Flushing Financial (FFIC)

Flushing Financial Corporation
October 28, 2008
Page Three

Earnings Summary - Three Months Ended September 30, 2008

For the three months ended September 30, 2008, net interest income was $22.1 million, an increase of $4.8 million, or 27.7%, from $17.3 million for the three months ended September 30, 2007. The increase in net interest income is attributed to an increase in the average balance of interest-earning assets of $479.6 million, to $3,409.4 million for the quarter ended September 30, 2008, combined with an increase in the net interest spread of 29 basis points to 2.44% for the quarter ended September 30, 2008 from 2.15% for the comparable period in 2007. The yield on interest-earning assets decreased 33 basis points to 6.36% for the three months ended September 30, 2008 from 6.69% in the three months ended September 30, 2007. However, this was more than offset by a decline in the cost of funds of 62 basis points to 3.92% for the three months ended September 30, 2008 from 4.54% for the comparable prior year period. The net interest margin improved 23 basis points to 2.60% for the three months ended September 30, 2008 from 2.37% for the three months ended September 30, 2007. Excluding prepayment penalty income, the net interest margin would have been 2.48% and 2.25% for the three month periods ended September 30, 2008 and 2007, respectively.

The decline in the yield of interest-earning assets was primarily due to a 27 basis point reduction in the yield of the loan portfolio combined with a $197.8 million increase in the average balance of the securities portfolio, which has a lower yield than total interest-earning assets. The 27 basis point decline in the yield of the loan portfolio to 6.63% for the three months ended September 30, 2008 from 6.90% for the three months ended September 30, 2007, was primarily the result of adjustable rate loans adjusting down, as rates have declined throughout 2008. The yield on mortgage loans was positively impacted by the average rate on mortgage loans originated during the past twelve months being higher than the average rate of both the existing loan portfolio and mortgage loans which were paid-in-full during the period. The yield on the mortgage loan portfolio declined 22 basis points to 6.64% for the three months ended September 30, 2008 from 6.86% for the three months ended September 30, 2007. The yield on the mortgage loan portfolio, excluding prepayment penalty income, declined 22 basis points to 6.50% for the three months ended September 30, 2008 from 6.72% for the three months ended September 30, 2007. The decline in the yield of interest-earning assets was partially offset by an increase of $282.1 million in the average balance of the loan portfolio to $2,880.5 million for the three months ended September 30, 2008.

The decrease in the cost of interest-bearing liabilities is primarily attributed to the FOMC lowering the overnight interest rate to 2.00% as of September 30, 2008. Certificates of deposit, money market accounts and saving accounts decreased 72 basis points, 131 basis points and 55 basis points respectively, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. NOW accounts increased 83 basis points for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. This increase in the average cost of NOW accounts is due to the introduction and promotion of new products which, although carrying a higher rate than other products in these types of accounts, had a lower rate during the quarter ended September 30, 2008 than the average cost of deposits. This resulted in a decrease in the cost of due to depositors of 80 basis points to 3.56% for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. The cost of borrowed funds also declined 37 basis points to 4.71% for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. The average balance of the higher-costing certificates of deposit and borrowed funds increased $90.2 million and $237.3 million, respectively, for the quarter ended September 30, 2008 compared to the prior year period. In addition, the combined average balances of lower-costing savings, money market and NOW accounts increased a total of $155.0 million for the quarter ended September 30, 2008 compared to the prior year period.

The net interest margin for the three months ended September 30, 2008 decreased seven basis points to 2.60% from 2.67% for the quarter ended June 30, 2008. The yield on interest-earning assets decreased eight basis points during the quarter, while the cost of interest-bearing liabilities decreased three basis points. Excluding prepayment penalty income, the net interest margin would have been 2.48% for the quarter ended September 30, 2008, a decrease of nine basis points from 2.57% for the quarter ended June 30, 2008.

A provision for loan losses of $3.0 million was recorded for the three months ended September 30, 2008, a $2.7 million increase from $0.3 million that was recorded in each of the first and second quarters of 2008. The Company did not record a provision for loan losses for the three months ended September 30, 2007. The increase in non-performing loans during the third quarter of 2008 is primarily attributed to multi-family residential and one-to-four family mixed use property mortgage loans. The collateral for these loans is primarily properties located in the New York City metropolitan market, which have seen relatively stable market values over the past couple of years. Historically, the Bank has not incurred losses on these types of loans, primarily due to conservative underwriting standards that include, among other things, a loan to value ratio of 75% or less and a debt coverage ratio of at least 125%. However, given the increase in non-performing loans and current economic uncertainties, management, as a result of the regular quarterly analysis of the allowance for loans losses, deemed it necessary to record an additional provision for possible loan losses in the third quarter of 2008.

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