prepayment speeds of 6%-20%.

It is not anticipated at this time that the one private issue CMO, for which an OTTI charge during the nine months ended September 30, 2012 was not recorded, would be settled at a price that is less than the current amortized cost of the Company’s investment. This security was performing according to their terms and in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell this security and it is more likely than not the Company will not be required to sell the security before recovery of the security’s 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 security. Therefore, the Company did not consider the security to be other-than-temporarily impaired at September 30, 2012.

At September 30, 2012, the Company held 15 private issue CMOs which had a current credit rating of at least one rating below investment grade. Five 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, 2012:

							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	$	10,322	$	8,419	$	11,470	$	3,470	2006	05/25/36	D	42%			16%				719
2		4,554		4,001		4,797		727	2006	08/19/36	D	54%							735
3		4,783		4,191		5,318		1,107	2006	08/25/36	D	36%	15%						714
4		3,588		3,365		4,161		780	2006	08/25/36	D	40%	14%		13%		11%		724
5		2,777		2,722		3,087		249	2006	03/25/36	CC	37%							726
6		1,245		1,265		1,252		-	2005	12/25/35	B-	40%							733
7		4,298		3,404		4,573		222	2006	05/25/36	CC	25%		21%	12%	11%			710
8		427		434		431		-	2006	08/25/36	CCC	28%							737
9		1,000		1,028		1,014		-	2005	11/25/35	B-	41%		15%				14%	727
10		817		820		819		-	2005	11/25/35	CC	47%	10%						738
Total	$	33,811	$	29,649	$	36,922	$	6,555

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table details gross unrealized losses recorded in AOCI and the ending credit loss amount on debt securities, as of September 30, 2012, for which the Company has recorded a credit related OTTI charge in the Consolidated Statements of Income:

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

Private issued CMO's (1)	$	30,322	$	26,102	$	4,220	$	3,015
Trust preferred securities (1)		9,262	$	4,350		4,912		3,738
Total	$	39,584	$	30,452	$	9,132	$	6,753

(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:

(in thousands)	For the nine months ended September 30, 2012
Beginning balance	$	6,922

Recognition of actual losses		(945	)
OTTI charges due to credit loss recorded in earnings		776
Securities sold during the period		-
Securities where there is an intent to sell or requirement to sell		-
Ending balance	$	6,753

The following table details the amortized cost and estimated fair value of the Company’s securities classified as available for sale at September 30, 2012, 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	$	28,389	$	28,408
Due after one year through five years		58,782		61,261
Due after five years through ten years		29,840		30,754
Due after ten years		115,566		112,536

Total other securities		232,577		232,959
Mortgage-backed securities		692,735		728,537

Total securities available for sale	$	925,312	$	961,496

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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, 2011:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
U.S. government agencies	$	1,980	$	2,039	$	59	$	-
Corporate		20,777		20,592		-		185
Municipals		4,534		4,532		-		2
Mutual funds		21,369		21,369		-		-
Other		22,023		16,710		9		5,322
Total other securities		70,683		65,242		68		5,509
REMIC and CMO		460,824		473,639		22,796		9,981
GNMA		62,040		67,632		5,592		-
FNMA		175,627		182,630		7,003		-
FHLMC		22,556		23,387		831		-
Total mortgage-backed securities		721,047		747,288		36,222		9,981
Total securities available for sale	$	791,730	$	812,530	$	36,290	$	15,490

Mortgage-backed securities shown in the table above include two private issue CMOs that are collateralized by commercial real estate mortgages with amortized cost and market values of $19.0 million and $19.2 million, respectively, at December 31, 2011. 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, 2011.

	Total				Less than 12 months				12 months or more
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Corporate	$	17,980	$	185	$	17,980	$	185	$	-	$	-
Municipals		1,997		2		1,997		2		-		-
Other		4,241		5,322		-		-		4,241		5,322
Total other securities		24,218		5,509		19,977		187		4,241		5,322

REMIC and CMO		38,684		9,981		12,560		124		26,124		9,857

Total	$	62,902	$	15,490	$	32,537	$	311	$	30,365	$	15,179

5. Loans held for sale

Loans held for sale are carried at the lower of cost or estimated fair value. At September 30, 2012, loans held for sale consists of four non-performing multi-family residential loans totaling $3.0 million and three non-performing commercial business loans totaling $5.8 million. There were no loans held for sale at December 31, 2011.

The Company has implemented a strategy of selling certain delinquent and non-performing loans. Once the Company has decided to sell a loan it usually will close in a short period of time, generally within the same quarter. Loans designated held for sale are reclassified from loans held for investment to loans held for sale. Terms of sale include cash due upon the closing of the sale, no contingencies or recourse to the Company and servicing is released to the buyer.

The Company sold delinquent and non-performing loans totaling $33.1 million, net of charge-offs of $4.9 million, during the nine months ended September 30, 2012 and sold delinquent and non-performing loans totaling $16.5 million, net of charge-offs of $2.2 million during the nine months ended September 30, 2011. There were no net gains from the sale of delinquent and non-performing loans during the three months ended September 30, 2012. There was $150,000 in net gains from the sale of delinquent and non-performing loans during the three months ended September 30, 2011. There were net gains from the sale of delinquent and non-performing loans totaling $31,000 and $150,000 for the nine months ended September 30, 2012 and 2011, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

6. 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. 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 for loan losses 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 the Company’s opinion, indicate the borrower will be unable to bring the loan current within a reasonable time. 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 the Company’s 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 dependent impaired loans are compared to the loan’s updated fair value. The balance which exceeds fair value is generally 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. The Company considers fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property. 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.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company evaluates the underlying collateral through a third party appraisal, or when a third party appraisal is not available, the Company will use an internal evaluation. The internal evaluations are performed using an income approach or a sales approach. 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 an internal evaluation is used, 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, 2012, the Company utilized recent third party appraisals of the collateral to measure impairment for $103.7 million, or 75.0%, of collateral dependent impaired loans and used internal evaluations of the property’s value for $34.6 million, or 25.0%, of collateral dependent impaired loans.

The Company may restructure a loan to enable a borrower to continue making payments when it is deemed that the restructure will allow borrowers to become current and remain current on their loans. 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. We classify these loans as Troubled Debt Restructured (“TDR”) when the Savings Bank grants a concession to a borrower who is experiencing financial difficulties.

These restructurings have not included a reduction of principal balance. The Company believes that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. All loans classified as TDR are considered impaired, however TDR loans which have been current for six consecutive months at the time they are restructured as TDR remain on accrual status and are not included as part of non-performing loans. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status and reported as non-performing loans 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 placed on non-accrual status and reported as non-performing loans.

The allocation of a portion of the allowance for loan losses for a performing TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate, or for a non-performing TDR which is collateral dependent, the fair value of the collateral. At September 30, 2012, 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.

The following table shows loans modified and classified as TDR for the three months ended September 30, 2012 and 2011:

	For the thee months ended September 30, 2012					For the thee months ended September 30, 2011
(Dollars in thousands)	Number		Balance		Modification description	Number		Balance		Modification description


One-to-four family - residential		1	$	400	Received a below market interest rate		-	$	-
Commercial business and other		2		1,900	Received a below market interest rate and the loan amortization was extended		-		-
Total		3	$	2,300			-	$	-

- 15 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows loans modified and classified as TDR for the nine months ended September 30, 2012 and 2011:

	For the nine months ended September 30, 2012					For the nine months ended September 30, 2011
(Dollars in thousands)	Number		Balance		Modification description	Number		Balance		Modification description


Multi-family residential		-	$	-			6	$	1,800	Received a below market interest rate and the loan amortization was extended
Commercial real estate		3		5,300	Received a below market interest rate and the loan amortization was extended		1		2,000	Received a below market interest rate
One-to-four family - mixed-use property		3		1,200	Received a below market interest rate		2		500	Received a below market interest rate and loan amortization term extended
One-to-four family - residential		1		400	Received a below market interest rate
Construction loans							2		24,200	Received a below market interest rate
Commercial business and other		2		1,900	Received a below market interest rate and the loan amortization was extended		-		-
Total		9	$	8,800			11	$	28,500

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

	September 30, 2012				December 31, 2011
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment

Multi-family residential		8	$	2,340		11	$	9,412
Commercial real estate		5		8,517		2		2,499
One-to-four family - mixed-use property		7		2,350		3		795
One-to-four family - residential		1		376
Construction		1		3,805		1		5,888
Commercial business and other		2		2,553		1		2,000
Total performing troubled debt restructured		24	$	19,941		18	$	20,594

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