UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 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 July 31, 2013 was 30,118,453.

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	43
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	63
ITEM 4. Controls and Procedures	64
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings	64
ITEM 1A. Risk Factors	64
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	64
ITEM 3. Defaults Upon Senior Securities	64
ITEM 4. Mine Safety Disclosures	64
ITEM 5. Other Information	64
ITEM 6. Exhibits	65
SIGNATURES	66

i

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)	June 30, 2013			December 31, 2012
ASSETS
Cash and due from banks	$	42,196		$	40,425
Securities available for sale:
Mortgage-backed securities ($15,040 and $24,911 at fair value pursuant to the fair value option at June 30, 2013 and December 31, 2012, respectively)		782,388			720,113
Other securities ($29,792 and $29,577 at fair value pursuant to the fair value option at June 30, 2013 and December 31, 2012 respectively)		258,335			229,453
Loans available for sale		335			5,313
Loans:
Multi-family residential		1,607,090			1,534,438
Commercial real estate		526,063			515,438
One-to-four family ― mixed-use property		605,254			637,353
One-to-four family ― residential		196,318			198,968
Co-operative apartments		9,335			6,303
Construction		11,450			14,381
Small Business Administration		8,565			9,496
Taxi medallion		5,114			9,922
Commercial business and other		306,897			295,076
Net unamortized premiums and unearned loan fees		12,016			12,746
Allowance for loan losses		(32,355	)		(31,104	)
Net loans		3,255,747			3,203,017
Interest and dividends receivable		17,380			17,917
Bank premises and equipment, net		21,380			22,500
Federal Home Loan Bank of New York stock		47,420			42,337
Bank owned life insurance		107,910			106,244
Goodwill		16,127			16,127
Core deposit intangible		234			468
Other assets		49,764			47,502
Total assets	$	4,599,216		$	4,451,416
LIABILITIES
Due to depositors:
Non-interest bearing	$	173,953		$	155,789
Interest-bearing:
Certificate of deposit accounts		1,165,157			1,253,229
Savings accounts		272,151			288,398
Money market accounts		197,123			148,618
NOW accounts		1,221,346			1,136,599
Total interest-bearing deposits		2,855,777			2,826,844
Mortgagors' escrow deposits		40,805			32,560
Borrowed funds ($26,192 and $23,922 at fair value pursuant to the fair value option at June 30, 2013 and December 31, 2012, respectively)		883,864			763,105
Securities sold under agreements to repurchase		175,300			185,300
Other liabilities		46,792			45,453
Total liabilities		4,176,491			4,009,051
STOCKHOLDERS' EQUITY
Preferred stock ($0.01 par value; 5,000,000 shares authorized; None issued)		-			-
Common stock ($0.01 par value; 100,000,000 shares authorized; 31,530,595 shares issued at June 30, 2013 and December 31, 2012; 30,103,613 shares and 30,743,329 shares outstanding at June 30, 2013 and December 31, 2012, respectively)		315			315
Additional paid-in capital		200,278			198,314
Treasury stock, at average cost (1,426,982 shares and 787,266 shares at June 30, 2013 and December 31, 2012, respectively)		(20,979	)		(10,257	)
Retained earnings		250,192			241,856
Accumulated other comprehensive income (loss), net of taxes		(7,081	)		12,137
Total stockholders' equity		422,725			442,365
Total liabilities and stockholders' equity	$	4,599,216		$	4,451,416

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

- 1 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

	For the three months ended June 30,						For the six months ended June 30 ,
(Dollars in thousands, except per share data)	2013			2012			2013			2012
Interest and dividend income
Interest and fees on loans	$	42,861		$	46,123		$	85,801		$	92,683
Interest and dividends on securities:
Interest		7,174			8,045			14,128			15,676
Dividends		236			205			411			412
Other interest income		24			11			41			28
Total interest and dividend income		50,295			54,384			100,381			108,799
Interest expense
Deposits		8,093			10,225			16,384			21,135
Other interest expense		4,906			5,872			12,555			12,032
Total interest expense		12,999			16,097			28,939			33,167
Net interest income		37,296			38,287			71,442			75,632
Provision for loan losses		3,500			5,000			9,500			11,000
Net interest income after provision for loan losses		33,796			33,287			61,942			64,632
Non-interest income (loss)
Other-than-temporary impairment ("OTTI") charge		(1,221	)		(6,218	)		(1,221	)		(6,218	)
Less: Non-credit portion of OTTI charge recorded in Other Comprehensive Income, before taxes		718			5,442			718			5,442
Net OTTI charge recognized in earnings		(503	)		(776	)		(503	)		(776	)
Loan fee income		817			634			1,425			1,100
Banking services fee income		411			409			843			864
Net gain on sale of loans		152			39			143			39
Net gain from sale of securities		18			-			2,876			-
Net loss from fair value adjustments		(308	)		(562	)		(431	)		(1,010	)
Federal Home Loan Bank of New York stock dividends		401			338			815			723
Bank owned life insurance		841			689			1,666			1,385
Other income		370			337			713			661
Total non-interest income		2,199			1,108			7,547			2,986
Non-interest expense
Salaries and employee benefits		10,961			10,457			23,194			21,498
Occupancy and equipment		1,856			1,918			3,716			3,848
Professional services		1,515			1,553			3,133			3,275
FDIC deposit insurance		786			1,087			1,777			2,104
Data processing		1,099			1,051			2,142			2,027
Depreciation and amortization		734			785			1,501			1,619
Other real estate owned/foreclosure expense		444			595			1,112			1,307
Other operating expenses		2,818			2,793			6,057			6,097
Total non-interest expense		20,213			20,239			42,632			41,775
Income before income taxes		15,782			14,156			26,857			25,843
Provision for income taxes
Federal		4,663			4,236			8,124			7,860
State and local		1,492			1,283			2,350			2,217
Total taxes		6,155			5,519			10,474			10,077
Net income	$	9,627		$	8,637		$	16,383		$	15,766
Basic earnings per common share	$	0.32		$	0.28		$	0.54		$	0.52
Diluted earnings per common share	$	0.32		$	0.28		$	0.54		$	0.52
Dividends per common share	$	0.13		$	0.13		$	0.26		$	0.26

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

	For the three months ended June 30,						For the six months ended June 30,
(Dollars in thousands)	2013			2012			2013			2012
Comprehensive Income
Net income	$	9,627		$	8,637		$	16,383		$	15,766
Amortization of actuarial losses		174			149			348			298
Amortization of prior service credits		(6	)		(7	)		(12	)		(13	)
OTTI charges included in income		283			437			283			437
Unrealized gains (losses) on securities, net		(15,634	)		2,052			(19,837	)		3,269
Comprehensive income (loss)	$	(5,556	)	$	11,268		$	(2,835	)	$	19,757

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	For the six months ended June 30,
(Dollars in thousands)	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	16,383		$	15,766
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		9,500			11,000
Depreciation and amortization of bank premises and equipment		1,501			1,619
Net gain on sale of loans		(143	)		(39	)
Net gain on sale of securities		(2,876	)		-
Amortization of premium, net of accretion of discount		3,750			3,210
Net loss from fair value adjustments		431			1,010
OTTI charge recognized in earnings		503			776
Income from bank owned life insurance		(1,666	)		(1,385	)
Stock-based compensation expense		2,400			2,219
Deferred compensation		(509	)		(304	)
Amortization of core deposit intangibles		234			234
Excess tax benefit from stock-based payment arrangements		(324	)		(78	)
Deferred income tax (benefit) provision		148			(485	)
Decrease in prepaid FDIC assessment		3,287			1,953
Increase in other liabilities		7,307			4,136
Decrease (increase) in other assets		572			(3,833	)
Net cash provided by operating activities		40,498			35,799
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(381	)		(708	)
Net purchase of Federal Home Loan Bank of New York shares		(5,083	)		(6,602	)
Purchases of securities available for sale		(303,694	)		(225,430	)
Proceeds from maturities and prepayments of securities available for sale		182,481			82,286
Net (originations) and repayments of loans		(77,337	)		(37,967	)
Purchases of loans		(452	)		(3,456	)
Proceeds from sale of real estate owned		2,834			1,229
Proceeds from sale of delinquent loans		20,891			16,494
Net cash used in investing activities		(180,741	)		(174,154	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		18,164			21,003
Net increase (decrease) in interest-bearing deposits		28,362			(37,243	)
Net increase in mortgagors' escrow deposits		8,245			6,094
Net proceeds from short-term borrowed funds		38,000			60,740
Proceeds from long-term borrowings		149,837			162,518
Repayment of long-term borrowings		(79,911	)		(80,000	)
Purchases of treasury stock		(13,363	)		(2,223	)
Excess tax benefit from stock-based payment arrangements		324			78
Proceeds from issuance of common stock upon exercise of stock options		235			814
Cash dividends paid		(7,879	)		(7,931	)
Net cash provided by financing activities		142,014			123,850
Net increase (decrease) in cash and cash equivalents		1,771			(14,505	)
Cash and cash equivalents, beginning of period		40,425			55,721
Cash and cash equivalents, end of period	$	42,196		$	41,216
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	28,319		$	32,879
Income taxes paid		10,732			11,573
Taxes paid if excess tax benefits were not tax deductible		11,056			11,651
Non-cash activities:
Loans transferred to real estate owned		2,758			1,632
Loans provided for the sale of real estate owned		2,583			1,428
Loans held for investment transferred to available for sale		7,525			740
Loans held for sale transferred to loans held for investment		2,214			-

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

	For the six months ended June 30,
(Dollars in thousands, except per share data)	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 (137,346 and 150,564 common shares for the six months ended June 30, 2013 and 2012, respectively)		1,556			1,398
Shares issued upon vesting of restricted stock unit awards (120,014 and 113,072 common shares for the six months ended June 30, 2013 and 2012, respectively)		160			317
Issuance upon exercise of stock options (96,925 and 102,540 common shares for the six months ended June 30, 2013 and 2012, respectively)		116			97
Stock-based compensation activity, net		(192	)		191
Stock-based income tax benefit		324			78
Balance, end of period	$	200,278		$	197,709
Treasury Stock
Balance, beginning of period	$	(10,257	)	$	(7,355	)
Purchases of shares outstanding(806,092 and130,900 common shares for the six months ended June 30, 2013, and 2012, respectively)		(12,609	)		(1,721	)
Shares issued upon vesting of restricted stock unit awards (176,456 and 142,022 common shares for the six months ended June 30, 2013 and 2012, respectively)		2,335			1,684
Issuance upon exercise of stock options (151,355 and 113,020 common shares for the six months ended June 30, 2013 and 2012, respectively)		2,056			1,356
Purchases of shares to fund options exercised (112,332 and 40,866 common shares for the six months ended June 30, 2013 and 2012, respectively)		(1,750	)		(548	)
Repurchase of shares to satisfy tax obligations (49,103 and 38,121 common shares for the six months ended June 30, 2013 and 2012, respectively)		(754	)		(502	)
Balance, end of period	$	(20,979	)	$	(7,086	)
Retained Earnings
Balance, beginning of period	$	241,856		$	223,510
Net income		16,383			15,766
Cash dividends declared and paid on common shares ($0.26 per common share for the six months ended June 30, 2013 and 2012, respectively)		(7,879	)		(7,931	)
Issuance upon exercise of stock options (54,160 and 10,480 common shares for the six months ended June 30, 2013 and 2012, respectively)		(69	)		(23	)
Shares issued upon vesting of restricted stock unit awards (56,242 and 28,950 common shares for the six months ended June 30, 2013 and 2012, respectively)		(99	)		(98	)
Balance, end of period	$	250,192		$	231,224
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period	$	12,137		$	4,813
Change in net unrealized gains (losses) on securities available for sale, net of taxes of approximately $14,140 and ($2,566) for the six months ended June 30, 2013 and 2012, respectively		(18,218	)		3,269
Amortization of actuarial losses, net of taxes of approximately ($270) and ($233) for the six months ended June 30, 2013 and 2012, respectively		348			298
Amortization of prior service credits, net of taxes of approximately $10 for both six month periods ended June 30, 2013 and 2012)		(12	)		(13	)
OTTI charges included in income, net of taxes of approximately ($220) and ($339) for the six months ended June 30, 2013 and 2012, respectively)		283			437
Reclassification adjustment for gains included in net income, net of tax of approximately $1,257 for the six months ended June 30, 2013		(1,619	)		-
Balance, end of period	$	(7,081	)	$	8,804
Total Stockholders' Equity	$	422,725		$	430,966

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 Flushing Commercial Bank (the “Merger”). 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.

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 June 30,						For the six months ended June 30,
	2013			2012			2013			2012
	(In thousands, except per share data)
Net income, as reported	$	9,627		$	8,637		$	16,383		$	15,766
Divided by:
Weighted average common shares outstanding		30,213			30,472			30,330			30,434
Weighted average common stock equivalents		22			20			27			22
Total weighted average common shares outstanding and common stock equivalents		30,235			30,492			30,357			30,456
Basic earnings per common share	$	0.32		$	0.28		$	0.54		$	0.52
Diluted earnings per common share (1)	$	0.32		$	0.28		$	0.54		$	0.52
Dividend payout ratio		40.6	%		46.4	%		48.1	%		50.0	%

(1) For the three and six months ended June 30, 2013, options to purchase 542,340 shares at an average exercise price of $17.66 were not included in the computation of diluted earnings per common share as they are anti-dilutive. For the three and six months ended June 30, 2012, options to purchase 720,865 shares at an average exercise price of $16.71 were not included in the computation of diluted earnings per common share as they are anti-dilutive.

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 and six months ended June 30, 2013 and 2012. Securities available for sale are recorded at fair value.

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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 June 30, 2013:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Corporate	$	128,480	$	131,665	$	3,890	$	705
Municipals		94,859		90,607		-		4,252
Mutual funds		21,496		21,496		-		-
Other		17,858		14,567		-		3,291
Total other securities		262,693		258,335		3,890		8,248
REMIC and CMO		521,549		525,094		11,091		7,546
GNMA		44,266		46,484		2,569		351
FNMA		198,488		195,866		2,742		5,364
FHLMC		14,838		14,944		239		133
Total mortgage-backed securities		779,141		782,388		16,641		13,394
Total securities available for sale	$	1,041,834	$	1,040,723	$	20,531	$	21,642

Mortgage-backed securities shown in the table above include three private issue collateralized mortgage obligations (“CMOs”) that are collateralized by commercial real estate mortgages with amortized cost and market values totaling $16.5 million and $16.6 million, respectively, at June 30, 2013.  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 the individual securities have been in a continuous unrealized loss position at June 30, 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	$	43,834	$	705	$	43,834	$	705	$	-	$	-
Municipals		81,280		4,252		81,280		4,252		-		-
Other		6,271		3,291		-		-		6,271		3,291
Total other securities		131,385		8,248		125,114		4,957		6,271		3,291
REMIC and CMO		225,023		7,546		205,880		6,090		19,143		1,456
GNMA		9,801		351		9,801		351		-		-
FNMA		106,512		5,364		106,512		5,364		-		-
FHLMC		8,055		133		8,055		133		-		-
Total mortgage-backed securities		349,391		13,394		330,248		11,938		19,143		1,456
Total securities available for sale	$	480,776	$	21,642	$	455,362	$	16,895	$	25,414	$	4,747

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.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company reviewed each investment that had an unrealized loss at June 30, 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 and related collateral, 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 pooled 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 of the related collateral, which includes delinquency and foreclosure levels, projected losses at various loss severity levels, credit enhancement and coverage; and (3) for private issue CMOs, through an impairment model from an independent third party and then recording those estimated losses as a credit related loss against earnings.

Corporate:

The unrealized losses in Corporate securities at June 30, 2013 consist of losses on five Corporate securities. The unrealized losses were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2013.

Municipals:

The unrealized losses in Municipal securities at June 30, 2013, consist of losses on 25 municipal securities. The unrealized losses were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2013.

Other Securities:

The unrealized losses in Other Securities at June 30, 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 the single issuer trust preferred security and 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.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

§ Ratio of tangible equity to assets

§ Tier 1 Risk Weighted Capital

§ Net interest margin

§ Efficiency ratio for most recent two quarters

§ Return on average assets for most recent two quarters

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

§ Credit ratings (where applicable)

§ Capital issuances within the past year (where applicable)

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

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

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

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

In order to estimate potential future defaults and deferrals, we segregated the performing underlying issuers by their Texas Ratio. We then reviewed performing issuers with Texas Ratios in excess of 50%. The Texas Ratio is a key indicator of the health of the institution and the likelihood of failure. This ratio compares the problem assets of the institution to the institution’s available capital and reserves to absorb losses that are likely to occur in these assets. There were 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 $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 are both performing according to their terms.  The Company also owns a pooled trust preferred security that is carried under the fair value option, where the unrealized losses are included in the Consolidated Statements of Income – Net gain (loss) from fair value adjustments.  This security is over 90 days past due and the Company has stopped accruing interest.

It is not anticipated at this time that the one single issuer trust preferred security and the two pooled trust preferred securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms; except for the pooled trust preferred securities for which the Company has stopped accruing interest as discussed above and, in the opinion of management based on the review performed at June 30, 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 June 30, 2013.

At June 30, 2013, the Company held five 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.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table details the remaining three trust preferred issues that were evaluated to determine if they were other-than-temporarily impaired at June 30, 2013. The class the Company owns in pooled trust preferred securities does not have any excess subordination.

									Deferrals/Defaults (1)
Issuer Type	Class	Performing Banks	Amortized Cost		Fair Value		Cumulative Credit Related OTTI		Actual as a Percentage of Original Security	Expected Percentage of Performing Collateral	Current Lowest Rating
			(Dollars in thousands)
Single issuer	n/a	1	$	300	$	291	$	-	None	None	BB-
Pooled issuer	B1	17		5,617		3,280		2,196	24.8%	0.0%	C
Pooled issuer	C1	16		3,645		2,700		1,542	21.3%	0.0%	C
Total			$	9,562	$	6,271	$	3,738

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

REMIC and CMO:

The unrealized losses in Real Estate Mortgage Investment Conduit (“REMIC”) and CMO securities at June 30, 2013 consist of 10 issues from the Federal Home Loan Mortgage Corporation (“FHLMC”), 14 issues from the Federal National Mortgage Association (“FNMA”), two issues from the Government National Mortgage Association (“GNMA”) and five private issues.

The unrealized losses on the REMIC and CMO securities issued by FHLMC, FNMA and GNMA were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities.  Therefore, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2013.

The unrealized losses at June 30, 2013 on the five 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 $0.5 million for the six months ended June 30, 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 recorded during the three and six months ended June 30, 2013 on four private issue CMOs of $1.2 million before tax, of which $0.5 million was charged against earnings in the Consolidated Statements of Income and $0.7 million before tax ($0.4 million after-tax) was recorded in AOCI.

The portion of the above mentioned OTTI, recorded during the three and six months ended June 30, 2013, that was related to credit losses was calculated using the following significant assumptions:  (1) delinquency and foreclosure levels of 6%-21%; (2) projected loss severity of 40%-50%; (3) assumed default rates of 6%-12% for the first 12 months, 2%-10% for the next 12 months, 2%-8% for the next 12 months and 2% thereafter; and (4) prepayment speeds of 6%-15%.

It is not anticipated at this time that the one private issue CMO, for which an OTTI charge during the three and six months ended June 30, 2013 was not recorded, would be settled at a price that is less than the current amortized cost of the Company’s investment.  The 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 June 30, 2013.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

At June 30, 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 June 30, 2013:

	Amortized		Fair		Outstanding		Cumulative OTTI Charges		Year of		Current Lowest	Collateral Located in:							Average FICO
Security	Cost		Value		Principal		Recorded		Issuance	Maturity	Rating	CA	FL	VA	NY	NJ	TX	CO	Score
	(Dollars in thousands)
1	$	9,027	$	9,084	$	10,037	$	3,705	2006	05/25/36	D	40%			16%					717
2		3,613		3,134		3,854		931	2006	08/19/36	D	54%						11%		738
3		4,301		3,964		4,661		1,108	2006	08/25/36	D	35%	15%							711
4		3,129		3,169		3,705		843	2006	08/25/36	D	42%	14%		12%		10%			723
5		4,051		3,579		4,327		222	2006	05/25/36	CC	21%		23%	12%	13%				709
Total	$	24,121	$	22,930	$	26,584	$	6,809

GNMA, FNMA and FHLMC:

The unrealized losses in GNMA, FNMA and FHLMC securities at June 30, 2013 consist of losses on one GNMA security, 14 FNMA securities and one FHLMC security. The unrealized losses were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements, and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities.  Therefore, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2013.

The following table details gross unrealized losses recorded in AOCI and the ending credit loss amount on debt securities, as of June 30, 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		Cumulative Credit OTTI Losses
Private issued CMO's (1)	$	24,120	$	22,929	$	1,191	$	2,455
Trust preferred securities (1)		9,262		5,980		3,282		3,738
Total	$	33,382	$	28,909	$	4,473	$	6,193

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 six months ended June 30, 2013
Beginning balance	$	6,178
Recognition of actual losses		(488	)
OTTI charges due to credit loss recorded in earnings		503
Securities sold during the period		-
Securities where there is an intent to sell or requirement to sell		-
Ending balance	$	6,193

The following table details the amortized cost and estimated fair value of the Company’s securities classified as available for sale at June 30, 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	$	22,496	$	22,496
Due after one year through five years		61,372		63,898
Due after five years through ten years		57,855		57,612
Due after ten years		120,970		114,329
Total other securities		262,693		258,335
Mortgage-backed securities		779,141		782,388
Total securities available for sale	$	1,041,834	$	1,040,723

The Company did not sell any securities during the three months ended June 30, 2013 and 2012. During the six months ended June 30, 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 six months ended June 30, 2012.  The Company used the specific identification method to calculate gross gains and losses from the sale of securities during the three and six months ended June 30, 2013 and 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 CMOs that are collateralized by commercial real estate mortgages with amortized cost and market values 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

5. Loans

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

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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 the Company’s opinion, indicate the borrower will be unable to bring the loan current within a reasonable time. All loans classified as non-performing, which includes all loans past due 90 days or more, are classified as non-accrual unless there is, in the Company’s opinion, compelling evidence the borrower will bring the loan current in the immediate future. Appraisals and/or updated internal evaluations are obtained as soon as practical and before the loan become 90 days delinquent. The loan balances of collateral dependent impaired loans are compared to the loan’s updated fair value. The balance which exceeds fair value is generally charged-off.

A loan is considered impaired when, based upon the most current information, the Company believes it is probable that it will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan. Impaired loans are measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. The Company considers fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property. Interest income on impaired loans is recorded on a cash basis. The Company’s management considers all non-accrual loans impaired.

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

The Company evaluates the underlying collateral through a third party appraisal, or when a third party appraisal is not available, the Company will use an internal evaluation. The internal evaluations are performed using an income approach or a sales approach. The income approach is used for income producing properties and uses current revenues less operating expenses to determine the net cash flow of the property. Once the net cash flow is determined, the value of the property is calculated using an appropriate capitalization rate for the property. The sales approach uses comparable sales prices in the market.  When an internal evaluation is used, we place greater reliance on the income approach to value the collateral.

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

As of June 30, 2013, the Company utilized recent third party appraisals of the collateral to measure impairment for $78.4 million, or 73.6%, of collateral dependent impaired loans and used internal evaluations of the property’s value for $28.6 million, or 26.4%, 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 June 30, 2013, there were no commitments to lend additional funds to borrowers whose loans were modified as TDRs. 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 June 30, 2013 and 2012:

	For the three months ended June 30, 2013					For the three months ended June 30, 2012
(Dollars in thousands)	Number		Balance		Modification description	Number		Balance		Modification description
Commercial real estate		1	$	488	Received a below market interest rate, loan amortization term extended and loan term extended		1	$	3,920	Received a below market interest rate, loan amortization term extended and loan term extended
One-to-four family - mixed-use property		1		390	Received a below market interest rate, loan amortization term extended and loan term extended		2		759	Received a below market interest rate
Total		2	$	878			3	$	4,679

The following table shows loans modified and classified as TDR during the six months ended June 30, 2013 and 2012:

	For the six months ended June 30, 2013					For the six months ended June 30, 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		2		761	Received a below market interest rate and the loan amortization was extended		3		5,307	Received a below market interest rate, loan amortization term extended and loan term extended
One-to-four family - mixed-use property		1		390	Received a below market interest rate and the loan amortization was extended		3		1,222	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		5	$	2,179			6	$	6,529

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.

- 16 -

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:

	June 30, 2013				December 31, 2012
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment
Multi-family residential		11	$	2,822		8	$	2,347
Commercial real estate		7		9,327		5		8,499
One-to-four family - mixed-use property		8		2,712		7		2,336
One-to-four family - residential		1		369		1		374
Construction		1		1,916		1		3,805
Commercial business and other		3		3,109		2		2,540
Total performing troubled debt restructured		31	$	20,255		24	$	19,901

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:

	June 30, 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		2,899		2		3,075
One-to-four family - mixed-use property		1		340		2		816
Construction		1		7,296		1		7,368
Total troubled debt restructurings that subsequently defaulted		4	$	10,535		7	$	11,582

During the six months ended June 30, 2013, there were no loans classified as performing TDR transferred to non-performing TDR not accruing interest.

- 17 -

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)	June 30, 2013		December 31, 2012
Loans ninety days or more past due and still accruing:
One-to-four family - residential	$	15	$	-
Commercial Business and other		558		644
Total		573		644
Non-accrual mortgage loans:
Multi-family residential		19,273		13,095
Commercial real estate		12,676		15,640
One-to-four family - mixed-use property		10,937		16,553
One-to-four family - residential		12,158		13,726
Co-operative apartments		160		234
Construction		7,326		7,695
Total		62,530		66,943
Non-accrual non-mortgage loans:
Small Business Administration		445		283
Commercial Business and other		9,999		16,860
Total		10,444		17,143
Total non-accrual loans		72,974		84,086
Total non-accrual loans and loans ninety days or more past due and still accruing	$	73,547	$	84,730

The table above does not include $0.3 million and $5.3 million of Substandard loans held for sale at June 30, 2013 and December 31, 2012, respectively.

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 June 30,				For the six months ended June 30,
	2013		2012		2013		2012
	(In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms	$	1,697	$	2,295	$	3,510	$	4,733
Less: Interest income included in the results of operations		220		218		496		492
Total foregone interest	$	1,477	$	2,077	$	3,014	$	4,241

- 18 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows an aged analysis of our recorded investment in loans at June 30, 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	$	17,221	$	1,739	$	19,273	$	38,233	$	1,568,857	$	1,607,090
Commercial real estate		6,693		686		12,676		20,055		506,008		526,063
One-to-four family - mixed-use property		19,345		2,499		11,447		33,291		571,963		605,254
One-to-four family - residential		3,568		1,564		11,945		17,077		179,241		196,318
Co-operative apartments		-		-		160		160		9,175		9,335
Construction loans		-		-		7,326		7,326		4,124		11,450
Small Business Administration		114		-		445		559		8,006		8,565
Taxi medallion		-		-		-		-		5,114		5,114
Commercial business and other		1		501		8,775		9,277		297,620		306,897
Total	$	46,942	$	6,989	$	72,047	$	125,978	$	3,150,108	$	3,276,086

The following table shows an aged 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

The following table shows the activity in the allowance for loan losses for the six months ended June 30, 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		2,749		734		3,135		691		74		304		337		-		864		8,888
Recoveries		65		293		111		106		4		-		60		-		-		639
Provision		2,641		620		3,498		685		123		434		269		-		1,230		9,500
Ending balance	$	12,958	$	5,884	$	6,434	$	2,099	$	99	$	196	$	497	$	7	$	4,181	$	32,355
Ending balance: individually evaluated for impairment	$	272	$	290	$	693	$	60	$	-	$	34	$	-	$	-	$	377	$	1,726
Ending balance: collectively evaluated for impairment	$	12,080	$	5,549	$	6,121	$	2,117	$	141	$	163	$	463	$	7	$	3,911	$	30,552
Financing Receivables:
Ending balance	$	1,607,090	$	526,063	$	605,254	$	196,318	$	9,335	$	11,450	$	8,565	$	5,114	$	306,897	$	3,276,086
Ending balance: individually evaluated for impairment	$	26,012	$	34,895	$	19,146	$	14,530	$	266	$	9,710	$	483	$	-	$	7,551	$	112,593
Ending balance: collectively evaluated for impairment	$	1,581,078	$	491,168	$	586,108	$	181,788	$	9,069	$	1,740	$	8,082	$	5,114	$	299,346	$	3,163,493

- 19 -

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 six month period ended June 30, 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	$	22,976	$	26,127	$	-	$	23,307	$	43
Commercial real estate		26,950		27,728		-		22,913		203
One-to-four family mixed-use property		14,529		17,301		-		14,852		82
One-to-four family residential		14,161		18,272		-		14,669		49
Co-operative apartments		266		384		-		267		4
Construction		7,794		12,518		-		7,815		-
Non-mortgage loans:
Small Business Administration		483		554		-		494		1
Taxi Medallion		-		-		-		-		-
Commercial Business and other		2,547		4,008		-		7,991		21
Total loans with no related allowance recorded		89,706		106,892		-		92,308		403
With an allowance recorded:
Mortgage loans:
Multi-family residential		3,036		3,037		272		2,747		84
Commercial real estate		7,945		8,011		290		7,308		174
One-to-four family mixed-use property		4,617		4,616		693		4,102		115
One-to-four family residential		369		369		60		371		7
Co-operative apartments		-		-		-		-		-
Construction		1,916		1,916		34		2,527		32
Non-mortgage loans:
Small Business Administration		-		-		-		-		-
Taxi Medallion		-		-		-		-		-
Commercial Business and other		5,004		5,004		377		4,720		127
Total loans with an allowance recorded		22,887		22,953		1,726		21,775		539
Total Impaired Loans:
Total mortgage loans	$	104,559	$	120,279	$	1,349	$	100,878	$	793
Total non-mortgage loans	$	8,034	$	9,566	$	377	$	13,205	$	149

- 21 -

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 year ended December 31, 2012:

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

- 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 June 30, 2013:

(In thousands)	Special Mention		Substandard (1)		Doubtful		Loss		Total
Multi-family residential	$	10,523	$	23,600	$	-	$	-	$	34,123
Commercial real estate		7,578		24,638		-		-		32,216
One-to-four family - mixed-use property		10,829		17,089		-		-		27,918
One-to-four family - residential		2,133		14,161		-		-		16,294
Co-operative apartments		-		266		-		-		266
Construction loans		1,916		7,794		-		-		9,710
Small Business Administration		323		108		-		-		431
Commercial business and other		2,206		15,093		425		-		17,724
Total loans	$	35,508	$	102,749	$	425	$	-	$	138,682

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 $0.3 million and $5.3 million of Substandard loans held for sale at June 30, 2013 and December 31, 2012, respectively.

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

	For the six months ended June 30
(In thousands)	2013			2012
Balance, beginning of period	$	31,104		$	30,344
Provision for loan losses		9,500			11,000
Charge-off's		(8,888	)		(10,883	)
Recoveries		639			438
Balance, end of period	$	32,355		$	30,899

- 23 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	Three Months Ended					Six Months Ended
(In thousands)	June 30, 2013			June 30, 2012		June 30, 2013		June 30, 2012
Multi-family residential	$	1,207		$	1,078	$	2,684	$	2,082
Commercial real estate		(160	)		387		441		2,097
One-to-four family – mixed-use property		471			838		3,024		2,250
One-to-four family – residential		(75	)		44		585		869
Co-operative apartments		(4	)		1		70		43
Construction		70			2,207		304		2,441
Small Business Administration		103			138		277		242
Commercial business and other		560			26		864		421
Total net loan charge-offs	$	2,172		$	4,719	$	8,249	$	10,445

Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally home equity lines of credit and business lines of credit) amounted to $50.2 million and $227.4 million, respectively, at June 30, 2013.

6. Loans held for sale

The following table shows our loans held for sale at the lower of cost or estimated fair value for the periods indicated:

	June 30, 2013				December 31, 2012
(Dollars in thousands)	Number of loans		Carrying Value		Number of loans		Carrying Value
Multi-family residential		-	$	-		4	$	3,442
One-to-four family - mixed-use property		1		335		4		1,871
Total		1	$	335		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 June 30, 2013
(Dollars in thousands)	Loans sold		Proceeds		Net charge-offs			Net gain (loss)
Multi-family residential		9	$	2,447	$	(468	)	$	-
Commercial real estate		5		2,349		(18	)		-
One-to-four family - mixed-use property		24		5,589		(70	)		-
Total		38	$	10,385	$	(556	)	$	-

The above table does not include the sale of one performing commercial real estate loan for $2.4 million, resulting in a net gain of $184,000 during the three months ended June 30, 2013.

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

	For the three months ended June 30, 2012
(Dollars in thousands)	Loans sold		Proceeds		Net charge-offs			Net gain (loss)
Multi-family residential		6	$	3,103	$	(207	)	$	31
Commercial real estate		3		2,191		(117	)		-
One-to-four family - mixed-use property		5		2,163		(398	)		-
Commercial business and other		1		499		-			8
Total		15	$	7,956	$	(722	)	$	39

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

	For the six months ended June 30, 2013
(Dollars in thousands)	Loans sold		Proceeds		Net charge-offs			Net gain (loss)
Multi-family residential		15	$	7,059	$	(576	)	$	6
Commercial real estate		7		3,464		(94	)		-
One-to-four family - mixed-use property		30		7,961		(110	)		(15	)
Commercial business and other		2		66		(185	)		-
Total		54	$	18,550	$	(965	)	$	(9	)

The above table does not include the sale of one performing commercial real estate loan for $2.4 million, resulting in a net gain of $184,000 during the six months ended June 30, 2013.

- 25 -

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 six months ended June 30, 2012
(Dollars in thousands)	Loans sold		Proceeds		Net charge-offs			Net gain (loss)
Multi-family residential		12	$	7,071	$	(388	)	$	31
Commercial real estate		6		3,869		(368	)		-
One-to-four family - mixed-use property		9		3,443		(798	)		-
Construction		3		2,540		(57	)		-
Commercial business and other		2		714		(136	)		8
Total		32	$	17,637	$	(1,747	)	$	39

7. Other Real Estate Owned

The following represents Other Real Estate Owned (“OREO”) activity during the periods indicated:

	For the six months ended June 30,
	2013			2012
	(In thousands)
Balance at beginning of period	$	5,278		$	3,179
Acquisitions		2,758			1,632
Write-down of carrying value		(180	)		(204	)
Sales		(5,265	)		(2,513	)
Balance at end of period	$	2,591		$	2,094

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 June 30,						For the six months ended June 30,
	2013			2012			2013			2012
	(In thousands)						(In thousands)
Gross gains	$	40		$	-		$	240		$	45
Gross losses		(66	)		(78	)		(88	)		(188	)
Write-down of carrying value		(115	)		(116	)		(180	)		(204	)
Total	$	(141	)	$	(194	)	$	(28	)	$	(347	)

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

8. Stock-Based Compensation

For the three months ended June 30, 2013 and 2012, the Company’s net income, as reported, included $0.4 million and $0.7 million, respectively, of stock-based compensation costs and $0.2 million and $0.3 million, respectively, of income tax benefits related to the stock-based compensation plans.  For the six months ended June 30, 2013 and 2012, the Company’s net income, as reported, included $2.4 million and $2.2 million, respectively, of stock-based compensation costs and $0.9 million and $0.9 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 six months ended June 30, 2013 and 2012, the Company granted 243,645 and 230,675 restricted stock units, respectively. There were no stock options granted during the six months  ended June 30, 2013 and 2012.  There were no stock options or restricted stock units granted during the three months ended June 30, 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 June 30, 2013, there were 362,056 shares available for full value awards and 56,620 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.

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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 full value awards at or for the six months ended June 30, 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		(185,330	)		14.46
Forfeited		(16,095	)		14.27
Non-vested at June 30, 2013		360,271		$	14.03
Vested but unissued at June 30, 2013		217,435		$	14.15

As of June 30, 2013, there was $4.3 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 3.4 years.  The total fair value of awards vested for the three months ended June 30, 2013 and 2012 were $0.2 million and $0.8 million, respectively.  The total fair value of awards vested for the six months ended June 30, 2013 and 2012 were $2.8 million and $2.7 million, respectively. The vested but unissued full value awards consist of awards made to employees and directors who are eligible for retirement. According to the terms of the Omnibus Plan, these employees and directors have no risk of forfeiture.  These shares will be issued at the original contractual vesting dates.

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

The following table summarizes certain information regarding the non-full value awards, all of which have been granted as stock options, at or for the six months ended June 30, 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		(151,355	)		13.11
Forfeited		(180	)		12.08
Outstanding at June 30, 2013		618,820		$	16.61		2.9	$	560
Exercisable shares at June 30, 2013		596,520		$	16.92		2.8	$	381
Vested but unexercisable shares at June 30, 2013		8,100		$	8.44		5.6	$	65

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

As of June 30, 2013, there was $11,000 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.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Cash proceeds, fair value received, tax benefits, intrinsic value related to stock options exercised and the weighted average grant date fair value for options granted during the six months ended June 30, 2013 are provided in the following table:

	For the three months ended June 30,				For the six months ended June 30,
(In thousands)	2013		2012		2013		2012
Proceeds from stock options exercised	$	212	$	570	$	235	$	814
Fair value of shares received upon exercised of stock options		937		-		1,574		548
Tax benefit related to stock options exercised		115		3		168		27
Intrinsic value of stock options exercised		203		16		377		130

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 Bank’s non-qualified deferred compensation plan. Employees vest under this plan 20% per year for 5 years. Employees also become 100% vested upon a change of control. Employees receive their vested interest in this plan in the form of a cash lump sum payment or installments, as elected by the employee, after termination of employment. The Company adjusts its liability under this plan to the fair value of the shares at the end of each period.

The following table summarizes the Phantom Stock Plan at or for the six months ended June 30, 2013:

Phantom Stock Plan	Shares			Fair Value
Outstanding at December 31, 2012		50,067		$	15.34
Granted		9,051			15.62
Forfeited		-			-
Distributions		(500	)		16.26
Outstanding at June 30, 2013		58,618		$	16.45
Vested at June 30, 2013		58,325		$	16.45

The Company recorded stock-based compensation expense (benefit) for the Phantom Stock Plan of ($21,000) and $15,000 for the three months ended June 30, 2013 and 2012, respectively. The total fair value of the distributions from the Phantom Stock Plan was $8,000 and $5,000 for the three months ended June 30, 2013 and 2012, respectively.

For the six months ended June 30, 2013 and 2012, the Company recorded stock-based compensation expense for the Phantom Stock Plan of $78,000 and $57,000, respectively. The total fair value of the distributions from the Phantom Stock Plan during the six months ended June 30, 2013 and 2012 were $8,000 and $6,000, 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 June 30,						Six months ended June 30,
(In thousands)	2013			2012			2013			2012
Employee Pension Plan:
Interest cost	$	207		$	220		$	414		$	440
Amortization of unrecognized loss		306			263			612			526
Expected return on plan assets		(315	)		(310	)		(630	)		(620	)
Net employee pension expense	$	198		$	173		$	396		$	346
Outside Director Pension Plan:
Service cost	$	21		$	20		$	42		$	40
Interest cost		24			28			48			56
Amortization of unrecognized gain		(9	)		(7	)		(18	)		(14	)
Amortization of past service liability		9			9			18			18
Net outside director pension expense	$	45		$	50		$	90		$	100
Other Postretirement Benefit Plans:
Service cost	$	112		$	100		$	224		$	200
Interest cost		55			54			110			108
Amortization of unrecognized loss		12			10			24			20
Amortization of past service credit		(20	)		(21	)		(40	)		(42	)
Net other postretirement expense	$	159		$	143		$	318		$	286

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 postretirement benefit plans (the “Other Postretirement Benefit Plans”) during the year ending December 31, 2013. As of June 30, 2013, the Company has contributed $0.5 million to the Employee Pension Plan, $49,000 to the Outside Director Pension Plan and $29,000 to the Other Postretirement Benefit Plans. As of June 30, 2013, the Company has not revised its expected contributions for the year ending December 31, 2013.

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 June 30, 2013, the Company carried financial assets and financial liabilities under the fair value option with fair values of $44.8 million and $26.2 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 six months ended June 30, 2013, the Company did not elect to carry any additional financial assets or financial liabilities under the fair value option. The Company elected to measure at fair value securities with a cost of $10.0 million that were purchased during the six months ended June 30, 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 indicated:

	Fair Value Measurements		Fair Value Measurements		Changes in Fair Values For Items Measured at Fair Value Pursuant to Election of the Fair Value Option
	at June 30,		at December 31,		Three Months Ended						Six Months Ended
(Dollars in thousands)	2013		2012		June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012
Mortgage-backed securities	$	15,040	$	24,911	$	(169	)	$	(143	)	$	(531	)	$	(161	)
Other securities		29,792		29,577		(220	)		5			53			246
Borrowed funds		26,192		23,922		(1,456	)		1,734			(2,275	)		1,905
Net gain (loss) from fair value adjustments (1) (2)					$	(1,845	)	$	1,596		$	(2,753	)	$	1,990

(1) The net gain (loss) from fair value adjustments presented in the above table does not include net gains of $1.5 million and net losses of $2.2 million for the three months ended June 30, 2013 and 2012, respectively, from the change in the fair value of interest rate caps/swaps.

(2) The net gain (loss) from fair value adjustments presented in the above table does not include net gains of $2.3 million and net losses of $3.0 million for the six months ended June 30, 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 June 30, 2013 and December 31, 2012.  The fair value of borrowed funds includes accrued interest payable of $0.1 million and $0.4 million at June 30, 2013 and December 31, 2012, respectively.

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

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

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

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

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

Level 1 – where quoted market prices are available in an active market. The Company did not value any of its assets or liabilities that are carried at fair value on a recurring basis as Level 1 at June 30, 2013 and December 31, 2012.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued.  Fair value can also be estimated by using pricing models, or discounted cash flows.  Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads.  In addition to observable market information, models also incorporate maturity and cash flow assumptions. At June 30, 2013, Level 2 included mortgage related securities, corporate debt and interest rate caps/swaps. At December 31, 2012, Level 2 included mortgage related securities, corporate debt and interest rate caps.

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3.  At June 30, 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 June 30, 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
	June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012
	(in thousands)
Assets:
Mortgage-backed Securities	$	-	$	-	$	759,458	$	696,638	$	22,930	$	23,475	$	782,388	$	720,113
Other securities		-		-		240,641		213,374		17,694		16,079		258,335		229,453
Interest rate caps		-		-		8		19		-		-		8		19
Interest rate swaps		-		-		646		3		-		-		646		3
Total assets	$	-	$	-	$	1,000,753	$	910,034	$	40,624	$	39,554	$	1,041,377	$	949,588
Liabilities:
Borrowings	$	-	$	-	$	-	$	-	$	26,192	$	23,922	$	26,192	$	23,922
Interest rate swaps		-		-		-		1,922		-		-		-		1,922
Total liabilities	$	-	$	-	$	-	$	1,922	$	26,192	$	23,922	$	26,192	$	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 six months ended June 30, 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		-			-			512		-
Net loss from fair value adjustment of financial liabilities		-			-			-		2,275
Decrease in accrued interest payable		-			-			-		(5	)
Other-than-temporary impairment charge		(503	)		-			-		-
Change in unrealized gains (losses) included in other comprehensive income		(42	)		(102	)		1,205		-
Ending balance	$	22,930		$	9,327		$	8,367	$	26,192
Changes in unrealized held at period end	$	(42	)	$	(102	)	$	1,205	$	-

The following table presents the quantitative information about recurring Level 3 fair value of financial instruments and the fair value measurements as of June 30, 2013:

June 30, 2013	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Assets:
				Spread to index	2.4%	-	4.3%	(3.4%)
				Loss Severity	40.0%	-	70.0%	(55.6%)
				Prepayment speeds	1.0%	-	10.0%	(6.9%)
				Defaults	3.0%	-	11.1%	(8.0%)
REMIC and CMO	$	22,930	Discounted cash flows	Average Life (years)	4.1	-	7.5	(5.4)
Municipals	$	9,327	Discounted cash flows	Discount rate	0.4%	-	4.0%	(3.6%)
				Discount rate	8.0%	-	16.1%	(11.6%)
				Prepayment assumptions	0%	-	45.5%	(33.3%)
Trust Preferred Securities	$	8,367	Discounted cash flows	Defaults	0%	-	17.3%	(9.2%)
Liabilities:
Junior subordinated debentures	$	26,192	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, loss severity, default rate, prepayment speeds 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 June 30, 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 non-recurring basis
	June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012
	(in thousands)
Assets:
Loans held for sale	$	-	$	-	$	-	$	-	$	335	$	5,313	$	335	$	5,313
Impaired loans		-		-		-		-		38,778		49,703		38,778		49,703
Other Real Estate Owned		-		-		-		-		2,591		5,278		2,591		5,278
Total assets	$	-	$	-	$	-	$	-	$	41,704	$	60,294	$	41,704	$	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 June 30, 2013:

June 30, 2013	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Assets:
Loans held for sale	$	335	Fair value of collateral	Loss severity discount				24.4%	(24.4%)
Impaired loans	$	38,778	Fair value of collateral	Loss severity discount		0.5%	-	89.5%	(32.9%)
Other real estate owned	$	2,591	Fair value of collateral	Loss severity discount		0.0%	-	80.7%	(16.1%)

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 June 30, 2013 and December 31, 2012.

The estimated fair value of each material class of financial instruments at June 30, 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 classified as (Level 3 input).

- 34 -

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 June 30, 2013 and December 31, 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 June 30, 2013:

	June 30, 2013
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Assets:
Cash and due from banks	$	42,196	$	42,196	$	42,196	$	-	$	-
Mortgage-backed Securities		782,388		782,388		-		759,458		22,930
Other securities		258,335		258,335		-		240,641		17,694
Loans held for sale		335		335		-		-		335
Loans		3,288,102		3,360,672		-		-		3,360,672
FHLB-NY stock		47,420		47,420		-		47,420		-
Interest rate caps		8		8		-		8		-
Interest rate swaps		646		646		-		646		-
OREO		2,591		2,591		-		-		2,591
Total assets	$	4,422,021	$	4,494,591	$	42,196	$	1,048,173	$	3,404,222
Liabilities:
Deposits	$	3,070,535		3,095,664	$	1,905,378	$	1,190,286	$	-
Borrowings		1,059,164		1,082,202		-		1,056,010		26,192
Total liabilities	$	4,129,699	$	4,177,866	$	1,905,378	$	2,246,296	$	26,192

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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 December 31, 2012:

	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 June 30, 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 June 30, 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 June 30, 2013:

	Notional Amount		Purchase Price		Net Carrying Value
	(In thousands)
Interest rate caps (non-hedge)	$	100,000	$	9,035	$	8
Interest rate swaps (non-hedge)		18,000		-		395
Interest rate swaps (hedge)		4,259		-		251
Total derivatives	$	122,259	$	9,035	$	654

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

	Notional Amount		Purchase Price		Net Carrying (1) 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 June 30,						For the six months ended June 30,
(In thousands)	2013			2012			2013			2012
Financial Derivatives:
Interest rate caps	$	(8	)	$	(114	)	$	(11	)	$	(262	)
Interest rate swaps		1,545			(2,044	)		2,333			(2,738	)
Net Gain (loss) (1)	$	1,537		$	(2,158	)	$	2,322		$	(3,000	)

(1) Net gains and (losses) are recorded as part of “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)

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.

 Income tax provisions are summarized as follows:

	For the Three months ended June 30,						For the Six months ended June 30,
(In thousands)	2013			2012			2013		2012
Federal:
Current	$	5,187		$	5,097		$	8,021	$	8,229
Deferred		(524	)		(861	)		103		(369	)
Total federal tax provision		4,663			4,236			8,124		7,860
State and Local:
Current		1,724			1,620			2,305		2,333
Deferred		(232	)		(337	)		45		(116	)
Total state and local tax provision		1,492			1,283			2,350		2,217
Total income tax provision	$	6,155		$	5,519		$	10,474	$	10,077

The income tax provision in the Consolidated Statements of Income has been provided at an effective rate of 39.0% for all periods presented in the table above.

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

	For the three months ended June 30,										For the six months ended June 30,
(dollars in thousands)	2013					2012					2013					2012
Taxes at federal statutory rate	$	5,524		35.0	%	$	4,955		35.0	%	$	9,400		35.0	%		9,045		35.0	%
Increase (reduction) in taxes resulting from:
State and local income tax, net of Federal income tax benefit		970		6.1			835		5.9			1,528		5.7			1,442		5.6
Other		(339	)	(2.1	)		(271	)	(1.9	)		(454	)	(1.7	)		(410	)	(1.6	)
Taxes at effective rate	$	6,155		39.0	%	$	5,519		39.0	%	$	10,474		39.0	%	$	10,077		39.0	%

The Company has recorded a deferred tax asset of $34.4 million at June 30, 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 $20.4 million deferred tax liability can be used to offset a portion of the deferred tax asset, as well as certain tax planning strategies, it is more likely than not that the deferred tax asset will be fully realized. Accordingly, no valuation allowance was deemed necessary for the deferred tax asset at June 30, 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 six months ended June 30, 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		(18,218	)		-		$	(18,218	)
Amounts reclassified from accumulated other comprehensive income, net of tax		(1,336	)		336			(1,000	)
Net current period other comprehensive income, net of tax		(19,554	)		336			(19,218	)
Ending balance, net of tax	$	(633	)	$	(6,448	)	$	(7,081	)

The following table sets forth significant amounts reclassified out of accumulated other comprehensive income by component for the three months ended June 30, 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:	$	18			Net gain on sale of securities
		(8	)		Tax expense
	$	10			Net of tax
OTTI charges	$	(503	)		OTTI charge
		220			Tax benefit
	$	(283	)		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.”

- 40 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table sets forth significant amounts reclassified out of accumulated other comprehensive income by component for the six months ended June 30, 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:	$	2,876			Net gain on sale of securities
		(1,257	)		Tax expense
	$	1,619			Net of tax
OTTI charges	$	(503	)		OTTI charge
		220			Tax benefit
	$	(283	)		Net of tax
Amortization of defined benefit pension items:
Actuarial losses	$	(618	)	(1)	Other expense
Prior service credits		22		(1)	Other expense
		(596	)		Total before tax
		260			Tax benefit
	$	(336	)		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.”

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.

- 41 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

At June 30, 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
Core Capital:
Capital level	$	433,594		9.62	%
Well capitalized		225,402		5.00
Excess		208,192		4.62
Tier 1 Risk-Based Capital:
Capital level	$	433,594		14.36	%
Well capitalized		181,198		6.00
Excess		252,396		8.36
Risk-Based Capital:
Capital level	$	465,949		15.43	%
Well capitalized		301,996		10.00
Excess		163,953		5.43

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 June 30, 2013, the Holding Company’s Tier I (leverage) capital, Tier I risk-based capital and Total risk-based capital was 9.76%, 14.58%, and 15.66%, respectively.

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.”

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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 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.

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.

We saw continued improvement in non-performing assets, as they decreased by $13.2 million during the three months ended June 30, 2013. Charge-offs for the second quarter of 2013 were primarily due to sales of delinquent loans and our continued practice 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. Net charge-offs in the second quarter were $2.2 million. As a result, we do not carry non-performing loans at more than 85% of their current appraised value. This process has ensured 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 55.7% at the end of the quarter.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Net loans increased $85.6 million during the second quarter of 2013, as loan originations for the quarter totaled a record $251.7 million. Our loan pipeline at June 30, 2013 grew to $342.3 million from $211.4 million at December 31, 2012. Our lending departments continue to emphasize full relationship banking with our borrowers. Originations were focused on multi-family and commercial business loans, which represented 53% and 28%, respectively, of loan originations during the second quarter of 2013. We generally obtain full banking relationships with these borrowers.

Our net interest margin for the second quarter of 2013 was 3.49%, a decrease of five basis points from the first quarter of 2013, excluding the prepayment penalty on borrowings incurred in the first quarter. While we saw a decrease in our funding costs of seven basis points for the quarter, excluding the prepayment penalty on borrowings, 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 second quarter of 2013, which further reduced the yield on our loan portfolio.

Net income for the six months ended June 30, 2013 was $16.4 million, an increase of $0.6 million, or 3.9%, compared to $15.8 million for the six months ended June 30, 2012. Diluted earnings per common share were $0.54 for the six months ended June 30, 2013, an increase of $0.02, or 3.9%, from $0.52 for the six months ended June 30, 2012.

We recorded a provision for loan losses of $9.5 million for the six months ended June 30, 2013, which was a decrease of $1.5 million from $11.0 million recorded in the six months ended June 30, 2012. During the six months ended June 30, 2013, non-performing loans decreased $16.0 million to $73.9 million from $89.8 million at December 31, 2012. Net charge-offs for the six months ended June 30, 2013 totaled $8.2 million, or 52 basis points of average loans. The current loan-to-value ratio for our non-performing loans collateralized by real estate was 55.7% at June 30, 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. As a result of the quarterly analysis of the allowance for loans losses, it was deemed necessary to record a $9.5 million provision for possible loan losses for the six months ended June 30, 2013. See “-ALLOWANCE FOR LOAN LOSSES.”

At June 30, 2013, the Bank continues to be well-capitalized under regulatory requirements, with Core, Tier 1 risk-based and Total risk-based capital ratios of 9.62%, 14.36% and 15.43%, respectively. The Company is also subject to the same regulatory requirements.  At June 30, 2013, the Company’s capital ratios for Core, Tier 1 risk-based and Total risk-based capital ratios were 9.76%, 14.58% and 15.66%, respectively.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2013 AND 2012

General.  Net income for the three months ended June 30, 2013 was $9.6 million, an increase of $1.0 million, or 11.5%, compared to $8.6 million for the three months ended June 30, 2012.  Diluted earnings per common share were $0.32 for the three months ended June 30, 2013, an increase of $0.04, or 14.0%, from $0.28 for the three months ended June 30, 2012.

Return on average equity was 8.8% for the three months ended June 30, 2013 compared to 8.1% for the three months ended June 30, 2012. Return on average assets was 0.8% for both of the three months ended June 30, 2013 and 2012.

Interest Income.  Total interest and dividend income decreased $4.1 million, or 7.5%, to $50.3 million for the three months ended June 30, 2013 from $54.4 million for the three months ended June 30, 2012. The decrease in interest income was attributable to a 53 basis point decline in the yield of interest-earning assets to 4.70% for the three months ended June 30, 2013 from 5.23% in the comparable prior year period combined with a $14.7 million decrease in the average balance of total loans to $3,189.4 million for the three months ended June 30, 2013, from $3,204.1 million for the comparable prior year period.  The 53 basis point decline in the yield of interest-earning assets was primarily due to a 38 basis point reduction in the yield of the loan portfolio to 5.38% for the three months ended June 30, 2013 from 5.76% for the three months ended June 30, 2012, combined with a 73 basis point decline in the yield on total securities to 2.85% for the three months ended June 30, 2013 from 3.58% for the comparable prior year period. In addition, the yield of interest-earning assets was negatively impacted by a $14.7 million decrease in the average balance of the higher yielding loan portfolio for the three months ended June 30, 2013 and a $116.1 million  increase in the average balance of the lower yielding securities portfolio for the three months ended June 30, 2013. The 38 basis point decrease in the yield of the loan portfolio was primarily due to a decline in the rates earned on new loan originations, partially offset by an increase in prepayment penalty income during the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The 73 basis point decrease in the yield of the securities portfolio was primarily due to the purchase of new securities at lower yields than the existing portfolio.  The yield on the mortgage loan portfolio, excluding prepayment penalty income, decreased 39 basis points to 5.33% for the three months ended June 30, 2013 from 5.72% for the three months ended June 30, 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

Interest Expense.  Interest expense decreased $3.1 million, or 19.3%, to $13.0 million for the three months ended June 30, 2013 from $16.1 million for the three months ended June 30, 2012. The decrease in interest expense was due to the reduction in the cost of interest-bearing liabilities, which decreased 35 basis points to 1.34% for the three months ended June 30, 2013 from 1.69% for the comparable prior year period, partially offset by an $88.0 million increase in the average balance of interest-bearing liabilities to $3,894.3 million for the three months ended June 30, 2013 from $3,806.3 million for the comparable prior year period.  The 35 basis point decrease in the cost of interest-bearing liabilities was primarily attributable to the Bank reducing the rates it pays on its deposit products and a shifting of deposit concentrations, as higher costing certificates of deposits average balance decreased $282.1 million to $1,144.0 million, while lower costing core deposits average balance increased $250.7 million to $1,798.5 million for the three months ended June 30, 2013.  Additionally, the cost of borrowed funds decreased 81 basis points to 2.19% for the three months ended June 30, 2013 from 3.00% for the comparable prior year period.  The decrease in the cost of borrowed funds was primarily due to maturing and new borrowings being replaced and obtained at lower rates.  The cost of certificates of deposit, money market accounts, savings accounts and NOW accounts decreased 21 basis points, six basis points, one basis point and seven basis points, respectively, for the three months ended June 30, 2013 from the comparable prior year period.  This resulted in a decrease in the cost of due to depositors of 27 basis points to 1.10% for the three months ended June 30, 2013 from 1.37% for the three months ended June 30, 2012.

Net Interest Income.  For the three months ended June 30, 2013, net interest income was $37.3 million, a decrease of $1.0 million, or 2.6%, from $38.3 million for the three months ended June 30, 2012. The decrease in net interest income was attributable to an 18 basis point decrease in the net-interest spread to 3.36% for the three months ended June 30, 2013 from 3.54% for the three months ended June 30, 2012, partially offset by the effect of an increase of $120.8 million in the average balance of interest-earning assets to $4,276.8 million for the three months ended June 30, 2013 from $4,156.0 million for the comparable prior year period.  The yield on interest-earning assets decreased 53 basis points to 4.70% for the three months ended June 30, 2013 from 5.23% for the three months ended June 30, 2012, while the cost of funds decreased 35 basis points to 1.34% for the three months ended June 30, 2013 from 1.69% for the comparable prior year period. The net interest margin decreased 19 basis points to 3.49% for the three months ended June 30, 2013 from 3.68% for the three months ended June 30, 2012. Excluding prepayment penalty income, the net interest margin would have decreased 24 basis points to 3.35% for the three months ended June 30, 2013 from 3.59% for the three months ended June 30, 2012.

Provision for Loan Losses.  A provision for loan losses of $3.5 million was recorded for the three months ended June 30, 2013, which was a decrease of $1.5 million, or 30.0%, from that recorded for the three months ended June 30, 2012.  During the three months ended June 30, 2013, non-performing loans decreased $14.1 million to $73.9 million from $88.0 million at March 31, 2013. Net charge-offs for the three months ended June 30, 2013 totaled $2.2 million, or 27 basis points of average loans. The current loan-to-value ratio for our non-performing loans collateralized by real estate was 55.7% at June 30, 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. As a result of the quarterly analysis of the allowance for loans losses, it was deemed necessary to record a $3.5 million provision for possible loan losses for the three months ended June 30, 2013. See “-ALLOWANCE FOR LOAN LOSSES.”

Non-Interest Income.Non-interest income for the three months ended June 30, 2013 was $2.2 million, an increase of $1.1 million from $1.1 million for the three months ended June 30, 2012.  The increase in non-interest income was primarily due to $0.3 million decrease in net losses from fair value adjustments and $0.3 million decrease in OTTI charges recorded on private issue collateralized mortgage obligations (“CMO”) during the three months ended June 30, 2013 compared to the three months ended June 30, 2012.  Additionally, increases were seen in bank owned life insurance (“BOLI”) and loan fee income of $0.2 million each as compared to the three months ended June 30, 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

Non-Interest Expense. Non-interest expense was $20.2 million for the three months ended June 30, 2013, the same as that recorded for the three months ended June 30, 2012. An increase in salaries and benefits expense of $0.5 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 was offset by decreases of $0.3 million and $0.2 million in FDIC insurance expense and real estate owned/foreclosure expense, respectively. The efficiency ratio was 49.7% for the three months ended June 30, 2013 compared to 49.0% for the three months ended June 30, 2012.

Income before Income Taxes.Income before the provision for income taxes increased $1.6 million, or 11.5%, to $15.8 million for the three months ended June 30, 2013 from $14.2 million for the three months ended June 30, 2012 for the reasons discussed above.

Provision for Income Taxes.Income tax expense increased $0.6 million to $6.2 million for the three months ended June 30, 2013 from $5.5 million for the three months ended June 30, 2012. The effective tax rate was 39.0% in both three months ended June 30, 2013 and 2012.

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

General.Net income for the six months ended June 30, 2013 was $16.4 million, an increase of $0.6 million, or 3.9%, compared to $15.8 million for the six months ended June 30, 2012. Diluted earnings per common share were $0.54 for the six months ended June 30, 2013, an increase of $0.02, or 4.0%, from $0.52 for the six months ended June 30, 2012.

Return on average equity was 7.5% for both of the six months ended June 30, 2013 and 2012. Return on average assets was 0.7% for both of the six months ended June 30, 2013 and 2012.

Interest Income.  Total interest and dividend income decreased $8.4 million, or 7.7%, to $100.4 million for the six months ended June 30, 2013 from $108.8 million for the six months ended June 30, 2012. The decrease in interest income was attributable to a 54 basis point decline in the yield of interest-earning assets to 4.76% for the six months ended June 30, 2013 from 5.30% in the comparable prior year period. The decrease in the yield was partially offset by a $107.0 million increase in the average balance of interest-earning assets to $4,216.2 million for the six months ended June 30, 2013 from $4,109.1 million for the comparable prior year period. The 54 basis point decline in the yield of interest-earning assets was primarily due to a 41 basis point reduction in the yield of the loan portfolio to 5.38% for the six months ended June 30, 2013 from 5.79% for the six months ended June 30, 2012, combined with a 73 basis point decline in the yield on total securities to 2.96% for the six months ended June 30, 2013 from 3.69% for the comparable prior year period. In addition, the yield of interest-earning assets was negatively impacted by a $10.9 million decrease in the average balance of the higher yielding loan portfolio for the six months ended June 30, 2013 and a $111.3 million increase in the average balance of the lower yielding securities portfolio for the six months ended June 30, 2013. The 41 basis point decrease in the yield of the loan portfolio was primarily due to a decline in the rates earned on new loan originations. The 73 basis point decrease in the yield of the securities portfolio was primarily due to the purchase of new securities at lower yields than the existing portfolio. The yield on the mortgage loan portfolio decreased 38 basis points to 5.52% for the six months ended June 30, 2013 from 5.90% for the six months ended June 30, 2012.  The yield on the mortgage loan portfolio, excluding prepayment penalty income, decreased 41 basis points to 5.35% for the six months ended June 30, 2013 from 5.76% for the six months ended June 30, 2012.

Interest Expense.  Interest expense decreased $4.2 million, or 5.5%, to $28.9 million for the six months ended June 30, 2013 from $33.2 million for the six months ended June 30, 2012. The decrease in interest expense was due to the reduction in the cost of interest-bearing liabilities, which decreased 25 basis points to 1.51% for the six months ended June 30, 2013 from 1.76% for the comparable prior year period and a shifting of deposit concentrations, as higher costing certificates of deposits average balance decreased $274.9 million to $1,185.3 million, while lower costing core deposits average balance increased $175.0 million to $1,706.3 million for the six months ended June 30, 2013.  The 25 basis point decrease in the cost of interest-bearing liabilities was primarily attributable to the Bank reducing the rates it pays on its deposit products and a reduction in the cost of borrowed funds. The cost of certificates of deposit, money market accounts, savings accounts and NOW accounts decreased 23 basis points, 13 basis points, five basis points and 11 basis points, respectively, for the six months ended June 30, 2013 from the comparable prior year period.  This resulted in a decrease in the cost of due to depositors of 28 basis points to 1.13% for the six months ended June 30, 2013 from 1.41% for the six months ended June 30, 2012. The cost of borrowed funds decreased 50 basis points to 2.78% for the six months ended June 30, 2013 from 3.28% for the six months ended June 30, 2012 with the average balance increasing $171.3 million to $904.6 million for the six months ended June 30, 2013 from $733.3 million for the six months ended June 30, 2012. The decline in the cost of borrowed funds was primarily due to the prepayment of $68.5 million in FHLB-NY advances during the first quarter of 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.

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 PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Net Interest Income.  For the six months ended June 30, 2013, net interest income was $71.4 million, a decrease of $4.2 million, or 5.5%, from $75.6 million for the six months ended June 30, 2012. The decrease in net interest income was attributable to a 29 basis point decrease in the net-interest spread to 3.25% for the six months ended June 30, 2013 from 3.54% for the six months ended June 30, 2012, partially offset by the effect of an increase of $107.0 million in the average balance of interest-earning assets to $4,216.2 million for the six months ended June 30, 2013 from $4,109.1 million for the comparable prior year period.  The yield on interest-earning assets decreased 54 basis points to 4.76% for the six months ended June 30, 2013 from 5.30% for the six months ended June 30, 2012 while the cost of funds decreased 25 basis points to 1.51% for the six months ended June 30, 2013 from 1.76% for the comparable prior year period. The net interest margin decreased 29 basis points to 3.39% for the six months ended June 30, 2013 from 3.68% for the six months ended June 30, 2012. Excluding prepayment penalty income on loans and prepayment penalties on borrowings, the net interest margin would have decreased 19 basis points to 3.39% for the six months ended June 30, 2013 from 3.58% for the six months ended June 30, 2012.

Provision for Loan Losses.  A provision for loan losses of $9.5 million was recorded for the six months ended June 30, 2013, which was a decrease of $1.5 million from $11.0 million recorded for the six months ended June 30, 2012. During the six months ended June 30, 2013, non-performing loans decreased $16.0 million to $73.9 million from $89.8 million at December 31, 2012. Net charge-offs for the six months ended June 30, 2013 totaled $8.2 million, or 52 basis points of average loans. The current loan-to-value ratio for our non-performing loans collateralized by real estate was 55.7% at June 30, 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. As a result of the quarterly analysis of the allowance for loans losses, it was deemed necessary to record a $9.5 million provision for possible loan losses for the six months ended June 30, 2013. See “-ALLOWANCE FOR LOAN LOSSES.”

Non-Interest Income.Non-interest income for the six months ended June 30, 2013 was $7.5 million, an increase of $4.6 million from $3.0 million for the six months ended June 30, 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, 2013 as part of a balance sheet restructuring as discussed above under “Balance Sheet Restructuring”.  Non-interest income also improved due to a $0.6 million decrease in net losses from fair value adjustments and $0.3 million decrease in OTTI charges recorded on private issue CMOs during the six months ended June 30, 2013 compared to the six months ended June 30, 2012. Additionally, increases were seen in BOLI and loan fee income of $0.3 million each as compared to the six months ended June 30, 2012.

Non-Interest Expense.Non-interest expense was $42.6 million for the six months ended June 30, 2013, an increase of $0.9 million, or 2.1%, from $41.8 million for the six months ended June 30, 2012. The increase was primarily due to an increase of $1.7 million in salaries and benefits expense primarily due to annual salary increases and increased pension and other postretirement expense. This increase was partially offset by decreases of $0.3 million and $0.2 million in FDIC insurance expense and real estate owned/foreclosure expense, respectively. The efficiency ratio was 53.2% for the three months ended June 30, 2013 compared to 51.2% for the six months ended June 30, 2012.

Income before Income Taxes.  Income before the provision for income taxes increased $1.0 million, or 3.9%, to $26.9 million for the six months ended June 30, 2013 from $25.8 million for the six months ended June 30, 2012 for the reasons discussed above.

Provision for Income Taxes.Income tax expense increased $0.4 million to $10.5 million for the six months ended June 30, 2013 from $10.1 million for the six months ended June 30, 2012.  The effective tax rate was 39.0% in both six months ended June 30, 2013 and 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

FINANCIAL CONDITION

Assets.Total assets at June 30, 2013 were $4,599.2 million, an increase of $147.8 million, or 3.3%, from $4,451.4 million at December 31, 2012. Total loans, net increased $52.7 million during the six months ended June 30, 2013 to $3,255.7 million from $3,203.0 million at December 31, 2012. Loan originations and purchases were $373.1 million for the six months ended June 30, 2013, an increase of $90.7 million from $282.3 million for the six months ended June 30, 2012. During the six months ended June 30, 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 remain strong, totaling $342.3 million at June 30, 2013 compared to $211.4 million at December 31, 2012 and $277.3 million at June 30, 2012.

The following table shows loan originations and purchases for the periods indicated:

	For the three months ended June 30,				For the six months ended June 30,
(In thousands)	2013		2012		2013		2012
Multi-family residential	$	132,292	$	79,850	$	175,217	$	141,753
Commercial real estate (1)		31,612		16,389		38,598		19,813
One-to-four family – mixed-use property		7,344		5,366		11,734		10,481
One-to-four family – residential		6,380		4,889		12,890		10,694
Co-operative apartments		1,695		1,626		3,762		1,626
Construction		1,788		570		1,788		570
Small Business Administration		210		67		378		333
Taxi Medallion (2)		-		-		-		3,464
Commercial business and other		70,361		54,965		128,701		93,601
Total	$	251,682	$	163,722	$	373,068	$	282,335

(1) Includes purchases of $0.5 million for the six months ended June 30, 2013.

(2) Includes purchases of $3.5 million for the six months ended June 30, 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 three months ended June 30, 2013 had an average loan-to-value ratio of 36.1% and an average debt coverage ratio of 326%.

The Bank’s non-performing assets totaled $80.8 million at June 30, 2013, a decrease of $17.7 million from $98.5 million at December 31, 2012. Total non-performing assets as a percentage of total assets were 1.76% at June 30, 2013 and 2.21% at December 31, 2012. The ratio of allowance for loan losses to total non-performing loans was 43.8% at June 30, 2013 and 34.6% at December 31, 2012.   See – “TROUBLED DEBT RESTRUCUTURED AND NON-PERFORMING ASSETS.”

During the six months ended June 30, 2013, mortgage-backed securities increased $62.3 million, or 8.7%, to $782.4 million from $720.1 million at December 31, 2012. The increase in mortgage-backed securities during the six months ended June 30, 2013 was primarily due to purchases of $237.5 million, partially offset by sales and repayments of $68.5 million and $74.2 million, respectively. During the six months ended June 30, 2013, other securities increased $28.9 million, or 12.6%, to $258.3 million from $229.5 million at December 31, 2012. The increase in other securities during the six months ended June 30, 2013 was primarily due to purchases of $66.2 million, partially offset by $30.0 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 $4,176.5 million at June 30, 2013, an increase of $167.4 million, or 4.2%, from $4,009.1 million at December 31, 2012. During the six months ended June 30, 2013, due to depositors increased $47.1 million, or 1.6%, to $3,029.7 million as a result of a $135.2 million increase in core deposits partially offset by an $88.1 million decrease in certificates of deposit. Borrowed funds increased $110.8 million during the six months ended June 30, 2013.  The increase in borrowed funds was primarily due to net increases of $69.9 million in long term borrowings and $38.0 million in short-term borrowings.

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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

Equity. Total stockholders’ equity decreased $19.6 million, or 4.4%, to $422.7 million at June 30, 2013 from $442.4 million at December 31, 2012. Stockholders’ equity decreased primarily due to a decrease in comprehensive income of $19.2 million primarily due to a decline in the market value of the securities portfolio, the purchase of 806,092 shares of treasury stock at a cost of $12.6 million and the declaration and payment of a dividend of $0.26 per common share totaling $7.9 million, partially offset by net income of $16.4 million and $1.4 million due to the issuance of shares from the annual funding of certain employee retirement plans through the release of common shares from the Employee Benefit Trust. In addition, the exercise of stock options increased stockholders’ equity by $0.3 million, including the income tax benefit realized. Book value per common share was $14.04 at June 30, 2013 compared to $14.39 at December 31, 2012. Tangible book value per common share was $13.52 at June 30, 2013 compared to $13.87 at December 31, 2012.

During the three months ended June 30, 2013, the Company completed the common stock repurchase program that was approved by the Company’s Board of Directors on September 20, 2011. On May 22, 2013, 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 its common stock.  During the six months ended June 30, 2013, the Company repurchased 806,092 shares of the Company’s common stock at an average cost of $15.64 per share. At June 30, 2013, 579,870 shares remain to be repurchased under the current stock repurchase program. The repurchase program does not have an expiration date or a maximum dollar amount that may be paid to repurchase the common shares.  Stock repurchases under this program will be made from time to time, on the open market or in privately negotiated transactions, at the discretion of the management of the Company.

Cash flow.  During the six months ended June 30, 2013, funds provided by the Company's operating activities amounted to $40.5 million. These funds combined with $142.0 million provided by financing activities were utilized to fund net investing activities of $180.7 million. The Company's primary business objective is the origination and purchase of one-to-four family (including mixed-use properties), multi-family residential and commercial real estate mortgage loans and commercial, business and SBA loans. During the six months ended June 30, 2013, the net total of loan originations and purchases less loan repayments and sales was $56.9 million. During the six months ended June 30, 2013, the Company also funded $303.7 million in purchases of securities available for sale.  During the six months ended June 30, 2013, funds were provided by a net increase of $69.9 million and $38.0 million in long-term and short-term borrowed funds, respectively.  Additionally, funds were provided by $182.5 million in proceeds from maturities, sales, calls and prepayments of securities available for sale and $54.8 million from a net increase in deposits. The Company also used funds of $7.9 million and $13.4 million for dividend payments and purchases of treasury stock, respectively, during the six months ended June 30, 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 operation if such assets were sold, or, in the case of securities classified as available-for-sale, decreases in the Company’s stockholders’ equity, if such securities were retained.

The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust its exposure to interest rate risk. On a quarterly basis, management prepares the “Earnings and Economic Exposure to Changes in Interest Rate” report for review by the Board of Directors, as summarized below. This report quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down  200 basis points (shocked), assuming the yield curves of the rate shocks will be parallel to each other. Net portfolio value is defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to the market value of assets. All changes in income and value are measured as percentage changes from the projected net interest income and net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at June 30, 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 June 30, 2013, the Company was within the guidelines set forth by the Board of Directors for each interest rate level.

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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 presents the Company’s interest rate shock as of June 30, 2013:

	Projected Percentage Change In
Change in Interest Rate	Net Interest Income			Net Portfolio Value			Net Portfolio Value Ratio
-200 Basis points		-1.81	%		17.94	%		14.43	%
-100 Basis points		0.40			11.62			13.92
Base interest rate		0.00			0.00			12.86
+100 Basis points		-4.36			-16.95			11.10
+200 Basis points		-9.41			-33.66			9.21

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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 June 30, 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 June 30,
	2013							2012
	Average Balance		Interest		Yield/ Cost			Average Balance		Interest		Yield/ Cost
Assets
Interest-earning assets:
Mortgage loans, net (1)	$	2,883,200		39,816		5.52	%	$	2,910,023		42,541		5.85	%
Other loans, net (1)		306,203		3,045		3.98			294,032		3,582		4.87
Total loans, net		3,189,403		42,861		5.38			3,204,055		46,123		5.76
Mortgage-backed securities		794,233		5,868		2.96			713,589		6,874		3.85
Other securities		243,983		1,542		2.53			208,544		1,376		2.64
Total securities		1,038,216		7,410		2.85			922,133		8,250		3.58
Interest-earning deposits and federal funds sold		49,215		24		0.20			29,815		11		0.15
Total interest-earning assets		4,276,834		50,295		4.70			4,156,003		54,384		5.23
Other assets		260,411							242,518
Total assets	$	4,537,245						$	4,398,521
Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Savings accounts	$	276,570		128		0.19		$	330,573		168		0.20
NOW accounts		1,337,479		1,789		0.54			1,035,245		1,589		0.61
Money market accounts		184,422		73		0.16			181,940		101		0.22
Certificate of deposit accounts		1,143,992		6,095		2.13			1,426,138		8,360		2.34
Total due to depositors		2,942,463		8,085		1.10			2,973,896		10,218		1.37
Mortgagors' escrow accounts		55,795		8		0.06			49,630		7		0.06
Total deposits		2,998,258		8,093		1.08			3,023,526		10,225		1.35
Borrowed funds		896,025		4,906		2.19			782,744		5,872		3.00
Total interest-bearing liabilities		3,894,283		12,999		1.34			3,806,270		16,097		1.69
Non interest-bearing deposits		164,327							132,569
Other liabilities		40,527							34,802
Total liabilities		4,099,137							3,973,641
Equity		438,108							424,880
Total liabilities and equity	$	4,537,245						$	4,398,521
Net interest income / net interest rate spread			$	37,296		3.36	%			$	38,287		3.54	%
Net interest-earning assets / net interest margin	$	382,551				3.49	%	$	349,733				3.68	%
Ratio of interest-earning assets to interest-bearing liabilities						1.10	X						1.09	X

(1) Loan interest income includes net amortization of deferred fees and costs, late charges, and prepayment penalties of approximately $1.1 million and $0.7 million for the three months ended June 30, 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

The following table sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the six months ended June 30, 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 six months ended June 30,
	2013							2012
	Average Balance		Interest		Yield/ Cost			Average Balance		Interest		Yield/ Cost
Assets
Interest-earning assets:
Mortgage loans, net (1)	$	2,882,614		79,563		5.52	%	$	2,908,422		85,738		5.90	%
Other loans, net (1)		305,458		6,238		4.08			290,589		6,945		4.78
Total loans, net		3,188,072		85,801		5.38			3,199,011		92,683		5.79
Mortgage-backed securities		751,841		11,589		3.08			710,082		13,887		3.91
Other securities		232,148		2,950		2.54			162,651		2,201		2.71
Total securities		983,989		14,539		2.96			872,733		16,088		3.69
Interest-earning deposits and federal funds sold		44,123		41		0.19			37,392		28		0.15
Total interest-earning assets		4,216,184		100,381		4.76			4,109,136		108,799		5.30
Other assets		266,078							238,787
Total assets	$	4,482,262						$	4,347,923
Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Savings accounts	$	280,753		263		0.19			334,816		396		0.24
NOW accounts		1,261,541		3,371		0.53			1,008,010		3,239		0.64
Money market accounts		164,027		127		0.15			188,521		265		0.28
Certificate of deposit accounts		1,185,284		12,606		2.13			1,460,146		17,217		2.36
Total due to depositors		2,891,605		16,367		1.13			2,991,493		21,117		1.41
Mortgagors' escrow accounts		49,005		17		0.07			43,934		18		0.08
Total deposits		2,940,610		16,384		1.11			3,035,427		21,135		1.39
Borrowed funds		904,614		12,555		2.78			733,331		12,032		3.28
Total interest-bearing liabilities		3,845,224		28,939		1.51			3,768,758		33,167		1.76
Non interest-bearing deposits		156,386							122,529
Other liabilities		40,882							34,455
Total liabilities		4,042,492							3,925,742
Equity		439,770							422,181
Total liabilities and equity	$	4,482,262						$	4,347,923
Net interest income / net interest rate spread			$	71,442		3.25	%			$	75,632		3.54	%
Net interest-earning assets / net interest margin	$	370,960				3.39	%	$	340,378				3.68	%
Ratio of interest-earning assets to interest-bearing liabilities						1.10	X						1.09	X

(1) Loan interest income includes net amortization of deferred fees and costs, late charges, and prepayment penalties of approximately $1.8 million and $1.3 million for the six months ended June 30, 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 six months ended June 30,
(In thousands)	2013		2012
Mortgage Loans
At beginning of period	$	2,906,881	$	2,939,012
Mortgage loans originated:
Multi-family residential		175,217		141,753
Commercial real estate		38,146		19,813
One-to-four family – mixed-use property		11,734		10,481
One-to-four family – residential		12,890		10,694
Co-operative apartments		3,762		1,626
Construction		1,788		570
Total mortgage loans originated		243,537		184,937
Mortgage loans purchased:
Commercial Loans Purchased		452		-
Total mortgage loans Purchased		452		-
Less:
Principal and other reductions		185,612		178,147
Sales		9,748		15,709
At end of period	$	2,955,510	$	2,930,093
Commercial Business and Other Loans
At beginning of period	$	314,494	$	274,981
Other loans originated:
Small business administration		378		333
Taxi Medallion		-		8
Commercial business		125,489		91,805
Other		3,212		1,796
Total other loans originated		129,079		93,942
Other loans purchased:
Taxi Medallion		-		3,456
Total other loans purchased		-		3,456
Less:
Principal and other reductions		122,997		79,509
Sales and loans transferred to available for sale		-		1,379
At end of period	$	320,576	$	291,491

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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:

(In thousands)	June 30, 2013		March 31, 2013		December 31, 2012
Accrual Status:
Multi-family residential	$	2,822	$	2,816	$	2,348
Commercial real estate		3,797		3,810		3,263
One-to-four family - mixed-use property		2,317		2,326		2,338
One-to-four family - residential		369		371		374
Construction loans		1,612		2,833		3,500
Commercial business and other		4,403		4,436		3,849
Total		15,320		16,592		15,672
Non-accrual status:
Commercial real estate		4,045		3,571		3,872
One-to-four family - mixed-use property		386		-
Total		4,431		3,571		3,872
Total performing troubled debt restructured	$	19,751	$	20,163	$	19,544

During the six months ended June 30, 2013, six loans totaling $2.6 million were restructured and classified 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.

- 55 -

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:

(In thousands)	June 30, 2013		March 31, 2013		December 31, 2012
Loans 90 days or more past due and still accruing:
Multi-family residential	$	-	$	1,073	$	-
One-to-four family - residential		15		-		-
Co-operative apartments		-		103		-
Construction		-		-		-
Commercial business and other		558		602		644
Total		573		1,778		644
Non-accrual loans:
Multi-family residential		19,273		21,261		16,486
Commercial real estate		12,676		14,554		15,640
One-to-four family - mixed-use property		11,272		16,029		18,280
One-to-four family - residential		12,158		13,686		13,726
Co-operative apartments		160		160		234
Construction		7,326		7,396		7,695
Small business administration		445		458		283
Commercial business and other		9,999		12,640		16,860
Total		73,309		86,184		89,204
Total non-performing loans		73,882		87,962		89,848
Other non-performing assets:
Real estate acquired through foreclosure		2,591		2,189		5,278
Investment securities		4,301		3,804		3,332
Total		6,892		5,993		8,610
Total non-performing assets	$	80,774	$	93,955	$	98,458

Included in non-accrual loans were four loans totaling $10.1 million, 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 June 30, 2013, March 31, 2013 and December 31, 2012, respectively.

The Bank’s non-performing assets totaled $80.8 million at June 30, 2013, a decrease of $13.2 million from $94.0 million at March 31, 2013 and a decrease of $17.7 million from $98.5 million at December 31, 2012. Total non-performing assets as a percentage of total assets were 1.76% at June 30, 2013, 2.09% at March 31, 2013 and 2.21% at December 31, 2012. The ratio of allowance for loan losses to total non-performing loans was 43.8% at June 30, 2013, 35.3% at March 31, 2013 and 34.6% at December 31, 2012.

The Bank’s non-performing loans totaled $73.9 million at June 30, 2013, a decrease of $14.1 million from $88.0 million at March 31, 2013 and a decrease of $16.0 million from $89.8 million at December 31, 2012. During the three months ended June 30, 2013, 28 loans totaling $7.0 million were added to non-performing loans, 16 loans totaling $3.8 million were returned to performing status, six loans totaling $1.2 million were paid in full, 38 loans totaling $10.2 million were sold, three loans totaling $2.1 million were transferred to other real estate owned, two loans totaling $0.9 million were modified as TDR and charge-offs of $1.5 million were recorded on non-performing loans that were non-performing at the beginning of the second quarter of 2013.

Non-performing investment securities include two pooled trust preferred securities for which we are not receiving payments. At June 30, 2013, these investment securities had a combined amortized cost and market value of $8.3 million and $4.3 million, respectively.

- 56 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

	June 30, 2013				December 31, 2012
	60 - 89 days		30 - 59 days		60 - 89 days		30 - 59 days
	(In thousands)
Multi-family residential	$	1,739	$	17,222	$	4,827	$	24,059
Commercial real estate		686		6,693		3,622		9,764
One-to-four family - mixed-use property		2,499		19,344		3,368		21,012
One-to-four family - residential		1,564		3,355		1,886		3,407
Co-operative apartments		-		-		-		-
Construction loans		-		-		-		2,462
Small Business Administration		-		114		-		404
Taxi medallion		-		-				-
Commercial business and other		501		1		6		2
Total delinquent loans	$	6,989	$	46,729	$	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 $182.4 million at June 30, 2013, a decrease of $41.8 million from $224.2 million at December 31, 2012.

- 57 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following table sets forth the Banks’ assets designated as Criticized and Classified at June 30, 2013:

(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total
Loans:
Multi-family residential	$	10,523	$	23,600	$	-	$	-	$	34,123
Commercial real estate		7,578		24,638		-		-		32,216
One-to-four family - mixed-use property		10,829		17,424		-		-		28,253
One-to-four family - residential		2,133		14,161		-		-		16,294
Co-operative apartments		-		266		-		-		266
Construction loans		1,916		7,794		-		-		9,710
Small Business Administration		323		108		-		-		431
Commercial business and other		2,206		15,093		425		-		17,724
Total loans		35,508		103,084		425		-		139,017
Investment Securities:(1)
Pooled trust preferred securities		-		16,683		-		-		16,683
Private issue CMO		-		24,120		-		-		24,120
Total investment securities		-		40,803		-		-		40,803
Other Real Estate Owned		-		2,591		-		-		2,591
Total	$	35,508	$	146,478	$	425	$	-	$	182,411

The following table sets forth the Banks’ 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 June 30, 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 Banks’ securities. Flushing Financial Corporation had one private issue trust preferred security classified as Substandard with a market value of $0.3 million at June 30, 2013 and two private issue trust preferred securities classified as Substandard with a market value of $0.8 million at December 31, 2012.

- 58 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

We designate investment securities as Substandard when the investment grade rating by one or more of the rating agencies is below investment grade. We have designated a total of nine investment securities that are held at the Bank as Substandard at June 30, 2013. Our classified investment securities at June 30, 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 June 30, 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 June 30, 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 and TDRs are considered 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. In connection with the determination of the allowance, the market value of collateral ordinarily is evaluated by our staff appraiser. 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 $1.7 million and $1.5 million at June 30, 2013 and December 31, 2012, respectively.

- 59 -

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 $30.6 million and $29.6 million at June 30, 2013 and December 31, 2012, respectively, resulting in a total allowance of $32.4 million and $31.1 million at June 30, 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 June 30, 2013, the allowance was sufficient to absorb losses inherent in our loan portfolio.

- 60 -

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 six months ended June 30,
(Dollars in thousands)	2013			2012
Balance at beginning of period	$	31,104		$	30,344
Provision for loan losses		9,500			11,000
Loans charged-off:
Multi-family residential		(2,749	)		(2,162	)
Commercial real estate		(734	)		(2,222	)
One-to-four family – mixed-use property		(3,135	)		(2,329	)
One-to-four family – residential		(691	)		(898	)
Co-operative apartments		(74	)		(43	)
Construction		(304	)		(2,441	)
Small Business Administration		(337	)		(265	)
Commercial business and other		(864	)		(523	)
Total loans charged-off		(8,888	)		(10,883	)
Recoveries:
Multi-family residential		65			80
Commercial real estate		293			125
One-to-four family – mixed-use property		111			79
One-to-four family – residential		106			29
Co-operative apartments		4			-
Small Business Administration		60			23
Commercial business and other		-			102
Total recoveries		639			438
Net charge-offs		(8,249	)		(10,445	)
Balance at end of period	$	32,355		$	30,899
Ratio of net charge-offs during the period to average loans outstanding during the period		0.52	%		0.65	%
Ratio of allowance for loan losses to gross loans at end of period		0.99	%		0.96	%
Ratio of allowance for loan losses to non-performing assets at end of period		40.06	%		26.40	%
Ratio of allowance for loan losses to non-performing loans at end of period		43.79	%		27.54	%

- 61 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

RECENT PROPOSED CHANGES TO REGULATORY CAPITAL RULES

During July 2013, the federal bank regulatory agencies issued revised notices of proposed rulemaking ("NPRs") that would revise and replace the agencies' current capital rules. The NPRs include numerous revisions to the existing capital regulations, including, but not limited to, the following:

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

· Adds a new common equity tier 1 capital ratio.

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

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

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

· Provides a transition period for several aspects of the proposed rule: the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions.

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

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

· Establishes due diligence requirements for securitization exposures.

The capital regulations would be effective January 1, 2015 for bank holding companies and banks with less than $15 billion in total assets, such as our Company and Bank. Based on our preliminary assessment of the NPRs, we believe we will see an increase in our total risk-weighted assets. However, the Company and the Banks, based on our preliminary assessment, would meet the requirements of the NPRs and will continue to be considered well-capitalized.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.     CONTROLS AND PROCEDURES

The Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 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 June 30, 2013:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
April 1 to April 30, 2013		24,800	$	15.25		24,800		342,602
May 1 to May 31, 2013		492,602		15.63		492,602		850,000
June 1 to June 30, 2013		270,130		15.66		270,130		579,870
Total		787,532	$	15.63		787,532

During the three months ended June 30, 2013, the Company completed the common stock repurchase program that was approved by the Company’s Board of Directors on September 20, 2011. On May 22, 2013, 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 its common stock.  The repurchase program does not have an expiration date or a maximum dollar amount that may be paid to repurchase the common shares.  Stock repurchases under this program will be made from time to time, on the open market or in privately negotiated transactions, at the discretion of the management of the Company.

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.
	10.1	Amended and Restated Employement Agreement between Flushing Bank and John R. Buran (filed herewith)
	10.2	Amended and Restated Employement Agreement between Flushing Financial Corporation and John R. Buran (filed herewith)
	10.3	Amended and Restated Employement Agreement between Flushing Financial Bank and Maria A. Grasso (filed herewith)
	10.4	Amended and Restated Employement Agreement between Flushing Financial Corporation and Maria A. Grasso (filed herewith)
	10.5	Form of Amended and Restated Employement Agreement between Flushing Bank and Certain Officers (filed herewith)
	10.6	Form of Amended and Restated Employement Agreement between Flushing Financial Corporation and Certain Officers (filed herewith)
	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: August 9, 2013	By: /s/John R. Buran
	John R. Buran
	President and Chief Executive Officer
Dated: August 9, 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.
	10.1	Amended and Restated Employement Agreement between Flushing Bank and John R. Buran (filed herewith)
	10.2	Amended and Restated Employement Agreement between Flushing Financial Corporation and John R. Buran (filed herewith)
	10.3	Amended and Restated Employement Agreement between Flushing Financial Bank and Maria A. Grasso (filed herewith)
	10.4	Amended and Restated Employement Agreement between Flushing Financial Corporation and Maria A. Grasso (filed herewith)
	10.5	Form of Amended and Restated Employement Agreement between Flushing Bank and Certain Officers (filed herewith)
	10.6	Form of Amended and Restated Employement Agreement between Flushing Financial Corporation and Certain Officers (filed herewith)
	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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