FLUSHING FINANCIAL CORP - Quarter Report: 2013 March (Form 10-Q)

f10q_051013.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 March 31, 2013

Commission file number 001-33013

FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

11-3209278

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

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

(Address of principal executive offices)

(718) 961-5400

(Registrant's telephone number, including area code)

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

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

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

Large accelerated filer __

Non-accelerated filer __

Accelerated filer X

Smaller reporting company __

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

The number of shares of the registrant’s Common Stock outstanding as of April 30, 2013 was 30,835,169.

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	42
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	58
ITEM 4. Controls and Procedures	58
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings	59
ITEM 1A. Risk Factors	59
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	59
ITEM 3. Defaults Upon Senior Securities	59
ITEM 4. Mine Safety Disclosures	59
ITEM 5. Other Information	59
ITEM 6. Exhibits	60
SIGNATURES	61

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements

(Dollars in thousands, except per share data)	March 31, 2013			December 31, 2012
ASSETS
Cash and due from banks	$	46,046		$	40,425
Securities available for sale:
Mortgage-backed securities ($17,965 and $24,911 at fair value pursuant to the fair value option at March 31, 2013 and December 31, 2012, respectively)		764,701			720,113
Other securities ($29,933 and $29,577 at fair value pursuant to the fair value option at March 31, 2013 and December 31, 2012 respectively)		235,593			229,453
Loans held for sale		9,907			5,313
Loans:
Multi-family residential		1,528,353			1,534,438
Commercial real estate		507,932			515,438
One-to-four family ― mixed-use property		615,661			637,353
One-to-four family ― residential		197,268			198,968
Co-operative apartments		8,221			6,303
Construction		10,952			14,381
Small Business Administration		8,812			9,496
Taxi medallion		8,777			9,922
Commercial business and other		302,726			295,076
Net unamortized premiums and unearned loan fees		12,495			12,746
Allowance for loan losses		(31,027	)		(31,104	)
Net loans		3,170,170			3,203,017
Interest and dividends receivable		17,209			17,917
Bank premises and equipment, net		22,016			22,500
Federal Home Loan Bank of New York stock		38,686			42,337
Bank owned life insurance		107,068			106,244
Goodwill		16,127			16,127
Core deposit intangible		351			468
Other assets		48,639			47,502
Total assets	$	4,476,513		$	4,451,416

LIABILITIES
Due to depositors:
Non-interest bearing	$	160,234		$	155,789
Interest-bearing:
Certificate of deposit accounts		1,200,906			1,253,229
Savings accounts		281,145			288,398
Money market accounts		139,711			148,618
NOW accounts		1,278,071			1,136,599
Total interest-bearing deposits		2,899,833			2,826,844
Mortgagors' escrow deposits		46,585			32,560
Borrowed funds ($24,742 and $23,922 at fair value pursuant to the fair value option at March 31, 2013 and December 31, 2012, respectively)		683,064			763,105
Securities sold under agreements to repurchase		185,300			185,300
Other liabilities		57,614			45,453
Total liabilities		4,032,630			4,009,051

Commitments and contingencies (Note 4 and Note 5)

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 March 31, 2013 and December 31, 2012; 30,846,118 shares and 30,743,329 shares outstanding at March 31, 2013 and December 31, 2012, respectively)		315			315
Additional paid-in capital		200,135			198,314
Treasury stock, at average cost (684,477 shares and 787,266 shares at March 31, 2013 and December 31, 2012, respectively)		(9,174	)		(10,257	)
Retained earnings		244,505			241,856
Accumulated other comprehensive income, net of taxes		8,102			12,137
Total stockholders' equity		443,883			442,365

Total liabilities and stockholders' equity	$	4,476,513		$	4,451,416

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

	For the three months ended March 31,
(Dollars in thousands, except per share data)	2013			2012

Interest and dividend income
Interest and fees on loans	$	42,940		$	46,560
Interest and dividends on securities:
Interest		6,954			7,631
Dividends		175			207
Other interest income		17			17
Total interest and dividend income		50,086			54,415

Interest expense
Deposits		8,291			10,910
Other interest expense		7,649			6,160
Total interest expense		15,940			17,070

Net interest income		34,146			37,345
Provision for loan losses		6,000			6,000
Net interest income after provision for loan losses		28,146			31,345

Non-interest income
Loan fee income		608			466
Banking services fee income		432			455
Net loss on sale of loans		(9	)		-
Net gain on sale of securities		2,858			-
Net loss from fair value adjustments		(123	)		(448	)
Federal Home Loan Bank of New York stock dividends		414			385
Bank owned life insurance		825			696
Other income		343			324
Total non-interest income		5,348			1,878

Non-interest expense
Salaries and employee benefits		12,233			11,041
Occupancy and equipment		1,860			1,930
Professional services		1,618			1,722
FDIC deposit insurance		991			1,017
Data processing		1,043			976
Depreciation and amortization		767			834
Other real estate owned/foreclosure expense		668			712
Other operating expenses		3,239			3,304
Total non-interest expense		22,419			21,536

Income before income taxes		11,075			11,687

Provision for income taxes
Federal		3,461			3,624
State and local		858			934
Total taxes		4,319			4,558

Net income	$	6,756		$	7,129


Basic earnings per common share	$	0.22		$	0.23
Diluted earnings per common share	$	0.22		$	0.23
Dividends per common share	$	0.13		$	0.13

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 March 31,
(Dollars in thousands)	2013			2012


Comprehensive Income, net of tax
Net income	$	6,756		$	7,129
Amortization of actuarial losses		174			149
Amortization of prior service credits		(6	)		(6	)
Unrealized gains (losses) on securities, net		(4,203	)		1,217
Comprehensive income	$	2,721		$	8,489

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 three months ended March 31,
(Dollars in thousands)	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	6,756		$	7,129
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		6,000			6,000
Depreciation and amortization of bank premises and equipment		767			834
Amortization of premium, net of accretion of discount		1,774			1,561
Net loss from fair value adjustments		123			448
Net loss from sale of loans		9			-
Net gain from sale of securities		(2,858	)		-
Income from bank owned life insurance		(825	)		(696	)
Stock-based compensation expense		1,993			1,418
Deferred compensation		(423	)		(306	)
Amortization of core deposit intangibles		117			117
Excess tax benefit from stock-based payment arrangements		(245	)		(106	)
Deferred income tax provision		904			713
Decrease in prepaid FDIC assessment		927			946
Increase (decrease) in other liabilities		2,089			(1,676	)
Decrease in other assets		3,004			540
Net cash provided by operating activities		20,112			16,922

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(283	)		(470	)
Net (purchase) redemptions of Federal Home Loan Bank of New York shares		3,651			(1,976	)
Purchases of securities available for sale		(171,018	)		(122,512	)
Proceeds from sales and calls of securities		96,396			-
Proceeds from maturities and prepayments of securities available for sale		37,461			39,035
Net (originations) and repayment of loans		4,426			(19,871	)
Purchases of loans		(452	)		(3,456	)
Proceeds from sale of real estate owned		1,793			624
Proceeds from sale of delinquent loans		8,166			9,091
Net cash used in investing activities		(19,860	)		(99,535	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		4,445			12,921
Net (decrease) increase in interest-bearing deposits		72,700			(743	)
Net increase in mortgagors' escrow deposits		14,025			11,457
Net (repayment) proceeds from short-term borrowed funds		(121,500	)		58,500
Proceeds from long-term borrowings		110,271			47,414
Repayment of long-term borrowings		(69,912	)		(62,000	)
Purchases of treasury stock		(954	)		(1,652	)
Excess tax benefit from stock-based payment arrangements		245			106
Proceeds from issuance of common stock upon exercise of stock options		22			244
Cash dividends paid		(3,973	)		(3,965	)
Net cash provided by financing activities		5,369			62,282

Net increase (decrease) in cash and cash equivalents		5,621			(20,331	)
Cash and cash equivalents, beginning of period		40,425			55,721
Cash and cash equivalents, end of period	$	46,046		$	35,390

SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	15,652		$	16,995
Income taxes paid		1,581			5,218
Taxes paid if excess tax benefits were not tax deductible		1,826			5,324
Non-cash activities:
Securities purchased not yet settled		14,308			-
Loans transferred to Other Real Estate Owned		679			1,293
Loans provided for the sale of Other Real Estate Owned		2,088			221
Loans held for investment transferred to loans held for sale		7,682			-

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 three months ended March 31,
(Dollars in thousands, except per share data)	2013			2012

Common Stock
Balance, beginning of period	$	315		$	315
No activity		-			-
Balance, end of period	$	315		$	315
Additional Paid-In Capital
Balance, beginning of period	$	198,314		$	195,628
Award of common shares released from Employee Benefit Trust (133,656 and 146,735 common shares for the three months ended March 31, 2013 and 2012, respectively)		1,563			1,363
Shares issued upon vesting of restricted stock unit awards (98,610 and 85,163 common shares for the three months ended March 31, 2013 and 2012, respectively)		78			151
Issuance upon exercise of stock options (42,400 and 56,850 common shares for the three months ended March 31, 2013 and 2012, respectively)		55			73
Stock-based compensation activity, net		(120	)		4
Stock-based income tax benefit		245			106
Balance, end of period	$	200,135		$	197,325
Treasury Stock
Balance, beginning of period	$	(10,257	)	$	(7,355	)
Purchases of outstanding shares (18,560 and 97,200 common shares for the three months ended March 31, 2013 and 2012, respectively)		(301	)		(1,282	)
Shares issued upon vesting of restricted stock unit awards (151,652 and 113,993 common shares for the three months ended March 31, 2013 and 2012, respectively)		1,983			1,343
Issuance upon exercise of stock options (52,320 and 67,330 common shares for the three months ended March 31, 2013 and 2012, respectively)		691			802
Purchases of shares to fund options exercised (39,957 and 40,866 common shares for the three months ended March 31, 2013 and 2012, respectively)		(637	)		(548	)
Repurchase of shares to satisfy tax obligations (42,666 and 27,883 common shares for the three months ended March 31, 2013 and 2012, respectively)		(653	)		(370	)
Balance, end of period	$	(9,174	)	$	(7,410	)
Retained Earnings
Balance, beginning of period	$	241,856		$	223,510
Net income		6,756			7,129
Cash dividends declared and paid on common shares ($0.13 per common share for the three months ended March 31, 2013 and 2012)		(3,973	)		(3,965	)
Issuance upon exercise of stock options (9,920 and 10,480 common shares for the three months ended March 31, 2013 and 2012, respectively)		(35	)		(24	)
Shares issued upon vesting of restricted stock unit awards (53,042 and 28,830 common shares for the three months ended March 31, 2013 and 2012, respectivley)		(99	)		(97	)
Balance, end of period	$	244,505		$	226,553
Accumulated Other Comprehensive Income
Balance, beginning of period	$	12,137		$	4,813
Change in net unrealized gains (losses) on securities available for sale, net of taxes of approximately $2,013 and ($962) for the three months ended March 31, 2013 and 2012, respectively		(2,594	)		1,217
Amortization of actuarial losses, net of taxes of approximately ($135) and ($117) for the three months ended March 31, 2013 and 2012, respectively		174			149
Amortization of prior service credits, net of taxes of approximately $5 for the three months ended March 31, 2013 and 2012)		(6	)		(6	)
Reclassification adjustment for losses included in net income, net of taxes of approximatley $1,249 for the three months ended March 31, 2013		(1,609	)		-
Balance, end of period	$	8,102		$	6,173

Total Stockholders' Equity	$	443,883		$	422,956

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

Flushing Financial Corporation (the “Holding Company”), a Delaware corporation, is a bank holding company. On February 28, 2013 the Holding Company’s wholly owned subsidiary Flushing Savings Bank, FSB (the “Savings Bank”), merged with and into (the “Merger”) Flushing Commercial Bank. Flushing Commercial Bank was the surviving entity of the Merger and its name was changed to Flushing Bank. References herein to the “Bank” mean the Savings Bank (including its wholly owned subsidiary, Flushing Commercial Bank) prior to the Merger and the surviving entity after the Merger. The Holding Company and its direct and indirect wholly-owned subsidiaries, including the Bank, Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc., are collectively herein referred to as “we,” “us,” “our” and the “Company.”

The Merger was the result of the combination of two entities under common control, and in accordance with ASC 805-50-30-5, the Bank measured the recognized assets and liabilities transferred at their carrying amounts (historical cost) for this transaction.

The primary business of the Holding Company is the operation of its wholly-owned subsidiary, the Bank. 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, 2012.

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 (“ALLL”), the evaluation of goodwill for impairment, the evaluation of the need for a valuation allowance of the Company’s deferred tax assets, the evaluation of other-than-temporary impairment (“OTTI”) on securities and the valuation of certain financial instruments. 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 March 31,
	2013			2012
	(In thousands, except per share data)
Net income, as reported	$	6,756		$	7,129
Divided by:
Weighted average common shares outstanding		30,449			30,396
Weighted average common stock equivalents		32			24
Total weighted average common shares outstanding and common stock equivalents		30,481			30,420

Basic earnings per common share	$	0.22		$	0.23
Diluted earnings per common share (1)	$	0.22		$	0.23
Dividend payout ratio		59.1	%		56.5	%

(1)

For the three months ended March 31, 2013, options to purchase 542,400 shares at an average exercise price of $17.66 were not included in the computation of diluted earnings per common share as they were anti-dilutive. For the three months ended March 31, 2012, options to purchase 720,340 shares at an average exercise price of $16.71were not included in the computation of diluted earnings per common share as they were anti-dilutive.

4.	Debt and Equity Securities

The Company’s investments in equity securities that have readily determinable fair values and all investments in debt securities are classified in one of the following three categories and accounted for accordingly: (1) trading securities, (2) securities available for sale and (3) securities held-to-maturity.

The Company did not hold any trading securities or securities held-to-maturity during the three month periods ended March 31, 2013 and 2012. Securities available for sale are recorded at fair value.

The following table summarizes the Company’s portfolio of securities available for sale at March 31, 2013:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
U.S. government agencies	$	10,006	$	10,020	$	14	$	-
Corporate		103,668		108,323		4,674		19
Municipals		81,113		81,200		417		330
Mutual funds		21,823		21,823		-		-
Other		18,172		14,227		17		3,962
Total other securities		234,782		235,593		5,122		4,311
REMIC and CMO		492,492		509,440		19,445		2,497
GNMA		37,487		40,843		3,356		-
FNMA		193,310		197,903		5,322		729
FHLMC		16,068		16,515		447		-
Total mortgage-backed securities		739,357		764,701		28,570		3,226
Total securities available for sale	$	974,139	$	1,000,294	$	33,692	$	7,537

The table above includes commitments to purchase securities totaling $14.3 million which settled during April 2013.

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 $18.0 million and $18.4 million, respectively, at March 31, 2013. 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 March 31, 2013:

	Total				Less than 12 months				12 months or more
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Corporate	$	9,981	$	19	$	9,981	$	19	$	-	$	-
Municipals		21,666		330		21,666		330		-		-
Other		5,600		3,962		-		-		5,600		3,962
Total other securities		37,247		4,311		31,647		349		5,600		3,962
REMIC and CMO		130,532		2,497		106,771		560		23,761		1,937
FNMA		73,523		729		73,523		729		-		-
Total mortgage-backed securities		204,055		3,226		180,294		1,289		23,761		1,937
Total securities available for sale	$	241,302	$	7,537	$	211,941	$	1,638	$	29,361	$	5,899

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 March 31, 2013. 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.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Corporate:

The unrealized losses in Corporate securities at March 31, 2013 consist of losses on one Corporate security. The unrealized loss was caused by movements in interest rates. It is not anticipated that this security would be settled at a price that is less than the amortized cost of the Company’s investment. This security 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 this security and it is more likely than not the Company will not be required to sell the security before recovery of the security’s amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the security. Therefore, the Company did not consider this investment to be other-than-temporarily impaired at March 31, 2013.

Municipals:

The unrealized losses in Municipal securities at March 31, 2013, consist of losses on eight 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 March 31, 2013.

Other Securities:

The unrealized losses in Other Securities at March 31, 2013, 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 of the banks:

§	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.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

In order to estimate potential future defaults and deferrals, we segregated the performing underlying issuers by their Texas Ratio. We then reviewed performing issuers with Texas Ratios in excess of 50%. The Texas Ratio is a key indicator of the health of the institution and the likelihood of failure. This ratio compares the problem assets of the institution to the institution’s available capital and reserves to absorb losses that are likely to occur in these assets. There were no issuers in our pooled trust preferred securities which had a Texas Ratio in excess of 50.00%. We assigned a zero default rate to these issuers. Our analysis also assumed that issuers currently deferring would default with no recovery, and issuers that have defaulted will have no recovery.

We had an independent third party prepare a discounted cash flow analysis for each of these pooled trust preferred securities based on the assumptions discussed above. Other significant assumptions were: (1) two issuers totaling $7.7 million will prepay in the second quarter of 2013 and two issuers totaling $21.5 million will prepay in the second quarter of 2015; (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.

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

It is not anticipated at this time that the one single issuer trust preferred security and the two pooled trust preferred securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms; except for the pooled trust preferred securities for which the Company has stopped accruing interest as discussed above and, in the opinion of management based on the review performed at March 31, 2013, 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 March 31, 2013.

At March 31, 2013, 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 March 31, 2013. The class the Company owns in pooled trust preferred securities does not have any excess subordination.

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

Single issuer	n/a	1	$	300	$	295	$	-	None	None	BB-
Single issuer	n/a	1		500		517		-	None	None	B+
Pooled issuer	B1	19		5,617		2,880		2,196	24.8%	0.0%	C
Pooled issuer	C1	19		3,645		2,425		1,542	21.3%	0.0%	C
Total			$	10,062	$	6,117	$	3,738

REMIC and CMO:

The unrealized losses in Real Estate Mortgage Investment Conduit (“REMIC”) and CMO securities at March 31, 2013 consist of seven issues from the Federal Home Loan Mortgage Corporation (“FHLMC”), six issues from the Federal National Mortgage Association (“FNMA”) and five 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 March 31, 2013.

The unrealized losses at March 31, 2013 on REMIC and CMO securities issued by private issuers were caused by movements in interest rates, a significant widening of credit spreads across markets for these securities and illiquidity and uncertainty in the financial markets. Each of these securities has some level of credit enhancements and none are collateralized by sub-prime loans. Currently, one of these securities is performing according to its terms, with four of these securities remitting less than the full principal amount due. The principal loss for these four securities totaled $0.2 million for the three months ended March 31, 2013. 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 not recorded during the three months ended March 31, 2013.

It is not anticipated at this time that the five private issue CMOs would be settled at a price that is less than the current amortized cost of the Company’s investment. 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 March 31, 2013.

At March 31, 2013, the Company held five private issue CMOs which had a current credit rating of at least one rating below investment grade.

The following table details the five private issue CMOs that were evaluated to determine if they were other-than-temporarily impaired at March 31, 2013:

							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		CO		Score
	(Dollars in thousands)

1	$	9,478	$	8,845	$	10,432	$	3,470	2006	05/25/36	D	40	%					16	%							716
2		4,216		3,695		4,353		727	2006	08/19/36	D	58	%											10	%	737
3		4,420		4,169		4,815		1,107	2006	08/25/36	D	35	%	15	%											711
4		3,309		3,150		3,828		780	2006	08/25/36	D	41	%	14	%			13	%			10	%			724
5		4,275		3,903		4,551		222	2006	03/25/36	CC	24	%			21	%	12	%	12	%					710
Total	$	25,698	$	23,762	$	27,979	$	6,306

FNMA:

The unrealized losses in FNMA securities at March 31, 2013 consist of losses on nine FNMA 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 March 31, 2013.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table details gross unrealized losses recorded in AOCI and the ending credit loss amount on debt securities, as of March 31, 2013, for which the Company has recorded a credit related OTTI charge in the Consolidated Statements of Income:

(in thousands)	Amortized Cost		Fair Value		Gross Unrealized Losses Recorded In AOCI		Ending Credit Loss Amount

Private issued CMO's (1)	$	25,698	$	23,762	$	1,937	$	2,271
Trust preferred securities (1)		9,262		5,305		3,957		3,738
Total	$	34,960	$	29,067	$	5,894	$	6,009

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

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

(in thousands)	For the three months ended March 31, 2013
Beginning balance	$	6,178

Recognition of actual losses		(169	)
OTTI charges due to credit loss recorded in earnings		-
Securities sold during the period		-
Securities where there is an intent to sell or requirement to sell		-
Ending balance	$	6,009

The following table details the amortized cost and estimated fair value of the Company’s securities classified as available for sale at March 31, 2013, 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	$	22,823	$	22,823
Due after one year through five years		59,256		62,081
Due after five years through ten years		49,774		51,110
Due after ten years		102,929		99,579
Total other securities		234,782		235,593
Mortgage-backed securities		739,357		764,701
Total securities available for sale	$	974,139	$	1,000,294

During the three months ended March 31, 2013, as part of a balance sheet restructuring, the Company sold $68.5 million in mortgage-backed securities and recorded gross gains of $3.2 million and gross losses of $0.3 million. The Company did not sell any securities during the three months ended March 31, 2012.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2012:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
U.S. government agencies	$	31,409	$	31,513	$	104	$	-
Corporate		83,389		87,485		4,096		-
Municipals		74,228		75,297		1,152		83
Mutual funds		21,843		21,843		-		-
Other		17,797		13,315		17		4,499
Total other securities		228,666		229,453		5,369		4,582
REMIC and CMO		453,468		474,050		23,690		3,108
GNMA		43,211		46,932		3,721		-
FNMA		168,040		175,929		7,971		82
FHLMC		22,562		23,202		640		-
Total mortgage-backed securities		687,281		720,113		36,022		3,190
Total securities available for sale	$	915,947	$	949,566	$	41,391	$	7,772

Mortgage-backed securities shown in the table above include two private issue CMOsthat are collateralized by commercial real estate mortgages with an amortized cost and market value of $15.2 million and $15.7 million, respectively, at December 31, 2012. The remaining private issue mortgage-backed securities are backed by one-to-four family residential mortgage loans.

The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2012.

	Total				Less than 12 months				12 months or more
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Municipals	$	9,782	$	83	$	9,782	$	83	$	-	$	-
Other		5,064		4,499		-		-		5,064		4,499
Total other securities		14,846		4,582		9,782		83		5,064		4,499

REMIC and CMO		64,126		3,108		40,651		155		23,475		2,953
FNMA		10,331		82		10,331		82		-		-
Total mortgage-backed securities		74,457		3,190		50,982		237		23,475		2,953
Total securities available for sale	$	89,303	$	7,772	$	60,764	$	320	$	28,539	$	7,452

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.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Increases and decreases in the allowance 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 our 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 our opinion, compelling evidence the borrower will bring the loan current in the immediate future. Appraisals and/or updated internal evaluations are obtained as soon as practical and before the loan become 90 days delinquent. The loan balances of collateral dependant impaired loans are compared to the loan’s updated fair value. The balance which exceeds fair value is generally charged-off. Management reviews the allowance for loan losses on a quarterly basis and records as a provision the amount deemed appropriate, after considering current year charge-offs, charge-off trends, new loan production, current balance by particular loan categories and delinquent loans by particular loan categories.

A loan is considered impaired when, based upon the most current information, the Company believes it is probable that it will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan. Impaired loans are measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. 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 March 31, 2013, the Company utilized recent third party appraisals of the collateral to measure impairment for $86.1 million, or 78.1%, of collateral dependent impaired loans and used internal evaluations of the property’s value for $24.5 million, or 21.9%, 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 Bank grants a concession to a borrower who is experiencing financial difficulties.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 March 31, 2013, there were no commitments to lend additional funds to borrowers whose loans were modified to a TDR. The modification of loans to a TDR did not have a significant effect on our operating results, nor did it require a significant allocation of the allowance for loan losses.

The following table shows loans modified and classified as TDR during the three months ended March 31, 2013 and 2012:

	For the three months ended March 31, 2013					For the three months ended March 31, 2012
(Dollars in thousands)	Number		Balance		Modification description	Number		Balance		Modification description


Multi-family residential		1	$	413	Received a below market interest rate and the loan amortization was extended		-	$	-
Commercial real estate		1		273	Received a below market interest rate and the loan amortization was extended		1		1,388	Received a below market interest rate, loan amortization term extended and loan term extended
One-to-four family - mixed-use property		-		-			2		462	Received a below market interest rate
Commercial business and other		1		615	Received a below market interest rate and the loan term was extended		-		-
Total		3	$	1,301			3	$	1,850

The recorded investment of each of the loans modified and classified to a TDR, presented in the table above, was unchanged as there was no principal forgiven in any of these modifications.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	March 31, 2013				December 31, 2012
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment

Multi-family residential		9	$	2,816		8	$	2,347
Commercial real estate		6		8,698		5		8,499
One-to-four family - mixed-use property		7		2,326		7		2,336
One-to-four family - residential		1		372		1		374
Construction		1		3,137		1		3,805
Commercial business and other		3		3,135		2		2,540
Total performing troubled debt restructured		27	$	20,484		24	$	19,901

During the three months ended March 31, 2013, there were no loans classified as TDR transferred to non-accrual status.

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

	March 31, 2013				December 31, 2012
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment

Multi-family residential		-	$	-		2	$	323
Commercial real estate		2		2,987		2		3,075
One-to-four family - mixed-use property		2		688		2		816
Construction		1		7,296		1		7,368
Total troubled debt restructurings that subsequently defaulted		5	$	10,971		7	$	11,582

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

(Dollars in thousands)	March 31, 2013		December 31, 2012

Loans ninety days or more past due and still accruing:
Multi-family residential	$	1,073	$	-
Co-operative apartment		103		-
Commercial Business and other		602		644
Total		1,778		644

Non-accrual mortgage loans:
Multi-family residential		18,569		13,095
Commercial real estate		13,811		15,640
One-to-four family - mixed-use property		10,523		16,553
One-to-four family - residential		13,547		13,726
Co-operative apartments		160		234
Construction		7,396		7,695
Total		64,006		66,943

Non-accrual non-mortgage loans:
Small Business Administration		458		283
Commercial Business and other		12,640		16,860
Total		13,098		17,143

Total non-accrual loans		77,104		84,086


Total non-accrual loans and loans ninety days or more past due and still accruing	$	78,882	$	84,730

The following is a summary of interest foregone on non-accrual loans and loans classified as TDR for the periods indicated:

	For the three months ended March 31,
	2013		2012
	(In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms	$	2,202	$	2,646
Less: Interest income included in the results of operations		243		147
Total foregone interest	$	1,959	$	2,499

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows an age analysis of our recorded investment in loans at March 31, 2013:

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


Multi-family residential	$	14,669	$	2,879	$	18,688	$	36,236	$	1,492,117	$	1,528,353
Commercial real estate		11,067		1,309		13,812		26,188		481,744		507,932
One-to-four family - mixed-use property		22,994		2,293		10,135		35,422		580,239		615,661
One-to-four family - residential		4,067		705		13,209		17,981		179,287		197,268
Co-operative apartments		-		-		161		161		8,060		8,221
Construction loans		-		-		7,396		7,396		3,556		10,952
Small Business Administration		31		-		458		489		8,323		8,812
Taxi medallion		-		-		-		-		8,777		8,777
Commercial business and other		62		1		11,451		11,514		291,212		302,726
Total	$	52,890	$	7,187	$	75,310	$	135,387	$	3,053,315	$	3,188,702

The following table shows an age analysis of our recorded investment in loans at December 31, 2012:

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

Multi-family residential	$	24,059	$	4,828	$	13,095	$	41,982	$	1,492,456	$	1,534,438
Commercial real estate		9,764		3,622		15,639		29,025		486,413		515,438
One-to-four family - mixed-use property		21,012		3,368		16,554		40,934		596,419		637,353
One-to-four family - residential		3,407		2,010		13,602		19,019		179,949		198,968
Co-operative apartments		-		-		234		234		6,069		6,303
Construction loans		2,462		-		7,695		10,157		4,224		14,381
Small Business Administration		404		-		283		687		8,809		9,496
Taxi medallion		-		-		-		-		9,922		9,922
Commercial business and other		2		5		15,601		15,608		279,468		295,076
Total	$	61,110	$	13,833	$	82,703	$	157,646	$	3,063,729	$	3,221,375

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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 three months ended March 31, 2013:

(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	$	13,001	$	5,705	$	5,960	$	1,999	$	46	$	66	$	505	$	7	$	3,815	$	31,104
Charge-off's		1,488		681		2,606		691		74		234		204		-		304		6,282
Recoveries		11		80		53		31		-		-		30		-		-		205
Provision		871		556		2,933		738		116		235		140		-		411		6,000
Ending balance	$	12,395	$	5,660	$	6,340	$	2,077	$	88	$	67	$	471	$	7	$	3,922	$	31,027
Ending balance: individually evaluated for impairment	$	209	$	320	$	592	$	60	$	-	$	37	$	-	$	-	$	180		1,398
Ending balance: collectively evaluated for impairment	$	12,186	$	5,340	$	5,748	$	2,017	$	88	$	30	$	471	$	7	$	3,742	$	29,629

Financing Receivables:
Ending balance	$	1,528,353	$	507,932	$	615,661	$	197,268	$	8,221	$	10,952	$	8,812	$	8,777	$	302,726	$	3,188,702
Ending balance: individually evaluated for impairment	$	26,094	$	25,545	$	18,762	$	15,548	$	267	$	10,229	$	505	$	-	$	18,613	$	115,563
Ending balance: collectively evaluated for impairment	$	1,502,259	$	482,387	$	596,899	$	181,720	$	7,954	$	723	$	8,307	$	8,777	$	284,113	$	3,073,139

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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 year ended December 31, 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		6,016		2,746		4,286		1,583		62		4,591		324			-			1,661		21,269
Recoveries		144		307		358		29		-		-		87			-			104		1,029
Provision		7,606		2,934		4,574		1,904		28		3,989		(245	)		(34	)		244		21,000
Ending balance	$	13,001	$	5,705	$	5,960	$	1,999	$	46	$	66	$	505		$	7		$	3,815	$	31,104
Ending balance: individually evaluated for impairment	$	183	$	359	$	571	$	94	$	-	$	38	$	-		$	-		$	249	$	1,494
Ending balance: collectively evaluated for impairment	$	12,818	$	5,346	$	5,389	$	1,905	$	46	$	28	$	505		$	7		$	3,566	$	29,610

Financing Receivables:
Ending balance	$	1,534,438	$	515,438	$	637,353	$	198,968	$	6,303	$	14,381	$	9,496		$	9,922		$	295,076	$	3,221,375
Ending balance: individually evaluated for impairment	$	21,675	$	23,525	$	26,368	$	15,702	$	237	$	14,232	$	850		$	-		$	26,021	$	128,610
Ending balance: collectively evaluated for impairment	$	1,512,763	$	491,913	$	610,985	$	183,266	$	6,066	$	149	$	8,646		$	9,922		$	269,055	$	3,092,765

- 20 -

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 three month period ended March 31, 2013:

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

	(Dollars in thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	23,637	$	26,895	$	-	$	21,695	$	47
Commercial real estate		18,875		19,644		-		26,774		78
One-to-four family mixed-use property		15,175		17,537				19,115		63
One-to-four family residential		15,176		19,226		-		15,252		20
Co-operative apartments		267		403		-		252		2
Construction		7,835		12,488		-		9,217		-
Non-mortgage loans:						-
Small Business Administration		505		621		-		678		1
Taxi Medallion		-		-		-		-
Commercial Business and other		13,434		15,442		-		8,913		15
Total loans with no related allowance recorded		94,904		112,256		-		101,896		226

With an allowance recorded:
Mortgage loans:
Multi-family residential		2,457		2,458		209		2,190		36
Commercial real estate		6,670		6,736		320		7,222		69
One-to-four family mixed-use property		3,587		3,586		592		3,451		55
One-to-four family residential		372		372		60		373		4
Co-operative apartments		-		-		-		-
Construction		3,137		3,137		37		3,471		28
Non-mortgage loans:
Small Business Administration		-		-		-		-
Taxi Medallion		-		-		-		-
Commercial Business and other		4,436		4,436		180		3,488		52
Total loans with an allowance recorded		20,659		20,725		1,398		20,195		244

Total Impaired Loans:
Total mortgage loans	$	97,188	$	112,482	$	1,218	$	109,012	$	402

Total non-mortgage loans	$	18,375	$	20,499	$	180	$	13,079	$	68

- 21 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	(Dollars in thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	19,753	$	22,889	$	-	$	27,720	$	429
Commercial real estate		34,672		38,594		-		43,976		536
One-to-four family mixed-use property		23,054		25,825		-		27,018		485
One-to-four family residential		15,328		18,995		-		15,047		186
Co-operative apartments		237		299		-		174		2
Construction		10,598		15,182		-		14,689		173
Non-mortgage loans:
Small Business Administration		850		1,075		-		1,042		25
Taxi Medallion		-		-		-		-		-
Commercial Business and other		4,391		5,741		-		5,102		53
Total loans with no related allowance recorded		108,883		128,600		-		134,768		1,889

With an allowance recorded:
Mortgage loans:
Multi-family residential		1,922		1,937		183		3,174		124
Commercial real estate		7,773		7,839		359		6,530		400
One-to-four family mixed-use property		3,314		3,313		571		4,385		205
One-to-four family residential		374		374		94		188		19
Co-operative apartments		-		-		-		101		-
Construction		3,805		3,805		38		4,275		140
Non-mortgage loans:
Small Business Administration		-		-		-		-		-
Taxi Medallion		-		-		-		-		-
Commercial Business and other		2,539		2,540		249		2,273		116
Total loans with an allowance recorded		19,727		19,808		1,494		20,926		1,004

Total Impaired Loans:
Total mortgage loans	$	120,830	$	139,052	$	1,245	$	147,277	$	2,699

Total non-mortgage loans	$	7,780	$	9,356	$	249	$	8,417	$	194

In accordance with our policy and the current regulatory guidelines, we designate loans as “Special Mention,” which are 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 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.

- 22 -

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 March 31, 2013:

(In thousands)	Special Mention		Substandard (1)		Doubtful		Loss		Total

Multi-family residential	$	11,153	$	23,690	$	-	$	-	$	34,843
Commercial real estate		8,600		25,545		-		-		34,145
One-to-four family - mixed-use property		11,813		17,039		-		-		28,852
One-to-four family - residential		2,842		15,176		-		-		18,018
Co-operative apartments		-		267		-		-		267
Construction loans		3,137		7,834		-		-		10,971
Small Business Administration		226		141		-		-		367
Commercial business and other		2,228		14,792		1,080		-		18,100
Total loans	$	39,999	$	104,484	$	1,080	$	-	$	145,563

The following table sets forth the recorded investment in loans designated as Criticized or Classified at December 31, 2012:

(In thousands)	Special Mention		Substandard (1)		Doubtful		Loss		Total

Multi-family residential	$	16,345	$	19,327	$	-	$	-	$	35,672
Commercial real estate		11,097		27,877		-		-		38,974
One-to-four family - mixed-use property		13,104		24,635		-		-		37,739
One-to-four family - residential		5,223		15,328		-		-		20,551
Co-operative apartments		103		237		-		-		340
Construction loans		3,805		10,598		-		-		14,403
Small Business Administration		323		212		244		-		779
Commercial business and other		3,044		18,419		1,080		-		22,543
Total loans	$	53,044	$	116,633	$	1,324	$	-	$	171,001

(1)	The tables above do not include $9.9 million and $5.3 million of Substandard loans held for sale at March 31, 2013 and December 31, 2012, respectively.

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

	For the three months ended March 31
(In thousands)	2013			2012

Balance, beginning of period	$	31,104		$	30,344
Provision for loan losses		6,000			6,000
Charge-off's		(6,282	)		(6,019	)
Recoveries		205			293
Balance, end of period	$	31,027		$	30,618

- 23 -

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
(In thousands)	March 31, 2013		March 31, 2012
Multi-family residential	$	1,477	$	1,004
Commercial real estate		601		1,710
One-to-four family – mixed-use property		2,553		1,412
One-to-four family – residential		660		825
Co-operative apartments		74		42
Construction		234		234
Small Business Administration		174		104
Commercial business and other		304		395
Total net loan charge-offs	$	6,077	$	5,726

Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally home equity lines of credit and business line of credit) amounted to $54.7 million and $138.9 million, respectively, at March 31, 2013.

6.	Loans held for sale

Loans held for sale are carried at the lower of cost or estimated fair value.

The following table shows our Loans held for sale for the periods indicated:

	March 31, 2013				December 31, 2012
(Dollars in thousands)	Number of loans		Carrying Value		Number of loans		Carrying Value

Multi-family residential		6	$	2,892		4	$	3,442
Commercial real estate		4		970		-		-
One-to-four family - mixed-use property		25		5,906		4		1,871
One-to-four family - residential		2		139		-		-


Total		37	$	9,907		8	$	5,313

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

- 24 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows delinquent and non-performing loans sold during the period indicated:

	For the three months ended March 31, 2013
(Dollars in thousands)	Loans sold		Proceeds		Net charge-offs			Net gain (loss)

Multi-family residential		6	$	4,612	$	(109	)	$	6
Commercial real estate		2		1,115		(76	)		-
One-to-four family - mixed-use property		6		2,373		(40	)		(15	)
Commercial business and other		2		66		(185	)		-
Total		16	$	8,166	$	(410	)	$	(9	)

The following table shows delinquent and non-performing loans sold during the period indicated:

	For the three months ended March 31, 2012
(Dollars in thousands)	Loans sold		Proceeds		Net charge-offs			Net gain (loss)

Multi-family residential		6	$	3,968	$	(181	)	$	-
Commercial real estate		3		1,678		(250	)		-
One-to-four family - mixed-use property		4		1,280		(399	)		-
Construction		3		2,540		(57	)		-
Commercial business and other		1		215		(136	)		-
Total		17	$	9,681	$	(1,023	)	$	-

7.	Other Real Estate Owned

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

	For the three months ended March 31,
	2013			2012
	(In thousands)

Balance at beginning of period	$	5,278		$	3,179
Acquisitions		679			1,293
Write-down of carrying value		(65	)		(88	)
Sales		(3,703	)		(780	)
Balance at end of period	$	2,189		$	3,604

- 25 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows the gross gains, gross losses and write-downs of OREO reported in the Consolidated Statements of Income during the periods indicated:

	For the three months ended March 31,
	2013			2012
	(In thousands)

Gross gains	$	201		$	45
Gross losses		(23	)		(110	)
Write-down of carrying value		(65	)		(88	)
Total	$	113		$	(153	)

8.	Stock-Based Compensation

For the three months ended March 31, 2013 and 2012, the Company’s net income, as reported, includes $2.0 million and $1.4 million, respectively, of stock-based compensation costs and $0.8 million and $0.6 million, respectively, of income tax benefits related to the stock-based compensation plans.

The Company estimates the fair value of stock options using the Black-Scholes valuation model. 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 three months ended March 31, 2013 and 2012, the Company granted 230,675 and 230,675 restricted stock units, respectively. There were no stock options granted during the three months ended March 31, 2013 and 2012.

The 2005 Omnibus Incentive Plan (“Omnibus Plan”) became effective on May 17, 2005 after 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 of the Company approved an amendment to the Omnibus Plan authorizing an additional 625,000 shares for use for full value awards. As of March 31, 2013, there were 340,125 shares available for full value awards and 56,440 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.

- 26 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Company’s full value awards at or for the three months ended March 31, 2013:

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

Non-vested at December 31, 2012		318,051		$	13.35
Granted		243,645			15.26
Vested		(175,486	)		14.19
Forfeited		-			-
Non-vested at March 31, 2013		386,210		$	14.18

Vested but unissued at March 31, 2013		232,395		$	14.29

As of March 31, 2013, there was $5.0 million of total unrecognized compensation cost related to non-vested full value awards granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of 3.6 years. The total fair value of awards vested for the three months ended March 31, 2013 and 2012 were $2.7 million and $1.9 million, respectively. The vested but unissued full value awards consist of awards made to employees and directors who are eligible for retirement. According to the terms of the Omnibus Plan, these employees and directors have no risk of forfeiture. These shares will be issued at the original contractual vesting dates.

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

The following table summarizes certain information regarding the non-full value awards, all of which have been granted as stock options, at or for the three months ended March 31, 2013:

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

Outstanding at December 31, 2012		770,355		$	15.92
Granted		-			-
Exercised		(52,320	)		12.62
Forfeited		-			-
Outstanding at March 31, 2013		718,035		$	16.16		2.8	$	1,014
Exercisable shares at March 31, 2013		680,095		$	16.34		2.7	$	824
Vested but unexercisable shares at March 31, 2013		14,560		$	13.29		5.6	$	69

* 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 March 31, 2013, there was $23,000 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 0.6 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.

- 27 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Cash proceeds, fair value received, tax benefits and the intrinsic value related to stock options exercised during the three months ended March 31, 2013 and 2012 are provided in the following table:

	For the three months ended March 31,
(In thousands)	2013		2012
Proceeds from stock options exercised	$	22	$	244
Fair value of shares received upon exercised of stock options		637		548
Tax benefit related to stock options exercised		53		24
Intrinsic value of stock options exercised		174		114

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 his or her 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 three months ended March 31, 2013:

Phantom Stock Plan	Shares			Fair Value

Outstanding at December 31, 2012		50,067		$	15.34
Granted		8,589			15.57
Forfeited		-			-
Distributions		(13	)		15.84
Outstanding at March 31, 2013		58,643		$	16.94
Vested at March 31, 2013		58,311		$	16.94

The Company recorded stock-based compensation expense for the Phantom Stock Plan of $99,000 and $42,000 for the three months ended March 31, 2013 and 2012, respectively. The total fair value of the distributions from the Phantom Stock Plan was $1,000 for each of the three month periods ended March 31, 2013 and 2012, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

9.	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 March 31,
(In thousands)	2013			2012

Employee Pension Plan:
Interest cost	$	207		$	220
Amortization of unrecognized loss		306			263
Expected return on plan assets		(315	)		(310	)
Net employee pension expense	$	198		$	173

Outside Director Pension Plan:
Service cost	$	21		$	20
Interest cost		24			28
Amortization of unrecognized gain		(9	)		(7	)
Amortization of past service liability		9			9
Net outside director pension expense	$	45		$	50

Other Postretirement Benefit Plans:
Service cost	$	112		$	100
Interest cost		55			54
Amortization of unrecognized loss		12			10
Amortization of past service credit		(20	)		(21	)
Net other postretirement expense	$	159		$	143

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2012 that it expects to contribute $0.8 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 post retirement benefit plans (the “Other Postretirement Benefit Plans”) during the year ending December 31, 2013. As of March 31, 2013, the Company has contributed $159,000 to the Employee Pension Plan, $22,000 to the Outside Director Pension Plan and $13,000 to the Other Postretirement Benefit Plans. As of March 31, 2013, the Company has not revised its expected contributions for the year ending December 31, 2012.

10.	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 March 31, 2013, the Company carried financial assets and financial liabilities under the fair value option with fair values of $47.9 million and $24.7 million, respectively. At December 31, 2012, the Company carried financial assets and financial liabilities under the fair value option with fair values of $54.5 million and $23.9 million, respectively. During the three months ended March 31, 2013 and 2012, the Company did not elect to carry any additional financial assets or financial liabilities under the fair value option. During the three months ended March 31, 2013, the Company sold financial assets carried under the fair value option totaling $4.4 million. The Company did not sell any financial assets during the three months ended March 31, 2012.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	Fair Value		Fair Value		Changes in Fair Values For Items Measured at Fair Value
	Measurements		Measurements		Pursuant to Election of the Fair Value Option
	at March 31,		at December 31,		Three Months Ended
(Dollars in thousands)	2013		2012		March 31, 2013			March 31, 2012

Mortgage-backed securities	$	17,965	$	24,911	$	(362	)	$	(18	)
Other securities		29,933		29,577		273			241
Borrowed funds		24,742		23,922		(819	)		171
Net gain from fair value adjustments (1)					$	(908	)	$	394

(1)	The net gain (loss) from fair value adjustments presented in the above table does not include net gains of $0.8 million and losses of $0.8 million for the three months ended March 31, 2013 and 2012, 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 March 31, 2013 and December 31, 2012. The fair value of borrowed funds includes accrued interest payable of $0.4 million at March 31, 2013 and December 31, 2012.

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 March 31, 2013 and December 31, 2012.

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 March 31, 2013 and December 31, 2012, Level 2 includes mortgage related securities, mutual funds, corporate debt and interest rate caps/swaps.

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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 March 31, 2013 and December 31, 2012, Level 3 includes REMIC and CMO securities, municipal securities and 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 and the method that was used to determine their fair value, at March 31, 2013 and December 31, 2012:

	Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)				Total carried at fair value on a recurring basis
	2013		2012		2013		2012		2013		2012		2013		2012


Assets:
Mortgage-backed Securities	$	-	$	-	$	740,940	$	696,638	$	23,761	$	23,475	$	764,701	$	720,113
Other securities		-		-		218,788		213,374		16,805		16,079		235,593		229,453
Interest rate caps		-		-		16		19		-		-		16		19
Interest rate swaps		-		-		51		3		-		-		51		3
Total assets	$	-	$	-	$	959,795	$	910,034	$	40,566	$	39,554	$	1,000,361	$	949,588

Liabilities:
Liabilities:
Borrowings	$	-	$	-	$	-	$	-	$	24,742	$	23,922	$	24,742	$	23,922
Interest rate swaps		-		-		1,138		1,922		-		-		1,138		1,922
Total liabilities	$	-	$	-	$	1,138	$	1,922	$	24,742	$	23,922	$	25,880	$	25,844

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	For the three months ended March 31, 2013
	REMIC and CMO		Municipals			Trust preferred securities		Junior subordinated debentures
	(In thousands)

Beginning balance	$	23,475	$	9,429		$	6,650	$	23,922
Transfer into Level 3		-		-			-		-
Net gain from fair value adjustment of financial assets		-		-			247		-
Net loss from fair value adjustment of financial liabilities		-		-			-		819
Increase in accrued interest payable		-		-			-		1
Change in unrealized gains (losses) included in other comprehensive income		286		(51	)		530		-
Ending balance	$	23,761	$	9,378		$	7,427	$	24,742

Changes in unrealized held at period end	$	286	$	(51	)	$	530	$	-

The following table presents the quantitative information about recurring Level 3 fair value of financial instruments and the fair value measurements as of March 31, 2013:

March 31, 2013	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Assets:

				Spread to index	2.4%	-	4.1%	(3.3%)
REMIC and CMO	$	23,761	Discounted cash flows	Average Life (years)	4.4	-	7.6	(5.6)

Municipals	$	9,378	Discounted cash flows	Discount rate	0.4%	-	4.0%	(3.6%)

				Discount rate	8.0%	-	16.9%	(11.9%)
				Prepayment assumptions	0%	-	73.0%	(45.6%)
Trust Preferred Securities	$	7,427	Discounted cash flows	Defaults	0%	-	10.3%	(7.6%)

Liabilities:

Junior subordinated debentures	$	24,742	Discounted cash flows	Discount rate	8.0%	-	8.0%	(8.0%)

The significant unobservable inputs used in the fair value measurement of the Company’s REMIC and CMO securities valued under Level 3 are the spread to an index and the average life of the security. Significant increases or decreases in either of those inputs in isolation would result in a significantly lower or higher fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Company’s municipal securities valued under Level 3 are the securities’ effective yield. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities valued under Level 3 are the securities’ prepayment assumptions and default rate. Significant increases or decreases in any of the inputs in isolation would result in a significantly lower or higher fair value measurement.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The significant unobservable inputs used in the fair value measurement of the Company’s junior subordinated Debentures are effective yield. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

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 March 31, 2013 and December 31, 2012:

	Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)				Total carried at fair value on a recurring basis
	2013		2012		2013		2012		2013		2012		2013		2012

Assets:
Loans held for sale	$	-	$	-	$	-	$	-	$	9,907	$	5,313	$	9,907	$	5,313
Impaired loans		-		-		-		-		39,689		49,703		39,689		49,703
Other real estate owned		-		-		-		-		2,189		5,278		2,189		5,278
Total assets	$	-	$	-	$	-	$	-	$	51,785	$	60,294	$	51,785	$	60,294

The following table presents the quantitative information about non-recurring Level 3 fair value of financial instruments and the fair value measurements as of March 31, 2013:

March 31, 2013	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Assets:

Loans held for sale	$	9,907	Fair value of collateral	Loss severity discount	3.8%	-	45.9%	(26.7%)
Impaired loans	$	39,689	Fair value of collateral	Loss severity discount	0.2%	-	90.7%	(26.8%)
Other real estate owned	$	2,189	Fair value of collateral	Loss severity discount	0.0%	-	80.7%	(25.3%)

The Company carries its Loans held for sale and OREO at the expected sales price less selling costs.

The Company carries its impaired collateral dependent loans at 85% of the appraised or internally estimated value of the underlying property.

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at March 31, 2013 and December 31, 2012.

The estimated fair value of each material class of financial instruments at March 31, 2013 and December 31, 2012 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:

The estimated fair values of securities available for sale are contained in Note 6 of the Notes to 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 valued using (Level 3 input).

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Loans held for sale:

The fair value of non-performing loans held for sale is estimated through bids received on the loans and, as such, are classified as a 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).

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 March 31, 2013 and 2012, the fair values of the above financial instruments approximate the recorded amounts of the related fees and were not considered to be material.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table sets forth the carrying amounts and estimated fair values of selected financial instruments based on the assumptions described above used by the Company in estimating fair value at March 31, 2013:

	March 31, 2013
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Assets:

Cash and due from banks	$	46,046	$	46,046	$	46,046	$	-	$	-
Mortgage-backed Securities		764,701		764,701		-		740,940		23,761
Other securities		235,593		235,593		-		218,788		16,805
Loans held for sale		9,907		9,907		-		-		9,907
Loans		3,201,197		3,365,486		-		-		3,365,486
FHLB-NY stock		38,686		38,686		-		38,686		-
Interest rate caps		16		16		-		16		-
Interest rate swaps		51		51		-		51		-
OREO		2,189		2,189		-		-		2,189
Total assets	$	4,298,386	$	4,462,675	$	46,046	$	998,481	$	3,418,148


Liabilities:
Deposits	$	3,106,652		3,141,268	$	1,905,746	$	1,235,522	$	-
Borrowings		868,364		905,984		-		882,062		23,922
Interest rate swaps		1,138		1,138		-		1,138		-
Total liabilities	$	3,976,154	$	4,048,390	$	1,905,746	$	2,118,722	$	23,922

- 35 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	December 31, 2012
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Assets:

Cash and due from banks	$	40,425	$	40,425	$	40,425	$	-	$	-
Mortgage-backed Securities		720,113		720,113		-		696,638		23,475
Other securities		229,453		229,453		-		213,374		16,079
Loans held for sale		5,313		5,313		-		-		5,313
Loans		3,234,121		3,416,313		-		-		3,416,313
FHLB-NY stock		42,337		42,337		-		42,337		-
Interest rate caps		19		19		-		19		-
Interest rate swaps		3		3		-		3		-
OREO		5,278		5,278		-		-		5,278
Total assets	$	4,277,062	$	4,459,254	$	40,425	$	952,371	$	3,466,458


Liabilities:
Deposits	$	3,015,193		3,057,152	$	1,761,964	$	1,295,188	$	-
Borrowings		948,405		992,069		-		968,147		23,922
Interest rate swaps		1,922		1,922		-		1,922		-
Total liabilities	$	3,965,520	$	4,051,143	$	1,761,964	$	2,265,257	$	23,922

11.	Derivative Financial Instruments

At March 31, 2013 and December 31, 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. Additionally, the Company at times may use swaps to mitigate the Company’s exposure to rising interest rates on its fixed rate loans.

At March 31, 2013, derivatives with a combined notional amount of $118.0 million are not designated as hedges and a derivative with a notional amount of $4.3 million is designated as a fair value hedge. Changes in the fair value of the derivatives not designated as hedges are reflected in “Net loss from fair value adjustments” in the Consolidated Statements of Income. The portions of the changes in the fair value of the derivative designated as a fair value hedge which is considered ineffective are reflected in “Net loss from fair value adjustments” in the Consolidated Statements of Income.

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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 March 31, 2013:

	March 31, 2013
	Notional Amount		Purchase Price		Net Carrying Value
	(In thousands)

Interest rate caps (non-hedge)	$	100,000	$	9,035	$	16
Interest rate swaps (non-hedge)		18,000		-		(1,138	)
Interest rate swaps (hedge)		4,280		-		51
Total derivatives	$	122,280	$	9,035	$	(1,071	)

The following table sets forth information regarding the Company’s derivative financial instruments at December 31, 2012:

	December 31, 2012
	Notional Amount		Purchase Price		Net Carrying Value
	(In thousands)

Interest rate caps (non-hedge)	$	100,000	$	9,035	$	19
Interest rate swaps (non-hedge)		18,000		-		(1,922	)
Interest rate swaps (hedge)		4,300		-		3
Total derivatives	$	122,300	$	9,035	$	(1,900	)

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

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

	For the three months ended March 31,
(In thousands)	2013			2012

Financial Derivatives:
Interest rate caps	$	(3	)	$	(337	)
Interest rate swaps		788			(1,927	)
Net Gain (loss) (1)	$	785		$	(2,264	)

(1)	Net gains and (losses) are recorded as part of “Net loss from fair value adjustments” in the Consolidated Statements of Income.

12.	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 Flushing Financial Capital Trust II, Flushing Financial Capital Trust III, and Flushing Financial Capital Trust IV, which file separate Federal income tax returns as trusts, and Flushing Preferred Funding Corporation, which files a separate Federal and New York State income tax return as a real estate investment trust.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Income tax provisions are summarized as follows:

	For the three months ended March 31,
(In thousands)	2013		2012
Federal:
Current	$	2,834	$	3,132
Deferred		627		492
Total federal tax provision		3,461		3,624
State and Local:
Current		581		713
Deferred		277		221
Total state and local tax provision		858		934

Total income tax provision	$	4,319	$	4,558

The income tax provision in the Consolidated Statements of Income has been provided at effective rates of 39.0% for the three months ended March 31, 2013 and 2012.

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

	For the three months ended March 31,
(dollars in thousands)	2013					2012

Taxes at federal statutory rate	$	3,876		35.0	%	$	4,090		35.0	%
Increase (reduction) in taxes resulting from:
State and local income tax, net of Federal income tax benefit		558		5.0			607		5.2
Other		(115	)	(1.0	)		(139	)	(1.2	)
Taxes at effective rate	$	4,319		39.0	%	$	4,558		39.0	%

The Company has recorded a deferred tax asset of $33.3 million at March 31, 2013, 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 $31.9 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 March 31, 2013.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

13.	Accumulated Other Comprehensive Income:

The following table sets forth the changes in accumulated other comprehensive income by component for the three months ended March 31, 2013:

	Unrealized Gains and Losses on Available for Sale Securities			Defined Benefit Pension Items			Total
	(In thousands)
Beginning balance, net of tax	$	18,921		$	(6,784	)	$	12,137
Other comprehensive income before reclassifications, net of tax		(2,594	)		-		$	(2,594	)

Amounts reclassified from accumulated other comprehensive income, net of tax		(1,609	)		168			(1,441	)

Net current period other comprehensive income, net of tax		(4,203	)		168			(4,035	)

Ending balance, net of tax	$	14,718		$	(6,616	)	$	8,102

The following table sets forth significant amounts reclassified out of accumulated other comprehensive income by component for the three months ended March 31, 2013:

Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the Statement Where Net Income is Presented
(Dollars in thousands)
Unrealized gains losses on available for sale securities:	$	2,858			Net gain on sale of securities
		(1,249	)		Tax expense
	$	1,609			Net of tax

Amortization of defined benefit pension items:
Actuarial losses	$	(309	)	(1)	Other expense
Prior service credits		11		(1)	Other expense
		(298	)		Total before tax
		130			Tax benefit
	$	(168	)		Net of tax

(1)	These accumulated other comprehensive income components are included in the computation of net periodic pension cost (See Note 9 of the Notes to Consolidated Financial Statements “Pension and Other Postretirement Benefit Plans.”

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

14.	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 established five capital zones or classifications (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized). Such classifications are used by 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 current capital regulations, the Bank is required to comply with each of three separate capital adequacy standards.

At March 31, 2013, the 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 Bank’s compliance:

(Dollars in thousands)	Amount		Percent of Assets

Tier I (leverage) capital:
Capital level	$	427,849		9.78	%
Requirement to be well capitalized		218,655		5.00
Excess		209,194		4.78

Tier I risk-based capital:
Capital level	$	427,849		14.33	%
Requirement to be well capitalized		179,162		6.00
Excess		248,687		8.33

Total risk-based capital:
Capital level	$	458,876		15.37	%
Requirement to be well capitalized		298,603		10.00
Excess		160,273		5.37

As a result of its conversion to a bank holding company on February 28, 2013, the Holding Company became subject to the same regulatory capital requirements as the Bank. At March 31, 2013, the Holding Company’s Tier I (leverage) capital, Tier I risk-based capital and Total risk-based capital was 10.16%, 14.89%, and 15.93%, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

15.	New Authoritative Accounting Pronouncements

In February 2013, the FASB issued ASU No. 2013-02, which amends the authoritative accounting guidance under ASC Topic 220 “Comprehensive Income.” The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2012. 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 Note 13 of the Notes to Consolidated Financial Statements “Accumulated Other Comprehensive Income.”

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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, 2012. 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 our consolidated subsidiaries, including the surviving entity of the merger (the “Merger”) on February 28, 2013 of our wholly owned subsidiary, Flushing Savings Bank, FSB (the “Savings Bank”) with and into Flushing Commercial Bank (the “Commercial Bank”). The surviving entity of the Merger was the Commercial Bank, whose name has been changed to “Flushing Bank.” References herein to the “Bank” mean the Savings Bank (including its wholly owned subsidiary, the Commercial Bank) prior to the Merger and the surviving entity after the Merger.

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, 2012. 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. 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 on November 21, 1995, at which time Flushing Financial Corporation acquired all of the stock of the Savings Bank. On February 28, 2013, in the Merger, the Savings Bank merged with and into the Commercial Bank, with the Commercial Bank as the surviving entity. Pursuant to the Merger, the Commercial Bank’s charter was changed to a full-service New York State chartered commercial bank, and its name was changed to Flushing Bank. 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 and Flushing Financial Corporation’s primary regulator became the Federal Reserve Board of Governors. Upon completion of the Merger, the Bank’s primary regulator became the New York State Department of Financial Services (formerly, the New York State Banking Department), and its primary federal regulator became the Federal Deposit Insurance Corporation (“FDIC”). Deposits are insured to the maximum allowable amount by the FDIC. Additionally, the Bank is a member of the Federal Home Loan Bank system. Also in connection with the Merger, Flushing Financial Corporation became a bank holding company. We do not anticipate any significant changes to our operations or services as a result of the Merger. The primary business of Flushing Financial Corporation has been the operation of the Bank. The Bank owns three subsidiaries: Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc. In November 2006, the Bank launched an internet branch, iGObanking.com®. The activities of Flushing Financial Corporation are primarily funded by dividends, if any, received from the 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. 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 as 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.

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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 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;

·	continue our transition to a ‘commercial’ 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 10 of the Notes to the Consolidated Financial Statements.

During the three months ended March 31, 2013, the Bank sold $68.5 million of mortgage-backed securities realizing a gain of $2.9 million, and prepaid $69.9 million of FHLB-NY advances scheduled to mature in 2014 and incurred a prepayment penalty of $2.6 million. Based on market prepayment assumptions, the mortgage-backed securities sold were yielding 1.96% while the advances prepaid were costing 3.21%. The mortgage-backed securities were replaced with securities yielding approximately 2.00% and were funded by a mixture of new FHLB-NY advances and deposits costing approximately 0.75%. This restructuring is expected to increase net interest income in future periods.

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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

Additionally, during the three months ended March 31, 2013, the Bank continued to take an aggressive approach to reduce the level of non-performing loans. The Bank sold 16 non-performing loans for proceeds totaling $8.2 million, with charge-offs recorded at the time of sale totaling $0.4 million. Additionally, the Bank has agreed to sell 34 non-performing loans for total proceeds of $7.7 million, and recorded $3.2 million in charge-offs. The sale of 30 of these loans, with net proceeds of $7.2 million, was completed in April. These loans are reported as Loans held for sale in our consolidated financial statements.

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 three months ended March 31, 2013 had an average loan-to-value ratio of 37.3% and an average debt coverage ratio of 265%.

Non-performing loans decreased by $2.3 million, or 3%, to $87.6 million, and are at their lowest level since the fourth quarter of 2009. Loans delinquent over 30 days decreased $18.3 million, or 11%, during the first quarter of 2013, and are at their lowest level since the second quarter of 2009. Loans delinquent over 90 days decreased $3.4 million, or 4%, and are at their lowest level since the first quarter of 2010. Classified and criticized loans continued their improving trend that began over a year ago, which resulted in a 16% reduction in these categories in the first quarter of 2013, and a 40% reduction since their peak level at June 30, 2011.

Charge-offs during the three months ended March 31, 2013 were primarily due to sales of delinquent loans and the transfer of loans to Loans held for sale. The net charge-offs totaled $3.7 million. Additional charge-offs were recorded as we continued our program of obtaining updated appraisals, and recording charge-offs based on these up-to-date values as opposed to adding to the allowance for loan losses. These charge-offs totaled $1.8 million. As a result, we do not carry any 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. The average loan-to-value ratio for our non-performing loans, based upon current appraisals, was 54.3% at the end of the quarter.

Our net interest margin for the three months ended March 31, 2013 was 3.29%. Excluding the prepayment penalty incurred as a result of prepaying the FHLB-NY advances, our net interest margin would have been 3.54%, a decrease of six basis points from 3.60% in the fourth quarter of 2012, and a decrease of 14 basis points from 3.68% in the first quarter of 2012. Excluding prepayment penalty income received on loans and prepayment penalty incurred on borrowings, our net interest margin for the first quarter of 2013 was 3.44%, a decrease of three basis points from 3.47% for the fourth quarter of 2012. While we saw a decrease in our funding costs of 13 basis points for the quarter, excluding the prepayment penalty on advances, the yield on interest-earning assets decreased 15 basis points, excluding prepayment penalty income on loans. In the current interest rate environment, new loans and securities are added at rates well below our portfolio average yield, and higher yielding loans and securities are prepaid. We also continued to experience higher than average activity in loans refinancing during the first quarter of 2013, which further reduced the yield on our loan portfolio.

The Bank continues to be well-capitalized under regulatory requirements, with Core, Tier 1 risk-based and Total risk-based capital ratios of 9.78%, 14.33% and 15.37%, respectively, at March 31, 2013. The Company is also subject to the same regulatory requirements. At March 31, 2013, the Company’s capital ratios for Core, Tier 1 risk-based and Total risk-based capital ratios were 10.16%, 14.89% and 15.93%, respectively.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

General. Net income for the three months ended March 31, 2013 was $6.8 million, a decrease of $0.4 million, or 5.2%, compared to $7.1 million for the three months ended March 31, 2012. Diluted earnings per common share were $0.22 for the three months ended March 31, 2013, a decrease of $0.01, or 4.4%, from $0.23 for the three months ended March 31, 2012.

Return on average equity was 6.1% for the three months ended March 31, 2013 compared to 6.8% for the three months ended March 31, 2012. Return on average assets was 0.6% for the three months ended March 31, 2013 compared to 0.7% for the three months ended March 31, 2012.

Interest Income. Total interest and dividend income decreased $4.3 million, or 8.0%, to $50.1 million for the three months ended March 31, 2013 from $54.4 million for the three months ended March 31, 2012. The decrease in interest income was attributable to a 54 basis point decline in the yield of interest-earning assets to 4.82% for the three months ended March 31, 2013 from 5.36% in the comparable prior year period partially offset by an increase of $92.6 million in the average balance of interest-earning assets to $4,154.9 million for the three months ended March 31, 2013 from $4,062.3 million for the comparable prior year period. The 54 basis point decline in the yield of interest-earning assets was primarily due to a 44 basis point reduction in the yield of the loan portfolio to 5.39% for the three months ended March 31, 2013 from 5.83% for the three months ended March 31, 2012, combined with a 74 basis point decline in the yield on total securities to 3.07% for the three months ended March 31, 2013 from 3.81% for the comparable prior year period. In addition, the yield of interest-earning assets was negatively impacted by a $7.2 million decrease in the average balance of the higher yielding loan portfolio and an $105.8 million increase in the average balances of the lower yielding securities portfolio for the three months ended March 31, 2013 as compared to the comparable prior year period, which has a lower yield than the yield of total interest-earning assets. These factors that reduced the yield were partially offset by a $6.0 million decrease in the average balance of lower yielding interest-earning deposits to $39.0 million for the three months ended March 31, 2013 from $45.0 million for the comparable prior year period. The 44 basis point decrease in the loan portfolio was primarily due to the decline in the rates earned on new loan originations. The yield on the mortgage loan portfolio, excluding prepayment penalty income, decreased 42 basis points to 5.26% for the three months ended March 31, 2013 from 5.70% for the three months ended March 31, 2012. The 74 basis point decrease in the securities portfolio yield was primarily due to the purchase of new securities at lower yields than the existing portfolio.

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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

Interest Expense. Interest expense decreased $1.1 million, or 6.6%, to $15.9 million for the three months ended March 31, 2013 from $17.1 million for the three months ended March 31, 2012. The decrease in interest expense was due to the reduction in the cost of interest-bearing liabilities, which decreased 15 basis points to 1.68% for the three months ended March 31, 2013 from 1.83% for the comparable prior year period. The 15 basis point decrease in the cost of interest-bearing liabilities was primarily due to a decline in the cost of total deposits and borrowed funds of 28 basis points and 25 basis points, respectively, partially offset by a shift in deposit concentrations as lower costing total deposits average balance decreased $165.0 million during the three months ended March 31, 2013, while the average balance of higher costing borrowed funds increased $229.4 million during the same period. The 28 basis point reduction in the cost of total deposits was primarily due to the Bank reducing the rates it pays on its deposit products. The cost of certificates of deposit, money market accounts, savings accounts and NOW accounts decreased 25 basis points, 19 basis points, eight basis points and 14 basis points, respectively, for the three months ended March 31, 2013 from the comparable prior year period. The decline in the cost of borrowed funds was primarily due to the prepayment of $68.5 million in FHLB-NY advances during the three months ended March 31, 2013 at an average cost of 3.21% which was scheduled to mature in 2014 and replacing those borrowings with new long-term advances costing 0.75%, partially offset by a $2.6 million prepayment penalty incurred on the transaction.

Net Interest Income. For the three months ended March 31, 2013, net interest income was $34.1 million, a decrease of $3.2 million, or 8.6%, from $37.3 million for the three months ended March 31, 2012. The decrease in net interest income was primarily attributable to a 39 basis point decrease in the net-interest spread to 3.14% for the three months ended March 31, 2013 from 3.53% for the three months ended March 31, 2012, partially offset by an increase of $92.6 million in the average balance of interest-earning assets to $4,154.9 million for the three months ended March 31, 2013 from $4,062.3 million for the comparable prior year period. The yield on interest-earning assets decreased 54 basis points to 4.82% for the three months ended March 31, 2013 from 5.36% for the three months ended March 31, 2012. The cost of funds decreased 15 basis points to 1.68% for the three months ended March 31, 2013 from 1.83% for the comparable prior year period. The net interest margin declined 39 basis points to 3.29% for the three months ended March 31, 2013 from 3.68% for the three months ended March 31, 2012. Excluding prepayment penalty income on loans and prepayment penalties on borrowings, the net interest margin would have been 3.44% for the three months ended March 31, 2013, a 13 basis point decrease from 3.57 for the comparable prior year period.

Provision for Loan Losses. A provision for loan losses of $6.0 million was recorded for the three months ended March 31, 2013, which was the same as that recorded for the three months ended March 31, 2012. During the three months ended March 31, 2013, non-performing loans decreased $2.3 million to $87.6 million from $89.8 million at December 31, 2012. Net charge-offs for the three months ended March 31, 2013 totaled $6.1 million. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 54.3% at March 31, 2013. 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 charge-offs recorded in the first quarter of 2013 and the current economic uncertainties, management, as a result of the regular quarterly analysis of the allowance for loans losses, deemed it necessary to record a $6.0 million provision for possible loan losses in the first quarter of 2013.See “-ALLOWANCE FOR LOAN LOSSES.”

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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

Non-Interest Income. Non-interest income for the three months ended March 31, 2013 was $5.3 million, an increase of $3.5 million from $1.9 million for the three months ended March 31, 2012. The increase in non-interest income was primarily due to the $2.9 million gain from the sale of mortgage-backed securities during the three months ended March 31, 2012, as part of the balance sheet restructuring previously discussed. Additionally, non-interest income improved due to a $0.3 million decrease in net losses from fair value adjustments and $0.1 million increases in both BOLI and FHLB-NY stock dividends from the comparable prior year period.

Non-Interest Expense. Non-interest expense was $22.4 million for the three months ended March 31, 2013, an increase of $0.9 million, or 4.1%, from $21.5 million for the three months ended March 31, 2012. The increase was primarily due to an increase of $1.2 million in salaries and benefits expense which was primarily due to increases in stock based compensation expense and employee benefits expense, partially offset by decreases of $0.1 million in both occupancy and equipment expense and professional services from the comparable prior year period. The first quarter of each year includes the effect of grants of annual restricted stock unit awards. GAAP requires a significant portion of these awards to be expensed at the time of grant. Included in Salaries and benefits expense is $0.7 million and $0.3 million for these awards in the three months ended March 31, 2013 and 2012, respectively, for accelerated expensing. Other expense includes $0.8 million and $0.7 million for these awards in the three months ended March 31, 2013 and 2012, respectively, for accelerated expensing. The increase in the current period accelerated expense as compared to the prior year period is due to the increase in the Company’s stock price and additional employees whose grants are required to be fully expensed on grant date. Since this accelerated expense for the annual restricted stock unit awards occurs in the first quarter, subsequent quarters of 2013 should have a lower level of non-interest expense.

Income before Income Taxes. Income before the provision for income taxes decreased $0.6 million, or 5.2%, to $11.1 million for the three months ended March 31, 2012 from $11.7 million for the three months ended March 31, 2012 for the reasons discussed above.

Provision for Income Taxes. Income tax expense decreased $0.2 million to $4.3 million for the three months ended March 31, 2013 from $4.6 million for the three months ended March 31, 2012. The effective tax rate was 39.0% for the three months ended March 31, 2013 and 2012.

FINANCIAL CONDITION

Assets. Total assets at March 31, 2013 were $4,476.5 million, an increase of $25.1 million, or 0.6%, from $4,451.4 million at December 31, 2012. Total loans, net decreased $32.8 million, during the three months ended March 31, 2013 to $3,170.2 million from $3,203.0 million at December 31, 2012. Loan originations and purchases were $121.4 million for the three months ended March 31, 2013, an increase of $2.8 million from $118.6 million for the three months ended March 31, 2012. During the three months ended March 31, 2013, we continued to focus on the origination of multi-family properties and business loans with a full relationship. Loan applications in process have continued to show improvement, totaling $360.4 million at March 31, 2013 compared to $211.4 million at December 31, 2012 and $258.4 million at March 31, 2012.

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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 loan originations and purchases for the periods indicated:

	For the three months
	ended March 31,
(In thousands)	2013		2012
Multi-family residential	$	42,925	$	61,903
Commercial real estate (1)		6,986		3,424
One-to-four family – mixed-use property		4,390		5,115
One-to-four family – residential		6,510		5,805
Co-operative apartments		2,067		-
Construction		-		-
Small Business Administration		168		266
Taxi medallion (2)		-		3,464
Commercial business and other		58,340		38,636
Total	$	121,386	$	118,613

(1) Includes purchases of $0.5 million for the three months ended March 31, 2013.

(2) Includes purchases of $3.5 million for the three months ended March 31, 2012.

The Bank continues 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 first quarter of 2013 had an average loan-to-value ratio of 37.3% and an average debt coverage ratio of 265%.

The Bank’s non-performing assets totaled $93.6 million at March 31, 2013, a decrease of $4.9 million from $98.5 million at December 31, 2012. Total non-performing assets as a percentage of total assets were 2.09% at March 31, 2013 compared to 2.21% at December 31, 2012. The ratio of allowance for loan losses to total non-performing loans was 35% at March 31, 2013 and December 31, 2012. See – “TROUBLED DEBT RESTRUCUTURED AND NON-PERFORMING ASSETS.”

During the three months ended March 31, 2013, mortgage-backed securities increased $44.6 million, or 6.2%, to $764.7 million from $720.1 million at December 31, 2012. The increase in mortgage-backed securities during the three months ended March 31, 2013 was primarily due to purchases of $158.0 million, partially offset by sales and repayments of $68.5 million and $36.2 million, respectively. During the three months ended March 31, 2013, other securities increased $6.1 million, or 2.7%, to $235.6 million from $229.5 million at December 31, 2012. The increase in other securities during the three months ended March 31, 2013 was primarily due to purchases of $27.3 million, partially offset by $20.3 million in calls. 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 $4,032.6 million at March 31, 2013, an increase of $23.6 million, or 0.6%, from $4,009.1 million at December 31, 2012. During the three months ended March 31, 2013, due to depositors increased $91.5 million, or 3.0%, to $3,106.7 million, as a result of a $143.8 million increase in core deposits partially offset by a $52.3 million decrease in certificates of deposit. Borrowed funds decreased $80.0 million during the three months ended March 31, 2013 primarily due to the $91.5 increase in due to depositors.

Equity. Total stockholders’ equity increased $1.5 million, or 0.3%, to $443.9 million at March 31, 2013 from $442.4 million at December 31, 2012. Stockholders’ equity increased primarily due to net income of $6.8 million for the three months ended March 31, 2013, and $1.5 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. These increases were partially offset by the declaration and payment of dividends on the Company’s common stock of $4.01 million, the purchase of 18,560 treasury shares at a cost of $0.3 million and a decrease in other comprehensive income of $4.0 million primarily due to a decrease in the fair value of the securities portfolio. Book value per common share was $14.39 at March 31, 2013 and December 31, 2012. Tangible book value per common share was $13.87 at March 31, 2013 and December 31, 2012.

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 March 31, 2013, the Company repurchased 18,560 shares of the Company’s common stock at an average cost of $16.24 per share. At March 31, 2013, 367,402 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.

- 47 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Cash flow. During the three months ended March 31, 2013, funds provided by the Company's operating activities amounted to $20.1 million. These funds were utilized to fund net investing activities of $19.9 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 three months ended March 31, 2013, the net total of loan originations and purchases less loan repayments and sales was a $12.1 million inflow of cash. During the three months ended March 31, 2013, the Company also funded $171.0 million in purchases of securities available for sale and repaid $121.5 million in short-term borrowed funds. During the three months ended March 31, 2013, funds were provided by a net increase of $40.4 million in long-term borrowed funds. Additionally, funds were provided by $133.9 million in proceeds from maturities, sales, calls and prepayments of securities available for sale and $91.2 million from a net increase in deposits. The Company also used funds of $4.0 million and $1.0 million for dividend payments and purchases of treasury stock, respectively, during the three months ended March 31, 2013.

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 operations 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 or down (shocked) 200 basis points, assuming the yield curves of the rate shocks will be parallel to each other. The Company’s regulators currently place focus on the net portfolio value, focusing on a rate shock up or down of 200 basis points. 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 March 31, 2013. 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 March 31, 2013, the Company was within the guidelines set forth by the Board of Directors for each interest rate level.

The following table presents the Company’s interest rate shock as of March 31, 2013:

	Projected Percentage Change In
	Net Interest			Net Portfolio			Net Portfolio
Change in Interest Rate	Income			Value			Value Ratio
-200 Basis points		-2.89	%		9.70	%		14.37	%
-100 Basis points		-0.82			6.12			14.08
Base interest rate		0.00			0.00			13.59
+100 Basis points		-2.64			-10.73			12.53
+200 Basis points		-5.86			-21.39			11.39

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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

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 March 31, 2013 and 2012, 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 March 31,
	2013							2012
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost
Assets
Interest-earning assets:
Mortgage loans, net (1)	$	2,882,021		39,747		5.52	%	$	2,906,820		43,197		5.94	%
Other loans, net (1)		304,704		3,193		4.19			287,147		3,363		4.68
Total loans, net		3,186,725		42,940		5.39			3,193,967		46,560		5.83
Mortgage-backed securities		708,977		5,721		3.23			706,576		7,013		3.97
Other securities		220,181		1,408		2.56			116,757		825		2.83
Total securities		929,158		7,129		3.07			823,333		7,838		3.81
Interest-earning deposits and
federal funds sold		38,975		17		0.17			44,969		17		0.15
Total interest-earning assets		4,154,858		50,086		4.82			4,062,269		54,415		5.36
Other assets		271,809							235,056
Total assets	$	4,426,667						$	4,297,325

Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Savings accounts	$	284,982		135		0.19		$	339,059		228		0.27
NOW accounts		1,184,758		1,582		0.53			980,775		1,650		0.67
Money market accounts		143,405		54		0.15			195,102		164		0.34
Certificate of deposit accounts		1,227,033		6,511		2.12			1,494,154		8,857		2.37
Total due to depositors		2,840,178		8,282		1.17			3,009,090		10,899		1.45
Mortgagors' escrow accounts		42,139		9		0.09			38,238		11		0.12
Total deposits		2,882,317		8,291		1.15			3,047,328		10,910		1.43
Borrowed funds		913,298		7,649		3.35			683,917		6,160		3.60
Total interest-bearing liabilities		3,795,615		15,940		1.68			3,731,245		17,070		1.83
Non interest-bearing deposits		148,357							114,489
Other liabilities		41,245							32,109
Total liabilities		3,985,217							3,877,843
Equity		441,450							419,482
Total liabilities and equity	$	4,426,667						$	4,297,325

Net interest income /
net interest rate spread			$	34,146		3.14	%			$	37,345		3.53	%

Net interest-earning assets /
net interest margin	$	359,243				3.29	%	$	331,024				3.68	%

Ratio of interest-earning assets to
interest-bearing liabilities						1.09	X						1.09	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 $0.8 million and $0.7 million for the three months ended March 31, 2013 and 2012, 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

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 three months ended March 31,
(In thousands)	2013		2012

Mortgage Loans

At beginning of period	$	2,906,881	$	2,939,012

Mortgage loans originated:
Multi-family residential		42,925		61,903
Commercial real estate		6,534		3,424
One-to-four family – mixed-use property		4,390		5,115
One-to-four family – residential		6,510		5,805
Co-operative apartments		2,067		-
Construction		-		-
Total mortgage loans originated		62,426		76,247

Mortgage loans purchased:
Commercial real estate		452		-
Total mortgage loans purchased		452		-

Less:
Principal and other reductions		96,853		86,859
Sales		4,519		8,842

At end of period	$	2,868,387	$	2,919,558

Commercial Business and Other Loans

At beginning of period	$	314,494	$	274,981

Other loans originated:
Small Business Administration		168		266
Taxi medallion		-		8
Commercial business		57,139		37,936
Other		1,201		700
Total other loans originated		58,508		38,910

Other loans purchased:
Taxi medallion		-		3,456
Total other loans purchased		-		3,456

Less:
Principal and other reductions		52,687		22,403
Sales		-		214

At end of period	$	320,315	$	294,730

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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

TROUBLED DEBT RESTRUCUTURED AND NON-PERFORMING ASSETS

Management continues to adhere to the Bank’s conservative underwriting standards. The majority of the Bank’s non-performing loans are collateralized by residential income producing properties that are occupied, thereby retaining more of their value and reducing the potential loss. The Bank takes a proactive approach to managing delinquent loans, including conducting site examinations and encouraging borrowers to meet with a Bank representative. The Bank has been developing short-term payment plans that enable certain borrowers to bring their loans current. The 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 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 Bank. This restructure may include making concessions to the borrower that the 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 Bank believes that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. The Bank classifies these loans as TDR. Loans which have been current for six consecutive months at the time they are restructured as TDR remain on accrual status. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status until they have made timely payments for six consecutive months. Loans that are restructured as TDR but are not performing in accordance with the restructured terms are excluded from the TDR table below, as they are placed on non-accrual status and reported as non-performing loans.

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

	March 31,		December 31,
(In thousands)	2013		2012
Accrual Status:
Multi-family residential	$	2,816	$	2,348
Commercial real estate		3,810		3,263
One-to-four family - mixed-use property		2,326		2,338
One-to-four family - residential		371		374
Construction		2,833		3,500
Commercial business and other		4,436		3,849

Total		16,592		15,672

Non-accrual status:
Commercial real estate		3,571		3,872
Total		3,571		3,872

Total performing troubled debt restructured	$	20,163	$	19,544

During the three months ended March 31, 2013, three loans totaling $1.3 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.

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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 non-performing assets at the periods indicated:

	March 31,		December 31,
(In thousands)	2013		2012
Loans 90 days or more past due
and still accruing:
Multi-family residential	$	1,073	$	-
Co-operative apartments		103		-
Construction		602		644
Total		1,778		644

Non-accrual loans:
Multi-family residential		21,261		16,486
Commercial real estate		14,554		15,640
One-to-four family - mixed-use property		16,029		18,280
One-to-four family - residential		13,686		13,726
Co-operative apartments		160		234
Construction		7,396		7,695
Small business administration		458		283
Commercial business and other		12,640		16,860
Total		86,184		89,204

Total non-performing loans		87,962		89,848

Other non-performing assets:
Real estate acquired through foreclosure		2,189		5,278
Investment securities		3,804		3,332
Total		5,993		8,610

Total non-performing assets	$	93,955	$	98,458

Included in non-accrual loans were five loans totaling $10.5 million and seven loans totaling $11.1 million which were restructured as TDR which were not performing in accordance with their restructured terms at March 31, 2013 and December 31, 2012, respectively.

The Bank’s non-performing loans totaled $87.6 million at March 31, 2013, a decrease of $2.3 million from $89.8 million at December 31, 2012. During the three months ended March 31, 2013, 48 loans totaling $18.0 million were added to non-performing loans, eight loans totaling $1.4 million were returned to performing status, 11 loans totaling $5.5 million were paid in full, 16 loans totaling $7.8 million were sold, four loans totaling $0.7 million were transferred to other real estate owned, and charge-offs of $5.4 million were recorded on non-performing loans that were non-performing at the beginning of the first quarter of 2013.

Non-performing investment securities include two pooled trust preferred securities for which we are not receiving payments. At March 31, 2013, these investment securities had a combined amortized cost and market value of $8.3 million and $3.8 million, respectively.

- 52 -

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:

	March 31, 2013				December 31, 2012
	60 - 89 days		30 - 59 days		60 - 89 days		30 - 59 days
	(In thousands)

Multi-family residential	$	2,542	$	14,669	$	4,827	$	24,059
Commercial real estate		1,309		11,067		3,622		9,764
One-to-four family - mixed-use property		1,905		22,994		3,368		21,012
One-to-four family - residential		705		3,729		1,886		3,407
Co-operative apartments		-		-		-		-
Construction loans		-		-		-		2,462
Small Business Administration		-		31		-		404
Taxi medallion		-		-				-
Commercial business and other		1		62		6		2
Total delinquent loans	$	6,462	$	52,552	$	13,709	$	61,110

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 $199.9 million at March 31, 2013, a decrease of $24.3 million from $224.2 million at December 31, 2012.

- 53 -

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 March 31, 2013:

(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total

Loans:
Multi-family residential	$	11,153	$	26,582	$	-	$	-	$	37,735
Commercial real estate		8,600		26,515		-		-		35,115
One-to-four family - mixed-use property		11,813		22,945		-		-		34,758
One-to-four family - residential		2,842		15,315		-		-		18,157
Co-operative apartments		-		267		-		-		267
Construction loans		3,137		7,834		-		-		10,971
Small Business Administration		226		141		-		-		367
Commercial business and other		2,228		14,792		1,080		-		18,100
Total loans		39,999		114,391		1,080		-		155,470

Investment Securities: (1)
Pooled trust preferred securities		-		16,541		-		-		16,541
Private issue CMO		-		25,698		-		-		25,698
Total investment securities		-		42,239		-		-		42,239

Other Real Estate Owned		-		2,189		-		-		2,189
Total	$	39,999	$	158,819	$	1,080	$	-	$	199,898

The following table sets forth the Bank’s assets designated as Criticized and Classified at December 31, 2012:

(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total

Loans:
Multi-family residential	$	16,345	$	22,769	$	-	$	-	$	39,114
Commercial real estate		11,097		27,877		-		-		38,974
One-to-four family - mixed-use property		13,104		26,506		-		-		39,610
One-to-four family - residential		5,223		15,328		-		-		20,551
Co-operative apartments		103		237		-		-		340
Construction loans		3,805		10,598		-		-		14,403
Small Business Administration		323		212		244		-		779
Commercial business and other		3,044		18,419		1,080		-		22,543
Total loans		53,044		121,946		1,324		-		176,314

Investment Securities: (1)
Pooled trust preferred securities		-		16,189		-		-		16,189
Private issue CMO		-		26,429		-		-		26,429
Total investment securities		-		42,618		-		-		42,618

Other Real Estate Owned		-		5,278		-		-		5,278
Total	$	53,044	$	169,842	$	1,324	$	-	$	224,210

(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 $36.3 million and $35.2 million at March 31, 2013 and December 31, 2012, 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 Bank’s securities. Flushing Financial Corporation had one private issue trust preferred security with a market value of $0.3 million classified as Substandard at March 31, 2013 and two private issue trust preferred securities classified as Substandard with a combined market value of $0.8 million at December 31, 2012.

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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 dependant 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 dependant 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 nine investment securities that are held at the Bank as Substandard at March 31, 2013. Our classified investment securities at March 31, 2013 held by the Bank include five 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 March 31, 2013 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 March 31, 2013, two of the pooled trust preferred securities and four 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 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 review our loan portfolio by separate categories with similar risk and collateral characteristics. Impaired loans are segregated and reviewed separately. All non-accrual loans are classified impaired. Impaired loans secured by collateral are reviewed based on the fair value of their collateral. For non-collateralized impaired loans, management estimates any recoveries that are anticipated for each loan. 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 property’s updated fair value. We consider fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property. The balance which exceeds fair value is generally charged-off. 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. Current year charge-offs, charge-off trends, new loan production, current balance by particular loan categories, and delinquent loans by particular loan categories are also taken into account in determining the appropriate amount of allowance. The Board of Directors reviews and approves the adequacy of the allowance for loan losses on a quarterly basis.

In assessing the adequacy of the allowance, 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 $1.4 million and $1.5 million at March 31, 2013 and December 31, 2012, 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 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 $29.6 million at March 31, 2013 and December 31, 2012, respectively, resulting in a total allowance of $31.0 million and $31.1 million at March 31, 2013 and December 31, 2012, 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 March 31, 2013, the allowance was sufficient to absorb losses inherent in our loan portfolio.

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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 activity in the Company's allowance for loan losses for the periods indicated:

	For the three months ended March 31,
(Dollars in thousands)	2013			2012

Balance at beginning of period	$	31,104		$	30,344

Provision for loan losses		6,000			6,000

Loans charged-off:
Multi-family residential		(1,488	)		(1,061	)
Commercial real estate		(681	)		(1,780	)
One-to-four family – mixed-use property		(2,606	)		(1,468	)
One-to-four family – residential		(691	)		(826	)
Co-operative apartments		(74	)		(42	)
Construction		(234	)		(234	)
Small Business Administration		(204	)		(113	)
Commercial business and other		(304	)		(495	)
Total loans charged-off		(6,282	)		(6,019	)

Recoveries:
Multi-family residential		11			57
Commercial real estate		80			70
One-to-four family – mixed-use property		53			56
One-to-four family – residential		31			1
Small Business Administration		30			9
Commercial business and other		-			100
Total recoveries		205			293

Net charge-offs		(6,077	)		(5,726	)

Balance at end of period	$	31,027		$	30,618

Ratio of net charge-offs during the period to
average loans outstanding during the period		0.76	%		0.72	%
Ratio of allowance for loan losses to gross loans at end of period		0.97	%		0.95	%
Ratio of allowance for loan losses to non-performing
assets at end of period		33.16	%		24.20	%
Ratio of allowance for loan losses to non-performing
loans at end of period		35.43	%		25.53	%

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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 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 March 31, 2013, 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, 2012.

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 March 31, 2013:

							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
January 1 to January 31, 2013		-	$	-		-		385,962
February 1 to February 28, 2013		-		-		-		385,962
March 1 to March 31, 2013		18,560		16.24		18,560		367,402
Total		18,560	$	16.24		18,560

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 March 31, 2013, the Company repurchased 18,560 shares of the Company’s common stock at an average cost of $16.24 per share. At March 31, 2013, 367,402 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 (furnished 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 (furnished 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: May 10, 2013 By: /s/John R. Buran

John R. Buran

President and Chief Executive Officer

Dated: May 10, 2013 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 (furnished 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 (furnished 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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