UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

Commission file number 000-24272
 
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   o No

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

      Large accelerated filer o                                Accelerated filer x                              Non-accelerated filer o 

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

      The number of shares of the registrant’s Common Stock outstanding as of October 31, 2007 was 21,271,561.



TABLE OF CONTENTS

 
      PAGE  
     
 
PART I — FINANCIAL INFORMATION        
  
ITEM 1.   Financial Statements      
  
    Consolidated Statements of Financial Condition     1  
  
    Consolidated Statements of Income and Comprehensive Income     2  
  
    Consolidated Statements of Cash Flows     3  
  
    Consolidated Statement 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		     15  
  
ITEM 3.   Quantitative and Qualitative Disclosures About Market Risk     29  
  
ITEM 4.   Controls and Procedures.     29  
  
PART II — OTHER INFORMATION        
  
ITEM 1.   Legal Proceedings     29  
  
ITEM 1A. Risk Factors     29  
  
ITEM 2.   Unregistered Sales of Equity Securities and Use of Proceeds     29  
  
ITEM 3.   Defaults Upon Senior Securities.     30  
  
ITEM 4.   Submission of Matters to a Vote of Security Holders     30  
  
ITEM 5.   Other Information.     30  
  
ITEM 6.   Exhibits.     31  
  
SIGNATURES.     32  

i


PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Financial Condition
 
(Dollars in thousands, except per share data) September 30,
2007 		  December 31,
2006 		 
 
ASSETS
 (Unaudited)    
Cash and due from banks $ 28,653   $ 29,251  
Securities available for sale:            
     Mortgage-backed securities ($122,487 at fair value as of September 30, 2007)   337,638     288,851  
     Other securities ($23,263 at fair value as of September 30, 2007)   63,379     41,736  
Loans:            
     Multi-family residential   960,570     870,912  
     Commercial real estate   608,030     519,552  
     One-to-four family — mixed-use property   667,738     588,092  
     One-to-four family — residential   162,146     161,889  
     Co-operative apartments   7,968     8,059  
     Construction   124,739     104,488  
     Small Business Administration   17,933     17,521  
     Commercial business and other   93,650     50,899  
     Net unamortized premiums and unearned loan fees   13,458     10,393  
     Allowance for loan losses   (6,824 )   (7,057 )
            Net loans   2,649,408     2,324,748  
Interest and dividends receivable   15,524     13,332  
Bank premises and equipment, net   24,426     23,042  
Federal Home Loan Bank of New York stock   39,384     36,160  
Bank owned life insurance   41,811     40,516  
Goodwill   16,127     14,818  
Core deposit intangible   2,928     3,279  
Other assets   21,875     20,788  
            Total assets $ 3,241,153   $ 2,836,521  
   
LIABILITIES            
Due to depositors:            
     Non-interest bearing $ 65,301   $ 80,061  
     Interest-bearing:            
         Certificate of deposit accounts   1,186,400     1,102,976  
         Savings accounts   327,069     262,980  
         Money market accounts   338,816     251,197  
         NOW accounts   61,399     47,181  
            Total interest-bearing deposits   1,913,684     1,664,334  
Mortgagors’ escrow deposits   31,958     19,755  
Borrowed funds ($135,505 at fair value as of September 30, 2007)   726,602     608,513  
Securities sold under agreements to repurchase ($25,759 at fair value
     as of September 30, 2007)		   254,659     223,900  
Other liabilities   20,026     21,543  
            Total liabilities   3,012,230     2,618,106  
   
STOCKHOLDERS’ EQUITY            
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)   —     —  
Common stock ($0.01 par value; 40,000,000 shares authorized; 21,263,640
     issued and outstanding at September 30, 2007; 21,165,052 shares issued,
     and 21,131,274 shares outstanding, at December 31, 2006)		   213     212  
Additional paid-in capital   73,904     71,079  
Treasury stock (none and 33,778 shares at September 30, 2007
     and December 31, 2006, respectively)		   —     (592 )
Unearned compensation - Employee Benefit Trust   (2,306 )   (2,897 )
Retained earnings   159,785     156,879  
Accumulated other comprehensive loss, net of taxes   (2,673 )   (6,266 )
            Total stockholders’ equity   228,923     218,415  
             
            Total liabilities and stockholders’ equity $ 3,241,153   $ 2,836,521  
 

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 and Comprehensive Income
(Unaudited)
 
For the three months
ended September 30, 		  For the nine months
ended September 30, 		 
 
 
(Dollars in thousands, except per share data) 2007 2006 2007 2006
 
Interest and dividend income                
Interest and fees on loans $ 44,839   $ 37,188   $ 128,870   $ 103,037  
Interest and dividends on securities:                        
   Interest   3,834     4,013     11,580     11,341  
   Dividends   165     84     371     237  
Other interest income   158     188     337     616  
      Total interest and dividend income   48,996     41,473     141,158     115,231  
  
Interest expense                        
Deposits   20,543     15,225     56,851     39,959  
Other interest expense   11,117     9,024     31,596     24,472  
      Total interest expense   31,660     24,249     88,447     64,431  
Net interest income   17,336     17,224     52,711     50,800  
Provision for loan losses   —     —     —     —  
Net interest income after provision for loan losses   17,336     17,224     52,711     50,800  
  
Non-interest income                        
Loan fee income   702     636     2,494     2,145  
Banking services fee income   369     386     1,137     1,096  
Net gain on sale of loans held for sale   11     158     269     518  
Net gain on sale of loans   106     —     224     100  
Net gain on sale of securities   —     —     —     81  
Net gain from fair value adjustments   789     —     960     —  
Federal Home Loan Bank of New York stock dividends   681     435     1,919     1,194  
Bank owned life insurance   442     441     1,295     1,112  
Other income   690     329     1,886     932  
      Total non-interest income   3,790     2,385     10,184     7,178  
  
Non-interest expense                        
Salaries and employee benefits   5,765     5,318     18,146     14,885  
Occupancy and equipment   1,635     1,580     4,868     3,950  
Professional services   1,131     965     3,522     2,899  
Data processing   861     681     2,572     1,975  
Depreciation and amortization of premises and equipment   597     439     1,794     1,170  
Other operating expenses   2,117     2,195     7,006     6,116  
      Total non-interest expense   12,106     11,178     37,908     30,995  
  
Income before income taxes   9,020     8,431     24,987     26,983  
  
Provision for income taxes                        
Federal   2,658     2,574     7,620     8,378  
State and local   635     545     1,473     1,976  
      Total taxes   3,293     3,119     9,093     10,354  
  
Net income $ 5,727   $ 5,312   $ 15,894   $ 16,629  
  
Other comprehensive income (loss), net of tax                        
  Unrealized holding gains (losses) arising during the period $ 712   $ 3,529   $ (142 ) $ 35  
  Reclassification adjustments for gains included in income   —     —     —     (49 )
  Amortization of net acturarial losses   19     —     49     —  
  Amortization of prior service costs   14     —     50     —  
       Net other comprehensive income (loss)   745     3,529     (43 )   (14 )
  
Comprehensive net income $ 6,472   $ 8,841   $ 15,851   $ 16,615  
  
Basic earnings per share $ 0.29   $ 0.27   $ 0.81   $ 0.91  
Diluted earnings per share $ 0.29   $ 0.27   $ 0.80   $ 0.89  
Dividends per share $ 0.12   $ 0.11   $ 0.36   $ 0.33  
 

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


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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
For the nine months ended
September 30,
 
(In thousands) 2007   2006  
 
OPERATING ACTIVITIES        
Net income $ 15,894   $ 16,629  
Adjustments to reconcile net income to net cash provided by
 operating activities:		            
   Depreciation and amortization of bank premises and equipment   1,794     1,170  
   Origination of loans held for sale   (7,513 )   (7,006 )
   Proceeds from sale of loans held for sale   7,782     7,602  
   Net gain on sale of loans held for sale   (269 )   (518 )
   Net gain on sales of loans   (224 )   (100 )
   Net gain on sales of securities   —     (81 )
   Fair value adjustment for financial assets and financial liabilities   (960 )   —  
   Amortization of unearned premium, net of accretion of unearned discount   1,317     1,052  
   Stock-based compensation expense   1,669     1,936  
   Deferred compensation   (790 )   (193 )
   Amortization of core deposit intangibles   351     117  
   Excess tax benefits from stock-based payment arrangements   (229 )   (1,303 )
   Deferred income tax expense   631     633  
Net change in other assets and liabilities   (3,268 )   (1,194 )
        Net cash provided by operating activities   16,185     18,744  
   
INVESTING ACTIVITIES            
Purchases of bank premises and equipment   (3,178 )   (4,616 )
Net purchases of Federal Home Loan Bank of New York shares   (3,224 )   (909 )
Purchases of securities available for sale   (147,974 )   (49,753 )
Proceeds from sales and calls of securities available for sale   769     45,547  
Proceeds from maturities and prepayments of securities available for sale   77,726     39,338  
Net originations and repayment of loans   (328,223 )   (242,709 )
Purchases of loans   (9,144 )   (5,080 )
Proceeds from sale of loans   2,050     8,695  
Proceeds from sale of delinquent loans   10,874     7,766  
Purchase of bank owned life insurance   —     (10,000 )
Cash used to acquire Atlantic Liberty Financial Corporation   —     (14,663 )
Cash acquired in acquisition of Atlantic Liberty Financial Corporation   —     3,401  
        Net cash used in investing activities   (400,324 )   (222,983 )
 

(Continued)

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


- 3 -


PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
 
For the nine months ended
September 30,
 
(In thousands) 2007   2006  
 
FINANCING ACTIVITIES        
Net (decrease) increase in non-interest bearing deposits   (14,760 )   4,943  
Net increase in interest-bearing deposits   248,681     152,432  
Net increase in mortgagors’ escrow deposits   12,203     7,552  
Net proceeds from short-term borrowed funds   5,000     32,500  
Proceeds from long-term borrowings   322,757     120,000  
Repayment of long-term borrowings   (183,542 )   (113,071 )
Purchases of treasury stock   (1,051 )   (5,572 )
Excess tax benefits from stock-based payment arrangements   229     1,303  
Proceeds from issuance of common stock upon exercise of stock options   1,063     2,040  
Cash dividends paid   (7,039 )   (6,042 )
        Net cash provided by financing activities   383,541     196,085  
   
Net decrease in cash and cash equivalents   (598 )   (8,154 )
Cash and cash equivalents, beginning of period   29,251     26,754  
        Cash and cash equivalents, end of period $ 28,653   $ 18,600  
   
SUPPLEMENTAL CASH FLOW DISCLOSURE            
Interest paid $ 87,599   $ 62,205  
Income taxes paid   8,429     5,848  
Taxes paid if excess tax benefits were not tax deductible   8,658     7,151  
Fair value of assets acquired   —     185,545  
Fair value of liabilities assumed   —     144,325  
Common shares issued in exchange for Atlantic Liberty common shares   —     26,557  
 

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 Statement of Changes in Stockholders’ Equity
(Unaudited)
 
(Dollars in thousands) For the nine months ended
September 30, 2007 		 
 
Common Stock    
Balance, beginning of period $ 212  
Issuance upon exercise of stock options (70,375 common shares)   1  
Shares issued upon vesting of restricted stock unit awards (28,213 common shares)   —  
 
 
          Balance, end of period $ 213  
 
 
Additional Paid-In Capital      
Balance, beginning of period $ 71,079  
Adjustment to purchase price of Atlantic Liberty Financial Corportation   1,308  
Award of common shares released from Employee Benefit Trust (4,810 common shares)   63  
Shares issued upon vesting of restricted stock unit awards (64,268 common shares)   486  
Issuance upon exercise of stock options (70,555 common shares)   748  
Forfeiture of restricted stock awards (690 common shares)   8  
Stock-based compensation activity, net   (17 )
Stock-based income tax benefit   229  
 
 
          Balance, end of period $ 73,904  
 
 
Treasury Stock      
Balance, beginning of period $ (592 )
Purchases of common shares outstanding (38,000 common shares)   (627 )
Issuance upon exercise of stock options (26,721 common shares)   453  
Repurchase of restricted stock awards to satisfy tax obligations
   (25,469 common shares)		   (424 )
Forfeiture of restricted stock awards (690 common shares)   (8 )
Shares issued upon vesting of restricted stock unit awards (71,216 common shares)   1,198  
 
 
          Balance, end of period $ —  
 
 
Unearned Compensation
Balance, beginning of period $ (2,897 )
Release of shares from Employee Benefit Trust (173,603 common shares)   591  
 
 
          Balance, end of period $ (2,306 )
 
 
Retained Earnings      
Balance, beginning of period $ 156,879  
Net income   15,894  
Cumulative adjustment related to the adoption of SFAS No. 159   (5,811 )
Cash dividends declared and paid   (7,039 )
Shares issued upon vesting of restricted stock unit awards (35,161 common shares)   (30 )
Stock options exercised (26,541 common shares)   (108 )
 
 
          Balance, end of period $ 159,785  
 
 
Accumulated Other Comprehensive Loss      
Balance, beginning of period $ (6,266 )
Cumulative adjustment related to the adoption of SFAS No. 159, net of taxes of approximately $2,875   3,636  
Change in net unrealized loss on securities available for sale, net of taxes of approximately ($341)   (142 )
Amortization of actuarial gains (losses), net of taxes of approximately $39   49  
Amortization of prior service costs, net of taxes of approximately $39   50  
 
 
          Balance, end of period $ (2,673 )
 
 
Total Stockholders’ Equity $ 228,923  
 
 
 

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

1.             Basis of Presentation

The primary business of Flushing Financial Corporation (the “Holding Company”) is the operation of its wholly-owned subsidiary, Flushing Savings Bank, FSB (the “Bank”). The consolidated financial statements presented in this Form 10-Q include the collective results of the Holding Company and the Bank, but reflect principally the Bank’s activities.

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 periods of Flushing Financial Corporation and Subsidiaries (the “Company”). Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year.

Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The interim financial information should be read in conjunction with the Company’s 2006 Annual Report on Form 10-K.

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 reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

3.             Earnings Per Share

Basic earnings per share for the three- and nine-month periods ended September 30, 2007 and 2006 was computed by dividing net income by the total weighted average number of common shares outstanding, including only the vested portion of restricted stock and restricted stock unit awards. Diluted earnings per share includes the additional dilutive effect of stock options outstanding and the unvested portion of restricted stock and restricted stock unit awards during the period. Earnings per share have been computed based on the following:

 
For the three months ended
September 30, 		For the nine months ended
September 30,
 
 
(In thousands, except per share data) 2007   2006   2007   2006  
 
Net income $ 5,727   $ 5,312   $ 15,894   $ 16,629  
Divided by:                        
     Weighted average common shares outstanding   19,673     19,452     19,592     18,349  
     Weighted average common stock equivalents   218     300     237     296  
Total weighted average common shares and
  common stock equivalents		   19,891     19,752     19,829     18,645  
Basic earnings per share $ 0.29   $ 0.27   $ 0.81   $ 0.91  
Diluted earnings per share $ 0.29   $ 0.27   $ 0.80   $ 0.89  
Dividends per share $ 0.12   $ 0.11   $ 0.36   $ 0.33  
Dividend payout ratio   41.38 %   40.74 %   44.44 %   36.26 %
 
Common stock equivalents that are antidilutive are not included in the computation of diluted earnings per share. Options to purchase 552,325 shares at an average exercise price of $17.35 and 292,300 shares at an average exercise price of $18.03, were not included in the computation of diluted earnings per share for the three months ended September 30, 2007 and 2006, respectively. Unvested restricted stock and restricted stock unit awards totaling 183,646 shares at an average market price on date of grant of $17.06, and 70,803 shares at an average market price on date of grant of $18.29 were not included in the computation of diluted earnings per share for the three months ended September 30, 2007 and 2006, respectively. Options to purchase 486,475 shares at an average exercise price of $17.47 and 292,300 shares at an average exercise price of $18.03 were not included in the computation of diluted earnings per share for the nine months ended September 30, 2007 and 2006, respectively. Unvested restricted stock and restricted stock unit awards totaling 151,446 shares at an average market price on date of grant of $17.19 and 78,003 shares at an average market price on date of grant of $18.18 were not included in the computation of diluted earnings per share for the nine months ended September 30, 2007 and 2006, respectively.

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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements

4.             Stock-Based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.” SFAS No. 123R establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires a fair-value-based measurement method in accounting for share-based payment transactions with employees. It also requires measurement of the cost of employee services received in exchange for an award of an equity instrument based on the grant date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. The requisite service period is usually the vesting period. Prior to January 1, 2006, the Company accounted for stock-based compensation in accordance with APB No. 25, which did not require compensation cost to be recognized. The Company elected to adopt SFAS No. 123R using the modified prospective method.

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 and restricted stock unit awards. Compensation cost is recognized over the vesting period of the award, using the straight line method. For the three-month period ending September 30, 2007, there were awards of 2,700 options shares of restricted stock units, while for the nine-month period ended September 30, 2007, there were 95,200 stock options granted and awards of 110,950 shares of restricted stock units. For the three-month period ending September 30, 2006 there were 2,000 stock options granted and awards of 1,000 shares of restricted stock units, while in the nine-month period ended September 30, 2006, there were 133,475 stock options granted and awards of 121,425 shares of restricted stock units.

The following are the significant weighted assumptions relating to the valuation of the Company’s stock options granted for the periods indicated and exclude the Atlantic Liberty stock options. There were no stock option grants awarded in the three-month period ended September 30, 2007.
 
  For the three months ended
September 30,		 For the nine months ended
September 30, 		 
 
 
  2007 2006 2007 2006  
 
   
  Dividend yield   n.a.     3.21 %   3.60 %   3.38 %  
  Expected volatility   n.a.     29.31 %   28.75 %   29.31 %  
  Risk-free interest rate   n.a.     5.10 %   5.03 %   5.10 %  
  Expected option life (years)   n.a.     7     7     7    
 

The Holding Company acquired Atlantic Liberty Financial Corporation (“Atlantic Liberty”) on June 30, 2006. Holders of Atlantic Liberty stock options had the election to convert their options to Holding Company options or receive cash for the difference between their option price and $24.00. Holders of 148,734 Atlantic Liberty options, with an exercise price of $18.50, elected to receive 212,687 Holding Company options with an exercise price of $12.94. This is considered a modification under SFAS 123R. No additional expense was recognized as the fair value of these options after this modification is less than the fair value before the modification, as the time period in which they can be exercised, and therefore their expected life, was reduced. The following are the significant assumptions relating to the valuation of the Atlantic Liberty stock options upon modification.

 
  2006    
   
   
  Dividend yield   3.71 %  
  Expected volatility   29.31 %  
  Risk-free interest rate   5.13 %  
  Expected option life (years)   3    
 
The 2005 Omnibus Incentive Plan (“Omnibus Plan”) authorizes the Compensation Committee to grant a variety of equity compensation awards. The Company has applied the shares authorized under the 1996 Restricted Stock Incentive Plan and the 1996 Stock Option Incentive Plan for use as full value awards and non-full value awards, respectively, for future awards under the Omnibus Plan. As of September 30, 2007, there were 188,008 shares available for full value awards and 148,988 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. All grants and awards under the 1996 Restricted Stock Incentive Plan and the 1996

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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements

Stock Option Incentive Plan prior to the effective date of the Omnibus Plan are still outstanding as 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 Omnibus Plan does not allow the transfer of shares from the full value pool to the non-full value pool. During the nine months ended September 30, 2007, 399,999 shares were transferred from the non-full value pool to the full value pool, which increased the full value pool by 133,333. 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 on the date of grant, and may not be repriced 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.

The Omnibus Plan provides two pools for stock-based compensation. 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 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 or the 1996 Restricted Stock Incentive Plan); the settlement of such an award in cash; 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 the surrender of shares by an award holder in payment of the exercise price or taxes to a full value award.

The following table summarizes the Company’s full value awards at or for the nine months ended September 30, 2007:
 
  Full Value Awards Shares   Weighted-Average
Grant-Date
Fair Value		    
 
   
  Non-vested at December 31, 2006   194,295   $ 16.77    
         Granted   110,950     16.62    
         Vested   (102,435 )   16.30    
         Forfeited   (10,590 )   16.58    
   
 
   
  Non-vested at September 30, 2007   192,220   $ 16.95    
   
 
   
  
  Vested but unissued at September 30, 2007   78,785   $ 16.70    
   
 
   
  
  Vested but unissued at December 31, 2006   85,296   $ 16.70    
   
 
   
  

As of September 30, 2007, there was $2.9 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 weighed-average period of 3.3 years. The total fair value of awards vested during the three months ended September 30, 2007 and 2006 was $0.2 million and $0.1 million respectively, with the nine months ended September 30, 2007 and 2006 at $1.7 million and $1.2 million, respectively. The vested but unissued full value awards were 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.

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.


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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements

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 nine months ended of September 30, 2007:
 
Non-Full Value Awards Shares   Weighted-
Average
Exercise
Price		   Weighted-Average
Remaining
Contractual
Term		   Aggregate
Intrinsic
Value
($000) *		  
 
Outstanding at December 31, 2006   1,651,576   $ 12.86              
       Granted   95,200     16.65              
       Exercised   (97,096 )   10.95              
       Forfeited   (12,035 )   16.03              
 
 
             
Outstanding at September 30, 2007   1,637,645   $ 13.17     5.8 years   $ 6,289  
 
 
 
 
 
  
Exercisable shares at September 30, 2007   1,413,155   $ 12.59     5.4 years   $ 6,203  
 
 
 
 
 
  
Vested but unexercisable shares at
       September 30, 2007		   17,965   $ 16.04     8.7 years   $ 14  
 
 
 
 
 
 

* The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

As of September 30, 2007, there was $0.8 million of total unrecognized compensation cost related to unvested non-full value awards granted under the Omnibus Plan. That cost is expected to be recognized over a weighed-average period of 3.7 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 shares will be exercisable at the original contractual vesting dates.

Cash proceeds, fair value received, tax benefits and intrinsic value related to total stock options exercised during the three- and nine-months ended September 30, 2007 and 2006 are provided in the following table:
 
For the three months ended
September 30, 		For the nine months ended
September 30,
(In thousands) 2007 2006 2007 2006
 
Proceeds from stock options exercised $ 135   $ 699   $ 1,063   $ 2,040  
Fair value of shares received upon exercise
   of stock options		   —     —     —     371  
Tax benefit related to stock options exercised   13     157     219     1,250  
Intrinsic value of stock options exercised   29     532     553     2,033  
Grant date fair value at weighted average   n.a.     4.86     4.30     5.52  
 

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 Vice President and above. Awards are made under this plan on compensation not eligible for awards made under the profit sharing plan, due to the terms of the profit sharing plan and IRS regulations. Employees receive awards under this plan proportionate to the amount they would have received under the profit sharing plan, had the excluded compensation been eligible. 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. Employees vest under this plan 20% per year for 5 years. Employees receive their vested interest in this plan in the form of a cash payment, 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.


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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
 
  Phantom Stock Plan Shares   Fair Value    
 
   
  
  Outstanding at December 31, 2006   15,920   $ 17.07    
         Granted   376     16.49    
         Distributions   (2,262 )   16.76    
   
 
   
  Outstanding at September 30, 2007   14,034   $ 16.80    
   
 
   
  Vested at September 30, 2007   13,952   $ 16.80    
   
 
   
 

The Company recorded stock-based compensation expense (benefit) for the phantom stock plan of $12,100 and $(4,900) for the three months ended September 30, 2007 and 2006 respectively. The total fair value of the distributions from the phantom stock plan during the three months ended September 30, 2007 and 2006 was $13,500 and $3,300, respectively.

For the nine months ended September 30, 2007 and 2006, the Company recorded stock-based compensation expense for the phantom stock plan of $1,000 and $33,900, respectively. The total fair value of the distributions from the phantom stock plan during the nine months ended September 30, 2007 and 2006 was $37,900 and $70,800, respectively.

5.             Pension and Other Postretirement Benefit Plans

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

 
For the three months ended
September 30,		 For the nine months ended
September 30,
(In thousands) 2007 2006 2007 2006
 
  
Employee Pension Plan:                
    Service cost $ —   $ 162   $ —   $ 486  
    Interest cost   218     221     654     663  
    Amortization of unrecognized loss   33     81     99     243  
    Amortization of past service liability   —     —     —     —  
    Expected return on plan assets   (321 )   (326 )   (963 )   (978 )
 
 
 
 
 
        Net employee pension expense $ (70 ) $ 138   $ (210 ) $ 414  
 
 
 
 
 
  
Outside Director Pension Plan:                        
    Service cost $ 13   $ 23   $ 39   $ 69  
    Interest cost   37     17     111     51  
    Amortization of unrecognized loss   —     4     —     12  
    Amortization of past service liability   36     37     108     111  
 
 
 
 
 
        Net outside director pension expense $ 86   $ 81   $ 258   $ 243  
 
 
 
 
 
  
Other Postretirement Benefit Plans:                        
    Service cost $ 31   $ 28   $ 93   $ 84  
    Interest cost   42     36     126     108  
    Amortization of unrecognized (gain)loss   (6 )   (6 )   (18 )   (18 )
    Amortization of past service liability   (3 )   (7 )   (9 )   (21 )
 
 
 
 
 
        Net other postretirement benefit expense $ 64   $ 51   $ 192   $ 153  
 
 
 
 
 

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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements

The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2006 that it expects to contribute $0.2 million and $0.1 million to the Outside Director Pension Plan and Other Post Retirement Benefit Plans, respectively, during the year ended December 31, 2007. The Company does not expect to make a contribution to the Employee Pension Plan during the year ended December 31, 2007. As of September 30, 2007, the Company has contributed $60,000 to the Outside Director Pension Plan and $36,000 to the Other Postretirement Benefit Plans, for the year ending December 31, 2007. As of September 30, 2007, the Company has not made any contribution to the Employee Pension Plan for the year ending December 31, 2007. As of September 30, 2007, the Company has not revised its expected contributions for the year ending December 31, 2007, with the exception of the Outside Director Plan, for which the Company now expects to contribute $0.1 million.

6.              Fair Value Measurements

Effective January 1, 2007, the Company adopted SFAS No. 157, “Fair Value Measurements”, and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB No. 115”. SFAS No. 157 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. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Management selected the fair value option for certain investment securities, primarily mortgage-backed securities, and certain borrowed funds. These financial instruments were chosen as the yield on the financial assets was a below-market yield, while the rate on the financial liabilities was an above-market rate. Management also considered the average duration of these instruments, which, for investment securities, was longer than the average for the portfolio of securities, and, for borrowings, primarily represents the longer-term borrowings of the Company. Choosing these instruments for the fair value option adjusts the carrying value of these financial assets and financial liabilities to their current fair value, and more closely aligns the financial performance of the Company with the economic value of these financial instruments. Management selected, as of January 1, 2007, financial assets and financial liabilities with fair values of $160.7 million and $120.1 million, respectively, for the fair value option. The selection of these financial assets and financial liabilities reduced the Company’s one year interest-rate gap position, thereby reducing the Company’s interest-rate risk position. Management believes that electing the fair value option allows them to better react to changes in interest rates. Management did not elect the fair value option for investment securities and borrowings with shorter duration, adjustable rates, and yields that approximate the current market rate, as management believes that these financial assets and financial liabilities approximate their economic value. On a going-forward basis, the Company currently plans to carry the financial assets and financial liabilities which replace the above noted items at fair value, and will evaluate other purchases of investments and acquisition of new debt to determine if they should be carried at cost or fair value.


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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements

The effect on the financial assets and financial liabilities selected for the fair value option as of January 1, 2007 is shown in the following table:
 
Prior to
Adoption		 Net
Gain (Loss)
upon
Adoption 		After
Adoption
 
    (in thousands)  
Mortgage-backed securities   $ 138,881   $ 534   $ 139,415  
Other securities     21,270     19     21,289  
Accrued interest receivable     547     (547 )   —  
Other assets     561     (561 )   —  
Borrowed funds     (90,619 )   (3,868 )   (94,487 )
Securities sold under agreements to repurchase     (25,000 )   (581 )   (25,581 )
Other liabilities     (1,108 )   1,108     —  
 
 
Pretax cumulative effect of adoption           (3,896 )      
Increase in deferred tax asset           1,721        
 
 
Cumulative effect on stockholders’ equity           (2,175 )      
Reclassification from accumulated other comprehensive loss           (3,636 )      
 
 
Cumulative effect on retained earnings         $ (5,811 )      
 
 
 

In July 2007, the Company issued junior subordinated debt with a face amount of $20.6 million, and called junior subordinated debt with a face amount of $20.6 million that was issued in 2002. This is in addition to the second quarter issuance of junior subordinated debt with a face amount of $41.2 million that the Company has elected to carry at fair value.

The following table presents the financial assets and financial liabilities reported at fair value, and the changes in fair value included in the Consolidated Statement of Income, at or for the three- and nine-month periods ended September 30, 2007:

 
        Changes in Fair Values For
Items Measured at Fair Value
Pursuant to Election of
the Fair Value Option 		 
    Fair Value  
 
Measurements at
September 30, 2007		 Three Months Ended
September 30, 2007 		Nine Months Ended
September 30, 2007
      (in thousands)  
Mortgage-backed securities   $ 122,487   $ 1,864   $ 1,005  
Other securities     23,263     59     (62 )
Borrowed funds     135,505     (810 )   195  
Securities sold under agreements to repurchase     25,759     (324 )   (178 )
 
Net gain from fair value adjustments         $ 789   $ 960
 

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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements

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). Each of the financial instruments reported at fair value were based on significant other observable inputs (level 2).

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. The Company continues to accrue, and report 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 and securities sold under agreements to repurchase have contractual principal amounts, as of September 30, 2007, of $131,857,000 and $25,000,000, respectively. The fair value of borrowed funds and securities sold under agreements to repurchase includes accrued interest payable, as of September 30, 2007, of $812,000 and $272,000, respectively.

7.             Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (FIN 48), “Accounting for Uncertainty in Income Taxes: an interpretation of SFAS No. 109”. FIN 48 clarifies Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”, by defining a criterion that an individual tax position would have to meet for some or all of the benefit of that position to be recognized in an entity’s financial statements. Entities should evaluate a tax position to determine if it is more likely than not that a position will be sustained on examination by taxing authorities. FIN 48 defines more likely than not as “a likelihood of more than 50 percent”. FIN 48 also requires certain disclosures, including the amount of unrecognized tax benefits that if recognized would change the effective tax rate, information concerning tax positions for which a significant increase or decrease in the unrecognized tax benefit liability is reasonably possible in the next 12 months, a tabular reconciliation of the beginning and ending balances of unrecognized tax benefits, and tax years that remain open for examination by major jurisdictions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material effect on the Company’s results of operations or financial condition.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” The Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No.140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The Statement also resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interest in Securitized Financial Assets.” SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain as embedded derivative requiring bifurcation, and clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. The Statement eliminates the interim guidance in SFAS No. 133 Implementation Issue No. D1, which provided that beneficial interests in securitized financial assets are not subject to the provisions of SFAS No. 133. The Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of this Statement did not have a material effect on the Company’s results of operations or financial condition.

In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements.” The Statement is effective for all financial statements issued for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Statement 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. The early adoption of SFAS No. 159 required the early adoption of SFAS No. 157. Adoption of SFAS No. 157 did not have a material impact on the Company’s results of operations or financial condition.


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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements

In February 2007, the FASB Issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB No. 115”. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective for the beginning of the first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of an entity’s fiscal year prior to the effective date, provided the election is made prior to the issuance of financial statements for that year or portion thereof, and the election is made within 120 days of the beginning of that fiscal year. Early adoption of SFAS No. 159 also requires the early adoption of SFAS No. 157. The impact of adopting this statement on the Company’s consolidated financial statements is discussed in Note 6.

In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The consensus reached in Issue No. 06-4 requires the accrual of a liability for the cost of the insurance policy during postretirement periods in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, or APB Opinion 12, “Omnibus Opinion”, when an employer has effectively agreed to maintain a life insurance policy during the employee’s retirement. At September 30, 2006, the Company had endorsement split-dollar life insurance arrangements with thirty-one present or former employees, which currently provides approximately $6.0 million of life insurance benefits to these employees. The amount of the benefit for each employee is based on the employee’s salary when their employment terminates. Issue No. 06-4 is effective for fiscal years beginning after December 15, 2007. Management has not yet determined the effect of the adoption of Issue No. 06-4 on its financial statements.


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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

GENERAL

Flushing Financial Corporation, a Delaware corporation (the “Holding Company”), was organized in May 1994 to serve as the holding company for Flushing Savings Bank, FSB (the “Bank”), a federally chartered, FDIC insured savings institution, originally organized in 1929. Flushing Financial Corporation’s common stock is publicly traded on the NASDAQ Global Select Market under the symbol “FFIC”. The Bank is a community oriented savings institution offering a wide variety of financial services to meet the needs of the businesses and consumers in the communities it serves. The Bank conducts its business through fourteen banking offices located in Queens, Brooklyn, Manhattan and Nassau County, and its internet banking division, “iGObanking.comTM”. The Bank also owns Flushing Commercial Bank, a limited-purpose commercial bank formed for the sole purpose of attracting governmental deposits. The operating results of Flushing Commercial Bank have not been significant. The following discussion of financial condition and results of operations includes the collective results of the Holding Company and the Bank (collectively, the “Company”), but reflects principally the Bank’s activities.

The Bank’s 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 one-to-four family (focusing on mixed-use properties – properties that contain both residential dwelling units and commercial units), multi-family residential and commercial real estate mortgage loans; (2) construction loans, primarily for multi-family 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. The Bank also originates certain other consumer loans.

The Company’s 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 its interest-bearing liabilities. Net interest income is the result of the Company’s 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. The Company also generates 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 Loan Bank of New York (“FHLB-NY”) stock and net gains and losses on sales of securities and loans. The Company’s operating expenses consist principally of employee compensation and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. The Company’s results of operations also can be significantly affected by its periodic provision for loan losses and specific provision for losses on real estate owned. However, the Company has not recorded a provision since 1999. Such results also are significantly affected by general economic and competitive conditions, including changes in market interest rates, the strength of the local economy, government policies and actions of regulatory authorities.

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, the factors set forth in the preceding paragraph and elsewhere in this Quarterly Report, and in other documents filed by the Company with the Securities and Exchange Commission from time to time, including, without limitation, the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. 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. The Company has no obligation to update these forward-looking statements.


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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

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

General.   Net income increased $0.4 million, or 7.8%, to $5.7 million for the three months ended September 30, 2007 from $5.3 million for the three months ended September 30, 2006. Diluted earnings per share was $0.29, an increase of $0.02, or 7.4% for the three months ended September 30, 2007 from $0.27 for the three months ended September 30, 2006. The return on average assets was 0.74% for the three months ended September 30, 2007, as compared to 0.79% for the three months ended September 30, 2006, while the return on average equity was 10.29% for the three months ended September 30, 2007 and 10.21% for the three months ended September 30, 2006.

Interest Income.   Total interest and dividend income increased $7.5 million, or 18.1%, to $49.0 million for the three months ended September 30, 2007 from $41.5 million for the three months ended September 30, 2006. The increase in interest income is attributed to the growth in the average balance of interest-earning assets, which increased $397.4 million to $2,929.8 million, combined with a 14 basis point increase in the yield of interest-earning assets to 6.69% for the three months ended September 30, 2007 from 6.55% for the three months ended September 30, 2006. The increase in the yield of interest-earning assets is primarily due to an increase of $432.8 million in the average balance of the loan portfolio to $2,598.4 million, combined with a $33.4 million decrease in the average balance of the lower-yielding securities portfolios. The yield on the mortgage loan portfolio increased one basis point to 6.86% for the three months ended September 30, 2007 from 6.85% for the three months ended September 30, 2006. The average note rate on mortgage loans originated in the current quarter was 7.16%. In an effort to increase the yield on interest-earning assets, we continued to fund a portion of the growth in the higher-yielding mortgage loan portfolio through repayments received on the lower-yielding securities portfolio.

Interest Expense.  Interest expense increased $7.4 million, or 30.6%, to $31.7 million for the three months ended September 30, 2007 from $24.2 million for the three months ended September 30, 2006. The increase in the cost of interest-bearing liabilities is primarily attributed to the Federal Open Market Committee (“FOMC”) increasing overnight rates for seventeen consecutive meetings through June 2006. Although the FOMC reduced the overnight rate by 50 basis points in September 2007, the prior increases resulted in an increase in our cost of funds as new deposits were obtained at rates higher than the average rate on existing deposits. Certificates of deposit, savings accounts and money market accounts increased 51 basis points, 109 basis points and 30 basis points, respectively, for the three months ended September 30, 2007 compared to the three months ended September 30, 2006, resulting in an increase in the cost of deposits of 59 basis points to 4.30% for the three months ended September 30, 2007 compared to the three months ended September 30, 2006. The cost of borrowed funds also increased 22 basis points to 5.08% for the three months ended September 30, 2007 compared to the three months ended September 30, 2006. This was combined with increases in the average balance of certificates of deposit of $166.4 million and borrowed funds of $133.4 million. In addition, the combined average balances of lower-costing savings, money market and NOW accounts increased a total of $104.0 million.

Net Interest Income. For the three months ended September 30, 2007, net interest income was $17.3 million, an increase of $0.1 million, or 0.7%, from $17.2 million for the three months ended September 30, 2006. An increase in the average balance of interest-earning assets of $397.4 million, to $2,929.8 million, was partially offset by a decrease in the net interest spread of 33 basis points to 2.15% for the quarter ended September 30, 2007 from 2.48% for the comparable period in 2006. The yield on interest-earning assets increased 14 basis points to 6.69% for the three months ended September 30, 2007 from 6.55% in the three months ended September 30, 2006. However, this was more than offset by an increase in the cost of funds of 47 basis points to 4.54% for the three months ended September 30, 2007 from 4.07% for the comparable prior year period. The net interest margin decreased 35 basis points to 2.37% for the three months ended September 30, 2007 from 2.72% for the three months ended September 30, 2006. Excluding prepayment penalty income, the net interest margin would have been 2.25% and 2.58% for the three month periods ended September 30, 2007 and 2006, 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

Provision for Loan Losses.  There was no provision for loan losses for either of the three-month periods ended September 30, 2007 and 2006. In assessing the adequacy of the Company’s allowance for loan losses, management considers the Company’s historical loss experience, recent trends in losses, collection policies and collection experience, trends in the volume of non-performing loans, changes in the composition and volume of the gross loan portfolio, and local and national economic conditions. In recent years, the Bank has seen a significant improvement in its loss experience. By adherence to its strict underwriting standards the Bank has been able to minimize net losses from impaired loans with net recoveries of $25,000 for the three months ended September 30, 2007, compared to net charge-offs of $14,000 for the comparable period in 2006. Although the local economic conditions and real estate values in the past year have seen a slow down and despite the growth in the loan portfolio, primarily in multi-family residential, commercial real estate, one-to-four family mixed-use property mortgage loans, and commercial business loans, no provision for loan losses was deemed necessary for either of the three-month periods ended September 30, 2007 and 2006. See “-ALLOWANCE FOR LOAN LOSSES”.

Non-Interest Income.  Non-interest income increased $1.4 million, or 58.9%, for the three months ended September 30, 2007 to $3.8 million, as compared to $2.4 million for the quarter ended September 30, 2006. This was primarily attributed to increases of $0.2 million in dividends received on Federal Home Loan Bank of New York (“FHLB-NY”) stock, $0.4 million in Other Income, and $0.8 million attributed to changes in fair value of financial assets and financial liabilities carried at fair value under SFAS No. 159.

Non-Interest Expense.  Non-interest expense was $12.1 million for the three months ended September 30, 2007, an increase of $0.9 million, or 8.3%, from $11.2 million for the three months ended September 30, 2006. The increase from the comparable prior year period is primarily attributed to increases of: $0.4 million in employee salary and benefit expenses primarily related to additional employees for the business banking initiative and the internet banking division, $0.2 million in depreciation primarily due to two additional branch locations, the business banking initiative and the internet banking division, $0.2 million in professional services, and $0.2 million in data processing expense. The efficiency ratio was 59.5% and 57.0% for the three month periods ended September 30, 2007 and 2006, respectively.

Income before Income Taxes. Income before the provision for income taxes increased $0.6 million, or 7.0%, to $9.0 million for the three months ended September 30, 2007 from $8.4 million for the three months ended September 30, 2006, for the reasons discussed above.

Provision for Income Taxes.  Income tax expense increased $0.2 million, to $3.3 million, for the three months ended September 30, 2007 as compared to $3.1 million for the three months ended September 30, 2006. This increase was due to increased pre-tax income for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006. The effective tax rate was 36.5% and 37.0% for the three-month periods ended September 30, 2007 and 2006, respectively. The decrease in the effective tax rate is due to the increased impact of the income from tax preference items.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

General.   Net income declined $0.7 million, or 4.4%, to $15.9 million for the nine months ended September 30, 2007 from $16.6 million for the nine months ended September 30, 2006. Diluted earnings per share was $0.80, a decrease of $0.09, or 10.1% for the nine months ended September 30, 2007 from $0.89 for the nine months ended September 30, 2006. The return on average assets was 0.71% for the nine months ended September 30, 2007, as compared to 0.89% for the nine months ended September 30, 2006, while the return on average equity was 9.70% for the nine months ended September 30, 2007 and 11.82% for the nine months ended September 30, 2006.


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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 Income.   Total interest and dividend income increased $25.9 million, or 22.5%, to $141.2 million for the nine months ended September 30, 2007 from $115.2 million for the nine months ended September 30, 2006. The increase in interest income is attributed to the growth in the average balance of interest-earning assets, which increased $440.5 million to $2,817.2 million, combined with a 22 basis point increase in the yield of interest-earning assets to 6.68% for the nine months ended September 30, 2007 from 6.46% for the nine months ended September 30, 2006. The increase in the yield of interest-earning assets is primarily due to an increase of $468.0 million in the average balance of the loan portfolio to $2,486.3 million, combined with a $19.1 million decrease in the average balance of the lower-yielding securities portfolios. The yield on the mortgage loan portfolio increased nine basis points to 6.88% for the nine months ended September 30, 2007 from 6.79% for the nine months ended September 30, 2006. This increase is due to the average rate on new loans originated since September 30, 2006 being above the average rate on the loan portfolio during this period. The average note rate on mortgage loans originated since September 30, 2006 was 7.14%. The yield on the mortgage loan portfolio, excluding prepayment penalty income, increased eleven basis points for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. In an effort to increase the yield on interest-earning assets, we continued to fund a portion of the growth in the higher-yielding mortgage loan portfolio through repayments received on the lower-yielding securities portfolio.

Interest Expense.  Interest expense increased $24.0 million, or 37.3%, to $88.4 million for the nine months ended September 30, 2007 from $64.4 million for the nine months ended September 30, 2006. The increase in the cost of interest-bearing liabilities is primarily attributed to the FOMC increasing overnight rates for seventeen consecutive meetings through June 2006. Although the FOMC reduced the overnight rate by 50 basis points in September 2007, the prior increases resulted in an increase in our cost of funds as new deposits were obtained at rates higher than the average rate on existing deposits. Certificates of deposit, savings accounts and money market accounts increased 62 basis points, 79 basis points and 59 basis points, respectively, for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006, resulting in an increase in the cost of deposits of 66 basis points to 4.14% for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. The cost of borrowed funds also increased 30 basis points to 4.97% for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. This was combined with increases in the average balance of certificates of deposit of $194.2 million and borrowed funds of $149.3 million. In addition, the combined average balances of lower-costing savings, money market and NOW accounts increased a total of $100.3 million.

Net Interest Income. For the nine months ended September 30, 2007, net interest income was $52.7 million, an increase of $1.9 million, or 3.8%, from $50.8 million for the nine months ended September 30, 2006. An increase in the average balance of interest-earning assets of $440.5 million, to $2,817.2 million, was partially offset by a decrease in the net interest spread of 33 basis points to 2.28% for the nine months ended September 30, 2007 from 2.61% for the comparable period in 2006. The yield on interest-earning assets increased 22 basis points to 6.68% for the nine months ended September 30, 2007 from 6.46% in the nine months ended September 30, 2006. However, this was more than offset by an increase in the cost of funds of 55 basis points to 4.40% for the nine months ended September 30, 2007 from 3.85% for the comparable prior year period. The net interest margin decreased 36 basis points to 2.49% for the nine months ended September 30, 2007 from 2.85% for the nine months ended September 30, 2006. Excluding prepayment penalty income, the net interest margin would have been 2.36% and 2.69% for the nine month periods ended September 30, 2007 and 2006, respectively.

Provision for Loan Losses.  There was no provision for loan losses for either of the nine-month periods ended September 30, 2007 and 2006. In assessing the adequacy of the Company’s allowance for loan losses, management considers the Company’s historical loss experience, recent trends in losses, collection policies and collection experience, trends in the volume of non-performing loans, changes in the composition and volume of the gross loan portfolio, and local and national economic conditions. In recent years, the Bank has seen a significant improvement in its loss experience. By adherence to its strict underwriting standards the Bank has been able to minimize net losses from impaired loans with net charge-offs of $233,000 for the nine months ended September 30, 2007, compared to net charge-offs of $4,000 for the comparable period in 2006. Although the local economic conditions and real estate values in the past year have seen a slow down and despite the growth in the loan portfolio, primarily in multi-family residential, commercial real estate, one-to-four family mixed-use property mortgage loans, and commercial business loans, no provision for loan losses was deemed necessary for either of the nine-month periods ended September 30, 2007 and 2006. See “-ALLOWANCE FOR LOAN LOSSES”.


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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Non-Interest Income.  Non-interest income increased $3.0 million, or 41.9%, for the nine months ended September 30, 2007 to $10.2 million, as compared to $7.2 million for the nine months ended September 30, 2006. This was primarily attributed to increases of: $0.2 million on BOLI due to the purchase of additional BOLI, $0.7 million in dividends received on FHLB-NY stock, $1.0 million in Other Income, and $1.0 million attributed to changes in fair value of financial assets and financial liabilities carried at fair value under SFAS No. 159.

Non-Interest Expense.  Non-interest expense was $37.9 million for the nine months ended September 30, 2007, an increase of $6.9 million, or 22.3%, from $31.0 million for the nine months ended September 30, 2006. The increase from the comparable prior year period is primarily attributed to increases of: $3.3 million in employee salary and benefit expenses related to additional employees for the additional branches, business banking initiative and the internet banking division, $0.9 million in occupancy and equipment costs primarily related to increased rental expense, $0.6 million in depreciation primarily due to additional locations, $0.6 million in professional services, $0.6 million in data processing expense, and $0.9 million in other operating expenses primarily related to the additional branches and employees. The efficiency ratio was 61.2% and 53.5% for the nine-month periods ended September 30, 2007 and 2006, respectively.

Income before Income Taxes. Income before the provision for income taxes decreased $2.0 million, or 7.4%, to $25.0 million for the nine months ended September 30, 2007 from $27.0 million for the nine months ended September 30, 2006, for the reasons discussed above.

Provision for Income Taxes.  Income tax expense decreased $1.3 million, to $9.1 million, for the nine months ended September 30, 2007 as compared to $10.4 million for the nine months ended September 30, 2006. This decrease was primarily due to lower pre-tax income for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006. The effective tax rate was 36.4% and 38.4% for the nine-month periods ended September 30, 2007 and 2006, respectively. The decrease in the effective tax rate is due to the increased impact of the income from tax preference items.

FINANCIAL CONDITION

Effective January 1, 2007, the Company elected the early adoption of SFAS No. 157 and SFAS No. 159 (see Notes 6 and 7 of Notes to Consolidated Financial Statements). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Upon adoption, the Company selected the fair value measurement option for various pre-existing financial assets and financial liabilities, including mortgage-backed securities with a fair value of $139.4 million, mutual funds with a fair value of $20.6 million, common stock with a fair value of $0.6 million, FHLB borrowings with a fair value of $98.8 million, and junior subordinated debt (commonly known as trust preferred securities) with a fair value of $21.3 million. On a going-forward basis, the Company currently plans to carry the financial assets and financial liabilities which replace the above noted items at fair value, and will evaluate other purchases of investments and acquisition of new debt to determine if they should be carried at cost or fair value. The initial fair value measurement of these items resulted in a reduction of stockholders’ equity of $2.2 million as of January 1, 2007. This one-time charge is comprised of a $5.8 million cumulative-effect adjustment, net of tax, recorded as a reduction of retained earnings, partially offset by a $3.6 million reduction in accumulated other comprehensive loss related to the election of the fair value option for certain investment securities. The Bank’s regulatory capital was reduced $5.4 million as of January 1, 2007 as a result of the adoption of SFAS No. 159. The Company believes that electing the fair value option will enable better management of interest-rate risk, and allow a better reaction to changes in interest rates. During the nine months ended September 30, 2007, the Company elected to measure at fair value junior subordinated debt (commonly know as trust preferred securities) with a face amount of $41.2 million that was issued during June 2007, and $20.6 million that was issued in July 2007.


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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

Assets.   At September 30, 2007, total assets were $3,241.2 million, an increase of $404.6 million, or 14.3%, from $2,836.5 million at December 31, 2006. Total loans, net increased $324.7 million, or 14.0%, during the nine months ended September 30, 2007 to $2,649.4 million from $2,324.7 million at December 31, 2006. At September 30, 2007, loans in process totaled $218.7 million, compared to $274.7 million at September 30, 2006 and $291.9 million at December 31, 2006.

The following table shows loan originations and purchases for the periods indicated. The table excludes loans acquired in the purchase of Atlantic Liberty Financial Corporation on June 30, 2006.

 
For the three months
ended September 30,		 For the nine months
ended September 30,
(In thousands) 2007 2006 2007 2006
Multi-family residential (1) $ 53,632   $ 38,160   $ 167,231   $ 102,819  
Commercial real estate (2)   36,607     39,042     137,313     113,369  
One-to-four family – mixed-use property   37,421     48,293     129,155     114,611  
One-to-four family – residential   9,570     2,350     27,108     8,866  
Construction (3)   12,397     28,374     37,773     59,701  
Commercial business and other loans   32,404     18,343     80,697     55,521  
    Total $ 182,031   $ 174,562   $ 579,277   $ 454,887  
   
(1)
Includes purchases of $8.7 million in the nine months ended September 30, 2007.
 
(2)
Includes purchases of $0.4 million in the nine months ended September 30, 2007, and $3.1 million in the three and nine months ended September 30, 2006.
 
(3)
Includes purchases of $2.0 million in the three and nine months ended September 30, 2006, respectively.
 

As the Bank continues to increase its loan portfolio, management continues to adhere to the Bank’s strict underwriting standards. As a result, the Bank has been able to minimize charge-offs of losses from impaired loans and maintain asset quality. Non-performing assets were $4.8 million at September 30, 2007 compared to $3.1 million at December 31, 2006 and $3.3 million at September 30, 2006. Total non-performing assets as a percentage of total assets was 0.15% at September 30, 2007 compared to 0.11% at December 31, 2006 and 0.12% as of September 30, 2006. The ratio of allowance for loan losses to total non-performing loans was 141.0% at September 30, 2007, compared to 226% at December 31, 2006 and 216% at September 30, 2006.

During the nine months ended September 30, 2007, mortgage-backed securities increased $48.8 million to $337.6 million, while other securities increased $21.6 million to $63.4 million. During September 2007, as a result of the widening spreads seen in the financial markets, the Bank purchased $78.0 million of mortgage-backed securities and $26.1 million of other securities in a series of transactions that were financed with borrowings. The spread, on a tax adjusted basis, between the securities purchased and the borrowings incurred is approximately 200 basis points. While these transactions will reduce the net interest margin, they will increase net interest income. Principal repayments on the securities portfolio during the nine months ended September 30, 2007 were reinvested in higher yielding loans. Other securities primarily consist of securities issued by government agencies and mutual or bond funds that invest in government and government agency securities.

Liabilities.   Total liabilities were $3,012.2 million at September 30, 2007, an increase of $394.1 million, or 15.1%, from December 31, 2006. During the nine months ended September 30, 2007, due to depositors increased $234.6 million to $1,979.0 million, primarily as a result of an increase of $83.4 million in certificates of deposit, of which $40.7 million were new brokered deposits, while core deposits increased $151.2 million. Borrowed funds increased $148.8 million, primarily due to the funds borrowed to purchase the securities noted above. During the third quarter of 2007, the Company issued junior subordinated debt with a face amount of $20.6 million, and called junior subordinated debt with a face amount of $20.6 million that was issued in 2002. This is in addition to the second quarter issuance of junior subordinated debt with a face amount of $41.2 million. The $61.8 million of junior subordinated debt was issued with a weighted average fixed rate of interest for the first five years of 6.96%, and then adjusts quarterly at a weighted average rate equal to three month LIBOR plus 142 basis points. The junior subordinated debt that was called in July adjusted quarterly at a rate equal to three month LIBOR plus 365 basis points. In July 2007, the Company used $30.0 million of the funds obtained from issuing this debt to increase its investment in the Bank, thereby increasing the Bank’s regulatory capital to support further asset growth. In addition, mortgagors’ escrow deposits increased $12.2 million during the nine months ended September 30, 2007.


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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 increased $10.5 million, or 4.8%, to $228.9 million at September 30, 2007 from $218.4 million at December 31, 2006. Net income of $15.9 million for the nine months ended September 30, 2007 was partially offset by a net after tax decrease of $0.1 million on the market value of securities available for sale, $0.6 million in treasury shares purchased through the Company’s stock repurchase program, a $2.2 million charge related to the adoption of SFAS No. 159, and $7.0 million of cash dividends declared and paid during the nine months ended September 30, 2007. The exercise of stock options increased stockholders’ equity by $1.3 million, including the income tax benefit realized by the Company upon the exercise of the options. An adjustment to the purchase price of Atlantic Liberty Financial Corporation, related to stock options, increased stockholders’ equity by $1.3 million. Goodwill was also increased $1.3 million for this adjustment. Book value per share was $10.77 at September 30, 2007, compared to $10.34 per share at December 31, 2006 and $10.19 per share at September 30, 2006.

Under its current stock repurchase program, the Company repurchased 38,000 shares during the nine months ended September 30, 2007, at a total cost of $0.6 million, or an average of $16.52 per share. At September 30, 2007, 362,050 shares remain to be repurchased under the current stock repurchase program. Through September 30, 2007, the Company had repurchased approximately 48% of the common shares issued in connection with the Company’s initial public offering at a cost of $118.6 million.

Cash flow.  During the nine months ended September 30, 2007, funds provided by the Company’s operating activities amounted to $16.2 million. These funds, together with $383.5 million provided by financing activities, were utilized to fund net investing activities of $400.3 million. The Company’s primary business objective is the origination and purchase of one-to-four family (primarily mixed-use properties), multi-family residential and commercial real estate mortgage loans, and commercial, business and SBA loans. During the nine months ended September 30, 2007, the net total of loan originations and purchases less loan repayments and sales was $324.4 million. The Company also purchased $148.0 million of securities classified as available for sale. Funds were provided by an increase of $233.9 million in due to depositors, an increase of $12.2 million in escrow deposits, an increase of $144.2 million in borrowings, and $78.5 million from maturities, prepayments, calls and sales of securities available for sale. Additional funds of $1.1 million were provided through the exercise of stock options. The Company also used funds of $1.1 million for treasury stock repurchases and $7.0 million for dividend payments during the nine months ended September 30, 2007.

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 (shocked) 200 basis points, assuming the yield curves of the rate shocks will be parallel to each other. The OTS currently places its focus on the net portfolio value, focusing on a rate shock up or down of 200 basis points. Net portfolio value is defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to the market value of assets. All changes in income and value are measured as percentage changes from the projected net interest income and net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at September 30, 2007. 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 September 30, 2007, the Company is 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 September 30, 2007.
 
Projected Percentage Change In
  Change in Interest Rate Net Interest
Income		   Net Portfolio
Value		   Net Portfolio
Value Ratio		  
 
 
  -200 Basis points -0.13 %   8.15 %   8.61 %  
  -100 Basis points 1.51     6.38     8.59    
  Base interest rate 0.00     0.00     8.23    
  +100 Basis points -3.34     -8.91     7.66    
  +200 Basis points -8.45     -19.77     6.91    
 

REGULATORY CAPITAL POSITION

Under Office of Thrift Supervision (“OTS”) capital regulations, the Bank is required to comply with each of three separate capital adequacy standards. At September 30, 2007, the Bank exceeded each of the three OTS capital requirements and is categorized as “well-capitalized” by the OTS under the prompt corrective action regulations. Set forth below is a summary of the Bank’s compliance with OTS capital standards as of September 30, 2007.

 
  (Dollars in thousands) Amount Percent of Assets
 
   
  
  Tangible Capital:          
      Capital level $ 236,799     7.38 %  
      Requirement   48,142     1.50    
      Excess   188,657     5.88    
  
  Leverage and Core Capital:              
      Capital level $ 236,799     7.38 %  
      Requirement   96,283     3.00    
      Excess   140,516     4.38    
  
  Risk-Based Capital:              
      Capital level $ 243,623     11.43 %  
      Requirement   170,530     8.00    
      Excess   73,093     3.43    

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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 operations for the three-month periods ended September 30, 2007 and 2006, 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 September 30,  
   
 
    2007   2006  
   
 
 
    Average
Balance
   Interest   Yield/
Cost 		  Average
Balance
   Interest   Yield/
Cost
 
   
 
 
Assets     (Dollars in thousands)  
Interest-earning assets:                      
  Mortgage loans, net (1)   $ 2,495,318   $ 42,795   6.86 % $ 2,115,274   $ 36,212   6.85 %
  Other loans, net (1)     103,112     2,044   7.93     50,309     976   7.76  
      Total loans, net     2,598,430     44,839   6.90     2,165,583     37,188   6.87  
  Mortgage-backed securities     275,833     3,414   4.95     314,101     3,641   4.64  
  Other securities     42,397     585   5.52     37,504     456   4.86  
      Total securities     318,230     3,999   5.03     351,605     4,097   4.66  
  Interest-earning deposits and
    federal funds sold		     13,144     158   4.81     15,219     188   4.94  
Total interest-earning assets     2,929,804     48,996   6.69     2,532,407     41,473   6.55  
Other assets     164,210               142,530            
   
      Total assets   $ 3,094,014             $ 2,674,937            
   
       
Liabilities and Equity                                  
Interest-bearing liabilities:                                  
  Deposits:                                  
    Savings accounts   $ 317,896     2,080   2.62   $ 271,591     1,036   1.53  
    NOW accounts     60,620     274   1.81     46,696     53   0.45  
    Money market accounts     316,390     3,439   4.35     272,213     2,756   4.05  
    Certificate of deposit accounts     1,188,794     14,728   4.96     1,022,438     11,364   4.45  
      Total due to depositors     1,883,700     20,521   4.36     1,612,938     15,209   3.77  
    Mortgagors’ escrow accounts     29,491     22   0.30     26,795     16   0.24  
      Total deposits     1,913,191     20,543   4.30     1,639,733     15,225   3.71  
  Borrowed funds     875,552     11,117   5.08     742,167     9,024   4.86  
      Total interest-bearing liabilities     2,788,743     31,660   4.54     2,381,900     24,249   4.07  
Non interest-bearing deposits     65,017               64,642            
Other liabilities     17,557               20,255            
   
      Total liabilities     2,871,317               2,466,797            
Equity     222,697               208,140            
   
      Total liabilities and equity   $ 3,094,014             $ 2,674,937            
   
Net interest income /
  net interest rate spread		         $ 17,336   2.15 %       $ 17,224   2.48 %
Net interest-earning assets /
  net interest margin		   $ 141,061         2.37 % $ 150,507         2.72 %
 
Ratio of interest-earning assets to
  interest-bearing liabilities		               1.05 X             1.06 X
 
   
(1)
Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $0.8 million and $0.9 million for the three-month periods ended September 30, 2007 and 2006, 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

AVERAGE BALANCES  (continued)

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 operations for the nine-month periods ended September 30, 2007 and 2006, 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 nine months ended September 30,  
   
 
    2007   2006  
   
 
 
    Average
Balance
   Interest   Yield/
Cost 		  Average
Balance
   Interest   Yield/
Cost
 
   
 
 
Assets     (Dollars in thousands)  
Interest-earning assets:                      
  Mortgage loans, net (1)   $ 2,398,690   $ 123,726   6.88 % $ 1,976,021   $ 100,677   6.79 %
  Other loans, net (1)     87,567     5,144   7.83     42,270     2,360   7.44  
      Total loans, net     2,486,257     128,870   6.91     2,018,291     103,037   6.81  
  Mortgage-backed securities     278,959     10,248   4.90     302,382     10,288   4.54  
  Other securities     42,537     1,703   5.34     38,223     1,290   4.50  
      Total securities     321,496     11,951   4.96     340,605     11,578   4.53  
  Interest-earning deposits and
    federal funds sold		     9,415     337   4.77     17,791     616   4.62  
Total interest-earning assets     2,817,168     141,158   6.68     2,376,687     115,231   6.46  
Other assets     162,527               118,218            
   
      Total assets   $ 2,979,695             $ 2,494,905            
   
Liabilities and Equity                                  
Interest-bearing liabilities:                                  
  Deposits:                                  
    Savings accounts   $ 297,416     5,092   2.28   $ 265,901     2,964   1.49  
    NOW accounts     55,303     563   1.36     42,211     151   0.48  
    Money market accounts     280,738     8,771   4.17     225,015     6,048   3.58  
    Certificate of deposit accounts     1,164,183     42,365   4.85     969,994     30,751   4.23  
      Total due to depositors     1,797,640     56,791   4.21     1,503,121     39,914   3.54  
    Mortgagors’ escrow accounts     31,873     60   0.25     28,813     45   0.21  
      Total deposits     1,829,513     56,851   4.14     1,531,934     39,959   3.48  
  Borrowed funds     847,938     31,596   4.97     698,663     24,472   4.67  
      Total interest-bearing liabilities     2,677,451     88,447   4.40     2,230,597     64,431   3.85  
Non interest-bearing deposits     65,425               59,466            
Other liabilities     18,393               17,325            
   
      Total liabilities     2,761,269               2,307,388            
Equity     218,426               187,517            
   
      Total liabilities and equity   $ 2,979,695             $ 2,494,905            
   
Net interest income /
  net interest rate spread		         $ 52,711   2.28 %       $ 50,800   2.61 %
Net interest-earning assets /
  net interest margin		   $ 139,717         2.49 % $ 146,090         2.85 %
 
Ratio of interest-earning assets to
  interest-bearing liabilities		               1.05 X             1.07 X
 
   
(1)
Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $2.8 million and $2.9 million for the three-month periods ended September 30, 2007 and 2006, 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 nine months ended September 30,
(In thousands) 2007 2006
  
Mortgage Loans        
  
At beginning of period $ 2,252,992   $ 1,851,251  
  
Mortgage loans originated:            
    Multi-family residential   158,514     102,819  
    Commercial real estate   136,886     110,282  
    One-to-four family – mixed-use property   129,155     114,611  
    One-to-four family – residential   26,473     8,741  
    Construction   37,773     57,721  
    Co-operative apartments   635     125  
        Total mortgage loans originated   489,436     394,299  
  
Mortgage loans purchased:            
    Multi-family residential   8,717     —  
    Commercial real estate   427     3,087  
    Construction   —     1,980  
    Acquisition of Atlantic Liberty loans   —     129,025  
  
        Total acquired loans   9,144     134,092  
  
Less:            
    Principal and other reductions   204,518     192,856  
    Sales   15,863     16,421  
    Mortgage loan foreclosures   —     —  
  
At end of period $ 2,531,191   $ 2,170,365  
  
Commercial Business and Other Loans            
  
At beginning of period $ 68,420   $ 28,601  
  
Other loans originated:            
    Small Business Administration   9,262     14,941  
    Small business (1)   70,253     39,783  
    Other   1,182     797  
        Total other loans originated   80,697     55,521  
  
Less:            
    Principal and other reductions   33,021     8,980  
    Sales   4,513     7,006  
    Elimination of loan to Atlantic Liberty   —     11,500  
At end of period $ 111,583   $ 56,636  
 

(1)    Includes an $11.5 million loan to Atlantic Liberty prior to the merger in the nine months ended September 30, 2006.


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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-PERFORMING ASSETS

The Company reviews loans in its portfolio on a monthly basis to determine whether any problem loans require classification in accordance with internal policies and applicable regulatory guidelines. The following table sets forth information regarding all non-accrual loans, loans which are 90 days or more delinquent and still accruing interest, and real estate owned at the dates indicated.
 
(Dollars in thousands) September 30, 2007 December 31, 2006
  
Non-accrual mortgage loans $ 3,632   $ 2,914  
Other non-accrual loans   292     212  
          Total non-accrual loans   3,924     3,126  
  
Mortgage loans 90 days or more delinquent
      and still accruing		   753     —  
Other loans 90 days or more delinquent
      and still accruing		   163     —  
          Total non-performing loans   4,840     3,126  
  
Real estate owned (foreclosed real estate)   —     —  
          Total non-performing assets $ 4,840   $ 3,126  
  
Non-performing loans to gross loans   0.18 %   0.13 %
Non-performing loans to total assets   0.15 %   0.11 %

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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

ALLOWANCE FOR LOAN LOSSES

The Bank has established and maintains on its books an allowance for loan losses that is designed to provide a reserve against estimated losses inherent in the Bank’s 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 its loan portfolio and other factors, including historical loan loss experience, changes in the composition and volume of the portfolio, collection policies and experience, trends in the volume of non-accrual loans and regional 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 regional economic conditions and other factors. Management reviews the Bank’s loan portfolio by separate categories with similar risk and collateral characteristics. Impaired loans are segregated and reviewed separately. All non-performing loans are classified impaired. Impaired loans secured by collateral are reviewed based on their collateral and the estimated time to recover the Bank’s investment in the loan, and the estimate of the recovery anticipated. For non-collateralized impaired loans, management estimates any recoveries that are anticipated for each loan. Specific reserves are allocated to impaired loans based on this review. In connection with the determination of the allowance, the market value of collateral ordinarily is evaluated by the Bank’s staff appraiser; however, the Bank may from time to time obtain independent appraisals for significant properties. Current year charge-offs, charge-off trends, new loan production and current balance 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, management also reviews the Bank’s loan portfolio by separate categories which have 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, SBA, commercial business and consumer loans. General provisions are established against performing loans in the Bank’s portfolio in amounts deemed prudent from time to time based on the Bank’s qualitative analysis of the factors, including the historical loss experience and regional economic conditions. Since January 1, 2002, the Bank incurred total net charge-offs of $514,000. This reflects a significant improvement over the loss experience of the 1990s. In addition, the regional economy has improved since 2002, including significant increases in real estate values. The Bank’s underwriting standards generally require a loan-to-value ratio of 75% at a time the loan is originated. Since real estate values have increased significantly since 2002, the loan-to-value ratios for loans originated in prior years have declined below the original 75% level. The rate at which the Bank’s mortgagors have been defaulting on their loans has declined, as the mortgagor’s equity in the property has increased. The Bank has not been affected by the recent increase in defaults on sub-prime mortgages as the Bank does not originate, or hold in portfolio, sub-prime mortgages. As a result, the Bank has not incurred losses on mortgage loans in recent years. As a result of these improvements, and despite the increase in the loan portfolio and shift to loans with greater risk, the Bank did not consider it necessary to provide a provision for loan losses in the nine-month period ended September 30, 2007. Management has concluded that the allowance is sufficient to absorb losses inherent in the loan portfolio.


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PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

The following table sets forth the activity in the Bank’s allowance for loan losses for the periods indicated.

 
For the nine months ended September 30,
(Dollars in thousands) 2007 2006
Balance at beginning of period   $ 7,057   $ 6,385  
  
Acquisition of Atlantic Liberty allowance     —     753  
  
Provision for loan losses     —     —  
  
Loans charged-off:  
    Multi-family residential     —     —  
    Commercial real estate     —     —  
    One-to-four family – mixed-use property     —     —  
    One-to-four family – residential     —     —  
    Co-operative apartments     —     —  
    Construction     —     —  
    SBA     (271 )
    Commercial business and other loans     (2 )   (14 )
 
        Total loans charged-off     (273 )   (14 )
 
  
Recoveries:  
    Mortgage loans     29     2  
   SBA, commercial business and other loans     11     8  
 
        Total recoveries     40     10  
 
Net charge-offs     (233 )   (4 )
 
Balance at end of period   $ 6,824   $ 7,134  
 
  
Ratio of net charge-offs during the period to  
   average loans outstanding during the period     0.01 %   — %
Ratio of allowance for loan losses to loans at end of period     0.26 %   0.32 %
Ratio of allowance for loan losses to non-performing  
   assets at end of period     141.00 %   216.19 %
Ratio of allowance for loan losses to non-performing  
   loans at end of period     141.00 %   216.19 %

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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 September 30, 2007, 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.

PART II – OTHER INFORMATION

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 Form 10-K for the year ended December 31, 2006.

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 quarter ended September 30, 2007.

 
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
July 1 to July 31, 2007     38   $ 15.92     —     362,050  
August 1 to August 31, 2007     —     —     —     362,050  
September 1 to September 30, 2007     —     —     —     362,050  
 
 
     
     Total     38   $ 15.92     —  
 
 
 
     
   

The current common stock repurchase program was approved by the Company’s Board of Directors on August 17, 2004 and authorized the repurchase of 1,000,000 common shares. The repurchase program does not have an expiration date or a maximum dollar amount that may be paid to repurchase the common shares.

Amounts shown in the above column titled “Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs” do not reflect shares which may be repurchased from employees to satisfy tax withholding obligations under equity compensation plans. During the quarter ended September 30, 2007, the Company purchased 38 common shares from employees, at an average cost of $15.92 to satisfy tax obligations due from the employees upon vesting of restricted stock awards.


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PART II – OTHER INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

ITEM 5.     OTHER INFORMATION.

Not applicable.


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PART II – OTHER INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

ITEM 6.     EXHIBITS.

 
Exhibit No.   Description
  3.1   Certificate of Incorporation of Flushing Financial Corporation (1)
       
  3.2  
Certificate of Amendment of Certificate of Incorporation of Flushing Financial Corporation (3)
       
  3.3  
Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
       
  3.4  
Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
       
  3.5   By-Laws of Flushing Financial Corporation (1)
       
  4.1  
Rights Agreement, dated as of September 8, 2006, between Flushing Financial Corporation and State Street Bank and Trust Company, as Rights Agent (2)
       
  10.1   Retirement and Consulting Agreement of Robert Callicutt, dated January 24, 2007. (5)
       
  10.2  
Flushing Financial Corporation Annual Incentive Plan for Executive and Senior Officers. (6)
       
  31.1  
       
  31.2  
       
  32.1  
       
  32.2  
       
(1)
Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1, Registration No. 33-96488.
   
(2) Incorporated by reference to Exhibits filed with Form 8-K filed September 21, 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 January 29, 2007.
   
(6) Incorporated by reference to Exhibit filed with Form 8-K filed March 1, 2007.

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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: November 9, 2007 By: /s/John R. Buran
   
  John R. Buran
  President and Chief Executive Officer
     
     
Dated: November 9, 2007 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
  3.1   Certificate of Incorporation of Flushing Financial Corporation (1)
       
  3.2  
Certificate of Amendment of Certificate of Incorporation of Flushing Financial Corporation (3)
       
  3.3  
Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
       
  3.4  
Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
       
  3.5   By-Laws of Flushing Financial Corporation (1)
       
  4.1  
Rights Agreement, dated as of September 8, 2006, between Flushing Financial Corporation and State Street Bank and Trust Company, as Rights Agent (2)
       
  10.1  
Retirement and Consulting Agreement of Robert Callicutt, dated January 24, 2007. (5)
       
  10.2  
Flushing Financial Corporation Annual Incentive Plan for Executive and Senior Officers. (6)
       
  31.1  
       
  31.2  
       
  32.1  
       
  32.2  
       
(1)
Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1, Registration No. 33-96488.
   
(2) Incorporated by reference to Exhibits filed with Form 8-K filed September 21, 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 January 29, 2007.
   
(6) Incorporated by reference to Exhibit filed with Form 8-K filed March 1, 2007.

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