Edgar Filing: FLUSHING FINANCIAL CORP

f10q_080912.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 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 __	Accelerated filer _X_

Non-accelerated filer __	Smaller reporting company __

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

The number of shares of the registrant’s Common Stock outstanding as of July 31, 2012 was 30,951,445.

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	36

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	56

ITEM 4. Controls and Procedures	56

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings	57

ITEM 1A. Risk Factors	57

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	57

ITEM 3. Defaults Upon Senior Securities	57

ITEM 4. Mine Safety Disclosures	57

ITEM 5. Other Information	57

ITEM 6. Exhibits	58

SIGNATURES	59

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements

	June 30,			December 31,
(Dollars in thousands, except per share data)	2012			2011
ASSETS
Cash and due from banks	$	41,216		$	55,721
Securities available for sale:
Mortgage-backed securities ($30,968 and $37,787 at fair value pursuant to the fair value option at June 30, 2012 and December 31, 2011, respectively)		738,099			747,288
Other securities ($31,377 and $30,942 at fair value pursuant to the fair value option at June 30, 2012 and December 31, 2011 respectively)		221,918			65,242
Loans available for sale		740			-
Loans:
Multi-family residential		1,453,049			1,391,221
Commercial real estate		552,513			580,783
One-to-four family ― mixed-use property		669,913			693,932
One-to-four family ― residential		208,273			220,431
Co-operative apartments		6,834			5,505
Construction		39,511			47,140
Small Business Administration		11,233			14,039
Taxi medallion		37,291			54,328
Commercial business and other		242,967			206,614
Net unamortized premiums and unearned loan fees		13,911			14,888
Allowance for loan losses		(30,899	)		(30,344	)
Net loans		3,204,596			3,198,537
Interest and dividends receivable		18,706			17,965
Bank premises and equipment, net		23,506			24,417
Federal Home Loan Bank of New York stock		36,847			30,245
Bank owned life insurance		84,839			83,454
Goodwill		16,127			16,127
Core deposit intangible		703			937
Other assets		48,532			48,016
Total assets	$	4,435,829		$	4,287,949

LIABILITIES
Due to depositors:
Non-interest bearing	$	139,510		$	118,507
Interest-bearing:
Certificate of deposit accounts		1,500,483			1,529,110
Savings accounts		322,728			349,630
Money market accounts		166,877			200,183
NOW accounts		971,128			919,029
Total interest-bearing deposits		2,961,216			2,997,952
Mortgagors' escrow deposits		35,880			29,786
Borrowed funds ($24,356 and $26,311 at fair value pursuant to the fair value option at June 30, 2012 and December 31, 2011, respectively)		641,708			499,839
Securities sold under agreements to repurchase		185,300			185,300
Other liabilities		41,249			39,654
Total liabilities		4,004,863			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 June 30, 2012 and December 31, 2011; 30,949,332 shares and 30,904,177 shares outstanding at June 30, 2012 and December 31, 2011, respectively)		315			315
Additional paid-in capital		197,709			195,628
Treasury stock, at average cost (581,263 shares and 626,418 shares at June 30, 2012 and December 31, 2011, respectively)		(7,086	)		(7,355	)
Retained earnings		231,224			223,510
Accumulated other comprehensive income, net of taxes		8,804			4,813
Total stockholders' equity		430,966			416,911

Total liabilities and stockholders' equity	$	4,435,829		$	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						For the six months
	ended June 30,						ended June 30 ,
(Dollars in thousands, except per share data)	2012			2011			2012			2011

Interest and dividend income
Interest and fees on loans	$	46,123		$	48,121		$	92,683		$	96,811
Interest and dividends on securities:
Interest		8,045			8,149			15,676			16,256
Dividends		205			202			412			404
Other interest income		11			27			28			54
Total interest and dividend income		54,384			56,499			108,799			113,525

Interest expense
Deposits		10,225			12,354			21,135			24,688
Other interest expense		5,872			7,350			12,032			14,887
Total interest expense		16,097			19,704			33,167			39,575

Net interest income		38,287			36,795			75,632			73,950
Provision for loan losses		5,000			5,000			11,000			10,000
Net interest income after provision for loan losses		33,287			31,795			64,632			63,950

Non-interest income (loss)
Other-than-temporary impairment ("OTTI") charge		(6,218	)		-			(6,218	)		(3,939	)
Less: Non-credit portion of OTTI charge recorded in Other Comprehensive Income, before taxes		5,442			-			5,442			3,013
Net OTTI charge recognized in earnings		(776	)		-			(776	)		(926	)
Loan fee income		634			515			1,100			949
Banking services fee income		409			388			864			849
Net gain on sale of loans		39			-			39			-
Net gain from sale of securities		-			-			-			-
Net loss from fair value adjustments		(562	)		(165	)		(1,010	)		(820	)
Federal Home Loan Bank of New York stock dividends		338			342			723			842
Bank owned life insurance		689			695			1,385			1,362
Other income		337			360			661			750
Total non-interest income		1,108			2,135			2,986			3,006

Non-interest expense
Salaries and employee benefits		10,457			9,682			21,498			19,709
Occupancy and equipment		1,918			1,874			3,848			3,741
Professional services		1,553			1,637			3,275			3,236
FDIC deposit insurance		1,087			951			2,104			2,379
Data processing		1,051			1,181			2,027			2,186
Depreciation and amortization		785			779			1,619			1,545
Other real estate owned/foreclosure expense		595			531			1,307			868
Other operating expenses		2,793			2,230			6,097			5,216
Total non-interest expense		20,239			18,865			41,775			38,880

Income before income taxes		14,156			15,065			25,843			28,076

Provision for income taxes
Federal		4,236			4,564			7,860			8,476
State and local		1,283			1,427			2,217			2,573
Total taxes		5,519			5,991			10,077			11,049

Net income	$	8,637		$	9,074		$	15,766		$	17,027


Basic earnings per common share	$	0.28		$	0.29		$	0.52		$	0.55
Diluted earnings per common share	$	0.28		$	0.29		$	0.52		$	0.55
Dividends per common share	$	0.13		$	0.13		$	0.26		$	0.26

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

	For the three months ended						For the six months ended
	June 30,						June 30,
(Dollars in thousands)	2012			2011			2012			2011


Comprehensive Income
Net income	$	8,637		$	9,074		$	15,766		$	17,027
Amortization of actuarial losses		149			79			298			156
Amortization of prior service credits		(7	)		(7	)		(13	)		(13	)
OTTI charges included in income		437			-			437			518
Unrealized gains (losses) on securities, net		2,052			3,933			3,269			443
Comprehensive income	$	11,268		$	13,079		$	19,757		$	18,131

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	For the six months ended
	June 30,
(Dollars in thousands)	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	15,766		$	17,027
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		11,000			10,000
Depreciation and amortization of bank premises and equipment		1,619			1,545
Net gain on sale of loans		(39	)		-
Amortization of premium, net of accretion of discount		3,210			2,795
Net loss from fair value adjustments		1,010			820
OTTI charge recognized in earnings		776			926
Income from bank owned life insurance		(1,385	)		(1,362	)
Stock-based compensation expense		2,219			1,663
Deferred compensation		(304	)		244
Amortization of core deposit intangibles		234			234
Excess tax benefit from stock-based payment arrangements		(78	)		(205	)
Deferred income tax provision		(485	)		(568	)
Decrease in prepaid FDIC assessment		1,953			2,179
Increase (decrease) in other liabilities		4,136			(844	)
Increase in other assets		(3,833	)		(7,544	)
Net cash provided by operating activities		35,799			26,910

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(708	)		(1,275	)
Net purchase of Federal Home Loan Bank of New York shares		(6,602	)		(2,421	)
Purchases of securities available for sale		(225,430	)		(119,462	)
Proceeds from maturities and prepayments of securities available for sale		82,286			68,362
Net (originations) and repayments of loans		(37,967	)		38,146
Purchases of loans		(3,456	)		(14,455	)
Proceeds from sale of real estate owned		1,229			515
Proceeds from sale of delinquent loans		16,494			7,766
Net cash used in investing activities		(174,154	)		(22,824	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		21,003			12,914
Net decrease in interest-bearing deposits		(37,243	)		(87,728	)
Net increase in mortgagors' escrow deposits		6,094			5,328
Net proceeds from short-term borrowed funds		60,740			104,639
Proceeds from long-term borrowings		162,518			26,335
Repayment of long-term borrowings		(80,000	)		(75,416	)
Purchases of treasury stock		(2,223	)		(374	)
Excess tax benefit from stock-based payment arrangements		78			205
Proceeds from issuance of common stock upon exercise of stock options		814			2,016
Cash dividends paid		(7,931	)		(8,010	)
Net cash provided by (used in) financing activities		123,850			(20,091	)

Net decrease in cash and cash equivalents		(14,505	)		(16,005	)
Cash and cash equivalents, beginning of period		55,721			47,789
Cash and cash equivalents, end of period	$	41,216		$	31,784

SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	32,879		$	39,210
Income taxes paid		11,573			13,656
Taxes paid if excess tax benefits were not tax deductible		11,651			13,861
Non-cash activities:
Loans transferred to real estate owned		1,632			1,861
Loans provided for the sale of real estate owned		1,428			1,345
Loans held for investment transferred to available for sale		740			-

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 six months ended
	June 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 six months ended June 30, 2011)		-			1
Shares issued upon vesting of restricted stock unit awards (119,600 commons shares for the six months ended June 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 (150,564 and 135,617 common shares for the six months ended June 30, 2012 and 2011, respectively)		1,398			1,468
Shares issued upon vesting of restricted stock unit awards (113,072 and 119,600 common shares for the six months ended June 30, 2012 and 2011, respectively)		317			1,667
Issuance upon exercise of stock options (102,540 and 175,570 common shares for the six months ended June 30, 2012 and 2011, respectively)		97			1,825
Stock-based compensation activity, net		191			21
Stock-based income tax benefit		78			205
Balance, end of period	$	197,709		$	194,534
Treasury Stock
Balance, beginning of period	$	(7,355	)	$	-
Purchases of shares outstanding(130,900 common shares for the six months ended June 30, 2012)		(1,721	)		-
Shares issued upon vesting of restricted stock unit awards (142,022 common shares for the six months ended June 30, 2012)		1,684			-
Issuance upon exercise of stock options (113,020 and 20,509 common shares for the six months ended June 30, 2012 and 2011, respectively)		1,356			294
Purchases of shares to fund options exercised (40,866 and 3,794 common shares for the six months ended June 30, 2012 and 2011, respectively)		(548	)		(54	)
Repurchase of shares to satisfy tax obligations (38,121 and 27,368 common shares for the six months ended June 30, 2012 and 2011, respectively)		(502	)		(374	)
Balance, end of period	$	(7,086	)	$	(134	)
Retained Earnings
Balance, beginning of period	$	223,510		$	204,128
Net income		15,766			17,027
Cash dividends declared and paid on common shares ($0.26 per common share for the six months ended June 30, 2012 and 2011, respectively)		(7,931	)		(8,010	)
Issuance upon exercise of stock options (10,480 and 175,570 common shares for the six months ended June 30, 2012 and 2011, respectively)		(23	)		(46	)
Shares issued upon vesting of restricted stock unit awards (28,950 common shares for the six months ended June 30, 2012)		(98	)		-
Balance, end of period	$	231,224		$	213,099
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period	$	4,813		$	(3,744	)
Change in net unrealized gains (losses) on securities available for sale, net of taxes of approximately ($2,566) and ($336) for the six months ended June 30, 2012 and 2011, respectively		3,269			443
Amortization of actuarial losses, net of taxes of approximately ($233) and ($122) for the six months ended June 30, 2012 and 2011, respectively		298			156
Amortization of prior service credits, net of taxes of approximately $10 for both six month periods ended June 30, 2012 and 2011)		(13	)		(13	)
OTTI charges included in income, net of taxes of approximately ($339) and ($408) for the six months ended June 30, 2012 and 2011, respectively)		437			518
Balance, end of period	$	8,804		$	(2,640	)

Total Stockholders' Equity	$	430,966		$	405,174

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						For the six months ended
	June 30,						June 30,
	2012			2011			2012			2011
	(In thousands, except per share data)
Net income, as reported	$	8,637		$	9,074		$	15,766		$	17,027
Divided by:
Weighted average common shares outstanding		30,472			30,823			30,434			30,722
Weighted average common stock equivalents		20			41			22			54
Total weighted average common shares outstanding and common stock equivalents		30,492			30,864			30,456			30,776

Basic earnings per common share	$	0.28		$	0.29		$	0.52		$	0.55
Diluted earnings per common share (1)	$	0.28		$	0.29		$	0.52		$	0.55
Dividend payout ratio		46.4	%		44.8	%		50.0	%		47.3	%

(1) For the three and six months ended June 30, 2012, options to purchase 720,865 shares at an average exercise price of $16.71 were not included in the computation of diluted earnings per common share as they are anti-dilutive. For the three and six months ended June 30, 2011, options to purchase 560,550 shares at an average exercise price of $17.62 were not included in the computation of diluted earnings per common share as they are anti-dilutive.

4. Debt and Equity Securities

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

The Company did not hold any trading securities or securities held-to-maturity during the three and six month periods ended June 30, 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 June 30, 2012:

					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
U.S. government agencies	$	31,739	$	31,956	$	217	$	-
Corporate		85,418		86,400		1,312		330
Municipals		65,431		64,927		300		804
Mutual funds		21,675		21,675		-		-
Other		22,198		16,960		18		5,256
Total other securities		226,461		221,918		1,847		6,390
REMIC and CMO		462,193		480,743		25,654		7,104
GNMA		53,828		58,418		4,590		-
FNMA		161,782		169,853		8,071		-
FHLMC		28,342		29,085		743		-
Total mortgage-backed securities		706,145		738,099		39,058		7,104
Total securities available for sale	$	932,606	$	960,017	$	40,905	$	13,494

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 $16.5 million and $16.9 million, respectively, at June 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 June 30, 2012:

	Total				Less than 12 months				12 months or more
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)
Corporate	$	39,140	$	330	$	39,140	$	330	$	-	$	-
Municipals		42,326		804		42,326		804		-		-
Other		4,307		5,256		-		-		4,307		5,256
Total other securities		85,773		6,390		81,466		1,134		4,307		5,256
REMIC and CMO		38,234		7,104		12,609		150		25,625		6,954
Total mortgage-backed securities		38,234		7,104		12,609		150		25,625		6,954
Total securities available for sale	$	124,007	$	13,494	$	94,075	$	1,284	$	29,932	$	12,210

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 June 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.

Corporate:

The unrealized losses in Corporate securities at June 30, 2012, consist of losses on six Corporate 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 June 30, 2012.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Municipals:

The unrealized losses in Municipal securities at June 30, 2012, consist of losses on 12 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 June 30, 2012.

Other Securities:

The unrealized losses in Other Securities at June 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 issuer with a Texas Ratio in excess of 50% for which we concluded there would not be a default, primarily due to its current operating results and demonstrated ability to raise additional capital.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

There were no remaining performing 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) one issuer will prepay in five years; (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 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 June 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 June 30, 2012.

At June 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 June 30, 2012. 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			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	$	272	$	-	None			None			BB-
Single issuer		n/a		1		500		518		-	None			None				B	+
Pooled issuer		B1		19		5,617		2,160		2,196		28.2	%		0.9	%		C
Pooled issuer		C1		19		3,645		1,875		1,542		25.6	%		0.0	%		C
Total					$	10,062	$	4,825	$	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 June 30, 2012 consist of four issues from the Federal Home Loan Mortgage Corporation (“FHLMC”), one issue from the Federal National Mortgage Association (“FNMA”), and seven private issues.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 June 30, 2012.

The unrealized losses at June 30, 2012 on the seven 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, three 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 $0.8 million for the six months ended June 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 three and six months ended June 30, 2012 on five private issue CMOs of $6.2 million before tax, of which $0.8 million was charged against earnings in the Consolidated Statements of Income and $5.4 million before tax ($3.1 million after-tax) was recorded in AOCL.

The portion of the above mentioned OTTI, recorded during the three and six months ended June 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 two private issue CMOs for which an OTTI charge during the three months ended June 30, 2012 was not recorded, would be settled at a price that is less than the current amortized cost of the Company’s investment. Both of these securities are performing according to their terms and in the opinion of management, will continue to perform according to their terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these two investments to be other-than-temporarily impaired at June 30, 2012.

At June 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.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table details the remaining 10 private issue CMOs that were evaluated to determine if they were other-than-temporarily impaired at June 30, 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	$	10,610	$	7,962	$	11,842	$	3,470		2006	05/25/36		D		42	%								15	%											719
	2		4,879		3,662		5,168		727		2006	08/19/36		D		55	%																				737
	3		4,907		4,022		5,466		1,107		2006	08/25/36		D		36	%		15	%																	713
	4		3,708		3,257		4,314		780		2006	08/25/36		D		37	%		13	%					12	%					12	%					724
	5		2,960		2,720		3,270		249		2006	03/25/36	CC			38	%																				727
	6		1,502		1,522		1,511		-		2005	12/25/35		B-		40	%																				734
	7		4,561		3,058		4,837		222		2006	05/25/36	CC			28	%					19	%		11	%		11	%								712
	8		643		655		649		-		2006	08/25/36	CCC			29	%																				737
	9		1,080		1,092		1,095		-		2005	11/25/35		B-		41	%					15	%											14	%		727
	10		953		944		954		-		2005	11/25/35	CC			47	%		10	%																	738
Total		$	35,803	$	28,894	$	39,106	$	6,555

The following table details gross unrealized losses recorded in AOCI and the ending credit loss amount on debt securities, as of June 30, 2012, for which the Company has 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)	$	31,626	$	24,681	$	6,945	$	3,200
Trust preferred securities (1)		9,262		4,035		5,227		3,738
Total	$	40,888	$	28,716	$	12,172	$	6,938

(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 six months ended
(in thousands)	June 30, 2012
Beginning balance	$	6,922

Recognition of actual losses		(760	)
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	$	6,938

-12-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table details the amortized cost and estimated fair value of the Company’s securities classified as available for sale at June 30, 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	$	30,914	$	30,943
Due after one year through five years		58,554		59,389
Due after five years through ten years		22,499		22,379
Due after ten years		114,494		109,207
Total other securities		226,461		221,918
Mortgage-backed securities		706,145		738,099
Total securities available for sale	$	932,606	$	960,017

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2011:

					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		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.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2011.

	Total				Less than 12 months				12 months or more
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		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 securities available for sale	$	62,902	$	15,490	$	32,537	$	311	$	30,365	$	15,179

5. Loans

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

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

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Increases and decreases in the allowance 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 become 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.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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 June 30, 2012, the Company utilized recent third party appraisals of the collateral to measure impairment for $127.2 million, or 76.5%, of collateral dependent impaired loans and used internal evaluations of the property’s value for $39.1 million, or 23.5%, of collateral dependent impaired loans.

The Company may restructure a loan to enable a borrower to continue making payments when it is deemed to be in the Company’s 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. 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 June 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.

During the three months ended June 30, 2012, two commercial loans totaling $3.9 million and a one-to-four family – mixed use property loan for $0.8 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 having the loan’s amortization term extended. During the three months ended June 30, 2011, two one-to-four family – mixed use property loans totaling $0.5 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, and each had the loan’s amortization term extended.

-15-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

During the six months ended June 30, 2012, three one-to-four family – mixed use property loans totaling $1.2 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; and three commercial mortgage loans totaling $5.3 million were modified and classified as TDR, as one borrower had two business lines of credit loans rolled into one five year fixed rate commercial mortgage and was given an interest rate that was considered below market for that borrower with the loan’s amortization term extended. For each of the loans that were modified and classified as TDR, the borrower was experiencing financial difficulties. The recorded investment of each of the loans modified and classified to TDR was unchanged as there was no principal forgiven in any of these modifications.

During the six months ended June 30, 2011, six multi-family loans totaling $1.8 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 and each had the loan’s amortization term extended; two constructions loans totaling $24.2 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; two one-to-four family – mixed use property loans totaling $0.5 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; one commercial business loan for $2.0 million was modified and classified as TDR, as the borrower was given an interest rate that was considered below market for that borrower.

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

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

Multi-family residential		8	$	2,348		11	$	9,412
Commercial real estate		4		7,276		2		2,499
One-to-four family - mixed-use property		7		2,365		3		795
Construction		1		4,178		1		5,888
Commercial business and other		1		2,000		1		2,000

Total performing troubled debt restructured		21	$	18,167		18	$	20,594

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

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

Multi-family residential		3	$	6,881		-	$	-
Commercial real estate		3		4,228		2		4,340
One-to-four family - mixed-use property		2		817		3		1,193
One-to-four family - residential		-		-		-		-
Construction		1		9,464		1		11,673
Total troubled debt restructurings that subsequently defaulted		9	$	21,390		6	$	17,206

During the three months ended June 30, 2012, one commercial loan for $0.4 million, which was modified and classified as TDR within the previous 12 months, was reclassified to non-accrual status as it was no longer performing in accordance with its modified terms. During the three months ended June 30, 2011, two one-to-four family – mixed-use property loans totaling $0.7 million, which were modified and classified as TDR within the previous 12 months, were reclassified to non-accrual status as they are no longer performing in accordance with their modified terms.

-16-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

During the six months ended June 30, 2012, three multi-family TDR totaling $6.9 million and one commercial TDR totaling $0.4 million were transferred to non-accrual status as they were no longer performing in accordance with their modified terms. During the six months ended June 30, 2011, one commercial loan for $3.3 million and one one-to-four family – mixed-use property loan for $0.3 million which were modified and classified as TDR within the previous 12 months, were reclassified to non-accrual status as they were no longer performing in accordance with their modified terms.

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

	June 30,		December 31,
(Dollars in thousands)	2012		2011

Loans ninety days or more past due and still accruing:
Multi-family residential	$	-	$	6,287
Commercial real estate		-		92
Construction		-		-
Total		-		6,379

Non-accrual mortgage loans:
Multi-family residential		27,972		19,946
Commercial real estate		19,585		19,895
One-to-four family - mixed-use property		20,437		28,429
One-to-four family - residential		12,450		12,766
Co-operative apartments		109		152
Construction		9,845		14,721
Total		90,398		95,909

Non-accrual non-mortgage loans:
Small Business Administration		392		493
Commercial Business and other		21,403		14,660
Total		21,795		15,153

Total non-accrual loans		112,193		111,062

Total non-accrual loans and loans ninety days or more past due and still accruing	$	112,193	$	117,441

The interest foregone on non-accrual loans and loans classified as TDR totaled $2.1 million and $2.3 million for the three months ended June 30, 2012 and 2011, respectively, and $4.2 million and $4.9 million for the six months ended June 30, 2012 and 2011, respectively.

-17-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows an age analysis of our recorded investment in loans at June 30, 2012:


					Greater
	30 - 59 Days		60 - 89 Days		than		Total Past
(in thousands)	Past Due		Past Due		90 Days		Due		Current		Total Loans


Multi-family residential	$	21,720	$	1,921	$	27,972	$	51,613	$	1,401,436	$	1,453,049
Commercial real estate		11,371		862		19,585		31,818		520,695		552,513
One-to-four family - mixed-use property		17,802		5,349		19,961		43,112		626,801		669,913
One-to-four family - residential		2,761		1,597		12,312		16,670		191,603		208,273
Co-operative apartments		144		-		109		253		6,581		6,834
Construction loans		2,462		-		9,845		12,307		27,204		39,511
Small Business Administration		1,032				392		1,424		9,809		11,233
Taxi medallion		-		-		-		-		37,291		37,291
Commercial business and other		509		2,160		20,555		23,224		219,743		242,967
Total	$	57,801	$	11,889	$	110,731	$	180,421	$	3,041,163	$	3,221,584

The following table shows an age analysis of our recorded investment in loans at December 31, 2011:


					Greater
	30 - 59 Days		60 - 89 Days		than		Total Past
(in thousands)	Past Due		Past Due		90 Days		Due		Current		Total Loans


Multi-family residential	$	20,083	$	6,341	$	26,233	$	52,657	$	1,338,564	$	1,391,221
Commercial real estate		10,804		1,797		19,987		32,588		548,195		580,783
One-to-four family - mixed-use property		20,480		3,027		27,950		51,457		642,475		693,932
One-to-four family - residential		4,699		1,769		12,766		19,234		201,197		220,431
Co-operative apartments		-		-		152		152		5,353		5,505
Construction loans		5,065		-		14,721		19,786		27,354		47,140
Small Business Administration		16		41		452		509		13,530		14,039
Taxi medallion		71		-		-		71		54,257		54,328
Commercial business and other		5,476		966		10,241		16,683		189,931		206,614
Total	$	66,694	$	13,941	$	112,502	$	193,137	$	3,020,856	$	3,213,993

-18-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows the activity in the allowance for loan losses for the six months ended June 30, 2012:

(in thousands)	Multi-family residential		Commercial real estate		One-to-four family - mixed-use property		One-to-four family - residential		Co-operative apartments		Construction loans		Small Business Administration			Taxi medallion			Commercial business and other			Total

Allowance for credit losses:
Beginning balance	$	11,267	$	5,210	$	5,314	$	1,649	$	80	$	668	$	987		$	41		$	5,128		$	30,344
Charge-off's		2,162		2,222		2,329		898		43		2,441		265			-			523			10,883
Recoveries		80		125		79		29		-		-		23			-			102			438
Provision		2,880		3,216		2,722		1,041		63		2,500		(89	)		(13	)		(1,320	)		11,000
Ending balance	$	12,065	$	6,329	$	5,786	$	1,821	$	100	$	727	$	656		$	28		$	3,387		$	30,899
Ending balance: individually evaluated for impairment	$	76	$	261	$	696	$	-	$	57	$	33	$	-		$	-		$	40		$	1,163
Ending balance: collectively evaluated for impairment	$	11,989	$	6,068	$	5,090	$	1,821	$	43	$	694	$	656		$	28		$	3,347		$	29,736

Financing Receivables:
Ending balance	$	1,453,049	$	552,513	$	669,913	$	208,273	$	6,834	$	39,511	$	11,233		$	37,291		$	242,967		$	3,221,584
Ending balance: individually evaluated for impairment	$	39,541	$	31,383	$	31,649	$	14,931	$	312	$	19,650	$	1,235		$	-		$	27,610		$	166,311
Ending balance: collectively evaluated for impairment	$	1,413,508	$	521,130	$	638,264	$	193,342	$	6,522	$	19,861	$	9,998		$	37,291		$	215,357		$	3,055,273

-19-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows our recorded investment, unpaid principal balance and allocated allowance for loan losses, average recorded investment and interest income recognized for loans that were considered impaired at or for the six month period ended June 30, 2012:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

	(Dollars in thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	36,361	$	40,512	$	-	$	35,487	$	184
Commercial real estate		44,412		49,758		-		52,370		285
One-to-four family mixed-use property		27,378		31,133		-		28,997		191
One-to-four family residential		14,931		18,032		-		14,904		71
Co-operative apartments		111		153		-		111		-
Construction		15,472		17,906		-		17,736		210
Non-mortgage loans:
Small Business Administration		1,235		1,474		-		957		19
Taxi Medallion		-		-		-		-		-
Commercial Business and other		6,690		7,423		-		6,180		38
Total loans with no related allowance recorded		146,590		166,391		-		156,742		998

With an allowance recorded:
Mortgage loans:
Multi-family residential		3,180		3,180		76		3,938		97
Commercial real estate		5,891		5,891		261		5,276		136
One-to-four family mixed-use property		4,271		4,271		696		5,021		132
One-to-four family residential		-		-		-		-		-
Co-operative apartments		201		201		57		202		6
Construction		4,178		4,178		33		4,745		77
Non-mortgage loans:
Small Business Administration		-		-		-		-		-
Taxi Medallion		-		-		-		-		-
Commercial Business and other		2,000		2,000		40		2,000		40
Total loans with an allowance recorded		19,721		19,721		1,163		21,182		488

Total Impaired Loans:
Total mortgage loans	$	156,386	$	175,215	$	1,123	$	168,787	$	1,389

Total non-mortgage loans	$	9,925	$	10,897	$	40	$	9,137	$	97

-20-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

	(Dollars in thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	18,403	$	19,200	$	-	$	16,930	$	838
Commercial real estate		12,474		12,547		-		10,008		443
One-to-four family mixed-use property		7,107		7,455		-		6,976		104
One-to-four family residential		8,394		8,394		-		6,556		97
Co-operative apartments		-		-		-		20		-
Construction		30,589		32,340		-		22,258		1,116
Non-mortgage loans:
Small Business Administration		-		-		-		-		-
Taxi Medallion		-		-		-		-		-
Commercial Business and other		8,745		8,825		-		4,271		558
Total loans with no related allowance recorded		85,712		88,761		-		67,019		3,156

With an allowance recorded:
Mortgage loans:
Multi-family residential		33,223		37,649		5,290		27,507		396
Commercial real estate		19,646		22,443		3,100		14,799		401
One-to-four family mixed-use property		26,432		28,622		3,960		23,551		290
One-to-four family residential		2,480		2,681		290		2,041		-
Co-operative apartments		-		-		-		-		-
Construction		-		-		-		1,750		-
Non-mortgage loans:
Small Business Administration		1,432		1,432		768		1,233		82
Taxi Medallion		-		-		-		-		-
Commercial Business and other		6,121		6,842		2,449		4,739		193
Total loans with an allowance recorded		89,334		99,669		15,857		75,620		1,362

Total Impaired Loans:
Total mortgage loans	$	158,748	$	171,331	$	12,640	$	132,396	$	3,685

Total non-mortgage loans	$	16,298	$	17,099	$	3,217	$	10,243	$	833

In accordance with our policy and the current regulatory guidelines, we designate loans as “Special Mention,” which is considered “Criticized Loans,” and “Substandard,” “Doubtful,” or “Loss,” which are considered “Classified Loans”. If a loan does not fall within one of the previous mentioned categories then the loan would be considered “Pass.” We designate a loan as Substandard when a well-defined weakness is identified that jeopardizes the orderly liquidation of the debt. We designate a loan as Doubtful when it displays the inherent weakness of a Substandard loan with the added provision that collection of the debt in full, on the basis of existing facts, is highly improbable. We designate a loan as Loss if it is deemed the debtor is incapable of repayment. Loans that are designated as Loss are charged to the Allowance for Loan Losses. Loans that are non-accrual are designated as Substandard, Doubtful or Loss. We designate a loan as Special Mention if the asset does not warrant classification within one of the other classifications, but does contain a potential weakness that deserves closer attention.

-21-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table sets forth the recorded investment in loans designated as Criticized or Classified at June 30, 2012:

(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total

Multi-family residential	$	13,793	$	37,193	$	-	$	-	$	50,986
Commercial real estate		14,191		31,383		-		-		45,574
One-to-four family - mixed-use property		13,167		30,832		-		-		43,999
One-to-four family - residential		4,197		14,932		-		-		19,129
Co-operative apartments		-		312		-		-		312
Construction loans		9,135		15,472		-		-		24,607
Small Business Administration		213		356		247		-		816
Commercial business and other		3,731		24,440		1,169		-		29,340
Total loans	$	58,427	$	154,920	$	1,416	$	-	$	214,763

The following table sets forth the recorded investment in loans designated as Criticized or Classified at December 31, 2011:

(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total

Multi-family residential	$	17,135	$	41,393	$	-	$	-	$	58,528
Commercial real estate		12,264		41,247		-		-		53,511
One-to-four family - mixed-use property		17,393		33,831		-		-		51,224
One-to-four family - residential		3,127		14,343		-		-		17,470
Co-operative apartments		203		153		-		-		356
Construction loans		2,570		28,555		-		-		31,125
Small Business Administration		666		256		214		-		1,136
Commercial business and other		13,585		17,613		1,169		-		32,367
Total loans	$	66,943	$	177,391	$	1,383	$	-	$	245,717

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

	For the six months
	ended June 30
(In thousands)	2012			2011

Balance, beginning of period	$	30,344		$	27,699
Provision for loan losses		11,000			10,000
Charge-off's		(10,883	)		(8,559	)
Recoveries		438			218
Balance, end of period	$	30,899		$	29,358

-22-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
(In thousands)	2012		2011		2012		2011
Multi-family residential	$	1,078	$	879	$	2,082	$	1,796
Commercial real estate		387		572		2,097		2,522
One-to-four family – mixed-use property		838		307		2,250		480
One-to-four family – residential		44		454		869		1,928
Co-operative apartments		1		-		43		-
Construction		2,207		703		2,441		703
Small Business Administration		138		148		242		471
Commercial business and other		26		9		421		441
Total net loan charge-offs	$	4,719	$	3,072	$	10,445	$	8,341

6. Other Real Estate Owned

The following are changes in Other Real Estate Owned (“OREO”) during the periods indicated:

	For the six months ended
	June 30,
	2012			2011
	(In thousands)

Balance at beginning of period	$	3,179		$	1,588
Acquisitions		1,632			1,861
Write-down of carrying value		(204	)		-
Sales		(2,513	)		(1,621	)
Balance at end of period	$	2,094		$	1,828

During the three months ended June 30, 2012, the Company did not record any gross gains from the sale of OREO. During the three months ended June 30, 2011, the Company recorded gross gains from the sale of OREO in the amount of $256,000. During the three months ended June 30, 2012, the Company recorded gross losses from the sale of OREO in the amount of $78,000. During the three months ended June 30, 2011, the Company did not record any gross losses from the sale of OREO. During the six months ended June 30, 2012 and 2011, the Company recorded gross gains from the sale of OREO in the amount of $45,000 and $256,000, respectively. During the six months ended June 30, 2012 and 2011, the Company recorded gross losses from the sale of OREO in the amount of $188,100 and $12,000, respectively. The net gains / losses on the sale of OREO are included in the Consolidated Statements of Income in Other operating expenses.

7. Stock-Based Compensation

For the three months ended June 30, 2012 and 2011, the Company’s net income, as reported, included $0.7 million and $0.5 million, respectively, of stock-based compensation costs and $0.3 million and $0.2 million, respectively, of income tax benefits related to the stock-based compensation plans. For the six months ended June 30, 2012 and 2011, the Company’s net income, as reported, included $2.2 million and $1.7 million, respectively, of stock-based compensation costs and $0.9 million and $0.6 million, respectively, of income tax benefits related to the stock-based compensation plans.

-23-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock price, the risk-free interest rate over the options’ expected term and the annual dividend yield. The Company uses the fair value of the common stock on the date of award to measure compensation cost for restricted stock unit awards. Compensation cost is recognized over the vesting period of the award using the straight line method. During the six months ended June 30, 2012 and 2011, the Company granted 230,675 and 213,095 restricted stock units, respectively. There were no stock options granted during the six month periods ended June 30, 2012 and 2011. There were no stock options or restricted stock units granted during the three month periods ended June 30, 2012 and 2011.

The 2005 Omnibus Incentive Plan (“Omnibus Plan”) became effective on May 17, 2005 after adoption by the Board of Directors and approval by the stockholders. The Omnibus Plan authorizes the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) to grant a variety of equity compensation awards as well as long-term and annual cash incentive awards, all of which can be structured so as to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). On May 17, 2011, stockholders approved an amendment to the Omnibus Plan authorizing an additional 625,000 shares for use for full value awards. As of June 30, 2012, there are 536,076 shares available for full value awards and 46,275 shares available for non-full value awards. To satisfy stock option exercises or fund restricted stock and restricted stock unit awards, shares are issued from treasury stock, if available, otherwise new shares are issued. The Company will maintain separate pools of available shares for full value as opposed to non-full value awards, except that shares can be moved from the non-full value pool to the full value pool on a 3-for-1 basis. The exercise price per share of a stock option grant may not be less than the fair market value of the common stock of the Company, as defined in the Omnibus Plan, on the date of grant and may not be re-priced without the approval of the Company’s stockholders. Options, stock appreciation rights, restricted stock, restricted stock units and other stock based awards granted under the Omnibus Plan are generally subject to a minimum vesting period of three years with stock options having a 10-year contractual term. Other awards do not have a contractual term of expiration. Restricted stock unit awards include participants who have reached or are close to reaching retirement eligibility, at which time such awards fully vest. These amounts are included in stock-based compensation expense.

Full Value Awards: The first pool is available for full value awards, such as restricted stock unit awards. The pool will be decreased by the number of shares granted as full value awards. The pool will be increased from time to time by: (1) the number of shares that are returned to or retained by the Company as a result of the cancellation, expiration, forfeiture or other termination of a full value award (under the Omnibus Plan); (2) the settlement of such an award in cash; (3) the delivery to the award holder of fewer shares than the number underlying the award, including shares which are withheld from full value awards or (4) the surrender of shares by an award holder in payment of the exercise price or taxes with respect to a full value award. The Omnibus Plan will allow the Company to transfer shares from the non-full value pool to the full value pool on a 3-for-1 basis, but does not allow the transfer of shares from the full value pool to the non-full value pool.

The following table summarizes the Company’s full value awards at or for the six months ended June 30, 2012:

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

Non-vested at December 31, 2011		363,589		$	13.52
Granted		230,675			13.28
Vested		(201,294	)		13.62
Forfeited		(3,931	)		13.82
Non-vested at June 30, 2012		389,039		$	13.32

Vested but unissued at June 30, 2012		147,176		$	13.43

-24-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

As of June 30, 2012, there was $4.1 million of total unrecognized compensation cost related to non-vested full value awards granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of 3.3 years. The total fair value of awards vested for the three months ended June 30, 2012 and 2011 were $0.8 million and $0.5 million, respectively. The total fair value of awards vested for the six months ended June 30, 2012 and 2011 were $2.7 million and $1.7 million, respectively. The vested but unissued full value awards consist of awards made to employees and directors who are eligible for retirement. According to the terms of the Omnibus Plan, these employees and directors have no risk of forfeiture. These shares will be issued at the original contractual vesting dates.

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

The following table summarizes certain information regarding the non-full value awards, all of which have been granted as stock options, at or for the six months ended June 30, 2012:

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

Outstanding at December 31, 2011		975,640		$	15.16
Granted		-			-
Exercised		(113,020	)		12.05
Forfeited		(44,895	)		12.67
Outstanding at June 30, 2012		817,725		$	15.73		3.4	$	515
Exercisable shares at June 30, 2012		755,405		$	16.09		3.2	$	281
Vested but unexercisable shares at June 30, 2012		11,120		$	11.59		6.4	$	41

* The intrinsic value of a stock option is the difference between the market value of the underlying stock and the exercise price of the option.

As of June 30, 2012, there was $0.1 million of total unrecognized compensation cost related to unvested non-full value awards granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of 1.1 years. The vested but unexercisable non-full value awards were made to employees who are eligible for retirement. According to the terms of the Omnibus Plan, these employees have no risk of forfeiture. These awards will be exercisable at the original contractual vesting dates.

Cash proceeds, fair value received, tax benefits, intrinsic value related to stock options exercised and the weighted average grant date fair value for options granted during the six months ended June 30, 2012 are provided in the following table:

	For the three months ended				For the six months ended
	June 30,				June 30,
(In thousands)	2012		2011		2012		2011
Proceeds from stock options exercised	$	570	$	1,492	$	814	$	2,016
Fair value of shares received upon exercised of stock options		-		54		548		54
Tax benefit (expense) related to stock options exercised		3		247		27		183
Intrinsic value of stock options exercised		16		340		130		419
Grant date fair value at weighted average		n/a		n/a		n/a		n/a

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Phantom Stock Plan: the Company maintains a non-qualified phantom stock plan as a supplement to its profit sharing plan for officers who have achieved the level of Senior Vice President and above and completed one year of service. However, officers who had achieved at least the level of Vice President and completed one year of service prior to January 1, 2009 remain eligible to participate in the phantom stock plan. Awards are made under this plan on certain compensation not eligible for awards made under the profit sharing plan, due to the terms of the profit sharing plan and the Internal Revenue Code. Employees receive awards under this plan proportionate to the amount they would have received under the profit sharing plan, but for limits imposed by the profit sharing plan and the Internal Revenue Code. The awards are made as cash awards and then converted to common stock equivalents (phantom shares) at the then current market value of the Company’s common stock. Dividends are credited to each employee’s account in the form of additional phantom shares each time the Company pays a dividend on its common stock. In the event of a change of control (as defined in this plan), an employee’s interest is converted to a fixed dollar amount and deemed to be invested in the same manner as their interest in the Savings Bank’s non-qualified deferred compensation plan. Employees vest under this plan 20% per year for 5 years. Employees also become 100% vested upon a change of control. Employees receive their vested interest in this plan in the form of a cash lump sum payment or installments, as elected by the employee, after termination of employment. The Company adjusts its liability under this plan to the fair value of the shares at the end of each period.

The following table summarizes the Phantom Stock Plan at or for the six months ended June 30, 2012:

Phantom Stock Plan	Shares			Fair Value

Outstanding at December 31, 2011		39,255		$	12.63
Granted		10,801			13.14
Forfeited		-			-
Distributions		(432	)		13.02
Outstanding at June 30, 2012		49,624		$	13.63
Vested at June 30, 2012		49,224		$	13.63

The Company recorded stock-based compensation expense for the Phantom Stock Plan of $15,000 and $67,000 for the three months ended June 30, 2012 and 2011, respectively. The total fair value of the distributions from the Phantom Stock Plan was $5,000 and $1,000 for the three months ended June 30, 2012 and 2011, respectively.

For the six months ended June 30, 2012 and 2011, the Company recorded stock-based compensation expense (benefit) for the Phantom Stock Plan of $57,000 and $(30,000), respectively. The total fair value of the distributions from the Phantom Stock Plan during the six months ended June 30, 2012 and 2011 were $6,000 and $2,000, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

8. Pension and Other Postretirement Benefit Plans

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

	Three months ended						Six months ended
	June 30,						June 30,
(In thousands)	2012			2011			2012			2011

Employee Pension Plan:
Interest cost	$	220		$	246		$	440		$	492
Amortization of unrecognized loss		263			153			526			306
Expected return on plan assets		(310	)		(308	)		(620	)		(616	)
Net employee pension expense	$	173		$	91		$	346		$	182

Outside Director Pension Plan:
Service cost	$	20		$	17		$	40		$	34
Interest cost		28			31			56			62
Amortization of unrecognized gain		(7	)		(13	)		(14	)		(26	)
Amortization of past service liability		9			10			18			20
Net outside director pension expense	$	50		$	45		$	100		$	90

Other Postretirement Benefit Plans:
Service cost	$	100		$	78		$	200		$	156
Interest cost		54			52			108			104
Amortization of unrecognized loss		10			-			20			-
Amortization of past service credit		(21	)		(21	)		(42	)		(42	)
Net other postretirement expense	$	143		$	109		$	286		$	218

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2011 that it expects to contribute $0.5 million to the Company’s Employee Pension Plan (the “Employee Pension Plan”) and $0.2 million to each of the Outside Director Pension Plan (the “Outside Director Pension Plan”) and the other postretirement benefit plans (the “Other Postretirement Benefit Plans”) during the year ending December 31, 2012. As of June 30, 2012, the Company has contributed $0.5 million to the Employee Pension Plan, $44,000 to the Outside Director Pension Plan and $28,000 to the Other Postretirement Benefit Plans. As of June 30, 2012, the Company has not revised its expected contributions for the year ending December 31, 2012.

9. Fair Value of Financial Instruments

The Company carries certain financial assets and financial liabilities at fair value in accordance with ASC Topic 825, “Financial Instruments” (“ASC Topic 825”) and values those financial assets and financial liabilities in accordance with ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”). ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 825 permits entities to choose to measure many financial instruments and certain other items at fair value. At June 30, 2012, the Company carried financial assets and financial liabilities under the fair value option with fair values of $62.3 million and $24.4 million, respectively. At December 31, 2011, the Company carried financial assets and financial liabilities under the fair value option with fair values of $68.7 million and $26.3 million, respectively. During the six months ended June 30, 2012, the Company did not elect to carry any additional financial assets or financial liabilities under the fair value option. The Company elected to measure at fair value securities with a cost of $10.0 million that were purchased during the six months ended June 30, 2011.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table presents the financial assets and financial liabilities reported at fair value under the fair value option, and the changes in fair value included in the Consolidated Statement of Income – Net gain from fair value adjustments, at or for the periods ended as indicated:

	Fair Value		Fair Value		Changes in Fair Values For Items Measured at Fair Value
	Measurements		Measurements		Pursuant to Election of the Fair Value Option
	at June 30,		at December 31,		Three Months Ended						Six Months Ended
(Dollars in thousands)	2012		2011		June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011

Mortgage-backed securities	$	30,968	$	37,787	$	(143	)	$	207		$	(161	)	$	(395	)
Other securities		31,377		30,942		5			(260	)		246			(769	)
Borrowed funds		24,356		26,311		1,734			1,096			1,905			1,521
Net gain from fair value adjustments (1) (2)					$	1,596		$	1,043		$	1,990		$	357

(1) The net gain from fair value adjustments presented in the above table does not include net losses of $2.2 million and $1.2 million for the three months ended June 30, 2012 and 2011, respectively, from the change in the fair value of interest rate caps/swaps.

(2) The net gain from fair value adjustments presented in the above table does not include net losses of $3.0 million and $1.2 million for the six months ended June 30, 2012 and 2011, respectively, from the change in the fair value of interest rate caps/swaps.

Included in the fair value of the financial assets and financial liabilities selected for the fair value option is the accrued interest receivable or payable for the related instrument. One pooled trust preferred security is over 90 days past due and the Company has stopped accruing interest. The Company continues to accrue on the remaining financial instruments and reports, as interest income or interest expense in the Consolidated Statement of Income, the interest receivable or payable on the financial instruments selected for the fair value option at their respective contractual rates.

The borrowed funds had a contractual principal amount of $61.9 million at June 30, 2012 and December 31, 2011. The fair value of borrowed funds includes accrued interest payable of $0.4 million at June 30, 2012 and December 31, 2011.

The Company generally holds its earning assets, other than securities available for sale, to maturity and settles its liabilities at maturity. However, fair value estimates are made at a specific point in time and are based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Accordingly, as assumptions change, such as interest rates and prepayments, fair value estimates change and these amounts may not necessarily be realized in an immediate sale.

Disclosure of fair value does not require fair value information for items that do not meet the definition of a financial instrument or certain other financial instruments specifically excluded from its requirements. These items include core deposit intangibles and other customer relationships, premises and equipment, leases, income taxes, foreclosed properties and equity.

Further, fair value disclosure does not attempt to value future income or business. These items may be material and accordingly, the fair value information presented does not purport to represent, nor should it be construed to represent, the underlying “market” or franchise value of the Company.

Financial assets and financial liabilities reported at fair value are required to be measured based on either: (1) quoted prices in active markets for identical financial instruments (Level 1); (2) significant other observable inputs (Level 2); or (3) significant unobservable inputs (Level 3).

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

Level 1 – where quoted market prices are available in an active market. The Company did not value any of its assets or liabilities that are carried at fair value on a recurring basis as Level 1 at June 30, 2012 and December 31, 2011.

Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads. In addition to observable market information, models also incorporate maturity and cash flow assumptions. At June 30, 2012, Level 2 included mortgage related securities, corporate debt and interest rate caps/swaps. At December 31, 2011, Level 2 included mortgage related securities, corporate debt and interest rate caps.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At June 30, 2012 and December 31, 2011, Level 3 included trust preferred securities owned by and junior subordinated debentures issued by the Company.

The methods described above may produce fair values that may not be indicative of net realizable value or reflective of future fair values. While the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies, assumptions and models to determine fair value of certain financial instruments could produce different estimates of fair value at the reporting date.

The following table sets forth the assets and liabilities that are carried at fair value on a recurring basis, classified within Level 3 of the valuation hierarchy for the period indicated:

	For the six months ended
	June 30, 2012
	Trust preferred			Junior subordinated
	securities			debentures
	(In thousands)

Beginning balance	$	5,632		$	26,311
Transfer into Level 3		-			-
Net loss from fair value adjustment of financial assets		(33	)		-
Net gain from fair value adjustment of financial liabilities		-			(1,905	)
Decrease in accrued interest		(1	)		(50	)
Change in unrealized net gains included in other comprehensive income		55			-
Ending balance	$	5,653		$	24,356

The following table sets forth the assets and liabilities that are carried at fair value on a recurring basis and the method that was used to determine their fair value, at June 30, 2012 and December 31, 2011:

	Quoted Prices
	in Active Markets				Significant Other				Significant Other
	for Identical Assets				Observable Inputs				Unobservable Inputs				Total carried at fair value
	(Level 1)				(Level 2)				(Level 3)				on a recurring basis
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2012		2011		2012		2011		2012		2011		2012		2011
	(in thousands)
Assets:
Mortgage-backed Securities	$	-	$	-	$	738,099	$	747,288	$	-	$	-	$	738,099	$	747,288
Other securities		-		-		216,265		59,610		5,653		5,632		221,918		65,242
Interest rate caps		-		-		94		356		-		-		94		356
Total assets	$	-	$	-	$	954,458	$	807,254	$	5,653	$	5,632	$	960,111	$	812,886


Liabilities:
Borrowings	$	-	$	-	$	-	$	-	$	24,356	$	26,311	$	24,356	$	26,311
Interest rate swaps		-		-		2,739		-		-		-		2,739		-
Total liabilities	$	-	$	-	$	2,739	$	-	$	24,356	$	26,311	$	27,095	$	26,311

-29-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table sets forth the Company’s assets that are carried at fair value on a non-recurring basis and the method that was used to determine their fair value, at June 30, 2012 and December 31, 2011:

	Quoted Prices
	in Active Markets				Significant Other				Significant Other
	for Identical Assets				Observable Inputs				Unobservable Inputs				Total carried at fair value
	(Level 1)				(Level 2)				(Level 3)				on a non-recurring basis
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2012		2011		2012		2011		2012		2011		2012		2011
	(in thousands)
Assets:
Impaired loans	$	-	$	-	$	-	$	-	$	54,671	$	48,555	$	54,671	$	48,555
Other Real Estate Owned		-		-		-		-		2,094		3,179		2,094		3,179

Total assets	$	-	$	-	$	-	$	-	$	56,765	$	51,734	$	56,765	$	51,734

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at June 30, 2012 and December 31, 2011.

The estimated fair value of each material class of financial instruments at June 30, 2012 and December 31, 2011 and the related methods and assumptions used to estimate fair value are as follows:

Cash and Due from Banks, Overnight Interest-Earning Deposits and Federal Funds Sold:

The fair values of financial instruments that are short-term or reprice frequently and have little or no risk are considered to have a fair value that approximates carrying value (Level 1).

FHLB-NY stock:

The fair value is based upon the par value of the stock which equals its carrying value (Level 2).

Securities Available for Sale:

Securities available for sale are carried at fair value in the Consolidated Financial Statements. Fair value is based upon quoted market prices (Level 1 input), where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued (Level 2 input). When there is limited activity or less transparency around inputs to the valuation, securities are classified as (Level 3 input).

Loans:

The estimated fair value of loans is estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities (Level 3 input).

For non-accruing loans, fair value is generally estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets or for collateral dependent loans 85% of the appraised or internally estimated value of the property.(Level 3 input).

Due to Depositors:

The fair values of demand, passbook savings, NOW, money market deposits and escrow deposits are, by definition, equal to the amount payable on demand at the reporting dates (i.e. their carrying value) (Level 1). The fair value of fixed-maturity certificates of deposits are estimated by discounting the expected future cash flows using the rates currently offered for deposits of similar remaining maturities (Level 2 input).

Borrowings:

The estimated fair value of borrowings are estimated by discounting the contractual cash flows using interest rates in effect for borrowings with similar maturities and collateral requirements (Level 2 input) or using a market-standard model (Level 3 input).

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Interest Rate Caps:

The estimated fair value of interest rate caps is based upon broker quotes (Level 2 input).

Interest Rate Swaps:

The estimated fair value of interest rate swaps is based upon broker quotes (Level 2 input).

Other Real Estate Owned:

OREO are carried at fair value less selling costs. The fair value is based on appraised value through a current appraisal, or sometimes through an internal review, additionally adjusted by the estimated costs to sell the property (Level 3 input).

Other Financial Instruments:

The fair values of commitments to sell, lend or borrow are estimated using the fees currently charged or paid to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties or on the estimated cost to terminate them or otherwise settle with the counterparties at the reporting date. For fixed-rate loan commitments to sell, lend or borrow, fair values also consider the difference between current levels of interest rates and committed rates (where applicable).

At June 30, 2012 and December 31, 2011, the fair values of the above financial instruments approximate the recorded amounts of the related fees and were not considered to be material.

The following table sets forth the carrying amounts and estimated fair values of selected financial instruments as well as assumptions used by the Company in estimating fair value at June 30, 2012 and December 31, 2011:

	June 30, 2012										December 31, 2011
	Carrying		Fair								Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3		Amount		Value
	(in thousands)

Assets:
Cash and due from banks	$	41,216	$	41,216	$	41,216	$	-	$	-	$	55,721	$	55,721
Mortgage-backed Securities		738,099		738,099		-		738,099		-		747,288		747,288
Other securities		221,918		221,918		-		216,265		5,653		65,242		65,242
Loans		3,235,495		3,409,335						3,409,335		3,228,881		3,407,454
FHLB-NY stock		36,847		36,847		-		36,847		-		30,245		30,245
Interest rate caps		94		94		-		94		-		356		356
OREO		2,094		2,094		-		-		2,094		3,179		3,179
Total assets	$	4,275,763	$	4,449,603	$	41,216	$	991,305	$	3,417,082	$	4,130,912	$	4,309,485


Liabilities:
Deposits	$	3,136,606		3,137,367	$	1,636,123		1,501,244			$	3,146,245	$	3,211,405
Borrowings		827,008		871,449		-		847,093		24,356		685,139		728,067
Interest rate swaps		2,739		2,739		-		2,739		-		-		-
Total liabilities	$	3,966,353	$	4,011,555	$	1,636,123	$	2,351,076	$	24,356	$	3,831,384	$	3,939,472

10. Derivative Financial Instruments

At June 30, 2012, the Company’s derivative financial instruments consist of purchased options and swaps. The purchased options are used to mitigate the Company’s exposure to rising interest rates on its financial liabilities without stated maturities. The Company’s swaps are used to mitigate the Company’s exposure to rising interest rates on a portion ($18.0 million) of its floating rate junior subordinated debentures that have a contractual value of $61.9 million.

These derivatives are not designated as hedges and have a combined notional amount of $118.0 million at June 30, 2012. Changes in the fair value of these derivatives are reflected in “Net loss from fair value adjustments” in the Consolidated Statements of Income.

-31-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table sets forth information regarding the Company’s derivative financial instruments at June 30, 2012:

	June 30, 2012
					Cumulative
	Notional				Unrealized				Net Gain
	Amount		Purchase Price		Gain		Loss		(loss) Position (1)
	(In thousands)

Interest rate caps	$	100,000	$	9,035	$	-	$	8,941	$	94
Interest rate swaps		18,000		-		-		2,739		(2,739	)
Total derivatives	$	118,000	$	9,035	$	-	$	11,680	$	(2,645	)

(1) Derivatives in a net gain position are recorded as “Other assets” and derivatives in a net loss position are recorded as “Other liabilities” in the Consolidated Statements of Financial Condition.

The following table displays a summary of the terms of the interest rate caps and interest rate swaps currently held by the Savings Bank:

Interest

Rate Cap 1

Rate Cap 2

Rate Swap 1

Rate Swap 2

Rate Swap 3

(Dollars in thousands)

Notional Amount

50,000

6,000

Trade Date

August 12, 2009

August 24, 2009

March 19, 2012

March 20, 2012

Effective Date

August 14, 2009

August 26, 2009

September 1, 2012

July 30, 2012

June 15, 2012

Fixed Rate Paid By Savings Bank

n/a

3.18

3.21

3.22

Adjustable rate paid by counterparty

3 month LIBOR

Strike price (3 month LIBOR)

1.47

n/a

Maturity Date

August 14, 2014

August 26, 2014

September 1, 2037

July 30, 2037

September 15, 2037

The following table sets forth the effect of derivative instruments on the Consolidated Statements of Income for the periods indicated:

	Three months ended						Six months ended
	June 30,						June 30,
(In thousands)	2012			2011			2012			2011

Financial Derivatives:
Interest rate caps	$	(148	)	$	(31	)	$	(262	)	$	-
Interest rate swaps		(693	)		-			(2,739	)		-
Net gain (loss)	$	(841	)	$	(31	)	$	(3,001	)	$	-

-32-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

11. Income Taxes

Flushing Financial Corporation files consolidated Federal and combined New York State and New York City income tax returns with its subsidiaries, with the exception of the Trusts, which file separate Federal income tax returns, and Flushing Preferred Funding Corporation, which files a separate Federal and New York State income tax return as a real estate investment trust.

Income tax provisions are summarized as follows:

	For the Three months						For the Six months
	ended June 30,						ended June 30,
(In thousands)	2012			2011			2012			2011
Federal:
Current	$	5,097		$	5,040		$	8,229		$	8,866
Deferred		(861	)		(476	)		(369	)		(390	)
Total federal tax provision		4,236			4,564			7,860			8,476
State and Local:
Current		1,620			1,645			2,333			2,752
Deferred		(337	)		(218	)		(116	)		(179	)
Total state and local tax provision		1,283			1,427			2,217			2,573

Total income tax provision	$	5,519		$	5,991		$	10,077		$	11,049

The income tax provision in the Consolidated Statements of Income has been provided at effective rates of 39.0% and 39.8% for the three months ended June 30, 2012 and 2011, respectively, and 39.0% and 39.4% for the six months ended June 30, 2012 and 2011, respectively.

The effective rates differ from the statutory federal income tax rate as follows:

	For the three months										For the six months
	ended June 30,										ended June 30,
(dollars in thousands)	2012					2011					2012					2011

Taxes at federal statutory rate	$	4,955		35.0	%	$	5,273		35.0	%	$	9,045		35.0	%		9,827		35.0	%
Increase (reduction) in taxes resulting from:
State and local income tax, net of Federal income tax benefit		835		5.9			927		6.2			1,442		5.6			1,672		6.0
Other		(271	)	(1.9	)		(209	)	(1.4	)		(410	)	(1.6	)		(450	)	(1.6	)
Taxes at effective rate	$	5,519		39.0	%	$	5,991		39.8	%	$	10,077		39.0	%	$	11,049		39.4	%

The Company has recorded a deferred tax asset of $33.7 million at June 30, 2012, which is included in “Other assets” in the Consolidated Statements of Financial Condition. This represents the anticipated net federal, state and local tax benefits expected to be realized in future years upon the utilization of the underlying tax attributes comprising this balance. The Company has reported taxable income for federal, state, and local tax purposes in each of the past three fiscal years. In management’s opinion, in view of the Company’s previous, current and projected future earnings trend, the probability that some of the Company’s $32.3 million deferred tax liability can be used to offset a portion of the deferred tax asset, as well as certain tax planning strategies, it is more likely than not that the deferred tax asset will be fully realized. Accordingly, no valuation allowance was deemed necessary for the deferred tax asset at June 30, 2012.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

12. Accumulated Other Comprehensive Income:

The components of accumulated other comprehensive income at June 30, 2012 and December 31, 2011 and the changes during the periods are as follows:

		June 30,			Other Comprehensive			December 31,
		2012			Income (loss)			2011
		(In thousands)
Net unrealized gain on securities available for sale	$	15,385		$	3,706		$	11,679
Net actuarial loss on pension plans and other postretirement benefits		(6,918	)		298			(7,216	)
Prior service cost on pension plans and other postretirement benefits		337			(13	)		350
Accumulated other comprehensive income	$	8,804		$	3,991		$	4,813

13. Regulatory

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) imposes a number of mandatory supervisory measures on banks and thrift institutions. Among other matters, FDICIA establishes five capital zones or classifications (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized). Such classifications are used by the Office of the Comptroller of the Currency (“OCC”) and other bank regulatory agencies to determine matters ranging from each institution’s quarterly FDIC deposit insurance premium assessments, to approvals of applications authorizing institutions to grow their asset size or otherwise expand business activities. Under capital regulations, the Savings Bank is required to comply with each of three separate capital adequacy standards.

At June 30, 2012, the Savings Bank exceeded each of the three capital requirements and is categorized as “well-capitalized” under the prompt corrective action regulations. Set forth below is a summary of the Savings Bank’s compliance:

(Dollars in thousands)	Amount		Percent of Assets

Core Capital:
Capital level	$	416,543		9.45	%
Well capitalized		220,423		5.00
Excess		196,120		4.45

Tier 1 Risk-Based Capital:
Capital level	$	416,543		13.71	%
Well capitalized		182,360		6.00
Excess		234,183		7.71

Risk-Based Capital:
Capital level	$	447,442		14.72	%
Well capitalized		303,933		10.00
Excess		143,509		4.72

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

14. New Authoritative Accounting Pronouncements

In April 2011, the FASB issued ASU No. 2011-03, which amends the authoritative accounting guidance under ASC Topic 860 “Transfers and Servicing.” The amendments in this update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this update are effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. Adoption of this update did not have a material effect on the Company’s consolidated results of operations or financial condition.

In May 2011, the FASB issued ASU No. 2011-04, which amends the authoritative accounting guidance under ASC Topic 820 “Fair Value Measurement.” The amendments in this update clarify how to measure and disclose fair value under ASC Topic 820. The amendments in this update are effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. Adoption of this update did not have a material effect on the Company’s consolidated results of operations or financial condition.

In June 2011, the FASB issued ASU No. 2011-05, which amends the authoritative accounting guidance under ASC Topic 220 “Comprehensive Income.” The amendments eliminate the option to present components of other comprehensive income in the statement of stockholders’ equity. Instead, the new guidance requires entities to present all nonowner changes in stockholders’ equity either as a single continuous statement of comprehensive income or as two separate but consecutive statements. The amendments in this update are effective for the first interim or annual period beginning on or after December 15, 2011 and must be applied retrospectively. Early adoption is permitted. Adoption of this update did not have a material effect on the Company’s consolidated results of operations or financial condition. See the Consolidated Statements of Comprehensive Income.

In September 2011, the FASB issued ASU No. 2011-08, which amends the authoritative accounting guidance under ASC Topic 350 “Intangibles – Goodwill and Other.” The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. Adoption of this update did not have a material effect on the Company’s consolidated results of operations or financial condition.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2011. In addition, please read this section in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.

As used in this Quarterly Report, the words “we,” “us,” “our” and the “Company” are used to refer to Flushing Financial Corporation and its direct and indirect wholly-owned subsidiaries, Flushing Savings Bank, FSB (the “Savings Bank”), Flushing Commercial Bank (the “Commercial Bank,” and together with the Savings Bank, the “Banks”), Flushing Preferred Funding Corporation, Flushing Service Corporation and FSB Properties, Inc.

Statements contained in this Quarterly Report relating to plans, strategies, objectives, economic performance and trends, projections of results of specific activities or investments and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed elsewhere in this Quarterly Report and in other documents filed by us with the Securities and Exchange Commission from time to time, including, without limitation, our Annual Report on Form 10-K for the year ended December 31, 2011. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “potential” or “continue” or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.

Executive Summary

We are a Delaware corporation organized in May 1994 at the direction of the Savings Bank. The Savings Bank was organized in 1929 as a New York State chartered mutual savings bank. In 1994, the Savings Bank converted to a federally chartered mutual savings bank and changed its name from Flushing Savings Bank to Flushing Savings Bank, FSB. The Savings Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank in 1995. On July 21, 2011, as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Savings Bank’s primary regulator became the Office of the Comptroller of the Currency (“OCC”). The Banks’ deposits are insured to the maximum allowable amount by the Federal Deposit Insurance Corporation (“FDIC”). The primary business of Flushing Financial Corporation at this time is the operation of its wholly owned subsidiary, the Savings Bank. The Savings Bank owns four subsidiaries: Flushing Commercial Bank, Flushing Preferred Funding Corporation, Flushing Service Corporation and FSB Properties Inc. In November 2006, the Savings Bank launched an internet branch, iGObanking.com®. The activities of Flushing Financial Corporation are primarily funded by dividends, if any, received from the Savings Bank, issuances of junior subordinated debt and issuances of equity securities. Flushing Financial Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol “FFIC.”

Our principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from ongoing operations and borrowings, primarily in (1) originations and purchases of multi-family residential properties and, to a lesser extent, one-to-four family (focusing on mixed-use properties, which are properties that contain both residential dwelling units and commercial units) and commercial real estate mortgage loans; (2) construction loans, primarily for residential properties; (3) Small Business Administration (“SBA”) loans and other small business loans; (4) mortgage loan surrogates such as mortgage-backed securities; and (5) U.S. government securities, corporate fixed-income securities and other marketable securities. We also originate certain other consumer loans including overdraft lines of credit.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Our results of operations depend primarily on net interest income, which is the difference between the income earned on its interest-earning assets and the cost of our interest-bearing liabilities. Net interest income is the result of our interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets compared to the average balance of interest-bearing liabilities. We also generate non-interest income from loan fees, service charges on deposit accounts, mortgage servicing fees, and other fees, income earned on Bank Owned Life Insurance (“BOLI”), dividends on Federal Home Bank of New York (“FHLB-NY”) stock and net gains and losses on sales of securities and loans. Our operating expenses consist principally of employee compensation and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. Our results of operations also can be significantly affected by our periodic provision for loan losses and specific provision for losses on real estate owned.

Our strategy is to continue our focus on being an institution serving consumers, businesses, and governmental units in our local markets. In furtherance of this objective, we intend to:

·	continue our emphasis on the origination of multi-family residential mortgage loans;

·	transition from a traditional thrift to a more ‘commercial-like’ banking institution;

·	increase our commitment to the multi-cultural marketplace, with a particular focus on the Asian community in Queens;

·	maintain asset quality;

·	manage deposit growth and maintain a low cost of funds through

§	business banking deposits,

§	municipal deposits through government banking, and

§	new customer relationships via iGObanking.com®;

·	cross sell to lending and deposit customers;

·	take advantage of market disruptions to attract talent and customers from competitors;

·	manage interest rate risk and capital: and

·	manage enterprise-wide risk.

There can be no assurance that we will be able to effectively implement this strategy. Our strategy is subject to change by the Board of Directors.

Our investment policy, which is approved by the Board of Directors, is designed primarily to manage the interest rate sensitivity of our overall assets and liabilities, to generate a favorable return without incurring undue interest rate risk and credit risk, to complement our lending activities and to provide and maintain liquidity. In establishing our investment strategies, we consider our business and growth strategies, the economic environment, our interest rate risk exposure, our interest rate sensitivity “gap” position, the types of securities to be held and other factors. We classify our investment securities as available for sale.

We carry a portion of our financial assets and financial liabilities at fair value and record changes in their fair value through earnings in non-interest income on our Consolidated Statements of Income and Comprehensive Income. A description of the financial assets and financial liabilities that are carried at fair value through earnings can be found in Note 9 of the Notes to the Consolidated Financial Statements.

We saw continued improvement in nonperforming assets, as they decreased by $9.5 million during the second quarter of 2012. Charge-offs and the provision for loan losses were both less than the prior quarter’s performance. As in most of the prior quarters, the majority of charge-offs came from revisions to our carrying values based upon our program of continually obtaining updated appraisals. As in prior quarters, we have recorded charge-offs based upon these up-to-date values as opposed to adding to the allowance. As a result, we do not carry non-performing assets at more than 85% of their current appraised value. This process has insured that we have kept pace with changing values in the real estate market and helped maintain strong returns on our delinquent loan sales, which was 92% of book balance for the quarter.

Classified assets and criticized assets continued their improving trend that began over a year ago, which resulted in an 8% reduction in these categories in the second quarter of 2012, and a 21% reduction since December 31, 2010.

Loan originations for the second quarter of 2012 totaled $163.7 million, the highest level since the second quarter of 2008, more than double compared to the second quarter of 2011, and an increase of 38% compared to the first quarter of 2012. Simultaneously, loan applications in process increased to $277.3 million, the highest amount since June 2008. The growth in loan applications in process includes growth in all of our lending areas, with the Business Banking area focusing on adjustable rate loans.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Net income for the six months ended June 30, 2012 was $15.8 million, a decrease of $1.3 million, or 7.4%, compared to $17.0 million for the six months ended June 30, 2011. Diluted earnings per common share were $0.52 for the six months ended June 30, 2012, a decrease of $0.03, or 5.5%, from $0.55 for the six months ended June 30, 2011.

Return on average equity was 7.5% for the six months ended June 30, 2012 compared to 8.6% for the six months ended June 30, 2011. Return on average assets was 0.7% for the six months ended June 30, 2012 compared to 0.8% for the six months ended June 30, 2011.

Our net interest margin for the second quarter of 2012 was 3.68%, an improvement of seven basis points from the second quarter of 2011, and the same as that for the first quarter of 2012. Continued growth in the average balance of core deposits helped us to reduce funding costs for the Company as we lowered total deposit and borrowing rates by 14 basis points from the first quarter of 2012 and 40 basis points from the second quarter of 2011. This enabled us to deliver record net interest income for the quarter of $38.3 million.

We recorded a provision for loan losses of $11.0 million during the six months ended June 30, 2012, which was an increase of $1.0 million from $10.0 million recorded during the six months ended June 30, 2011. The provision was deemed necessary as a result of the regular quarterly analysis of the allowance for loan losses. The regular quarterly analysis is based on management’s evaluation of the risks inherent in the various components of the loan portfolio and other factors, including historical loan loss experience (which is updated quarterly), changes in the composition and volume of the portfolio, collection policies and experience, trends in the volume of non-accrual loans and local and national economic conditions. See “-ALLOWANCE FOR LOAN LOSSES.”

The Savings Bank continues to be well-capitalized under regulatory requirements, with Core, Tier 1 risk-based and Total risk-based capital ratios of 9.45%, 13.71% and 14.72%, respectively, at June 30, 2012.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED

JUNE 30, 2012 AND 2011

General. Net income for the three months ended June 30, 2012 was $8.6 million, a decrease of $0.4 million, or 4.8%, compared to $9.1 million for the three months ended June 30, 2011. Diluted earnings per common share were $0.28 for the three months ended June 30, 2012, a decrease of $0.01, or 3.4%, from $0.29 for the three months ended June 30, 2011. Return on average equity was 8.1% for the three months ended June 30, 2012 compared to 9.1% for the three months ended June 30, 2011. Return on average assets was 0.8% for both of the three month periods ended June 30, 2012 and 2011.

Interest Income. Total interest and dividend income decreased $2.1 million, or 3.7%, to $54.4 million for the three months ended June 30, 2012 from $56.5 million for the three months ended June 30, 2011. The decrease in interest income was attributable to a 31 basis point decline in the yield of interest-earning assets to 5.23% for the three months ended June 30, 2012 from 5.54% in the comparable prior year period combined with a $16.8 million decrease in the average balance of total loans to $3,204.1 million for the three months ended June 30, 2012, from $3,220.9 million for the comparable prior year period. The 31 basis point decline in the yield of interest-earning assets was primarily due to a 22 basis point reduction in the yield of the loan portfolio to 5.76% for the three months ended June 30, 2012 from 5.98% for the three months ended June 30, 2011, combined with a 60 basis point decline in the yield on total securities to 3.58% for the three months ended June 30, 2012 from 4.18% for the comparable prior year period. In addition, the yield of interest-earning assets was negatively impacted by a $16.8 million decrease in the average balance of the higher yielding loan portfolio for the three months ended June 30, 2012 and a $123.3 million increase in the average balances of the lower yielding securities portfolio for the three months ended June 30, 2012, as compared to the comparable prior year period. These factors that reduced the yield were partially offset by a $31.0 million decrease in the average balance of lower yielding interest-earning deposits to $29.8 million for the three months ended June 30, 2012 from $60.8 million for the comparable prior year period. The 22 basis point decrease in the yield of the loan portfolio was primarily due to a decline in the rates earned on new loan originations partially offset by an increase in prepayment penalty income during the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The yield on the mortgage loan portfolio decreased nine basis points to 5.85% for the three months ended June 30, 2012 from 5.94% for the three months ended March 31, 2012. The yield on the mortgage loan portfolio, excluding prepayment penalty income, decreased 24 basis points to 5.72% for the three months ended June 30, 2012 from 5.96% for the three months ended June 30, 2011. The 60 basis point decrease in the securities portfolio yield was primarily due to the purchase of new securities at lower yields than the existing portfolio.

-38-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Interest Expense. Interest expense decreased $3.6 million, or 18.3%, to $16.1 million for the three months ended June 30, 2012 from $19.7 million for the three months ended June 30, 2011. The decrease in interest expense was due to the reduction in the cost of interest-bearing liabilities, which decreased 40 basis points to 1.69% for the three months ended June 30, 2012 from 2.09% for the comparable prior year period, partially offset by a $40.7 million increase in the average balance of interest-bearing liabilities to $3,806.3 million for the three months ended June 30, 2012 from $3,765.6 million for the comparable prior year period. The 40 basis point decrease in the cost of interest-bearing liabilities was primarily attributable to the Banks’ reducing the rates it pays on its deposit products and a reduction in the cost of borrowed funds. The cost of certificates of deposit, money market accounts, savings accounts and NOW accounts decreased 13 basis points, 24 basis points, 43 basis points and 25 basis points, respectively, for the three months ended June 30, 2012 from the comparable prior year period. This resulted in a decrease in the cost of due to depositors of 25 basis points to 1.37% for the three months ended June 30, 2012 from 1.62% for the three months ended June 30, 2011. The cost of borrowed funds decreased 140 basis points from the comparable prior year period to 3.00% for the three months ended June 30, 2012. This decrease in the cost of borrowed funds was primarily due to maturing borrowings being replaced at lower rates and new borrowings being obtained at lower rates.

Net Interest Income. For the three months ended June 30, 2012, net interest income was $38.3 million, an increase of $1.5 million, or 4.1%, from $36.8 million for the three months ended June 30, 2011. The increase in net interest income was attributable to a nine basis point increase in the net-interest spread to 3.54% for the three months ended June 30, 2012 from 3.45% for the three months ended June 30, 2011, combined with an increase of $75.5 million in the average balance of interest-earning assets to $4,156.0 million for the three months ended June 30, 2012 from $4,080.5 million for the comparable prior year period. The yield on interest-earning assets decreased 31 basis points to 5.23% for the three months ended June 30, 2012 from 5.54% for the three months ended June 30, 2011. However, this was more than offset by a decline in the cost of funds of 40 basis points to 1.69% for the three months ended June 30, 2012 from 2.09% for the comparable prior year period. The net interest margin improved seven basis points to 3.68% for the three months ended June 30, 2012 from 3.61% for the three months ended June 30, 2011. Excluding prepayment penalty income, the net interest margin would have increased five basis points to 3.59% for the three months ended June 30, 2012 from 3.54% for the three months ended June 30, 2011.

Provision for Loan Losses. A provision for loan losses of $5.0 million was recorded for the three months ended June 30, 2012, which was the same as that recorded for the three months ended June 30, 2011. During the three months ended June 30, 2012, non-performing loans decreased $7.7 million to $112.2 million from $119.9 million at March 31, 2012. Net charge-offs for the three months ended June 30, 2012 totaled $4.7 million, or 59 basis points of average loans. The current loan-to-value ratio for our non-performing loans collateralized by real estate was 61.1% at June 30, 2012. When we have obtained properties through foreclosure, we have been able to quickly sell the properties at amounts that approximate book value. We anticipate that we will continue to see low loss content in our loan portfolio. The Savings Bank continues to maintain conservative underwriting standards. However, given the level of non-performing loans, the current economic uncertainties, and the charge-offs recorded in the second quarter of 2012, management, as a result of the regular quarterly analysis of the allowance for loans losses, deemed it necessary to record a $5.0 million provision for possible loan losses in the second quarter of 2012. See “-ALLOWANCE FOR LOAN LOSSES.”

Non-Interest Income. Non-interest income for the three months ended June 30, 2012 was $1.1 million, a decrease of $1.0 million from $2.1 million for the three months ended June 30, 2011. The decrease in non-interest income was primarily due to $0.8 million in OTTI charges recorded on five private issue collateralized mortgage obligations (“CMO”) during the three months ended June 30, 2012 and a $0.4 million increase in net losses recorded from fair value adjustments.

Non-Interest Expense. Non-interest expense was $20.2 million for the three months ended June 30, 2012, an increase of $1.4 million, or 7.3%, from $18.9 million for the three months ended June 30, 2011. The increase was primarily due to the growth of the Company over the past year, which included the opening of a new branch in January 2012. Salaries and benefits increased $0.8 million for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 primarily due to the opening of a new branch in 2012, an increase in stock based compensation expense and employee benefits expense. In addition, other operating expense for the three months ended June 30, 2012 increased $0.6 million primarily due to $0.2 million in net losses recorded from the sale of other real estate owned (“OREO”) recorded during the three months ended June 30, 2012 compared to $0.3 million in net gains from the sale of OREO recorded during the three months ended June 30, 2011. The efficiency ratio was 49.0% for the three months ended June 30, 2012 compared to 48.8% for the three months ended June 30, 2011.

-39-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Income before Income Taxes. Income before the provision for income taxes decreased $0.9 million, or 6.0%, to $14.2 million for the three months ended June 30, 2012 from $15.1 million for the three months ended June 30, 2011 for the reasons discussed above.

Provision for Income Taxes. Income tax expense decreased $0.5 million to $5.5 million for the three months ended June 30, 2012 from $6.0 million for the three months ended June 30, 2011. The effective tax rate was 39.0% and 39.8% for the three months ended June 30, 2012 and 2011, respectively.

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED

JUNE 30, 2012 AND 2011

General. Net income for the six months ended June 30, 2012 was $15.8 million, a decrease of $1.3 million, or 7.4%, compared to $17.0 million for the six months ended June 30, 2011. Diluted earnings per common share were $0.52 for the six months ended June 30, 2012, a decrease of $0.03, or 5.5%, from $0.55 for the six months ended June 30, 2011. Return on average equity was 7.5% for the six months ended June 30, 2012 compared to 8.6% for the six months ended June 30, 2011. Return on average assets was 0.7% for the six months ended June 30, 2012 compared to 0.8% for the six months ended June 30, 2011.

Interest Income. Total interest and dividend income decreased $4.7 million, or 4.2%, to $108.8 million for the six months ended June 30, 2012 from $113.5 million for the six months ended June 30, 2011. The decrease in interest income was attributable to a 25 basis point decline in the yield of interest-earning assets to 5.30% for the six months ended June 30, 2012 from 5.55% in the comparable prior year period. The decrease in the yield was partially offset by a $16.0 million increase in the average balance of interest-earning assets to $4,109.1 million for the six months ended June 30, 2012 from $4,093.2 million for the comparable prior year period. The 25 basis point decline in the yield of interest-earning assets was primarily due to a 20 basis point reduction in the yield of the loan portfolio to 5.79% for the six months ended June 30, 2012 from 5.99% for the six months ended June 30, 2011, combined with a 48 basis point decline in the yield on total securities to 3.69% for the six months ended June 30, 2012 from 4.17% for the comparable prior year period. In addition, the yield of interest-earning assets was negatively impacted by a $35.7 million decrease in the average balance of the higher yielding loan portfolio for the six months ended June 30, 2012 and a $73.6 million increase in the average balances of the lower yielding securities portfolio for the six months ended June 30, 2012, as compared to the comparable prior year period. These factors that reduced the yield were partially offset by a $22.0 million decrease in the average balance of lower yielding interest-earning deposits to $37.4 million for the three months ended June 30, 2012 from $59.4 million for the comparable prior year period. The 20 basis point decrease in the yield of the loan portfolio was primarily due to a decline in the rates earned on new loan originations. The 35 basis point decrease in the securities portfolio was primarily due to the purchase of new securities at lower yields than the existing portfolio. The yield on the mortgage loan portfolio decreased 18 basis points to 5.90% for the six months ended June 30, 2012 from 6.08% for the six months ended June 30, 2011. The yield on the mortgage loan portfolio, excluding prepayment penalty income, decreased 23 basis points to 5.76% for the six months ended June 30, 2012 from 5.99% for the six months ended June 30, 2011.

Interest Expense. Interest expense decreased $6.4 million, or 16.2%, to $33.2 million for the six months ended June 30, 2012 from $39.6 million for the six months ended June 30, 2011. The decrease in interest expense was due to the reduction in the cost of interest-bearing liabilities, which decreased 33 basis points to 1.76% for the six months ended June 30, 2012 from 2.09% for the comparable prior year period. The 33 basis point decrease in the cost of interest-bearing liabilities was primarily attributable to the Banks’ reducing the rates it pays on its deposit products and a reduction in the cost borrowed funds. The cost of certificates of deposit, money market accounts, savings accounts and NOW accounts decreased 13 basis points, 21 basis points, 38 basis points and 22 basis points, respectively, for the six months ended June 30, 2012 from the comparable prior year period. This resulted in a decrease in the cost of due to depositors of 20 basis points to 1.41% for the six months ended June 30, 2012 from 1.61% for the six months ended June 30, 2011. The cost of borrowed funds decreased 112 basis points to 3.28% for the six months ended June 30, 2012 from 4.40% for the six months ended June 30, 2011 with the average balance increasing $57.0 million to $733.3 million for the six months ended June 30, 2012 from $676.3 million for the six months ended June 30, 2011. The decrease in the cost of borrowed funds was primarily due to maturing borrowings being replaced at lower rates and new borrowings being obtained at lower rates.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Net Interest Income. For the six months ended June 30, 2012, net interest income was $75.6 million, an increase of $1.7 million, or 2.3%, from $74.0 million for the six months ended June 30, 2011. The increase in net interest income was attributable to an eight basis point increase in the net-interest spread to 3.54% for the six months ended June 30, 2012 from 3.46% for the six months ended June 30, 2011, combined with an increase of $16.0 million in the average balance of interest-earning assets to $4,109.1 million for the six months ended June 30, 2012 from $4,093.2 million for the comparable prior year period. The yield on interest-earning assets decreased 25 basis points to 5.30% for the six months ended June 30, 2012 from 5.55% for the six months ended June 30, 2011. However, this was more than offset by a decline in the cost of funds of 33 basis points to 1.76% for the six months ended June 30, 2011 from 2.09% for the comparable prior year period. The net interest margin improved seven basis points to 3.68% for the six months ended June 30, 2012 from 3.61% for the six months ended June 30, 2011. Excluding prepayment penalty income, the net interest margin would have been 3.58% for the six months ended June 30, 2012, an increase of three basis points from 3.55% for the six months ended June 30, 2011.

Provision for Loan Losses. A provision for loan losses of $11.0 million was recorded for the six months ended June 30, 2012, which was an increase of $1.0 million from $10.0 million recorded in the six months ended June 30, 2011. During the six months ended June 30, 2012, non-performing loans decreased $5.2 million to $112.2 million from $117.4 million at December 31, 2011. Net charge-offs for the six months ended June 30, 2012 totaled $10.4 million, or 65 basis points of average loans. The current loan-to-value ratio for our non-performing loans collateralized by real estate was 61.1% at June 30, 2012. When we have obtained properties through foreclosure, we have been able to quickly sell the properties at amounts that approximate book value. We anticipate that we will continue to see low loss content in our loan portfolio. The Bank continues to maintain conservative underwriting standards. However, given the level of non-performing loans, the current economic uncertainties, and the charge-offs recorded during the six months ended June 30, 2012, management, as a result of the regular quarterly analysis of the allowance for loans losses, deemed it necessary to record an $11.0 million provision for possible loan losses for the six months ended June 30, 2012. See “-ALLOWANCE FOR LOAN LOSSES.”

Non-Interest Income. Non-interest income for the six months ended June 30, 2012 was $3.0 million, which was the same as that recorded for the six months ended June 30, 2011. An increase of $0.2 million in net losses from fair value adjustments was offset by a $0.2 million decrease in OTTI charges recorded during the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

Non-Interest Expense. Non-interest expense was $41.8 million for the six months ended June 30, 2012, an increase of $2.9 million, or 7.5%, from $38.9 million for the six months ended June 30, 2011. The increase was primarily due to the growth of the Company over the past year, which included the opening of a new branch in January 2012. Salaries and benefits increased $1.8 million for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 primarily due to the opening of a new branch in January 2012, an increase in stock based compensation expense and employee benefits expense. Other operating expense for the six months ended June 30, 2012 increased $0.9 million primarily due to $0.3 million in net losses recorded from the sale of OREO recorded during the six months ended June 30, 2012 compared to $0.2 million in net gains from the sale of OREO recorded during the six months ended June 30, 2011. In addition, other real estate owned/foreclosure expense increased $0.4 million in the six months ended June 30, 2012 compared to the six months ended June 30, 2011. The efficiency ratio was 51.2% for the three months ended June 30, 2012 compared to 49.6% for the three months ended June 30, 2011.

Income before Income Taxes. Income before the provision for income taxes decreased $2.2 million, or 8.0%, to $25.8 million for the six months ended June 30, 2012 from $28.1 million for the six months ended June 30, 2011 for the reasons discussed above.

Provision for Income Taxes. Income tax expense decreased $1.0 million to $10.1 million for the six months ended June 30, 2012 from $11.0 million for the six months ended June 30, 2011. The effective tax rate was 39.0% and 39.4% for the six months ended June 30, 2012 and 2011, respectively.

FINANCIAL CONDITION

Assets. Total assets at June 30, 2012 were $4,435.8 million, an increase of $147.9 million, or 3.5%, from $4,287.9 million at December 31, 2011. Total loans, net increased $6.1 million, during the six months ended June 30, 2012 to $3,204.6 million from $3,198.5 million at December 31, 2011. Loan originations and purchases were $282.3 million for the six months ended June 30, 2012, an increase of $105.0 million from $177.3 million for the six months ended June 30, 2011. During the six months ended June 30, 2012, we continued to focus on the origination of multi-family properties and deemphasize non-owner occupied commercial real estate and construction lending. Loan applications in process have continued to show improvement, totaling $277.3 million at June 30, 2012 compared to $194.4 million at December 31, 2011 and $197.4 million at June 30, 2011.

-41-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following table shows loan originations and purchases for the periods indicated. The table includes loan purchases of $3.5 million and $14.5 million for the six months ended June 30, 2012 and 2011, respectively, and $1.9 million for the three months ended June 30, 2011. No loans were purchased during the three months ended June 30, 2012.

	For the three months				For the six months
	ended June 30,				ended June 30,
(In thousands)	2012		2011		2012		2011
Multi-family residential	$	79,850	$	54,461	$	141,753	$	100,480
Commercial real estate		16,389		1,593		19,813		3,012
One-to-four family – mixed-use property		5,366		7,826		10,481		12,645
One-to-four family – residential		4,889		3,856		10,694		7,209
Co-operative apartments		1,626		-		1,626		-
Construction		570		197		570		1,203
Small Business Administration		67		509		333		2,838
Taxi Medallion		-		2,410		3,464		26,234
Commercial business and other		54,965		7,426		93,601		23,717
Total	$	163,722	$	78,278	$	282,335	$	177,338

We continue to maintain conservative underwriting standards that include, among other things, a loan-to-value ratio of 75% or less and a debt coverage ratio of at least 125%. Multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans originated during the second quarter of 2012 had an average loan-to-value ratio of 48.8% and an average debt coverage ratio of 202%.

The Savings Bank’s non-performing assets totaled $117.0 million at June 30, 2012, a decrease of $6.1 million from $123.2 million at December 31, 2011. Total non-performing assets as a percentage of total assets were 2.64% at June 30, 2012 compared to 2.87% at December 31, 2011. The ratio of allowance for loan losses to total non-performing loans was 27.5% at June 30, 2012 compared to 25.8% at December 31, 2011. See – “TROUBLED DEBT RESTRUCUTURED AND NON-PERFORMING ASSETS.”

During the six months ended June 30, 2012, mortgage-backed securities decreased $9.2 million, or 1.2%, to $738.1 million from $747.3 million at June 30, 2012. The decrease in mortgage-backed securities during the six months ended June 30, 2012 was primarily due to principal repayments of $77.5 million partially offset by purchases of $65.0 million and a $5.7 million improvement in fair value. Additionally, during the six months ended June 30, 2012 $0.8 million in OTTI charges were recorded on five private issue CMOs. During the six months ended June 30, 2012, other securities increased $156.7 million, or 240.2%, to $221.9 million from $65.2 million at December 31, 2012. The increase in other securities during the six months ended June 30, 2012 was primarily due to purchases of $160.4 million. Other securities primarily consist of securities issued by government agencies, mutual or bond funds that invest in government and government agency securities and corporate bonds.

Liabilities. Total liabilities were $4,004.9 million at June 30, 2012, an increase of $133.8 million, or 3.5%, from $3,871.0 million at December 31, 2011. During the six months ended June 30, 2012, due to depositors decreased $15.7 million, or 0.5%, to $3,100.7 million, as a result of a $28.6 million decrease in certificates of deposit partially offset by a $12.9 million increase in core deposits. Borrowed funds increased $141.9 million during the six months ended June 30, 2012. The increase in borrowed funds was primarily due to a net increase of $82.5 million in long term borrowings combined with a $60.0 million increase in short-term borrowings.

Equity. Total stockholders’ equity increased $14.1 million, or 3.4%, to $431.0 million at June 30, 2012 from $416.9 million at December 31, 2011. Stockholders’ equity increased primarily due to net income of $15.8 million for the six months ended June 30, 2012, an increase in other comprehensive income of $4.0 million primarily due to an increase in the fair value of the securities portfolio and $1.4 million due to the issuance of shares from the annual funding of certain employee retirement plans through the release of common shares from the Employee Benefit Trust. In addition, the exercise of stock options increased stockholders’ equity by $0.8 million, including the income tax benefit realized. These increases were partially offset by the declaration and payment of dividends on the Company’s common stock of $7.9 million and the purchase of 130,900 treasury shares at a cost of $1.7 million. Book value per common share was $13.92 at June 30, 2012 compared to $13.49 at December 31, 2011. Tangible book value per common share was $13.40 at June 30, 2012 compared to $12.96 at December 31, 2011.

-42-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

On September 28, 2011, the Company announced the authorization by the Board of Directors of a new common stock repurchase program which authorizes the purchase of up to 1,000,000 shares of the Company’s common stock. During the six months ended June 30, 2012, the Company repurchased 130,900 shares of the Company’s common stock at an average cost of $13.15 per share. At June 30, 2012, 607,062 shares remain to be repurchased under the current stock repurchase program. Stock will be purchased under the current stock repurchase program from time to time, in the open market or through private transactions, subject to market conditions. There is no expiration or maximum dollar amount under this authorization.

Cash flow. During the six months ended June 30, 2012, funds provided by the Company's operating activities amounted to $35.8 million. These funds, together with $123.9 million provided by financing activities and funds available at the beginning of the period, were utilized to fund net investing activities of $174.2 million. The Company's primary business objective is the origination and purchase of one-to-four family (including mixed-use properties), multi-family residential and commercial real estate mortgage loans and commercial, business and SBA loans. During the six months ended June 30, 2012, the net total of loan originations and purchases less loan repayments and sales was $24.9 million. During the six months ended June 30, 2012, the Company also funded $225.4 million in purchases of securities available for sale. During the six months ended June 30, 2012, funds were primarily provided by an increase of $60.7 million in short-term borrowed funds and an $82.5 million net increase in long-term borrowed funds. Additionally, funds were provided by $82.3 million in proceeds from maturities, sales, calls and prepayments of securities available for sale. These increases funded a $10.1 million decrease in deposits. The Company also used funds of $7.9 million and $2.2 million for dividend payments and purchases of treasury stock, respectively, during the six months ended June 30, 2012.

INTEREST RATE RISK

The Consolidated Statements of Financial Position have been prepared in accordance with generally accepted accounting principles in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in fair value of certain investments due to changes in interest rates. Generally, the fair value of financial investments such as loans and securities fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Company’s interest-earning assets which could adversely affect the Company’s results of operation if such assets were sold, or, in the case of securities classified as available-for-sale, decreases in the Company’s stockholders’ equity, if such securities were retained.

The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust its exposure to interest rate risk. On a quarterly basis, management prepares the “Earnings and Economic Exposure to Changes in Interest Rate” report for review by the Board of Directors, as summarized below. This report quantifies the potential changes in net interest income and net portfolio value should interest rates go up 400 basis points or down 200 basis points (shocked), assuming the yield curves of the rate shocks will be parallel to each other. Net portfolio value is defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to the market value of assets. All changes in income and value are measured as percentage changes from the projected net interest income and net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at June 30, 2012. Various estimates regarding prepayment assumptions are made at each level of rate shock. However, prepayment penalty income is excluded from this analysis. Actual results could differ significantly from these estimates. At June 30, 2012, the Company was within the guidelines set forth by the Board of Directors for each interest rate level.

-43-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following table presents the Company’s interest rate shock as of June 30, 2012:

	Projected Percentage Change In
	Net Interest		Net Portfolio		Net Portfolio
Change in Interest Rate	Income		Value		Value Ratio
-200 Basis points		-2.76		29.58		15.38	%
-100 Basis points		-1.05		16.00		14.05
Base interest rate		0.00		0.00		12.51
+100 Basis points		-4.74		-16.19		10.87
+200 Basis points		-8.97		-31.54		9.20
+300 Basis points		-13.79		-45.71		7.55
+400 Basis points		-19.64		-49.33		6.08

-44-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

AVERAGE BALANCES

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amount of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following table sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the three months ended June 30, 2012 and 2011, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.

	For the three months ended June 30,
	2012							2011
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost
Assets	(Dollars in thousands)
Interest-earning assets:
Mortgage loans, net (1)	$	2,910,023		42,541		5.85	%	$	2,926,738		44,310		6.06	%
Other loans, net (1)		294,032		3,582		4.87			294,144		3,811		5.18
Total loans, net		3,204,055		46,123		5.76			3,220,882		48,121		5.98
Mortgage-backed securities		713,589		6,874		3.85			735,895		7,850		4.27
Other securities		208,544		1,376		2.64			62,854		501		3.19
Total securities		922,133		8,250		3.58			798,749		8,351		4.18
Interest-earning deposits and federal funds sold		29,815		11		0.15			60,833		27		0.18
Total interest-earning assets		4,156,003		54,384		5.23			4,080,464		56,499		5.54
Other assets		242,518							215,406
Total assets	$	4,398,521						$	4,295,870

Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Savings accounts	$	330,573		168		0.20		$	376,351		597		0.63
NOW accounts		1,035,245		1,589		0.61			804,764		1,726		0.86
Money market accounts		181,940		101		0.22			301,350		350		0.46
Certificate of deposit accounts		1,426,138		8,360		2.34			1,566,900		9,669		2.47
Total due to depositors		2,973,896		10,218		1.37			3,049,365		12,342		1.62
Mortgagors' escrow accounts		49,630		7		0.06			47,579		12		0.10
Total deposits		3,023,526		10,225		1.35			3,096,944		12,354		1.60
Borrowed funds		782,744		5,872		3.00			668,639		7,350		4.40
Total interest-bearing liabilities		3,806,270		16,097		1.69			3,765,583		19,704		2.09
Non interest-bearing deposits		132,569							106,175
Other liabilities		34,802							25,743
Total liabilities		3,973,641							3,897,501
Equity		424,880							398,369
Total liabilities and equity	$	4,398,521						$	4,295,870

Net interest income / net interest rate spread			$	38,287		3.54	%			$	36,795		3.45	%

Net interest-earning assets / net interest margin	$	349,733				3.68	%	$	314,881				3.61	%

Ratio of interest-earning assets to interest-bearing liabilities						1.09	X						1.08	X

-45-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(1)	Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $0.7 million and $0.4 million for the three months ended June 30, 2012 and 2011, respectively.

The following table sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the six months ended June 30, 2012 and 2011, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.

	For the six months ended June 30,
	2012							2011
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost
Assets	(Dollars in thousands)
Interest-earning assets:
Mortgage loans, net (1)	$	2,908,422		85,738		5.90	%	$	2,936,827		89,244		6.08	%
Other loans, net (1)		290,589		6,945		4.78			297,869		7,567		5.08
Total loans, net		3,199,011		92,683		5.79			3,234,696		96,811		5.99
Mortgage-backed securities		710,082		13,887		3.91			739,744		15,704		4.25
Other securities		162,651		2,201		2.71			59,350		956		3.22
Total securities		872,733		16,088		3.69			799,094		16,660		4.17
Interest-earning deposits and federal funds sold		37,392		28		0.15			59,392		54		0.18
Total interest-earning assets		4,109,136		108,799		5.30			4,093,182		113,525		5.55
Other assets		238,787							215,170
Total assets	$	4,347,923						$	4,308,352

Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Savings accounts	$	334,816		396		0.24		$	376,547		1,172		0.62
NOW accounts		1,008,010		3,239		0.64			817,823		3,500		0.86
Money market accounts		188,521		265		0.28			332,310		809		0.49
Certificate of deposit accounts		1,460,146		17,217		2.36			1,540,835		19,183		2.49
Total due to depositors		2,991,493		21,117		1.41			3,067,515		24,664		1.61
Mortgagors' escrow accounts		43,934		18		0.08			41,804		24		0.11
Total deposits		3,035,427		21,135		1.39			3,109,319		24,688		1.59
Borrowed funds		733,331		12,032		3.28			676,293		14,887		4.40
Total interest-bearing liabilities		3,768,758		33,167		1.76			3,785,612		39,575		2.09
Non interest-bearing deposits		122,529							102,663
Other liabilities		33,455							26,141
Total liabilities		3,924,742							3,914,416
Equity		422,181							393,936
Total liabilities and equity	$	4,346,923						$	4,308,352

Net interest income / net interest rate spread			$	75,632		3.54	%			$	73,950		3.46	%

Net interest-earning assets / net interest margin	$	340,378				3.68	%	$	307,570				3.61	%

Ratio of interest-earning assets to interest-bearing liabilities						1.09	X						1.08	X

(1)	Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $1.3 million and $0.7 million for the six months ended June 30, 2012 and 2011, respectively.

-46-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

LOANS

The following table sets forth the Company’s loan originations (including the net effect of refinancing) and the changes in the Company’s portfolio of loans, including purchases, sales and principal reductions for the periods indicated.

	For the six months ended June 30,
(In thousands)	2012		2011

Mortgage Loans

At beginning of period	$	2,939,012	$	2,966,890

Mortgage loans originated:
Multi-family residential		141,753		100,480
Commercial real estate		19,813		3,012
One-to-four family – mixed-use property		10,481		12,645
One-to-four family – residential		10,694		7,209
Co-operative apartments		1,626		-
Construction		570		1,203
Total mortgage loans originated		184,937		124,549


Less:
Principal and other reductions		178,147		147,169
Sales		15,709		7,626

At end of period	$	2,930,093	$	2,936,644

Commercial Business and Other Loans

At beginning of period	$	274,981	$	292,936

Other loans originated:
Small business administration		333		2,838
Taxi Medallion		8		11,779
Commercial business		91,805		21,841
Other		1,796		1,876
Total other loans originated		93,942		38,334

Other loans purchased:
Taxi Medallion		3,456		14,455
Total other loans purchased		3,456		14,455

Less:
Principal and other reductions		79,509		62,775
Sales and loans transferred to available for sale		1,379		4,005

At end of period	$	291,491	$	278,945

-47-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

TROUBLED DEBT RESTRUCUTURED AND NON-PERFORMING ASSETS

Management continues to adhere to the Savings Bank’s conservative underwriting standards. The Savings Bank takes a proactive approach to managing delinquent loans, including conducting site examinations and encouraging borrowers to meet with a Savings Bank representative. The Savings Bank has been developing short-term payment plans that enable certain borrowers to bring their loans current. The Savings Bank reviews its delinquencies on a loan by loan basis and continually explores ways to help borrowers meet their obligations and return them back to current status. At times, the Savings Bank may restructure a loan to enable a borrower to continue making payments when it is deemed to be in the best long-term interest of the Savings Bank. This restructure may include making concessions to the borrower that the Savings Bank would not make in the normal course of business, such as reducing the interest rate until the next reset date, extending the amortization period thereby lowering the monthly payments, or changing the loan to interest only payments for a limited time period. At times, certain problem loans have been restructured by combining more than one of these options. The Savings Bank believes that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. The Savings Bank classifies these loans as Troubled Debt Restructured (“TDR”). Loans which have been current for six consecutive months at the time they are restructured as TDR remain on accrual status. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status until they have made timely payments for six consecutive months. Loans that are restructured as TDR but are not performing in accordance with the restructured terms are excluded from the TDR table below, as they are placed on non-accrual status and reported as non-performing loans.

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

	June 30,		March 31,		December 31,
(In thousands)	2012		2012		2011
Accrual Status:
Multi-family residential	$	2,348	$	2,356	$	9,412
Commercial real estate		1,898		2,404		2,413
One-to-four family - mixed-use property		1,080		1,084		795
Construction loans		3,874		5,008		5,584
Commercial business and other		2,000		2,000		2,000

Total		11,200		12,852		20,204

Non-accrual status:
Commercial real estate		5,287		1,388		-
One-to-four family - mixed-use property		1,275		170		-
Total		6,562		1,558		-

Total performing troubled debt restructured	$	17,762	$	14,410	$	20,204

During the six months ended June 30, 2012, four TDR totaling $7.2 million were transferred to non-accrual and seven loans totaling $6.9 million were restructured as TDR.

Interest income on loans is recognized on the accrual basis. The accrual of income on loans is discontinued when certain factors, such as contractual delinquency of 90 days or more, indicate reasonable doubt as to the timely collectability of such income. Additionally, uncollected interest previously recognized on non-accrual loans is reversed from interest income at the time the loan is placed on non-accrual status. Loans in default 90 days or more as to their maturity date but not their payments continue to accrue interest as long as the borrower continues to remit monthly payments.

-48-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

	June 30,		March 31,		December 31,
(In thousands)	2012		2012		2011
Loans 90 days or more past due and still accruing:
Multi-family residential	$	-	$	-	$	6,287
Commercial real estate		-		-		92
Construction loans		-		108		-
Total		-		108		6,379

Non-accrual loans:
Multi-family residential		27,972		25,986		19,946
Commercial real estate		19,585		24,876		19,895
One-to-four family - mixed-use property		20,437		23,475		28,429
One-to-four family - residential		12,450		12,337		12,766
Co-operative apartments		109		110		152
Construction loans		9,845		11,944		14,721
Small business administration		392		592		493
Commercial business and other		21,403		20,478		14,660
Total		112,193		119,798		111,062

Total non-performing loans		112,193		119,906		117,441

Other non-performing assets:
Real estate acquired through foreclosure		2,094		3,604		3,179
Investment securities		2,761		3,035		2,562
Total		4,855		6,639		5,741

Total non-performing assets	$	117,048	$	126,545	$	123,182

Included in non-accrual loans were nine loans totaling $20.9 million, nine loans totaling $23.2 million and six loans totaling $17.1 million which were restructured as TDR which were not performing in accordance with their restructured terms at June 30, 2012, March 31, 2012 and December 31, 2011, respectively.

The Bank’s non-performing assets totaled $117.0 million at June 30, 2012, a decrease of $9.5 million from $126.5 million at March 31, 2012 and a decrease of $6.1 million from $123.2 million at December 31, 2011. Total non-performing assets as a percentage of total assets were 2.64% at June 30, 2012 compared to 2.90% at March 31, 2012 and 2.87% at December 31, 2011. The ratio of allowance for loan losses to total non-performing loans was 27.5% at June 30, 2012 compared to 25.5% at March 31, 2012 and 25.8% at December 31, 2011.

The Bank’s non-performing assets totaled $112.2 million at June 30, 2012, a decrease of $7.7 million from $119.9 million at March 31, 2012 and a decrease of $5.2 million from $117.4 million at December 31, 2011. During the three months ended June 30, 2012, 38 loans totaling $12.2 million, (net of $0.2 million in charge-offs), were added to non-performing loans, 13 loans totaling $7.0 million were returned to performing status, eight loans totaling $1.4 million were paid in full, 14 loans totaling $6.2 million were sold, two loans totaling $0.3 million were transferred to other real estate owned, and charge-offs of $4.7 million were recorded on non-performing loans that were non-performing at the beginning of the second quarter of 2012.

Non-performing investment securities include two pooled trust preferred securities for which we are not receiving payments. At June 30, 2012, these investment securities had a combined amortized cost and market value of $8.3 million and $2.8 million, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following table shows our delinquent loans that are less than 90 days past due still accruing interest and considered performing at the periods indicated:

	June 30, 2012				December 31, 2011
		60 - 89		30 - 59		60 - 89		30 - 59
	days		days		days		days
	(In thousands)

Multi-family residential	$	1,921	$	21,720	$	6,341	$	20,083
Commercial real estate		862		11,371		1,797		10,712
One-to-four family - mixed-use property		4,873		17,802		3,027		20,480
One-to-four family - residential		1,459		2,905		1,769		4,699
Co-operative apartments		-		-		-		-
Construction loans		-		2,462		-		5,065
Small Business Administration		-		1,032		-		16
Taxi medallion		-		-				71
Commercial business and other		2,160		67		966		1,056
Total delinquent loans	$	11,275	$	57,359	$	13,900	$	62,182

CRITICIZED AND CLASSIFIED ASSETS

Our policy is to review our assets, focusing primarily on the loan portfolio, other real estate owned and the investment portfolios, to ensure that the credit quality is maintained at the highest levels. When weaknesses are identified, immediate action is taken to correct the problem through direct contact with the borrower or issuer. We then monitor these assets and, in accordance with our policy and current regulatory guidelines, we designate them as “Special Mention,” which is considered a “Criticized Asset,” and “Substandard,” “Doubtful,” or “Loss,” which are considered “Classified Assets,” as deemed necessary. We designate an asset as Substandard when a well-defined weakness is identified that jeopardizes the orderly liquidation of the debt. We designate an asset as Doubtful when it displays the inherent weakness of a Substandard asset with the added provision that collection of the debt in full, on the basis of existing facts, is highly improbable. We designate an asset as Loss if it is deemed the debtor is incapable of repayment. Loans that are designated as Loss are charged to the Allowance for Loan Losses. Assets that are non-accrual are designated as Substandard, Doubtful or Loss. We designate an asset as Special Mention if the asset does not warrant designation within one of the other categories, but does contain a potential weakness that deserves closer attention. Our total Criticized and Classified assets were $268.5 million at June 30, 2012, a decrease of $36.7 million from $305.1 million at December 31, 2011.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following table sets forth the Banks’ assets designated as Criticized and Classified at June 30, 2012:


(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total

Loans:
Multi-family residential	$	13,793	$	37,193	$	-	$	-	$	50,986
Commercial real estate		14,191		31,383		-		-		45,574
One-to-four family - mixed-use property		13,167		30,832		-		-		43,999
One-to-four family - residential		4,197		14,932		-		-		19,129
Co-operative apartments		-		312		-		-		312
Construction loans		9,135		15,472		-		-		24,607
Small Business Administration		213		356		247		-		816
Commercial business and other		3,731		24,440		1,169		-		29,340
Total loans		58,427		154,920		1,416		-		214,763

Investment Securities: (1)
Pooled trust preferred securities		-		15,579		-		-		15,579
Private issue CMO		-		36,024		-		-		36,024
Total investment securities		-		51,603		-		-		51,603

Other Real Estate Owned		-		2,094		-		-		2,094
Total	$	58,427	$	208,617	$	1,416	$	-	$	268,460

The following table sets forth the Banks’ assets designated as Criticized and Classified at December 31, 2011:


(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total

Loans:
Multi-family residential	$	17,135	$	41,393	$	-	$	-	$	58,528
Commercial real estate		12,264		41,247		-		-		53,511
One-to-four family - mixed-use property		17,393		33,831		-		-		51,224
One-to-four family - residential		3,127		14,343		-		-		17,470
Co-operative apartments		203		153		-		-		356
Construction loans		2,570		28,555		-		-		31,125
Small Business Administration		666		256		214		-		1,136
Commercial business and other		13,585		17,613		1,169		-		32,367
Total loans		66,943		177,391		1,383		-		245,717

Investment Securities: (1)
Pooled trust preferred securities		-		15,344		-		-		15,344
Private issue CMO		-		40,905		-		-		40,905
Total investment securities		-		56,249		-		-		56,249

Other Real Estate Owned		-		3,179		-		-		3,179
Total	$	66,943	$	236,819	$	1,383	$	-	$	305,145

(1) Our investment securities are classified as securities available for sale and as such are carried at their fair value in our Consolidated Financial Statements. The securities above had a fair value of $39.5 million and $41.1 million at June 30, 2012 and December 31, 2011, respectively. Under current applicable regulatory guidelines, we are required to disclose the classified investment securities, as shown in the tables above, at their book values (amortized cost, or fair value for securities that are under the fair value option). Additionally, the requirement is only for the Banks’ securities. Flushing Financial Corporation had two private issue trust preferred securities classified as Substandard with a combined market value of $0.8 million at June 30, 2012 and December 31, 2011.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

On a quarterly basis, all collateral dependent loans that are designated as Special Mention, Substandard or Doubtful are internally reviewed for impairment, based on updated cash flows for income producing properties or updated independent appraisals. The loan balances of collateral dependent impaired loans are then compared to the loans updated fair value. The balance which exceeds fair value is generally charged-off to the allowance for loan losses.

We designate investment securities as Substandard when the investment grade rating by one or more of the rating agencies is below investment grade. We have designated a total of 19 investment securities that are held at the Savings Bank as Substandard at June 30, 2012. Our classified investment securities at June 30, 2012 held by the Savings Bank include 15 private issue CMOs rated below investment grade by one or more of the rating agencies, three issues of pooled trust preferred securities and one private issue trust preferred security. The Investment Securities which are classified as Substandard at June 30, 2012 are securities that were rated investment grade when we purchased them. These securities have each been subsequently downgraded by at least one rating agency to below investment grade. Through June 30, 2012, two of the pooled trust preferred securities and eight private issue CMOs are not paying principal and interest as scheduled. We test each of these securities quarterly for impairment, through an independent third party.

ALLOWANCE FOR LOAN LOSSES

We have established and maintain on our books an allowance for loan losses that is designed to provide a reserve against estimated losses inherent in our overall loan portfolio. The allowance is established through a provision for loan losses based on management’s evaluation of the risk inherent in the various components of the loan portfolio and other factors, including historical loan loss experience (which is updated quarterly), changes in the composition and volume of the portfolio, collection policies and experience, trends in the volume of non-accrual and classified loans and local and national economic conditions. The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and local economic conditions and other factors. We incurred total net charge-offs of $4.7 million and $3.1 million during the three months ended June 30, 2012 and 2011, respectively, and $10.4 million and $8.3 million during the six months ended June 30, 2012 and 2011, respectively. The national and regional economies were generally considered to be in a recession from December 2007 through the middle of 2009. This has resulted in increased unemployment and declining property values, although the property value declines in the New York City metropolitan area have not been as great as many other areas of the country. While the national and regional economies have shown signs of improvement since the second half of 2009, unemployment has remained at elevated levels. The deterioration in the economy has resulted in an elevated level of non-performing loans, which totaled $112.2 million at June 30, 2012 and $117.4 million at December 31, 2011. The Savings Bank’s underwriting standards generally require a loan-to-value ratio of no more than 75% at the time the loan is originated. At June 30, 2012, the average outstanding principal balance of our non-performing loans was 61.1% of the estimated current value of the supporting collateral, after considering the charge-offs that have been recorded. A provision for loan losses of $11.0 million and $10.0 million was recorded for the six months ended June 30, 2012 and 2011, respectively.

We review our loan portfolio by separate categories with similar risk and collateral characteristics, e.g., multi-family residential, commercial real estate, one-to-four family mixed-use property, one-to-four family residential, co-operative apartment, construction, SBA, commercial business, taxi medallion and consumer loans. Impaired loans are segregated and reviewed separately. All non-accrual loans and TDRs are considered impaired. Impaired loans secured by real estate are reviewed based on the fair value of their collateral. In connection with the determination of the allowance, the market value of collateral ordinarily is evaluated by our staff appraiser. On a quarterly basis, the estimated values of impaired mortgage loans are internally reviewed based on updated cash flows for income producing properties and, at times, an updated independent appraisal is obtained. The loan balances of collateral dependent impaired loans are then compared to the loans updated fair value. The balance which exceeds fair value is generally charged-off. We do not allocate additional reserves to loans which have been written down to their fair value. When evaluating a loan for impairment, we do not rely on guarantees and the amount of impairment, if any, is based on the fair value of the collateral. We do not carry loans at a value in excess of the fair value due to a guarantee from the borrower. Impaired mortgage loans that were written down resulted from quarterly reviews or updated appraisals that indicated the properties’ estimated value had declined from when the loan was originated. Loans classified as TDR which are performing in accordance with their modified terms are evaluated based on the projected discounted cash flow of the restructured loan at the loans effective interest rate prior to restructuring. A portion of the allowance for loan losses is allocated in the amount by which the recorded investment in the TDR exceeds the discounted cash flow. For non-collateralized impaired loans, management estimates any recoveries that are anticipated for each loan. A portion of the allowance is allocated to non-collateralized loans based on these estimates. Based on the review of impaired loans, which includes loans classified as TDR, a portion of the allowance was allocated to impaired loans in the amount of $1.2 million and $4.2 million at June 30, 2012 and December 31, 2011, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

General provisions are established against performing loans in our portfolio in amounts deemed prudent by management. A portion of the allowance is allocated to the remaining portfolio based on historical loss experience. The historical loss period used for this allocation was three years. Management also prepared an additional analysis to ensure that the remaining unallocated portion of the allowance for possible loan losses is sufficient to cover losses inherent in the loan portfolio. This analysis considered: (1) the current economic environment, (2) delinquency and non-accrual trends, (3) classified loan trends, (4) the risk inherent in our loan portfolio and volume and trends of loan types, (5) recent trends in charge-offs, (6) changes in underwriting standards, (7) the experience, ability and depth of our lenders, and (8) collection policies and experience. Based on these reviews, management concluded the general portion of the allowance should be $29.7 million and $26.1 million at June 30, 2012 and December 31, 2011, respectively, resulting in a total allowance of $30.9 million and $30.3 million at June 30, 2012 and December 31, 2011, respectively. The Board of Directors reviews and approves the adequacy of the allowance for loan losses on a quarterly basis. Management has concluded and the Board of Directors has concurred, that at June 30, 2012, the allowance was sufficient to absorb losses inherent in our loan portfolio.

The following table sets forth the activity in the Company's allowance for loan losses for the periods indicated:

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

	For the six months ended June 30,
(Dollars in thousands)	2012			2011

Balance at beginning of period	$	30,344		$	27,699

Provision for loan losses		11,000			10,000

Charge-offs:
Multi-family residential		(2,162	)		(1,817	)
Commercial real estate		(2,222	)		(2,522	)
One-to-four family – mixed-use property		(2,329	)		(588	)
One-to-four family – residential		(898	)		(1,991	)
Co-operative apartments		(43	)		-
Construction		(2,441	)		(703	)
Small Business Administration		(265	)		(488	)
Commercial business and other		(523	)		(450	)
Total charge-offs		(10,883	)		(8,559	)

Recoveries:
Multi-family residential		80			21
Commercial real estate		125			-
One-to-four family – mixed-use property		79			108
One-to-four family – residential		29			63
Small Business Administration		23			17
Commercial business and other		102			9
Total recoveries		438			218

Net charge-offs		(10,445	)		(8,341	)

Balance at end of period	$	30,899		$	29,358

Ratio of net charge-offs during the period to average loans outstanding during the period		0.65	%		0.52	%
Ratio of allowance for loan losses to gross loans at end of period		0.96	%		0.91	%
Ratio of allowance for loan losses to non-performing assets at end of period		26.40	%		25.41	%
Ratio of allowance for loan losses to non-performing loans at end of period		27.54	%		26.68	%

RECENT PROPOSED CHANGES TO REGULATORY CAPITAL RULES

During the second quarter of 2012, the federal bank regulatory agencies jointly issued three notices of proposed rulemaking ("NPRs") that would revise and replace the agencies' current capital rules. The NPRs include numerous revisions to the existing capital regulations, including, but not limited to, the following:

·	Revises the definition of regulatory capital components and related calculations.

·	Adds a new common equity tier 1 capital ratio.

·	Increases the minimum tier 1 capital ratio requirement from four percent to six percent.

·	Incorporates the revised regulatory capital requirements into the Prompt Corrective Action framework.

Implements a new capital conservation buffer that would limit payment of capital distributions and certain discretionary bonus payments to executive officers and key risk takers if the banking organization does not hold certain amounts of common equity tier 1 capital in addition to those needed to meet its minimum risk-based capital requirements.

·	Provides a transition period for several aspects of the proposed rule, including the phase-out period for certain non-qualifying capital instruments, the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

·	Revises risk weights for residential mortgages based on loan-to-value ratios and certain product and underwriting features.

·	Increases capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term loan commitments.

·	Removes references to credit ratings consistent with Section 939A of the Dodd-Frank Act.

·	Establishes due diligence requirements for securitization exposures.

The proposed NPRs will result in the Company, in addition to the Banks, becoming subject to capital requirements. Based on our preliminary assessment of the NPRs, we believe we will see an increase in our total risk-weighted assets. However, the Company and the Banks, based on our preliminary assessment, would meet the requirements of the NPRs and will continue to be considered well-capitalized.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of the qualitative and quantitative disclosures about market risk, see the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk."

ITEM 4. CONTROLS AND PROCEDURES

The Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2012, the design and operation of these disclosure controls and procedures were effective. During the period covered by this Quarterly Report, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

ITEM 1. LEGAL PROCEEDINGS

The Company is a defendant in various lawsuits. Management of the Company, after consultation with outside legal counsel, believes that the resolution of these various matters will not result in any material adverse effect on the Company's consolidated financial condition, results of operations and cash flows.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information regarding the shares of common stock repurchased by the Company during the three months ended June 30, 2012:

							Maximum
					Total Number of		Number of
	Total				Shares Purchased		Shares That May
	Number				as Part of Publicly		Yet Be Purchased
	of Shares		Average Price		Announced Plans		Under the Plans
Period	Purchased		Paid per Share		or Programs		or Programs
April 1 to April 30, 2012		-	$	-		-		640,762
May 1 to May 31, 2012		-		-		-		640,762
June 1 to June 30, 2012		33,700		13.01		33,700		607,062
Total		33,700	$	13.01		33,700

On September 28, 2011, the Company announced the authorization by the Board of Directors of a new common stock repurchase program, which authorizes the purchase of up to 1,000,000 shares of the Company’s common stock. During the three months ended June 30, 2012, the Company repurchased 33,700 shares of the Company’s common stock at an average cost of $13.01 per share. At June 30, 2012, 640,762 shares remain to be repurchased under the current stock repurchase program. Stock will be purchased under the current stock repurchase program from time to time, in the open market or through private transactions subject to market conditions. There is no expiration or maximum dollar amount under this authorization.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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PART II – OTHER INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

ITEM 6. EXHIBITS

Exhibit No.		Description

	2.1	Agreement and Plan of Merger dated as of December 20, 2005 by and between Flushing Financial Corporation and Atlantic Liberty Financial Corp. (7)
	3.1	Certificate of Incorporation of Flushing Financial Corporation (1)
	3.2	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (3)
	3.3	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (6)
	3.4	Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
	3.5	Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
	3.6	By-Laws of Flushing Financial Corporation (1)
	4.1	Rights Agreement, dated as of September 8, 2006, between Flushing Financial Corporation and Computershare Trust Company N.A., as Rights Agent, which includes the form of Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock as Exhibit A, form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C (5)
	4.2	Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
	31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
	31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
	32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
	32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
	101.INS	XBRL Instance Document (furnished herewith)
	101.SCH	XBRL Taxonomy Extension Schema Document (furnished herewith)
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith)
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith)
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document (furnished herewith)
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith)
(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed September 1, 1995, Registration No. 33-96488.
(2) Incorporated by reference to Exhibits filed with Form 8-K filed September 26, 2006.
(3) Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.
(4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.
(5) Incorporated by reference to Exhibit filed with Form 8-K filed September 11, 2006.
(6) Incorporated by reference to Exhibit filed with Form 10-K filed March 15, 2012.
(7) Incorporated by reference to Exhibit filed with Form 8-K filed December 23, 2005.

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Flushing Financial Corporation,

Dated: August 9, 2012 By: /s/John R. Buran

John R. Buran

President and Chief Executive Officer

Dated: August 9, 2012 By: /s/David W. Fry

David W. Fry

Executive Vice President, Treasurer and

Chief Financial Officer

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

EXHIBIT INDEX

Exhibit No.		Description

	2.1	Agreement and Plan of Merger dated as of December 20, 2005 by and between Flushing Financial Corporation and Atlantic Liberty Financial Corp. (7)
	3.1	Certificate of Incorporation of Flushing Financial Corporation (1)
	3.2	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (3)
	3.3	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (6)
	3.4	Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
	3.5	Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
	3.6	By-Laws of Flushing Financial Corporation (1)
	4.1	Rights Agreement, dated as of September 8, 2006, between Flushing Financial Corporation and Computershare Trust Company N.A., as Rights Agent, which includes the form of Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock as Exhibit A, form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C (5)
	4.2	Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
	31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
	31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
	32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
	32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
	101.INS	XBRL Instance Document (furnished herewith)
	101.SCH	XBRL Taxonomy Extension Schema Document (furnished herewith)
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith)
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith)
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document (furnished herewith)
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith)
(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed September 1, 1995, Registration No. 33-96488.
(2) Incorporated by reference to Exhibits filed with Form 8-K filed September 26, 2006.
(3) Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.
(4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.
(5) Incorporated by reference to Exhibit filed with Form 8-K filed September 11, 2006.
(6) Incorporated by reference to Exhibit filed with Form 10-K filed March 15, 2012.
(7) Incorporated by reference to Exhibit filed with Form 8-K filed December 23, 2005.

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