Flushing Financial (FFIC)

earning assets was primarily due to a 21 basis point reduction in the yield of the loan portfolio combined with a $168.3 million increase in the combined average balances of the lower yielding securities portfolio and interest-earning deposits, with each having a lower yield than the average yield of total interest-earning assets. The 21 basis point reduction in the yield of the loan portfolio to 6.69% for the
year ended December 31, 2008 from 6.90% for the year ended December 31, 2007 was primarily the result of adjustable rate loans adjusting downward, as rates declined throughout 2008. Additionally, an increase in non-accrual loans has reduced the yield of the loan portfolio. The yield 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 that were
paid-in-full during the period. The yield on the mortgage loan portfolio declined 18 basis points to 6.69% for the year ended December 31, 2008 from 6.87% for the year ended December 31, 2007. The yield on the mortgage loan portfolio, excluding prepayment penalty income, declined 17 basis points to 6.55% for the year ended December 31, 2008 from 6.72% for the year ended December 31, 2007. The decline in the yield of interest-earning assets was partially offset by an increase of
$307.7 million in the average balance of the loan portfolio to $2,841.9 million for the year ended December 31, 2008.

          Interest income from securities increased $8.2 million, as the average balance increased $151.2 million for the year ended December 31, 2008 to $503.2 million, combined with an 11 basis point increase in the yield to 5.19% during 2008 from 5.08% during 2007. The increase in the average balance of the securities portfolios was primary to support the
activities of Flushing Commercial Bank. Interest income from interest-bearing deposits and federal funds sold decreased $0.1 million as an increase in the average balance of $17.1 million for the year ended December 31, 2008 to $32.4 million was more than offset by a decrease in the yield to 1.84% during 2008 from 4.64% during 2007.

          Interest Expense. Interest expense increased $6.3 million, or 5.2%, to $129.0 million for the year ended December 31, 2008 from $122.6 million for the year ended December 31, 2007. An increase of $474.1 million in the average balance of interest-bearing liabilities was partly offset by a 45 basis point decrease in the cost of interest-bearing
liabilities to 3.99% for the year ended December 31, 2008 from 4.44% for the year ended December 31, 2007. The decrease in the cost of interest-bearing liabilities is primarily attributed to the FOMC lowering the overnight interest rate to a range of 0.00% to 0.25% as of December 31, 2008. Certificates of deposit, money market accounts and saving accounts decreased 53 basis points, 103 basis points and 31 basis points respectively, for the year ended December 31, 2008 compared to
the year ended December 31, 2007. NOW accounts increased 93 basis points for the year ended December 31, 2008 compared to the year ended December 31, 2007 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 year ended December 31, 2008 than the average cost of deposits. This resulted in a decrease in the cost of due to depositors of 60 basis points to 3.66% for the
year ended December 31, 2008 compared to 4.26% for the year ended December 31, 2007. The cost of borrowed funds also decreased 26 basis points to 4.71% for the year ended December 31, 2008 compared to 4.97% for the year ended December 31, 2007. The average balance of higher-costing certificates of deposit and borrowed funds increased $107.3 million and $209.8 million, respectively, for the year ended December 31, 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 $153.9 million for the year ended December 31, 2008 compared to the prior year period.

          Net Interest Income. Net interest income for the year ended December 31, 2008 totaled $87.7 million, an increase of $16.8 million, or 23.7%, from $70.9 million for 2007. The net interest spread increased 20 basis points to 2.43% for 2008 from 2.23% in 2007. The yield on interest-earning assets decreased 25 basis points to 6.42% for the year ended
December 31, 2008 from 6.67% for the year ended December 31, 2007. However, this was more than offset by a decline in the cost of funds of 45 basis points to 3.99% for the year ended December 31, 2008 from 4.44% for the comparable prior year period. The net interest margin improved 16 basis points to 2.60% for the year ended December 31, 2008 from 2.44% for the year ended December 31, 2007. Excluding prepayment penalty income, the net interest margin would have been 2.48% and 2.32%
for the years ended December 31, 2008 and 2007, respectively.

          Provision for Loan Losses. A provision for loan losses of $5.6 million was recorded for the year ended December 31, 2008. There was no provision for loan losses for the year ended December 31, 2007. 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. The provision for loan losses recorded in 2008 was primarily due to an increase in non-performing loans. This increase in non-performing loans primarily consists of mortgage loans that are located in the New York City metropolitan market. Historically, we
have not incurred losses on mortgage loans, primarily due to our 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

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regular quarterly analyses of the allowance for loans losses, deemed it necessary to record additional provisions for possible loan losses in the year ended December 31, 2008. The ratio of non-performing loans to gross loans was 1.35% and 0.22% at December 31, 2008 and 2007, respectively. The allowance for loan losses as percentage of non-performing loans was 28% and 113% at December 31, 2008 and 2007,
respectively. The ratio of allowance for loan losses to gross loans was 0.37% and 0.25% at December 31, 2008 and 2007, respectively. The Company experienced net charge-offs of $1.2 million and $0.4 million for the years ended December 31, 2008 and 2007, respectively.

          Non-Interest Income. Non-interest income decreased $3.3 million, or 32.0%, for the year ended December 31, 2008 to $7.0 million, as compared to $10.3 million for the year ended December 31, 2007. Increases of $17.4 million in the net gain attributed to changes in fair value of financial assets and financial liabilities carried at fair value under
SFAS No. 159, $0.2 million in dividends received from FHLB-NY stock, and $0.5 million in income from Bank Owned Life Insurance were more than offset by a $0.5 million decrease in fee income and a $22.9 million increase in other-than-temporary impairment charges recorded during the year ended December 31, 2008 as compared to the year ended December 31, 2007. The net gain in fair value of financial assets and financial liabilities carried at fair value under SFAS No. 159 was primarily
the result of widening credit spreads in credit markets on trust preferred securities and the related junior subordinated debentures. The other-than-temporary impairment charges in both years were on the preferred stock issues of Freddie Mac and Fannie Mae, two government sponsored entities. These preferred shares have been written down to their market value of $0.6 million at December 31, 2008. The year ended December 31, 2008 includes income of $2.4 million representing a partial
recovery of a loss sustained in 2002, on a WorldCom, Inc. senior note. This amount was received as a result of a class action litigation settlement, and was included in Other Income.

          Non-Interest Expense. Non-interest expense was $54.8 million for the year ended December 31, 2008, an increase of $4.7 million, or 9.4%, from $50.1 million for the year ended December 31, 2007. The increase from the comparable prior year period is primarily attributed to increases of: $2.6 million in employee salary and benefits, $0.6 million in
professional services and $0.4 million in data processing expense, each of which is primarily attributed to the growth of the Bank over the past twelve months. Additionally, other operating expense increased $1.2 million, primarily due to an increase in deposit insurance expense. The efficiency ratio was 58.4% and 60.2% for the years ended December 31, 2008 and 2007, respectively.

          Income Tax Provisions. Income tax expense for the year ended December 31, 2008 increased $1.1 million to $12.1 million, compared to $10.9 million for the year ended December 31, 2007. This increase is primarily attributed to the increase of $3.2 million in income before income taxes. The effective tax rate was 35.1% for the year ended December 31,
2008, the same as that for the year ended December 31, 2007.

earning assets was primarily due to a 21 basis point reduction in the yield of the loan portfolio combined with a $168.3 million increase in the combined average balances of the lower yielding securities portfolio and interest-earning deposits, with each having a lower yield than the average yield of total interest-earning assets. The 21 basis point reduction in the yield of the loan portfolio to 6.69% for the
year ended December 31, 2008 from 6.90% for the year ended December 31, 2007 was primarily the result of adjustable rate loans adjusting downward, as rates declined throughout 2008. Additionally, an increase in non-accrual loans has reduced the yield of the loan portfolio. The yield 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 that were
paid-in-full during the period. The yield on the mortgage loan portfolio declined 18 basis points to 6.69% for the year ended December 31, 2008 from 6.87% for the year ended December 31, 2007. The yield on the mortgage loan portfolio, excluding prepayment penalty income, declined 17 basis points to 6.55% for the year ended December 31, 2008 from 6.72% for the year ended December 31, 2007. The decline in the yield of interest-earning assets was partially offset by an increase of
$307.7 million in the average balance of the loan portfolio to $2,841.9 million for the year ended December 31, 2008.

          Interest income from securities increased $8.2 million, as the average balance increased $151.2 million for the year ended December 31, 2008 to $503.2 million, combined with an 11 basis point increase in the yield to 5.19% during 2008 from 5.08% during 2007. The increase in the average balance of the securities portfolios was primary to support the
activities of Flushing Commercial Bank. Interest income from interest-bearing deposits and federal funds sold decreased $0.1 million as an increase in the average balance of $17.1 million for the year ended December 31, 2008 to $32.4 million was more than offset by a decrease in the yield to 1.84% during 2008 from 4.64% during 2007.

          Interest Expense. Interest expense increased $6.3 million, or 5.2%, to $129.0 million for the year ended December 31, 2008 from $122.6 million for the year ended December 31, 2007. An increase of $474.1 million in the average balance of interest-bearing liabilities was partly offset by a 45 basis point decrease in the cost of interest-bearing
liabilities to 3.99% for the year ended December 31, 2008 from 4.44% for the year ended December 31, 2007. The decrease in the cost of interest-bearing liabilities is primarily attributed to the FOMC lowering the overnight interest rate to a range of 0.00% to 0.25% as of December 31, 2008. Certificates of deposit, money market accounts and saving accounts decreased 53 basis points, 103 basis points and 31 basis points respectively, for the year ended December 31, 2008 compared to
the year ended December 31, 2007. NOW accounts increased 93 basis points for the year ended December 31, 2008 compared to the year ended December 31, 2007 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 year ended December 31, 2008 than the average cost of deposits. This resulted in a decrease in the cost of due to depositors of 60 basis points to 3.66% for the
year ended December 31, 2008 compared to 4.26% for the year ended December 31, 2007. The cost of borrowed funds also decreased 26 basis points to 4.71% for the year ended December 31, 2008 compared to 4.97% for the year ended December 31, 2007. The average balance of higher-costing certificates of deposit and borrowed funds increased $107.3 million and $209.8 million, respectively, for the year ended December 31, 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 $153.9 million for the year ended December 31, 2008 compared to the prior year period.

          Net Interest Income. Net interest income for the year ended December 31, 2008 totaled $87.7 million, an increase of $16.8 million, or 23.7%, from $70.9 million for 2007. The net interest spread increased 20 basis points to 2.43% for 2008 from 2.23% in 2007. The yield on interest-earning assets decreased 25 basis points to 6.42% for the year ended
December 31, 2008 from 6.67% for the year ended December 31, 2007. However, this was more than offset by a decline in the cost of funds of 45 basis points to 3.99% for the year ended December 31, 2008 from 4.44% for the comparable prior year period. The net interest margin improved 16 basis points to 2.60% for the year ended December 31, 2008 from 2.44% for the year ended December 31, 2007. Excluding prepayment penalty income, the net interest margin would have been 2.48% and 2.32%
for the years ended December 31, 2008 and 2007, respectively.

          Provision for Loan Losses. A provision for loan losses of $5.6 million was recorded for the year ended December 31, 2008. There was no provision for loan losses for the year ended December 31, 2007. 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. The provision for loan losses recorded in 2008 was primarily due to an increase in non-performing loans. This increase in non-performing loans primarily consists of mortgage loans that are located in the New York City metropolitan market. Historically, we
have not incurred losses on mortgage loans, primarily due to our 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

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regular quarterly analyses of the allowance for loans losses, deemed it necessary to record additional provisions for possible loan losses in the year ended December 31, 2008. The ratio of non-performing loans to gross loans was 1.35% and 0.22% at December 31, 2008 and 2007, respectively. The allowance for loan losses as percentage of non-performing loans was 28% and 113% at December 31, 2008 and 2007,
respectively. The ratio of allowance for loan losses to gross loans was 0.37% and 0.25% at December 31, 2008 and 2007, respectively. The Company experienced net charge-offs of $1.2 million and $0.4 million for the years ended December 31, 2008 and 2007, respectively.

          Non-Interest Income. Non-interest income decreased $3.3 million, or 32.0%, for the year ended December 31, 2008 to $7.0 million, as compared to $10.3 million for the year ended December 31, 2007. Increases of $17.4 million in the net gain attributed to changes in fair value of financial assets and financial liabilities carried at fair value under
SFAS No. 159, $0.2 million in dividends received from FHLB-NY stock, and $0.5 million in income from Bank Owned Life Insurance were more than offset by a $0.5 million decrease in fee income and a $22.9 million increase in other-than-temporary impairment charges recorded during the year ended December 31, 2008 as compared to the year ended December 31, 2007. The net gain in fair value of financial assets and financial liabilities carried at fair value under SFAS No. 159 was primarily
the result of widening credit spreads in credit markets on trust preferred securities and the related junior subordinated debentures. The other-than-temporary impairment charges in both years were on the preferred stock issues of Freddie Mac and Fannie Mae, two government sponsored entities. These preferred shares have been written down to their market value of $0.6 million at December 31, 2008. The year ended December 31, 2008 includes income of $2.4 million representing a partial
recovery of a loss sustained in 2002, on a WorldCom, Inc. senior note. This amount was received as a result of a class action litigation settlement, and was included in Other Income.

          Non-Interest Expense. Non-interest expense was $54.8 million for the year ended December 31, 2008, an increase of $4.7 million, or 9.4%, from $50.1 million for the year ended December 31, 2007. The increase from the comparable prior year period is primarily attributed to increases of: $2.6 million in employee salary and benefits, $0.6 million in
professional services and $0.4 million in data processing expense, each of which is primarily attributed to the growth of the Bank over the past twelve months. Additionally, other operating expense increased $1.2 million, primarily due to an increase in deposit insurance expense. The efficiency ratio was 58.4% and 60.2% for the years ended December 31, 2008 and 2007, respectively.

          Income Tax Provisions. Income tax expense for the year ended December 31, 2008 increased $1.1 million to $12.1 million, compared to $10.9 million for the year ended December 31, 2007. This increase is primarily attributed to the increase of $3.2 million in income before income taxes. The effective tax rate was 35.1% for the year ended December 31,
2008, the same as that for the year ended December 31, 2007.