Edgar Filing: FLUSHING FINANCIAL CORP

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

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

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

Large accelerated filer o

Non-accelerated filer o

Accelerated filer x

Smaller reporting company 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 July 31, 2009 was 21,796,754

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

TABLE OF CONTENTS

	PAGE
PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

Consolidated Statements of Financial Condition	1

Consolidated Statements of Income	2

Consolidated Statements of Cash Flows	3

Consolidated Statement of Changes in Stockholders’ Equity and Consolidated Statements of Comprehensive Income	4

Notes to Consolidated Financial Statements	6

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	43

ITEM 4. Controls and Procedures	43

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings	43

ITEM 1A. Risk Factors	43

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	43

ITEM 4. Submission of Matters to a Vote of Security Holders	44

ITEM 6. Exhibits	45

SIGNATURES	46

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

ITEM 1.

	June 30,			December 31,
	2009			2008
ASSETS	(Unaudited)
Cash and due from banks	$	45,054		$	30,404
Securities available for sale:
Mortgage-backed securities ($110,287 and $110,833 at fair value pursuant to the fair value option at June 30, 2009 and December 31, 2008, respectively)		683,701			674,764
Other securities ($17,328 and $28,688 at fair value pursuant to the fair value option at June 30, 2009 and December 31, 2008, respectively)		40,797			72,497
Loans:
Multi-family residential		1,067,067			999,185
Commercial real estate		779,194			752,120
One-to-four family ― mixed-use property		745,205			751,952
One-to-four family ― residential		241,295			238,711
Co-operative apartments		6,445			6,566
Construction		102,810			103,626
Small business administration		18,712			19,671
Taxi medallion		45,713			12,979
Commercial business and other		75,421			69,759
Net unamortized premiums and unearned loan fees		17,098			17,121
Allowance for loan losses		(14,427	)		(11,028	)
Net loans		3,084,533			2,960,662
Interest and dividends receivable		19,084			18,473
Bank premises and equipment, net		22,851			22,806
Federal Home Loan Bank of New York stock		44,979			47,665
Bank owned life insurance		58,702			57,499
Goodwill		16,127			16,127
Core deposit intangible		2,108			2,342
Other assets		45,643			46,232
Total assets	$	4,063,579		$	3,949,471

LIABILITIES
Due to depositors:
Non-interest bearing	$	87,025		$	69,624
Interest-bearing:
Certificate of deposit accounts		1,449,110			1,436,450
Savings accounts		435,802			359,595
Money market accounts		327,324			306,178
NOW accounts		352,273			265,762
Total interest-bearing deposits		2,564,509			2,367,985
Mortgagors' escrow deposits		29,439			31,225
Borrowed funds ($107,492 and $107,689 at fair value pursuant to the fair value option at June 30, 2009 and December 31, 2008, respectively)		827,688			916,292
Securities sold under agreements to repurchase ($25,268 and $25,757 at fair value pursuant to the fair value option at June 30, 2009 and December 31, 2008, respectively)		212,168			222,657
Other liabilities		30,701			40,196
Total liabilities		3,751,530			3,647,979

STOCKHOLDERS' EQUITY
Preferred stock ($0.01 par value; 5,000,000 shares authorized; 70,000 shares issued at June 30, 2009 and December 31, 2008, respectively liquidation preference value of $70,000)		1			1
Common stock ($0.01 par value; 40,000,000 shares authorized; 21,801,049 shares and 21,625,709 shares issued at June 30, 2009 and December 31, 2008, respectively; 21,796,604 shares and 21,625,709 shares outstanding at June 30, 2009 and December 31, 2008, respectively)		218			216
Additional paid-in capital		153,009			150,662
Treasury stock (4,445 shares and none at June 30, 2009 and December 31, 2008, respectively)		(48	)		-
Unearned compensation		(935	)		(1,300	)
Retained earnings		176,674			172,216
Accumulated other comprehensive loss, net of taxes		(16,870	)		(20,303	)
Total stockholders' equity		312,049			301,492

Total liabilities and stockholders' equity	$	4,063,579		$	3,949,471

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

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

	For the three months ended June 30,						For the six months ended June 30,
(Dollars in thousands, except per share data)	2009			2008			2009			2008
Interest and dividend income
Interest and fees on loans	$	48,851		$	47,166		$	96,227		$	94,477
Interest and dividends on securities:
Interest		8,972			5,081			18,309			10,036
Dividends		366			936			778			1,800
Other interest income		14			179			57			476
Total interest and dividend income		58,203			53,362			115,371			106,789

Interest expense
Deposits		16,929			18,356			35,756			37,988
Other interest expense		12,353			12,913			24,638			25,993
Total interest expense		29,282			31,269			60,394			63,981

Net interest income		28,921			22,093			54,977			42,808
Provision for loan losses		5,000			300			9,500			600
Net interest income after provision for loan losses		23,921			21,793			45,477			42,208

Non-interest income
Other-than-temporary impairment ("OTTI") charge		(9,637	)		-			(9,637	)		-
Less: Non-credit portion of OTTI charge recorded in Other Comprehensive Income, before taxes		8,497			-			8,497			-
Net OTTI charge recognized in earnings		(1,140	)		-			(1,140	)		-
Loan fee income		513			698			930			1,396
Banking services fee income		421			396			867			838
Net gain on sale of loans held for sale		-			-			-			31
Net gain on sale of loans		-			47			-			69
Net gain on sale of securities		23			-			23			-
Net gain (loss) from fair value adjustments		703			(339	)		3,052			(1,941	)
Federal Home Loan Bank of New York stock dividends		610			854			956			1,735
Bank owned life insurance		604			549			1,203			1,103
Other income		627			536			1,150			3,482
Total non-interest income		2,361			2,741			7,041			6,713

Non-interest expense
Salaries and employee benefits		7,396			6,827			14,867			13,281
Occupancy and equipment		1,624			1,585			3,398			3,221
Professional services		1,547			1,386			3,202			2,769
FDIC deposit insurance		3,220			311			4,197			566
Data processing		1,083			928			2,172			1,973
Depreciation and amortization of premises and equipment		682			597			1,304			1,191
Other operating expenses		2,170			2,690			4,574			4,540
Total non-interest expense		17,722			14,324			33,714			27,541

Income before income taxes		8,560			10,210			18,804			21,380

Provision for income taxes
Federal		1,203			2,931			4,298			6,095
State and local		2,195			780			3,035			1,635
Total taxes		3,398			3,711			7,333			7,730

Net income	$	5,162		$	6,499		$	11,471		$	13,650

Preferred dividends and amortization of issuance costs	$	951		$	-		$	1,903		$	-
Net income available to common shareholders	$	4,211		$	6,499		$	9,568		$	13,650

Basic earnings per common share	$	0.20		$	0.32		$	0.46		$	0.68
Diluted earnings per common share	$	0.20		$	0.32		$	0.46		$	0.67
Dividends per common share	$	0.13		$	0.13		$	0.26		$	0.26

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

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	For the six months ended June 30,
(Dollars in thousands)	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	11,471		$	13,650
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		9,500			600
Depreciation and amortization of bank premises and equipment		1,304			1,191
Origination of loans held for sale		-			(658	)
Proceeds from sale of loans held for sale		-			686
Net gain on sale of loans held for sale		-			(31	)
Net gain on sales of loans		-			(69	)
Net gain on sale of securities		(23	)		-
Amortization of premium, net of accretion of discount		2,030			859
Fair value adjustment for financial assets and financial liabilities		(3,052	)		1,941
OTTI charge recognized in earnings		1,140			-
Income from bank owned life insurance		(1,203	)		(1,103	)
Stock-based compensation expense		1,203			1,450
Deferred compensation		(28	)		(508	)
Amortization of core deposit intangibles		234			234
Excess tax expense (benefits) from stock-based payment arrangements		202			(659	)
Deferred income tax (benefit) provision		9,866			(711	)
Decrease (increase) in other liabilities		1,234			(998	)
Increase in other assets		(11,654	)		(2,038	)
Net cash provided by operating activities		22,224			13,836

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(1,349	)		(608	)
Net (purchases) redemptions of Federal Home Loan Bank of New York shares		2,686			(2,450	)
Purchases of securities available for sale		(102,807	)		(54,219	)
Proceeds from sales and calls of securities available for sale		13,956			-
Proceeds from maturities and prepayments of securities available for sale		107,916			28,538
Net originations and repayment of loans		(101,163	)		(92,629	)
Purchases of loans		(35,422	)		(65,253	)
Proceeds from sale of delinquent loans		1,926			8,798
Net cash used in investing activities		(114,257	)		(177,823	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		17,401			4,684
Net increase in interest-bearing deposits		196,099			147,936
Net increase (decrease) in mortgagors' escrow deposits		(1,786	)		5,177
Net repayments of short-term borrowed funds		(28,300	)		-
Proceeds from long-term borrowings		69,911			144,923
Repayment of long-term borrowings		(140,017	)		(107,018	)
Purchases of treasury stock		(231	)		(400	)
Excess tax benefits from stock-based payment arrangements		(202	)		659
Proceeds from issuance of common stock upon exercise of stock options		617			2,075
Cash dividends paid		(6,809	)		(5,166	)
Net cash provided by financing activities		106,683			192,870

Net increase in cash and cash equivalents		14,650			28,883
Cash and cash equivalents, beginning of period		30,404			36,148
Cash and cash equivalents, end of period	$	45,054		$	65,031

SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	60,956		$	61,831
Income taxes paid		9,590			9,095
Taxes paid if excess tax benefits were not tax deductible		9,388			9,754
Non-cash activities:
Securities purchased, not yet settled		-			20,288
Securities sold, not yet settled		148			-
Additions to real estate owned		411			-

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity and Consolidated Statements of Comprehensive Income

(Unaudited)

	For the six months ended June 30,
(Dollars in thousands)	2009			2008

Preferred Stock
Balance, beginning of period	$	1		$	-
No activity		-			-
Balance, end of period	$	1		$	-
Common Stock
Balance, beginning of period	$	216		$	213
Issuance upon exercise of stock options (96,742 and 183,298 common shares for the six months ended June 30, 2009 and 2008, respectively)		1			2
Shares issued upon vesting of restricted stock unit awards (78,598 and 85,335 common shares for the six months ended June 30, 2009 and 2008, respectively)		1			1
Balance, end of period	$	218		$	216
Additional Paid-In Capital
Balance, beginning of period	$	150,662		$	74,861
Additional preferred stock issuance costs		(144	)		-
Amortization of preferred stock issuance costs		152			-
Award of common shares released from Employee Benefit Trust (161,999 and 80,717common shares for the six months ended June 30, 2009 and 2008, respectively)		827			825
Shares issued upon vesting of restricted stock unit awards (95,534 and 87,825 common shares for the six months ended June 30, 2009 and 2008, respectively)		1,511			2,114
Issuance upon exercise of stock options (96,742 and 183,298 common shares for the six months ended June 30, 2009 and 2008, respectively)		669			1,440
Stock-based compensation activity, net		(466	)		(353	)
Stock-based income tax benefit (expense)		(202	)		659
Balance, end of period	$	153,009		$	79,546
Treasury Stock
Balance, beginning of period	$	-		$	-
Shares issued upon vesting of restricted stock unit awards (16,936 and 13,565 common shares for the six months ended June 30, 2009 and 2008, respectively)		177			253
Issuance upon exercise of stock options (25,558 and 4,000 common shares for the six months ended June 30, 2009 and 2008, respectively)		258			67
Repurchase of shares to satisfy tax obligations (22,091 and 21,783common shares for the six months ended June 30, 2009 and 2008, respectively)		(231	)		(400	)
Purchase of shares to pay for option exercise (24,848 common shares for the six months ended June 30, 2009)		(252	)		-
Balance, end of period	$	(48	)	$	(80	)
Unearned Compensation
Balance, beginning of period	$	(1,300	)	$	(2,110	)
Release of shares from the Employee Benefit Trust (106,479 and 119,005 common shares for the six months ended June 30, 2009 and 2008, respectively)		365			406
Balance, end of period	$	(935	)	$	(1,704	)

Continued

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity and Consolidated Statements of Comprehensive Income (continued)

(Unaudited)

	For the six months ended
	June 30,
(Dollars in thousands)	2009			2008

Retained Earnings
Balance, beginning of period	$	172,216		$	161,598
Net income		11,471			13,650
Cash dividends declared and paid on common shares ($0.26 per common share for the six months ended June 30, 2009 and 2008, respectively)		(5,388	)		(5,166	)
Cash dividends declared and paid on preferred shares (5.00% cumulative preferred dividends for the six months ended June 30, 2009)		(1,421	)		-
Issuance upon exercise of stock options (25,558 and 4,000 common shares for the six months ended June 30, 2009 and 2008, respectively)		(52	)		(20	)
Shares issued upon vesting of restricted stock unit awards (11,075 common shares for the six months ended June 30, 2008)		-			(33	)
Cumulative adjustment related to the adoption of Emerging Issues Task Force Issue
Issue No. 06-4, net of taxes of approximately $449		-			(569	)
Effects of changing the pension plan measurement date pursuant to SFAS No. 158:
Service cost, interest cost, and expected return on plan assets for October 1 - December 31, 2007, net of taxes of approximately $13		-			(17	)
Amortization of actuarial gains (losses) for October 1 - December 31, 2007,net of taxes of approximately $7		-			(9	)
Amortization of prior service costs for October 1 - December 31, 2007, net of taxes of approximately $3		-			(4	)
Amortization of preferred stock issuance costs		(152	)		-
Balance, end of period	$	176,674		$	169,430
Accumulated Other Comprehensive Loss
Balance, beginning of period	$	(20,303	)	$	(908	)
Change in net unrealized gain (loss) on securities available for sale, net of taxes of approximately ($2,728) and $2,546 for the six months ended June 30, 2009and 2008, respectively		2,715			(6,977	)
Amortization of actuarial losses, net of taxes of approximately ($68) and ($14)for the six months ended June 30, 2009 and 2008, respectively		85			18
Amortization of prior service costs, net of taxes of approximately ($10) and ($6)for the six months ended June 30, 2009 and 2008, respectively		13			7
Effects of changing the pension plan measurement date pursuant to SFAS No. 158:
Amortization of actuarial gains (losses) for October 1 - December 31, 2007,net of taxes of approximately ($7)		-			9
Amortization of prior service costs for October 1 - December 31, 2007,net of taxes of approximately ($3)		-			4
OTTI charges included in income, net of taxes of approximately ($507) for the six months ended June 30, 2009		633			-
Reclassification adjustment for gains included in net income, net of taxes of approximately $10 for the six months ended June 30, 2009		(13	)		-
Balance, end of period	$	(16,870	)	$	(7,847	)
Total Stockholders' Equity	$	312,049		$	239,561

	For the three months ended						For the six months ended
	June 30,						June 30,
	2009			2008			2009		2008
Comprehensive Income
Net income	$	5,162		$	6,499		$	11,471	$	13,650
Other comprehensive income, net of tax
Amortization of actuarial losses		43			9			85		18
Amortization of prior service costs		6			3			13		7
OTTI charges included in income		633			-			633		-
Unrealized gains (losses) on securities		(354	)		(3,301	)		2,702		(6,977	)
Comprehensive income	$	5,490		$	3,210		$	14,904	$	6,698

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

1.	Basis of Presentation

The primary business of Flushing Financial Corporation (the “Holding Company”) is the operation of its wholly-owned subsidiary, Flushing Savings Bank, FSB (the “Bank”). The unaudited 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 accompanying unaudited consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for such presented periods of Flushing Financial Corporation and Subsidiaries (the “Company”). Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. All inter-company balances and transactions have been eliminated in consolidation. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year.

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated interim financial information should be read in conjunction with the Company’s 2008 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 disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

3.	Earnings Per Share

Earnings per share are computed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.” Effective January 1, 2009, on a retrospective basis, SFAS No. 128 was amended by the Financial Accounting Standards Board (“FASB”) with FASB Staff Position (“FSP”) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Basic earnings per common share is computed by dividing net income available to common shareholders by the total weighted average number of common shares outstanding, which includes unvested participating securities. The Company’s restricted stock and restricted stock unit awards are considered participating securities. Therefore, weighted average common shares outstanding used for computing basic earnings per common share includes common shares outstanding plus unvested restricted stock and restricted stock unit awards. Earnings per share for the three and six months ended June 30, 2008 have been retrospectively adjusted to reflect the effects of FSP EITF 03-6-1. The computation of diluted earnings per share includes the additional dilutive effect of stock options outstanding during the period. Common stock equivalents that are anti-dilutive are not included in the computation of diluted earnings per common share. The numerator for calculating basic and diluted earnings per common share is net income available to common shareholders.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	For the three months ended						For the six months ended
	June 30,						June 30,
	2009			2008			2009			2008
	(In thousands, except per share data)
Net income, as reported	$	5,162		$	6,499		$	11,471		$	13,650
Preferred dividends and amortization of issuance costs		(951	)		-			(1,903	)		-
Net income available to common shareholders	$	4,211		$	6,499		$	9,568		$	13,650
Divided by:
Weighted average common shares outstanding		20,718			20,142			20,654			20,065
Weighted average common stock equivalents		-			235			4			197
Total weighted average common shares outstanding and common stock equivalents		20,718			20,377			20,658			20,262

Basic earnings per common share	$	0.20		$	0.32		$	0.46		$	0.68
Diluted earnings per common share (1)(2)	$	0.20		$	0.32		$	0.46		$	0.67
Dividend payout ratio		65.0	%		40.6	%		56.5	%		38.2	%

(1)

Common stock equivalents that are anti-dilutive are not included in the computation of diluted earnings per share. A Warrant to purchase 751,611 shares at an exercise price of $13.97 is not included in the computation of diluted earnings per common share for the three months ended June 30, 2009. For the three months ended June 30, 2009, options to purchase 1,422,673 shares at an average exercise price of $14.31 were not included in the computation of diluted earnings per common share. For the three months ended June 30, 2008, options to purchase 113,850 shares at an average exercise price of $19.55 were not included in the computation of diluted earnings per common share.

(2)

A Warrant to purchase 751,611 shares at an exercise price of $13.97 is not included in the computation of diluted earnings per common share for the six months ended June 30, 2009. For the six months ended June 30, 2009, options to purchase 1,422,673 shares at an average exercise price of $14.31 were not included in the computation of diluted earnings per common share. For the six months ended June 30, 2008, options to purchase 338,025 shares at an average exercise price of $18.36 were not included in the computation of diluted earnings per common share.

4.	Debt and Equity Securities

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” The FSP amends the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in financial statements. The FSP replaces the existing requirement that an entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert that it does not have the intent to sell the security and it is more likely than not it will not have to sell the security before recovery of its cost basis. The FSP requires an entity to recognize impairment losses on a debt security attributed to credit in income, and to recognize noncredit impairment losses in accumulated other comprehensive income. This requirement applies to debt securities held to maturity as well as debt securities held as available for sale. Upon adoption of this FSP, an entity will be required to record a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-than-temporary impairment (“OTTI”) from retained earnings to accumulated other comprehensive income if the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery.

The Company adopted FSP FAS 115-2 and FAS 124-2 effective April 1, 2009. As a result of adopting this FSP, the Company’s OTTI charges recorded in earnings were reduced, and income before income taxes was increased, by $8.5 million for the three months ended June 30, 2009. Adoption of this FSP did not require a cumulative-effect adjustment in the financial statements.

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Notes to Consolidated Financial Statements

(Unaudited)

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

All of the Company’s securities at June 30, 2009 and December 31, 2008 were classified as available for sale.

The amortized cost and fair value of the Company’s securities classified as available for sale at June 30, 2009 are as follows:

					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
U.S. government agencies	$	3,652	$	3,726	$	74	$	-
Other		35,893		29,608		270		6,555
Mutual funds		7,463		7,463		-		-
Total other securities		47,008		40,797		344		6,555
REMIC and CMO		363,988		341,404		6,961		29,545
GNMA		143,349		146,097		2,750		2
FNMA		149,056		152,964		3,908		-
FHLMC		42,443		43,236		793		-
Total mortgage-backed securities		698,836		683,701		14,412		29,547
Total securities available for sale	$	745,844	$	724,498	$	14,756	$	36,102

Included in gross unrealized losses in the above table is an OTTI loss of $8.5 million on one private issue collateralized mortgage obligation, which represents the non-credit portion of the security’s overall impairment.

The amortized cost and fair value of the Company’s securities classified as available for sale at December 31, 2008 are as follows:

					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
U.S. government agencies	$	12,616	$	12,658	$	42	$	-
Other		46,623		40,725		169		6,067
Mutual funds		19,114		19,114		-		-
Total other securities		78,353		72,497		211		6,067
REMIC and CMO		330,767		304,511		3,386		29,642
GNMA		152,350		154,553		2,270		67
FNMA		165,375		167,592		2,341		124
FHLMC		47,815		48,108		293		-
Total mortgage-backed securities		696,307		674,764		8,290		29,833
Total securities available for sale	$	774,660	$	747,261	$	8,501	$	35,900

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Notes to Consolidated Financial Statements

(Unaudited)

The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2009:

	Total				Less than 12 months				12 months or more
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)
Other	$	7,251	$	6,555	$	414	$	90	$	6,837	$	6,465
Total other securities		7,251		6,555		414		90		6,837		6,465
REMIC and CMO		64,186		29,545		14,328		69		49,858		29,476
GNMA		9,688		2		9,688		2		-		-
Total mortgage-backed securities		73,874		29,547		24,016		71		49,858		29,476
Total securities available for sale	$	81,125	$	36,102	$	24,430	$	161	$	56,695	$	35,941

Included in the above table under unrealized losses of 12 months or more is an OTTI loss of $8.5 million on one private issue collateralized mortgage obligation, which represents the non-credit portion of the security’s overall impairment.

The Company conducts reviews of each investment that has an unrealized loss. An unrealized loss exists when the current fair value of an investment is less than its amortized cost basis. Unrealized losses on available for sale securities that are deemed to be temporary are recorded, net of tax, in accumulated other comprehensive loss. Unrealized losses that are considered to be other-than-temporary are split between credit related and non-credit related impairments, with the credit related impairment being recorded as a charge against earnings in the Consolidated Statement of Income and the non-credit impairment being recorded in accumulated other comprehensive income, net of tax. During the quarter ended June 30, 2009 the Company recorded an OTTI charge on one privately issued collateralized mortgage obligation of $9.6 million before tax, of which $1.1 million was charged against earnings in the Consolidated Statement of Income and $8.5 million before tax ($4.7 million after-tax) was recorded in Accumulated Other Comprehensive Loss.

The unrealized losses in Other securities at June 30, 2009 were caused by market interest volatility, a significant widening of credit spreads across markets for these securities, and illiquidity and uncertainty in the financial markets. These securities consist of two single issuer trust preferred securities and three pooled trust preferred issues. The Company evaluates these securities using an impairment model that is applied to debt securities. This review included evaluating the financial condition of each counter party. Each of these securities is performing according to its terms, and, in the opinion of management, will continue to perform according to their terms. The Company does not have the intent to sell these securities and does not anticipate that these securities will be required to be sold before recovery of full principal and interest due, which may be at maturity. Therefore the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2009.

The unrealized losses in REMIC and CMO securities at June 30, 2009 were caused by market interest volatility, a significant widening of credit spreads across markets for these securities, and illiquidity and uncertainty in the financial markets. These securities consist of one issue from FHLMC, one issue from FNMA and 10 private issues.

The unrealized losses on the REMIC and CMO securities issued by FHLMC and FNMA were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms, and, in the opinion of management, will continue to perform according to their terms. The Company does not have the intent to sell these securities and does not anticipate that these securities will be required to be sold before recovery of full principal and interest due, which may be at maturity. Therefore the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2009.

The unrealized losses on REMIC and CMO securities issued by private issuers were caused by movements in interest rates, a significant widening of credit spreads across markets for these securities, and illiquidity and uncertainty in the financial markets. Each of these securities has some level of credit enhancements, and none are collateralized by sub-prime loans. Management periodically reviews the characteristics of these securities, including

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Notes to Consolidated Financial Statements

(Unaudited)

delinquency and foreclosure levels, projected losses at various loss severity levels, and credit enhancement and coverage. Based on these reviews, an OTTI charge was recorded on one privately issued collateralized mortgage obligation of $9.6 million before tax, of which $1.1 million was charged against earnings in the Consolidated Statement of Income and $8.5 million before tax ($4.7 million after-tax) was recorded in Accumulated Other Comprehensive Loss.

The portion of the above mentioned OTTI that was related to credit losses was calculated using a discounted cash flow model. Significant assumptions used to calculate the credit related impairment were a default rate of 10% for the first 12 months, 8% for the next twelve months, 6% for the next twelve months, and 2% thereafter, a loss severity of 40% of the principal, and a prepayment speed of 10%.

It is not anticipated at this time that the other nine securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms, and, in the opinion of management, except for the above mentioned security that the OTTI charge was recorded on, will continue to perform according to their terms. The Company does not have the intent to sell these securities and does not anticipate that these securities will be required to be sold before recovery of full principal and interest due, which may be at maturity. Therefore the Company did not consider the other nine investments to be other-than-temporarily impaired at June 30, 2009.

The unrealized loss on GNMA (one security) mortgage-backed securities was caused by movements in interest rates. It is not anticipated that this security would be settled at a price that is less than the amortized cost of the Company’s investment. This security is performing according to its terms, and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and does not anticipate that these securities will be required to be sold before recovery of full principal and interest due, which may be at maturity. Therefore the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2009.

	Total				Less than 12 months				12 months or more
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)
Other	$	7,733	$	6,067	$	7,733	$	6,067	$	-	$	-
Total other securities		7,733		6,067		7,733		6,067		-		-
REMIC and CMO		92,659		29,642		74,970		19,475		17,689		10,167
GNMA		12,187		67		12,187		67		-		-
FNMA		17,151		124		9,999		101		7,152		23
Total mortgage-backed securities		121,997		29,833		97,156		19,643		24,841		10,190
Total securities available for sale	$	129,730	$	35,900	$	104,889	$	25,710	$	24,841	$	10,190

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Notes to Consolidated Financial Statements

(Unaudited)

The following table represents a rollforward of the activity related to the credit loss component recognized in earnings on debt securities held by the Company for which a portion of OTTI was recognized in other comprehensive loss for the three months ended June 30, 2009:

(in thousands)
Balance at April 1, 2009	$	-

OTTI charges due to credit loss recorded in earnings		1,140
Securities sold during the period		-
Securities where there is an intent to sell or requirement to sell		-
Balance at June 30, 2009	$	1,140

The amortized cost and estimated fair value of the Company’s securities, classified as available for sale at June 30, 2009, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized
	Cost		Fair Value
	(In thousands)

Due in one year or less	$	14,519	$	14,534
Due after one year through five years		6,132		6,206
Due after five years through ten years		-		-
Due after ten years		26,357		20,057

Total other securities		47,008		40,797
Mortgage-backed securities		698,836		683,701

Total securities available for sale	$	745,844	$	724,498

The amortized cost and estimated fair value of the Company’s securities, classified as available for sale at December 31, 2008, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized
	Cost		Fair Value
	(In thousands)

Due in one year or less	$	36,766	$	36,924
Due after one year through five years		11,220		11,258
Due after five years through ten years		8,654		8,668
Due after ten years		21,713		15,647

Total other securities		78,353		72,497
Mortgage-backed securities		696,307		674,764

Total securities available for sale	$	774,660	$	747,261

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Notes to Consolidated Financial Statements

(Unaudited)

Loans

Loans are reported at their principal outstanding balance net of any unearned income, charge-offs, deferred loan fees and costs on originated loans and unamortized premiums or discounts on purchased loans. Interest on loans is recognized on the accrual basis. The accrual of income on loans is discontinued when certain factors, such as contractual delinquency of ninety days or more, indicate reasonable doubt as to the timely collectability of such income. Uncollected interest previously recognized on non-accrual loans is reversed from interest income at the time the loan is placed on non-accrual status. A non-accrual loan can be returned to accrual status after the loan meets certain criteria. Subsequent cash payments received on non-accrual loans that do not meet the criteria are applied first as a reduction of principal until all principal is recovered and then subsequently to interest. Loan fees and certain loan origination costs are deferred. Net loan origination costs and premiums or discounts on loans purchased are amortized into interest income over the contractual life of the loans using the level-yield method. Prepayment penalties received on loans which pay in full prior to their scheduled maturity are included in interest income.

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

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Increases and decreases in the allowance other than charge-offs and recoveries are included in the provision for loan losses. When a loan or a portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance, and subsequent recoveries, if any, are credited to the allowance. During the three months ended June 30, 2009 and 2008, the Bank recorded net loan charge-offs of $5.9 million and $0.2 million, respectively. During the six months ended June 30, 2009 and 2008, the Bank recorded net loan charge-offs of $6.1 million and $0.3 million, respectively.

The total amount of non-performing loans increased $20.9 million during the six months ended June 30, 2009 to $60.9 million from $40.0 million at December 31, 2008. The Company recorded a provision for loan losses of $9.5 million during the six months ended June 30, 2009, which was an $8.9 million increase from the $0.6 million provision recorded during the six months ended June 30, 2008. The increase in the provision for loan losses during the six months ended June 30, 2009 as compared to the six months ended June 30, 2008 reflects the increase in non-performing loans and net loan charge-offs experienced during the six months ended June 30, 2009.

6.	Stock-Based Compensation

In accordance with SFAS No. 123R, “Share-based Payments,” the Company estimates the fair value of stock options awarded on the date of grant using the Black Scholes valuation model. Under the Black Scholes valuation model, key assumptions are used to estimate the fair value of stock options including 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 months ended June 30, 2008, there were 80,100 stock options and 128,070 restricted stock units granted. For the six months ended June 30, 2009, there were 118,100 stock options and 124,350 restricted stock units granted while for the six months ended June 30, 2008, there were 88,100 stock options and 128,570 restricted stock units granted. There were no stock options or restricted stock units granted during the three months ended June 30, 2009.

For the three months ended June 30, 2009 and 2008, the Company’s net income, as reported, includes $0.6 million and $1.1 million, respectively, of stock-based compensation costs and $0.2 million and $0.4 million, respectively, of income tax benefits related to the stock-based compensations plans. For the six months ended June 30, 2009 and 2008, the Company’s net income, as reported, includes $1.2 million and $1.5 million, respectively, of stock-based compensation costs and $0.4 million and $0.5 million, respectively, of income tax benefits related to the stock-based compensations plans.

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Notes to Consolidated Financial Statements

(Unaudited)

The following are the significant weighted assumptions relating to the valuation of the Company’s stock options granted for the periods indicated:

	For the three months ended	For the six months ended
	June 30,	June 30,
	2008	2009	2008

Dividend yield	3.30%	6.16%	3.38%
Expected volatility	28.91%	34.99%	28.91%
Risk-free interest rate	3.89%	2.27%	3.82%
Expected option life (years)	7	7	7

The 2005 Omnibus Incentive Plan (“Omnibus Plan”) became effective on May 17, 2005 after adoption by the Board of Directors and approval by the stockholders. The Omnibus Plan authorizes the Compensation Committee to grant a variety of equity compensation awards as well as long-term and annual cash incentive awards, all of which can be structured so as to comply with Section 162(m) of the Internal Revenue Code. On May 20, 2008 stockholders approved an amendment to the Omnibus Plan authorizing an additional 600,000 shares for the Omnibus Plan, of which 350,000 shares are available for use for full value awards and 250,000 shares are available for use for non-full value awards. These additional shares, along with shares remaining that were previously authorized by stockholders under the 1996 Restricted Stock Incentive Plan and the 1996 Stock Option Incentive Plan, are available for use as full value awards and non-full value awards under the Omnibus Plan. All grants and awards under the 1996 Restricted Stock Incentive Plan and the 1996 Stock Option Incentive Plan issued prior to the effective date of the Omnibus Plan remained outstanding after such effective date.

The Omnibus Plan provides for annual grants of 3,600 shares of restricted stock to the Company’s non-employee directors. These shares were awarded on June 1 of each year following the date of the director’s initial election or appointment as a non-employee director of the Company. Additionally, the Omnibus Plan provides for an initial grant of restricted stock to non-employee directors upon their initial election or appointment. The number of shares awarded under the initial grant are determined by a formula which allocates 300 shares for each full or partial month from the date of such director’s initial election or appointment to the following June 1. During January 2009, the Compensation Committee and the Board of Directors approved an amendment to the Omnibus Plan that changed the date annual grants to non-employee directors are awarded to January 30. The Omnibus Plan was also amended at the same time to change the formula for which initial grants to non-employee directors are determined, from allocating 300 shares for each full or partial month from the date of such director’s initial election or appointment to the following January 30. The Compensation Committee may substitute shares of restricted stock with restricted stock units prior to grant.

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, restricted stock units and stock option awards all include participants who have reached or are close to reaching retirement eligibility, at which time such awards fully vest. These amounts are included in stock-based compensation expense.

Full Value Awards: The first pool is available for full value awards, such as restricted stock unit awards. The pool will be decreased by the number of shares granted as full value awards. The pool will be increased from time to time by 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 with respect to a full value award.

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Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Company’s full value awards at or for the six months ended June 30, 2009:

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

Non-vested at December 31, 2008		211,158		$	18.02
Granted		124,350			8.44
Vested		(95,734	)		14.66
Forfeited		(3,470	)		15.64
Non-vested at June 30, 2009		236,304		$	14.38

Vested but unissued at June 30, 2009		65,735		$	13.70

Vested but unissued at December 31, 2008		65,755		$	18.10

As of June 30, 2009, there was $3.1 million of total unrecognized compensation cost related to non-vested full value awards granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of 3.1 years. The total fair value of awards vested during the three months ended June 30, 2009 and 2008 was $0.7 million and $1.9 million respectively, with the six months ended June 30, 2009 and 2008 at $0.9 million and $1.9 million, respectively. The vested but unissued full value awards were made to employees and directors eligible for retirement. According to the terms of the Omnibus Plan, these employees and directors have no risk of forfeiture. These shares will be issued at the original contractual vesting dates.

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

The following table summarizes certain information regarding the non-full value awards, all of which have been granted as stock options, at or for the six months ended June 30, 2009:

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

Outstanding at December 31, 2008		1,428,033		$	14.18
Granted		118,100			8.44
Exercised		(122,300	)		7.10
Forfeited		(800	)		16.64
Outstanding at June 30, 2009		1,423,033		$	14.31	5.6 years	$	108

Exercisable shares at June 30, 2009		1,132,133		$	14.40	4.8 years	$	1
Vested but unexercisable shares at June 30, 2009		5,620		$	15.80	8.2 years	$	1

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

As of June 30, 2009, 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 weighted-average period of 3.1 years. The vested but unexercisable non-full value awards were made to employees and directors eligible for retirement. According to the terms of the Omnibus Plan, these employees and directors have no risk of forfeiture. These shares will be exercisable at the original contractual vesting dates.

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Notes to Consolidated Financial Statements

(Unaudited)

Cash proceeds, fair value received, tax benefits and intrinsic value related to total stock options exercised and the weighted average grant date fair value for options granted during the three months ended June 30, 2009 and 2008 are provided in the following table:

	For the three months ended June 30,					For the six months ended June 30,
(In thousands except grant date fair value)	2009			2008		2009		2008
Proceeds from stock options exercised	$	-		$	1,925	$	617	$	2,075
Fair value of shares received upon exercise of stock options		251			-		251		-
Tax benefit (expense) related to stock options exercised		(6	)		526		39		555
Intrinsic value of stock options exercised		75			1,391		177		1,460
Grant date fair value at weighted average		n/a			4.79		1.26		4.66

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

The following table summarizes the Company’s Phantom Stock Plan at or for the six months ended June 30, 2009:

Phantom Stock Plan	Shares			Fair Value

Outstanding at December 31, 2008		15,760		$	11.96
Granted		9,347			8.45
Forfeited		(47	)		6.49
Distributions		(296	)		8.86
Outstanding at June 30, 2009		24,764		$	9.35
Vested at June 30, 2009		23,670		$	9.35

The Company recorded stock-based compensation expense for the phantom stock plan of $85,000 and $24,000 for the three months ended June 30, 2009 and 2008, respectively. The total fair value of the distributions from the phantom stock plan during the three months ended June 30, 2009 and 2008 were $1,000 and $3,000, respectively.

For the six months ended June 30, 2009 and 2008, the Company recorded stock-based compensation expense (benefit) for the phantom stock plan of $(27,000) and $54,000, respectively. The total fair value of the distributions from the phantom stock plan during the six months ended June 30, 2009 and 2008 were $3,000 and $14,000, respectively.

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(Unaudited)

7.	Pension and Other Postretirement Benefit Plans

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

	Three months ended June 30,						Six months ended June 30,
(In thousands)	2009			2008			2009			2008

Employee Pension Plan:
Service cost	$	-		$	-		$	-		$	-
Interest cost		228			228			456			456
Amortization of unrecognized loss		80			24			160			48
Expected return on plan assets		(321	)		(337	)		(642	)		(674	)
Net employee pension expense	$	(13	)	$	(85	)	$	(26	)	$	(170	)

Outside Director Pension Plan:
Service cost	$	20		$	14		$	40		$	28
Interest cost		34			35			68			70
Amortization of unrecognized gain		(4	)		(8	)		(8	)		(16	)
Amortization of past service liability		10			10			20			20
Net outside director pension expense	$	60		$	51		$	120		$	102

Other Postretirement Benefit Plans:
Service cost	$	55		$	39		$	110		$	78
Interest cost		57			53			114			106
Amortization of past service liability		2			(3	)		4			(6	)
Net other postretirement benefit expense	$	114		$	89		$	228		$	178

The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2008 that it expects to contribute $0.2 million to each of the Outside Director Pension Plan and Other Post Retirement Benefit Plans during the year ending December 31, 2009. The Company does not expect to make a contribution to the Employee Pension Plan during the year ending December 31, 2009. As of June 30, 2009, the Company has contributed $44,000 to the Outside Director Pension Plan and $19,000 to the Other Postretirement Benefit Plans. As of June 30, 2009, the Company has not made any contribution to the Employee Pension Plan for the year ending December 31, 2009. As of June 30, 2009, the Company has not revised its expected contributions for the year ending December 31, 2009.

8.	Fair Value of Financial Instruments

The Company carries certain financial assets and financial liabilities at fair value in accordance with SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB No. 115,” and value those financial assets and financial liabilities in accordance with SFAS No. 157, “Fair Value Measurements.” 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. At June 30, 2009, the Company carried financial assets and financial liabilities under the fair value option with fair values of $127.6 million and $132.8 million, respectively. At December 31, 2008, the Company carried financial assets and financial liabilities under the fair value option with fair values of $139.5 million and $133.4 million, respectively. During the three and six months ended June 30, 2009, the Company did not elect to carry any additional financial assets or financial liabilities under the fair value option.

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

During the three months ended June 30, 2009 the Company received an in-kind distribution from a mutual fund carried at fair value under SFAS No. 159 classified as Other securities. This mutual fund had a fair value of $11.5 million on the date of distribution. The in-kind distribution was primarily made in the form of mortgaged-backed securities, which were the mutual funds underlying investments. All of the mortgaged-backed securities received from the in-kind distribution are carried at fair value under SFAS No. 159.

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 – Net gain (loss) from fair value adjustments, at or for the three and six months ended June 30, 2009 and 2008:

			Changes in Fair Values For Items Measured at Fair Value
	Fair Value		Pursuant to Election of the Fair Value Option
	Measurements
	at June 30,		Three Months Ended						Six Months Ended
Description	2009		June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008
(Dollars in thousands)
Mortgage-backed securities	$	110,287	$	791		$	(2,524	)	$	2,492		$	(747	)
Other securities		17,328		94			(2,130	)		(107	)		(3,098	)
Borrowed funds		107,492		(457	)		3,941			182			1,905
Securities sold under agreements to repurchase		25,268		275			374			485			(1	)
Net gain (loss) from fair value adjustments			$	703		$	(339	)	$	3,052		$	(1,941	)

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

Level 1 – where quoted market prices are available in an active market. At June 30, 2009 and December 31, 2008, Level 1 includes preferred stock issued by Fannie Mae and Freddie Mac.

Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to observable market information, models also incorporate maturity and cash flow assumptions. At June 30, 2009 and December 31, 2008, Level 2 includes mortgage related securities, corporate debt, securities sold under agreements to repurchase and FHLB-NY advances.

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. During 2008, certain financial instruments previously classified as Level 2 were reclassified to Level 3. At June 30, 2009 and December 31, 2008, Level 3 includes trust preferred securities owned by and junior subordinated debentures issued by the Company.

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

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table sets forth the financial assets and financial liabilities carried at fair value on a recurring basis that are classified within Level 3 of the valuation hierarchy for the six months ended June 30, 2009:

	Trust preferred			Junior subordinated
	securities			debentures
	(In thousands)

Balance at December 31, 2008	$	10,699		$	33,052

Net loss from fair value adjustment of financial assets		(113	)		-
Net loss from fair value adjustments of financial liabilities		-			1,026
Increase (decrease) in accrued interest		10			(4	)
Change in unrealized losses included in other comprehensive loss		(496	)		-
Balance at June 30, 2009	$	10,100		$	34,074

The financial assets and financial liabilities that were transferred to Level 3 during 2008 were transferred due to an inactive market for these financial instruments. In valuing these financial instruments, which included trust preferred securities and junior subordinated debentures, the determination of fair value required models which take into consideration market spread data for similar instruments and other contractual features. The Company used an independent third party to model these assumptions.

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 that are carried at fair value have contractual principal amounts, as of June 30, 2009, of $131.9 million and $25.0 million, respectively. The fair value of borrowed funds and securities sold under agreements to repurchase includes accrued interest payable, as of June 30, 2009, of $0.8 million and $0.3 million, respectively.

The difference between the fair value of borrowed funds and the contractual principal of these same borrowed funds at June 30, 2009, were primarily the result of widening credit spreads in credit markets on trust preferred securities and the related junior subordinated debentures. Recent issuances of these types of financial instruments had a significantly higher interest cost due to widening spreads against the indexes for which the interest rate is referenced. The $61.9 million of debentures issued by the Company have a spread to their index of approximately 142 basis points, which is significantly less than credit spreads in the current market.

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table sets forth the Company's assets and liabilities that are carried at fair value on a recurring basis, and the method that was used to determine their fair value, at June 30, 2009 and December 31, 2008:

	Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)
	June 30,		December 31,		June 30,		December 31,		June 30,	December 31,
	2009		2008		2009		2008		2009	2008
Assets:
Securities available for sale
Mortgage-backed securities	$	-	$	-	$	683,701	$	674,764